The European Union's push to introduce new capital requirements for banks through the Basel-II (Revised international capital framework) pact may hit specialist commodity traders, such as large oil companies.
According to KPMG, a global network of professional firms providing audit, tax, and advisory services, Basel-II was introduced in January to better match banks' capital requirements with the risks that they take. It also affects bank clients such as traders in commodity markets.
Basel-II Framework describes a more comprehensive measure and minimum standard for capital adequacy that national supervisory authorities are now working to implement through domestic rule-making and adoption procedures. It seeks to improve on the existing rules by aligning regulatory capital requirements more closely to the underlying risks that banks face.
In addition, the Basel II Framework is intended to promote a more forward-looking approach to capital supervision, one that encourages banks to identify the risks they may face, today and in the future, and to develop or improve their ability to manage those risks. As a result, it is intended to be more flexible and better able to evolve with advances in markets and risk management practices.
Banks and financial market participants have at least two years to get their systems in place before the Basel-II accord is enforced by the European Union via the Capital Requirements Directive.
The KPMG report said commodity traders should be treated differently to financial market participants as commodity markets are ultimately backed by the physical delivery of commodities.
It also said the requirement to hold capital against settlement and counterparty risks did not take account of the realities of physical transactions or market practice for risk mitigation.
