#commodity markets – Federal Financial Analytics

25 04, 2022

M042522

Arezou Rafikian2023-03-01T16:00:41-05:00April 25th, 2022|6- Client Memo|

Why Prime Brokers are Prime Suspects

Although Ukraine and emerging-market distress were the most frequently discussed topics around last week’s Bank/Fund meetings, two other high-impact issues were also top of mind. One is the end of the international financial order as we’ve known it for decades; I’ll return to this shortly as well as in my forthcoming book. The other to which I now turn is more immediate: commodity-market stress and what regulators will do to avert it if they can. I have heard a lot about a number of options, but I fear that regulators will do what they always do when trouble lurks: double-down on banks under their thumb instead of flexing their muscles to govern nonbanks at the heart of the global financial infrastructure.

M042522.pdf…

25 04, 2022

Karen Petrou: Why Prime Brokers are Prime Suspects

Arezou Rafikian2023-03-01T16:00:47-05:00April 25th, 2022|The Vault|

Although Ukraine and emerging-market distress were the most frequently discussed topics around last week’s Bank/Fund meetings, two other high-impact issues were also top of mind. One is the end of the international financial order as we’ve known it for decades; I’ll return to this shortly as well as in my forthcoming book. The other to which I now turn is more immediate: commodity-market stress and what regulators will do to avert it if they can. I have heard a lot about a number of options, but I fear that regulators will do what they always do when trouble lurks: double-down on banks under their thumb instead of flexing their muscles to govern nonbanks at the heart of the global financial infrastructure.

In the commodity markets, as in all but the most direct financial-intermediation functions, banks are increasingly risk enablers, not takers. This isn’t because banks are just too darn good; it’s because they are regulated and, after 2010, regulated to the point at which the capital costs of engaging directly in key businesses outweighed the profit potential in financial markets where nonbanks do not face the same costly constraints.

Going back to 2011, we’ve pointed out that asymmetric market regulation leads to rapid risk migration. In market after market, nonbanks have driven prices down to the point where they can still earn comfortable margins, pushing banks saddled by capital, conduct, and risk-management standards to bow out of a market except where legacy assets such as low-cost funding and …

28 03, 2022

Karen Petrou: Why the Fed Might Bail Out the Commodity Market

Eliza Allen2023-03-27T15:57:01-04:00March 28th, 2022|The Vault|

In the midst of chaos, volatility always makes matters worse and this is very much the case with the commodities sector. This has led to growing speculation that central banks will step in should unprecedented price swings show signs of systemic impact. As we noted, we don’t know a central banker that wants to bail out commodities. But none of them wanted to bail out anyone else either. If market stress turns systemic, then central banks will step in. Indeed, they may intervene even if stress seems manageable if they also believe that public welfare is at risk when core commodities go from pricey to prohibitive.

In the U.S., the Fed will resist calls to backstop commodities companies or traders for as long as it can by citing what it believes to be its limited mandate even as it argues that its anti-inflation policies will stabilize markets – just you wait. However, whatever the Fed is able to do about inflation will take time and whatever it does about its portfolio to address inflation will exacerbate commodity-market stress.

Three possible sources of extreme volatility are already on the horizon.

First, there’s the liquidity stress sparked by CCP margin demands. This was the culprit in the letter from energy traders to the European Central Bank and it’s at least as much of a factor in the U.S. The more commodity-market volatility, the higher clearinghouse initial and variation margin demands and the harder it is to post eligible assets already scarce …

18 03, 2022

DAILY031822

Eliza Allen2023-04-03T14:21:59-04:00March 18th, 2022|2- Daily Briefing|

Commodity-Market Backstop Prospects, Impact

In this alert, we update clients on our assessment of policy consequences related to commodity-market strains. Notably, a letter from European energy traders to the ECB has been made public indicating stress in this sector is so severe that traders are seeking emergency liquidity support. While directed to the ECB, the letter calls upon all central banks to provide this support, making it likely that a similar plea has been sent to the Federal Reserve.

Congress Wants More, Tougher Sanctions

Although witnesses at yesterday’s Senate Banking Committee sought to assure Congress that digital currency does not promote sanctions evasion (see Client Report SANCTION17), legislation continues to advance to curtail any form of sanctions evasion. As we noted yesterday, senior Senate Democrats have introduced a bill expressly targeting digital assets and exchanges while HFSC marked up numerous bills tightening more conventional financial-transmission and policy channels.

Daily031822.pdf…

8 03, 2022

DAILY030822

Eliza Allen2023-04-04T12:19:56-04:00March 8th, 2022|2- Daily Briefing|

Congress Prepares Gold-Related Sanctions vs. Russia

Sens. Cornyn (R-TX), Hassan (D-NH), and bipartisan colleagues have added to the Congressional proposals to sanction Russia with S. 3771, legislation to impose secondary sanctions related to American entities that knowingly engage in gold sales or transport involving the Russian central bank.

Mandatory-Arb Bill Gets Low-Priority, Partisan Reception

As we anticipated, today’s Senate Banking hearing on mandatory arbitration in financial products was partisan and provided little in the way of an actionable agenda. The hearing was also poorly attended due to higher-priority concerns, with Chairman Brown (D-OH) and Democrats supporting the legislation they recently introduced to ban mandatory arbitration and class-action waivers.

Energy Financing Now Under Sanctions Gun

As anticipated, President Biden’s executive order today barring oil and related energy imports also extends the sanctions regime to financing, approving, guaranteeing or facilitating sanctioned imports and any energy-related investments.

FedFin Advisory: Commodity Risk Would Renew Political Challenge

A key question we hear from large-bank investors is the extent to which the Ukraine crisis may lead to significant commodity-related losses at the largest U.S. banks due not only to their own exposures, but also to Archegos-like risk positions in these often opaque markets.

Daily030822.pdf…