CEBS consultation on commodities businesses reveals risk areas

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A consultation by a group of EU banking supervisors on issues arising from trade in commodities has identified market, operational, legal and liquidity risk as possible problem areas.

The Committee of European Banking Supervisors’ (CEBS) consultation, published on June 15, also said that no generalisations can be made regarding systemic risk.

CEBS said: “Systemic risk crystallises through contagion transmitted via market participants' direct and indirect interdependencies. While the perceived interconnections may give rise to systemic risk concerns, their extent may depend on the size of the respective markets for commodities or exotic derivatives, relative to the wider financial market or the related industry.”

The report is a response to the EU Commission’s request, made in August 2006, for the organisation to assess commodities risk. CEBS has also stated that counterparty credit quality should not matter when assessing the level of risk involved in large exposures.

The Committee said: “CEBS’s preliminary view is that, given the nature of unforeseen event risk, counterparty creditworthiness should not be reflected in these limits.”

The statement coincides with the committee’s announcement on June 15 that it would begin a public consultation on the regulation of large exposures. The consultation will consider issues such as the importance of counterparty credit quality and the 800% aggregate large-exposures limit.

It has released a preliminary document detailing the CEBS’s stance on some of the most important concepts involved in the large-exposures regime. The committee has invited the public to submit comments up until August 15.