The UK's Financial Services Authority is to step up its oversight of the commodities market in the wake of a substantial bull run which it claims has raised risk levels for all market participants.
The recent growth in commodity markets with record prices, high volatility, and the high returns to be gained have attracted a wave of new investors and firms into what was previously viewed as a specialist market. These new entrants include hedge funds, pension funds, high net worth individuals and even a small number of retail investors.
The level of funds being invested is expected to grow and, unlike previous cycles, to remain, says Hector Sants, FSA managing director, wholesale business.
"The risks we have identified should not come as a surprise to those active in the market but serve to focus attention on the areas we consider to be of most impact and importance," he says. "Firms and exchanges need to consider how they have addressed these risks and continue to mitigate against them in the future."
The challenges identified relate to a shortage of specialist staff, system capacity constraints, risk management issues and algorithmic testing and tuning.
Aggressive and high volume trading and ever more ambitious investment funds pose fresh challenges for more traditional users of the markets and for the infrastructure providers who must now operate in a significantly changed environment, says the FSA.
"Given the growth of investment and the range of new participants we will be increasing our monitoring of commodities markets," says the FSA. "While these markets are no more susceptible to improper practices than any other, firms should ensure they have adequate controls in place."
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