ENGLAND — Following Russia’s invasion of Ukraine, the Bank of England announced on Tuesday that would carry out a thorough analysis to improve surveillance of “opaque” commodity markets. Prior to the Russian invasion, the central bank lacked a complete understanding of risks and vulnerabilities.
Similar to how the global financial crisis brought attention to unregulated “shadow banks,” this year’s spikes in commodity prices have alerted regulators to the need to close data gaps in the industry as consumers struggle with skyrocketing energy costs that are fueling inflation.
In its half-yearly report on risks to Britain’s financial system, the Financial Policy Committee of the BoE stated that “there is a significant risk of further disruption to commodity markets” as a result of the increased uncertainty following the Russian invasion.
Large UK banks may be grossly exposed to commodity suppliers, traders, and derivatives to the tune of 140 billion pounds ($168.39 billion), or 50% of their total core capital.
On their lending books are exposures to UK banks worth approximately 110 billion pounds.
According to the report, banks have sufficient capital to keep extending credit to participants in the commodity market.
Banks “may become even less willing to extend credit to participants in the commodity market if disruption is prolonged and uncertainty rises,” the BoE warned.
Regulators monitor the energy and metals markets traded in Britain, but other countries, including the United States and France, trade commodities like grains.
Additionally, a sizable portion of commodity market activity is transacted privately, off an exchange, over-the-counter. It is also challenging to develop a comprehensive picture due to physical production and inventory, which are largely unregulated and poorly reported.
After Russia, a major producer, invaded Ukraine, nickel prices on the London Metal Exchange reached a record high of more than $100,000 per tonne. Trading was suspended for a week in March, and the clearing house of the LME was compelled to nearly double its default fund.
The LME and its clearing arm are the subject of investigations by the BoE and Financial Conduct Authority.
Separately on Tuesday, the European Union’s securities watchdog ESMA said a stress test of the bloc’s clearing houses had revealed that they were resilient to significant shocks, but that commodity derivatives had ‘gaps’ in safety buffers.
OPACITY AND SCATTERING
Because of rising commodity prices, Britain’s economic outlook has materially worsened, and the BoE is prioritizing better understanding of underlying activity that is connected to the larger economy and financial system.
The BoE stated that addressing this globally should be a priority. “Due to opacity, fragmentation of reporting, and lack of data in some markets, quantifying the size and scale of these fragilities and interconnections remained challenging,” the BoE said.
Despite the fact that trade repositories for reporting transactions were established more than ten years ago in the wake of the global financial crisis, it is still challenging to use their data to create an overview of who is exposed to a given commodity.
At a news conference, BoE Governor Andrew Bailey stated, “I think it’s important that the market structures keep up and reflect the change in the supply-demand balance in these markets.
There are discrepancies in reporting, a lack of data granularity in some markets, and the absence of some physically settled off exchange transactions from reporting to repositories.
Bailey suggested that global coordination be used to improve data reporting so that authorities can better monitor these markets. (1 dollar = 0.8314 pounds) (Huw Jones reported; Andy Bruce, William Maclean, edited the story)