On March 8 as the global market for Nickel seized up and commodity markets spasmed, the European Federation of Energy Traders, a leading industry group, called on central banks to provide liquidity to support vital commodity markets.
The role of the clearing houses should not be forgotten. The establishment of LME Clear and LCH should eliminate counterparty risk in the event of default. However whether they are up to the task is another matter. The fact that LME suspended nickel trading implies that they may not, choosing to suspend activity and cancel trades, be able to manage their market risks. A wobbly Clearing House represents a more existential risk to markets than a defaulting counterparty.
My comment was truncated. Here's the full comment:
Interesting and extensive. Thanks for quoting me. I wrote a post on this particular subject yesterday, and wrote a white paper on the issue of whether commodity trading firms posed a systemic risk. My conclusion then--that they do not--remains unchanged in the face of these current events. Re A Miles' comment, I also wrote a post on nickel and the central clearing issues.
Did the volcker rule have a role in curbing the size of commodity linkages into the larger US financial system? I vaguely remember Senator Levin's committee hearings from 2013 where nearly all TBTF banks were disclosed playing in commodity markets, hoarding oil due to contango etc etc. all manner of commodity involvement, post GFC. Did Volcker save us here?
Is there somewhere where your 2007 article "Just Say No To Gazprom." in World Energy is available publicly? A quick google turns up a blank for me, and it sounds like it would be an interesting read in light of recent events.
Boy that's one from waaaaayyyy back. I might have a hardcopy that I can scan and post. But I think it was based on a blog post. Let me check the blog. Hang on.
Thank you! I am really quite ignorant on the entire subject and field of energy markets, so I hope you don't go too far out of your way, but on the flipside I would still love to read it if you happen across it. It is always fascinating to take a step back and see how thinking has changed over time, and just going off the title it sounds like it has particular relevance to our present times.
Conventional central bank liquidity support is collateralized. Clearing houses don't have much illiquid collateral worth posting. This isn't a conceptual problem for an unlimited liability mutualized clearing arrangement. The "collateral" is simply the collective IOUs of the members, which can be quite illiquid in a crisis, but will pay off in time unless the entire industry is permanently insolvent. However, clearing has become a limited liability business: as permitted by brain-dead regulators. Which puts the central banks in a bit of a pickle.
Just imagine a world WITHOUT commodity futures contracts! A foreshortening of financial vision that undermines the entirety of "net present valuation", you undermine that.......you can kiss it *all* bye. And the bizarro notion of "liquidity" support while inflation is on fire! what happens to logic beyond the event horizon?
Congrats on #100!
The role of the clearing houses should not be forgotten. The establishment of LME Clear and LCH should eliminate counterparty risk in the event of default. However whether they are up to the task is another matter. The fact that LME suspended nickel trading implies that they may not, choosing to suspend activity and cancel trades, be able to manage their market risks. A wobbly Clearing House represents a more existential risk to markets than a defaulting counterparty.
Cheers! I will say that I called this one early. https://twitter.com/SAlexashenko/status/1499012485076164608?s=20&t=P_tSL19VDf5bBbm8TXp3KQ
God forbid that traders actually be forced to recognize the true level of risk in the world.
My comment was truncated. Here's the full comment:
Interesting and extensive. Thanks for quoting me. I wrote a post on this particular subject yesterday, and wrote a white paper on the issue of whether commodity trading firms posed a systemic risk. My conclusion then--that they do not--remains unchanged in the face of these current events. Re A Miles' comment, I also wrote a post on nickel and the central clearing issues.
Here's the post from yesterday:
https://streetwiseprofessor.com/the-current-volatility-is-a-risk-to-commodity-trading-firms-but-they-are-not-too-big-to-fail/
Here's the nickel post:
https://streetwiseprofessor.com/a-nickel-is-now-worth-a-dime-is-the-lme-too/
Did the volcker rule have a role in curbing the size of commodity linkages into the larger US financial system? I vaguely remember Senator Levin's committee hearings from 2013 where nearly all TBTF banks were disclosed playing in commodity markets, hoarding oil due to contango etc etc. all manner of commodity involvement, post GFC. Did Volcker save us here?
Hey Craig,
Is there somewhere where your 2007 article "Just Say No To Gazprom." in World Energy is available publicly? A quick google turns up a blank for me, and it sounds like it would be an interesting read in light of recent events.
Hey, Rocky
Boy that's one from waaaaayyyy back. I might have a hardcopy that I can scan and post. But I think it was based on a blog post. Let me check the blog. Hang on.
Thanks for your interest.
No dice re the blog. I'll take a look in my files.
Thank you! I am really quite ignorant on the entire subject and field of energy markets, so I hope you don't go too far out of your way, but on the flipside I would still love to read it if you happen across it. It is always fascinating to take a step back and see how thinking has changed over time, and just going off the title it sounds like it has particular relevance to our present times.
Conventional central bank liquidity support is collateralized. Clearing houses don't have much illiquid collateral worth posting. This isn't a conceptual problem for an unlimited liability mutualized clearing arrangement. The "collateral" is simply the collective IOUs of the members, which can be quite illiquid in a crisis, but will pay off in time unless the entire industry is permanently insolvent. However, clearing has become a limited liability business: as permitted by brain-dead regulators. Which puts the central banks in a bit of a pickle.
Just imagine a world WITHOUT commodity futures contracts! A foreshortening of financial vision that undermines the entirety of "net present valuation", you undermine that.......you can kiss it *all* bye. And the bizarro notion of "liquidity" support while inflation is on fire! what happens to logic beyond the event horizon?
Another super intuitive article. Congrats on #100