LONDON, March 23 (Reuters) - A crash in oil prices has once again proven the resilience of trading houses and shown there is no need to put them under strict capital requirement regulations, research funded by trading house Trafigura showed on Monday.
The report came as European authorities review a set of regulations known as the Markets in Financial Instruments Directive (Mifid II), which contains capital requirement directive (CRD IV) aimed at cutting systemic risks across equity, fixed income and commodity markets.
The research funded by Trafigura and written by Craig Pirrong, professor at the University of Houston and a commodity market expert, said that unlike major banks, traders posed no systemic risks.
If Europe decides to slap new capital requirements on trading houses, they would be forced to shrink and deleverage, ultimately making commodity prices more expensive.
“There is little if any justification for subjecting commodity trading firms to CRD IV,” the research said. “This would produce no material reduction in systemic risk, but would increase the costs of commodity trading, to the detriment not just of trading firms, but of the producers and consumers of commodities.”
Trafigura is one of the world’s top five trading houses alongside rivals such as Glencore, Vitol, Mercuria and Gunvor.
The research noted commodities traders are much smaller than banks and in times of crisis they generally do much better.
If trading houses were made subject of capital requirements, they might be also forced to raise more money via equity to pay down debt.
“Traders can very well rely on other mechanisms to serve the markets without relying on the equity markets. It is simply costly for them to raise equity,” Pirrong said. (Reporting by Dmitry Zhdannikov; Editing by David Holmes)