FSA to step up commodities monitoring
UK - The Financial Services Authority (FSA) has announced that it will increase its monitoring of the commodity markets in light of the fact that new players like pension funds have entered the market in masses and are in it to stay.
There will be no change in the FSA structure and certainly no regulatory changes, a FSA spokesman told IPE. "It will only be a step-up in the scrutiny of the commodities markets. We do supervise them anyway but given the growth we need to keep more of an eye on them - especially given new entrants and risks we have identified."
These risks are mainly associated with companies actually in the commodities market itself. The FSA pointed out in particular the importance of appropriate risk management systems and the problems created by a limited pool of investment staff from which to recruit.
Furthermore, the supervisory body told market participants to watch out for changes in the commodities sector arising from the use of new trading methods, and particularly from new entrants to the market who "may not share the same level of insight into the behaviour of the markets as traditional participants".
In any case the FSA agrees with investment managers that commodity investment is here to stay and that the trend will go "away from a cyclical opportunistic market to a genuine asset class".
Mark Mathias, chief executive for Dawnay Day Quantum, a structured investment specialist, recommended capital protected exposure for first investments in commodities. Alternatively, institutional investors could "use index exposure, but phase-in total investment over a pre-defined period to reach the final asset allocation desired".
The FSA said that most market participants believe institutional investors should build an exposure of at least 5%". In total this would add up to around $930bn (€698bn) in commodity investment worldwide.
Mathias commented: "Rigorous analysis would lead to a conclusion that 10% is nearer to the correct base allocation," he commented.
The study can be found on http://www.fsa.gov.uk/pubs/other/commodity_invest.pdf .