Commodities traders are rushing their private bilateral contracts into exchanges and clearing houses as they race to reduce their counterparty risk amid a deepening financial crisis.
The transfer of the opaque over-the-counter deals comes as observers warn that commodities, where trading has ballooned in the past five years, could be the next market hit by counterparty failures.
Martin Abbott, chief executive at the London Metal Exchange, said the crisis was bringing new business into the LME as traders tried to reduce their risk, with turnover 45 per cent higher in September compared with the same month of 2007.
“Business that was already sitting in the OTC market is now been brought into the exchange,” he told the Financial Times in an interview.
The LME, the world’s largest base metals exchange, has extended its forward-dated futures in copper and aluminium to 10 years from five as it tries to capture OTC business.
Mr Abbott said: “When you look at [today’s] markets, it is utterly sensible to assume that being on exchange, with clearing house . . . must be attractive.”
The LME’s move comes as other exchanges are pushing into the OTC clearing business, in part to capitalise on the strong backing that regulators have given to the creation of a central clearing counterparty model for the credit derivative markets.
The aim is to reduce the systemic risks inherent when credit derivatives are negotiated bilaterally between traders by having a clearing house guarantee against default.
Regulators’ focus is on the $58,000bn credit default swaps market. The commodities OTC market is estimated at $9,000bn, according to the Bank of International Settlements.
Counterparty risk and tumbling prices will be key topics at the LME Week, a gathering of the mining and metals industry, which starts today in London.
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