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Commodity giant steps out of the shadows in academic case study

Metal News - Published on Sat, 19 Apr 2014

Reuters reported that a detailed new case study scrutinizing the risk management practices of Swiss based Trafigura is the latest effort to demystify  the once secretive commodity trading industry, just as big merchants seek to fill a void being left by Wall Street banks.

The study said that "The Economics of Commodity Trading Firms," comes as US regulators mull new restrictions on banks' physical commodity trading, a crackdown some large energy companies say would rob them of credit worthy, transparent counterparties and leave them at the mercy of shadowy and risky firms.

Facing higher capital requirements and regulatory pressure, some banks like JPMorgan Chase & Company have already quit the business of shipping cargoes of crude and storing metal, opening an opportunity for the mostly privately held trading houses like Trafigura and Mercuria to take up new customers.

Mr Andrew Gowers global head of corporate affairs at Trafigura said that "A number of these firms have become very large too large to ignore, if you like. So even those of us who remain private companies feel the need to explain themselves somewhat more in public."

The firm approached Mr Craig Pirrong, a well known professor of finance and commodity markets commentator at the University of Houston, last July to commission an independent review of the commodity trading industry, with the goal of demystifying it.

Mr Pirrong has studied commodity markets for 25 years but said his sojourn in Switzerland provided his first glimpse into a trading firm's inner sanctum. The way they characterized it was that this was sort of our coming out. We haven't had that much of a profile in the past, and we're introducing ourselves.

He used Trafigura, a firm that recorded revenues of USD 133 billion in 2013 trading everything from oil to iron ore, as a case study to illustrate how trading houses manage the risks of storing, transporting and refining raw materials.

Among his findings: the firm normally has up to USD 1 billion posted at collateral with clearing houses; about 15% of all its trades are uncleared over-the-counter transactions; and it has invested some USD 550 million over the past three years to build the information technology system to manage its business.

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Posted By : admin on Sat, 19 Apr 2014
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