With commodity traders facing increased margin pressure due to elevated volatility, large global banks have stepped up their lending to traders, Fitch Ratings reports.
The rating agency said that with commodity prices reaching record highs, trading firms are facing higher margin requirements and “unprecedented” liquidity needs.
“Higher prices are generally positive for commodity traders’ revenues but they force the firms to post substantial cash collateral, largely sourced from committed bank credit facilities, to sustain out-of-the-money positions in derivatives,” Fitch reported.
In turn, large banks with global footprints and large wholesale operations that have material exposure to the major commodity trading firms have increased their lending to these firms.
“We expect the banks to continue to fund the firms’ margin calls because the liquidity pressure, although serious, should be temporary, and commodity traders are a good source of profit for the banks in normal times,” Fitch said.
Additionally, the report noted that the banks’ risks are mitigated by the fact that much of their lending is to trading firms with sound business models, large liquidity buffers, and diverse financing.
“Positively, most of the big European banks have shifted their focus to large, top-tier commodity traders in recent years, with some significantly reducing their trade and commodity financing activities,” Fitch said.
“This puts them in a better position to withstand a potential stress in the sector and should mitigate any resulting pressure on asset quality,” it added.