The Financial Stability Aspects of Commodities Markets

The FSB published the Financial Stability Aspects of Commodities Markets report.
The report presents an overview of a few globally traded commodities markets (crude oil, natural gas, & wheat) that are of particular economic importance, and examines their vulnerabilities and mechanisms through which any further stresses in commodities markets could propagate more broadly through the financial system. First, by being concentrated in a number of ways (this report uses the example of the European natural gas derivatives market), contagion risks in the financial system are multiplied. Second, a widespread use of leverage in the commodities sector can lead to liquidity stress in the event of margin calls on derivatives positions and collateral calls on short-term borrowing. Finally, opacity in some areas of the commodities sector, including OTC derivatives markets, makes it is difficult to obtain a full picture of the size or network of exposures across jurisdictions and to quantify the financial stability transmission channels.
Continued geopolitical tensions and heightened macroeconomic uncertainty in an environment of tightening financial conditions raise the risk of further significant volatility in commodities markets. In the event that this happens, CCPs and clearing members would need to make further margin calls, banks may choose to limit their credit exposures, and market participants might cut back their trading in both cleared and non-cleared markets.
Hence, a key takeaway of this report is that there is significant concentration in commodities markets, as certain banks are more highly exposed to commodities traders, some of whom represent a significant share of market activity and are highly leveraged and rely on short-term debt. A few banks have an outsized role in commodities derivatives markets, particularly as clearing members that act as intermediaries between commodities firms and CCPs, and a few large CCPs are used to clear commodities derivatives. Also, some commodities market participants represent a significant portion of outstanding exposures in certain markets, and a few PTFs account for a significant part of commodities derivatives ETD trading volumes.
This suggests the need for the FSB and its member authorities to continue monitoring developments in commodities markets and the preparedness of commodities firms – working with CCPs and clearing members – to manage sudden increases in margin on derivatives positions, and to mitigate contagion risks in the financial system. Relevant authorities should consider ways to make better use of existing data and to address the opacity of activities across physical and derivatives commodities markets, to facilitate vulnerabilities assessments.
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Figure 1: Stylised interlinkages in exchange-traded commodity markets