Tougher global regulations on derivatives may put small oil traders out of business

GENEVA: Tougher global regulations on derivatives and capital requirements might put small oil traders out of business in the next few years and increase the dominance of just a few major houses, something the regulators might ultimately regret.

"The big fear at the moment is that regulators may achieve the opposite of what the regulations are meant to achieve. You might end up with less competition," said Folker Trepte, a partner at PwC, who advises commodities traders.

Trepte says that when clients ask him how regulations will change the trading landscape in the next years, he has a pretty gloomy answer - if you are a small firm, you may not survive.

"Some small and mid-sized traders will decide to leave the market as costs will become too high. Sometimes you have two traders and may need more people in the back office. It may be just too expensive," Trepte told a room full of traders at an industry conference Global Energy in Geneva this week.

Commodities traders have been adjusting to tightening regulations on financial markets since the middle of last decade and will have to continue doing so until 2015 as new rules on derivative trading and capital requirements come into force.

Regulators in the United States and the European Union say new rules are needed to cap speculative froth, prevent important institutions from collapsing and eliminate manipulation, which pushes up energy or food prices.

The adjustments will cost a lot. "The regulations as well as financing issues could have the biggest toll on smaller and mid-sized companies and traders," Christophe Salmon, chief financial officer for Europe, Middle East and Africa at Trafigura, one of the world's biggest traders, said on the sidelines of Global Energy.

'NAKED' TRADES

So far, regulations have had the biggest impact on commodities trading at large banks due to a crackdown on proprietary trading and the planned Dodd-Frank regulation, which would limit positions banks can take in derivatives.

Under Basel regulations, requirements to set aside capital for trading at banks nearly tripled this year. Although commodity traders are exempted from capital requirements until 2015, it looks more and more likely the rules for traders could be quite similar to banks.

"I see many commodities businesses in the EU and the US restructuring quite dramatically. There will be consolidation and it is better to realise now that you will be too small in the new world and try to find a solution," said Robert Finney, partner at law firm Holman Fenwick Willan.

Trepte says that although it will take up to two years to get more clarity on the final outline of regulations, it is possible that in Europe traders may need a banking license.

The idea seems strange to most players. "Trafigura is an international commodities trading and logistics company - not a bank. So I don't understand why we would need a banking license," said Salmon from Trafigura. With all its financial might Trafigura could afford a license but it could be a step too far for small traders.