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OTC reforms to reshape commodities markets
10 October 2013
Key trends that will determine the future of commodities trading
The changing nature of commodity investments, with increasing regulation and globalisation will have a significant impact on commodity trading, SunGard has argued.
The firm said that six key trends would be highly important to the mid-term future of commodity trading over the next 12-18 months, with reforms to over-the-counter (OTC) trading and the role of technology being particularly important.
Robert Stowsky, senior analyst, Aite Group, said: “Regulatory change while not new continues to become more diverse and widespread, creating more complex challenges and subsequent pressures on commodity trading firms to quickly adapt yet continue to operate profitably.
“This is driving a renewed focus on technology upgrades and enhancements to equip the industry with the right tools and information to better comply and compete.”
SunGard said the 'commodity super cycle' of the last few years had largely come to an end, with low correlations across commodities forcing hedge fund managers to to look at micro approaches.
It added that safe havens from collateral charges in the newly reformed OTC environment would be “scarce”, requiring more collateral management systems for hedging and trading operations, while the replication of OTC trading conventions in exchange-cleared contracts, combined ever-greater globalisation, would call for more flexibility in trade capture and reporting systems.
SunGard said technology would come to the fore, as the shift from formula to value-at-risk (VaR) based systems for movement of margin calculations would make middle and back-office risk modelling methodologies more important.
It added that the increasing volume and complexity of data, which includes reference and market data, would force companies to invest more in data management and interpretation. The firm also argued that the rise in high-frequency trading in the commodities futures markets had increased both market depth and intraday execution risk, making real-time risk analytics and reporting a vital part of decision-makers' toolkits.
Matthew Healy, senior vice president and general manager, Kiodex, SunGard’s capital markets business, added: “The regulatory landscape for OTC and cleared commodity trading is changing rapidly, requiring firms in all verticals to adapt their risk and process methodologies toward new standards."