LONDON--Commodities-trading houses are posing a challenge to
market oversight, the U.K.'s Financial Conduct Authority warned
Thursday.
As tighter regulatory requirements have reduced banks'
activities in the sector, their places have been taken by
specialist companies, many of which are closely held and have
substantial operations outside direct oversight of market
regulators.
The best known, like Cargill, Vitol Group SA and Trafigura
Beheer B.V., churn through hundreds of billions of dollars of sales
every year through global operations that span from London to
Singapore and control the movement of huge volumes of essential
goods--ranging from grains, cocoa and coffee beans to industrial
metals and oil.
In the first comprehensive update on commodity market regulation
in the U.K. since 2007, the FCA said "the rise in proportion of
activity on London markets by unregulated, overseas entities poses
a challenge to our market supervision, alongside risks to market
standards and integrity."
The FCA didn't name any companies.
The update by the U.K.'s financial regulator comes as new
regulations, devised to increase scrutiny of the commodities
markets, are about to be implemented.
Just last month, the European Union agreed to a basic text for
its Markets in Financial Instruments Directive, or MiFiD. The
wide-ranging law, which was 3 1/2 years in the making, will impose
trading limits on a number of energy and agricultural commodity
derivatives and bring more companies under the FCA's regulatory
scope. The EU has also agreed on regulations to increase
transparency and scrutiny of market abuse, while the Dodd-Frank act
in the U.S. has also increased regulatory scrutiny of the
commodities markets.
The trading companies' own expansion is already making them more
accessible. Razor-thin profit margins and fierce competition in the
physical markets where they operate have encouraged many of the
larger companies to invest in fixed assets like mines, oil fields
and pipelines to secure market share and lock in value. The big
acquisitions are pushing the companies to tap the public markets
for cash. Glencore PLC went public in 2011, while competitors like
Trafigura and Gunvor now publish annual accounts after they issued
bonds on the Singapore Stock Exchange last year.
Commodities traders say the impact of regulatory changes brought
into effect over the last few years are already being felt.
"There is already a much stricter regulatory regime for all of
us in Europe and in the States," said one senior executive at a
large commodity trading house during a conference in London last
week. "I don't think that's going to change. I think it's going to
get stricter and stricter," the executive said.
-Write to Sarah Kent at sarah.kent@wsj.com
Subscribe to WSJ: http://online.wsj.com?mod=djnwires