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Commodity frenzy brings FSA warning

The FSA is warning that in the clamour to jump on the commodities bandwagon, some investment firms are appointing inexperienced staff.

The regulator says it is concerned that some firms are now being overstretched and groups should ensure risk is managed as a priority as businesses set up trading desks.

The FSA pointed to two US hedge funds as prime examples of how companies can fall into the trap of increased price volatility, which has raised risk levels and the cost of trading, with hedge fund businesses Amaranth Advisors and Ospraie making big-bets on natural gas and metal prices respectively, with both backfiring.

Commodities exchanges were also implicated in the warning, with the FSA claiming that their compliance functions needed to be properly resourced. It points to the London International Financial Futures and Options Exchange, London Metal Exchange and the ICE Futures market as the three main regulators of the market.

The last few years have seen vast sums ploughed into the commodities sector in various guises. For example, the face value of commodities derivatives in contracts has risen fivefold to £3,250bn in the past two years while around £40m of pension fund assets is now invested in commodities.

FSA managing director, wholesale business Hector Sants, says: “The recent growth in the level of investment in commodity markets, the development of new products and a changing user base has combined to create a greatly changed environment in the commodities markets over the last few years. This has given rise to a number of risks and challenges both for established and newly arrived participants.

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