Banking Reform: Coming to a Commodity (Metals) Market Near You

Though banking regulations probably don’t appear top of mind for most buyers of metals, Senate Banking Committee Chairman Christopher Dodd’s financial reform bill, currently under consideration, could drastically alter the way OTC swap markets and other commodity trading schemes are regulated. Reuters columnist John Kemp provides an overview of the key provisions of the bill impacting metals markets. A summary of those provisions appears below:

  • A swap dealer and swap market participant will face similar regulatory oversight specifically, “It preserves the corporate-user exemption for firms using swaps primarily for hedging, reducing or otherwise mitigating commercial risk. However, “really large corporate users would be subject to oversight
  • All swaps are banned “unless they conform to the bill’s provisions (which means they must be cleared, registered and reported)
  • The bill would allow corporate end users (e.g. most of you) to engage in un-margined swap deals. A company would need to apply for an exemption and only industrial firms would qualify for the exemption
  • The bill would grant the CFTC with rights to “impose position limits on regulated futures markets so that it applies to Ëœswaps that perform or affect a significant price discovery function with respect to regulated markets.’
  • The bill would also “clarify position limits that can be applied to traders or group of traders
  • The one part of the bill that we find most intriguing involves the proverbial ËœChinese wall’ “swap dealers major market participants and futures commission merchants must implement systems to manage conflicts of interest in the publication of price and market analysis.
  • Finally the bill would create these same reporting requirements overseas. The idea is to prevent the industry from moving elsewhere to avoid legislation

This Wall Street Journal summary provides a comprehensive “Readers Digest version of the entire bill which contains many additional points not necessarily related to swaps, derivatives etc. It also summarizes the four key changes to the derivatives portion of the legislation as: “closes regulatory gaps, provides for central clearing and exchange trading, safeguards for un-cleared trades and creates market transparency. But as with all new bills, the proof remains in the pudding. This presentation from Business Insider outlines several compelling arguments against the legislation and personally, the first one appears hard to argue with “The Fed Cannot Identify Risk.

For those of you buying organizations who look at supply and demand factors and scratch your heads not understanding how say copper could double in price from 2009 to 2010, (see Stuart’s previous article) just know that if Senator Dodd’s bill becomes law, we’ll see some changes in base metals, precious metals and even some of the steel markets. And yes, perhaps some of the speculative froth will disappear. Now whether or not the federal government has the foresight and ability to read markets better than the private sector, well, that’s a different matter entirely.

–Lisa Reisman

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