A rapidly evolving regulatory framework
The commodity trading industry is increasingly regulated and the sector engages with multiple policy stakeholders and decision makers in Switzerland and abroad.
Following the 2008 credit crisis, the 2009 G 20 Summit in Pittsburgh ushered in a new regulatory landscape for commodity traders.
Given the key role played by financial derivative products in the crisis and in an effort to reduce systemic risk, legislators and regulators worldwide set to introduce stringent rules to increase market transparency, strengthen risk management mechanisms and better protect investors.
Broadly speaking these new sets of rules can be broken down in three categories:
- Capital requirements
- Regulations specifically covering OTC derivatives
- Market conduct, transparency and market protection
These sweeping changes have a profound impact on the way business operations are conducted and risk leading to geographical arbitrage in the absence of a coherent global approach.
Swiss regulation of the derivatives market
Switzerland has adapted its national framework of rules applicable to the trade in derivatives, in line with the G20 commitments and in keeping with the recommendations of the Financial Stability Council. Adopted in 2015, the new Swiss FMIA, or Financial Markets Infrastructure Act, brings together in one piece of legislation the various relevant rules that used to be disseminated across several different legal texts.
At the fundamental level, the FMIA introduces three key requirements for derivatives trading: mandatory compensation, mandatory reporting and mandatory risk reduction and management.
For commodity trading companies, this translates into increased complexity and cost of trading operations. Systems and processes upgrades will be required to meet the new reporting requirements. The rules will increase working-capital needs to cover clearing fees, margins and collateral. Compliance functions will also be upgraded to track trading thresholds, position limits, etc.
STSA's contribution to the public policy debate
STSA works with its Members to actively inform the debate and towards the adoption of fit-for-purpose rules that reflect the specificities of commodity trading activities and are consistenly enforced at the international level.
The STSA Regulation Committee brings together heads of compliance and legal experts from Members to discuss changes in the legal and regulatory framework, with a focus on Swiss rules.
The Regulation Committee has particularly focused on the adoption and upcoming implementation of the Financial Markets Infrastructure Act (2015), better known under its German FinfraG acronym.
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Helping trading companies be compliant with the Swiss Financial Markets Infrastructure Act (FMIA/FinfraG/LIMF)
STSA has prepared together with its members a step-by-step guide for small trading companies under FMIA/FinfraG that details the key operational actions that companies should carry out. The guide was published in December 2017.
With the decision of the Federal Council to postpone the mandatory reporting of trades for small companies (qualifying as "small non-financial companies") until 1 January 2024, trading firms have additional time to prepare for full implementation and can concentrate on documentation and risk reduction requirements.
Basel Committee on Banking Supervision
Prudential rules for banks affect commodity trade finance framework conditions
Commodity trading firms have always relied on banks to finance and guarantee their activities.
The series of changes introduced by the Basel Committee on Banking Supervision have led to the tightening of access to financing as banks are pushed into lowering trade-finance exposures. This has had a strong impact on the commodity trading sector and has led to higher costs across all trade finance products.
Over the years, the BCBS has introduced a number of new rules that are shaping the industry:
- Basel 1 (1988) focused on credit risk and the risk-weighting of assets.
- Basel 2 (2004) expanded the Basel 1 set of rules for internationally active banks, with a strengthened capital requirements framework, supervisory review and market discipline rules. The aim was to better align the regulatory capital requirements to the underlying risks.
- Basel 3 (2010) added rules with regards to leverage ratios and liquidity requirements for banks, in order to mitigate the risk of runs on banks.
The BCBS is currently working on revising Basel 2 and a future Basel 4.
Keen to learn more about financial regulation?
The following websites provide a wealth of information: