A Singapore senior minister says the city-state’s financial regulator does not plan to inject liquidity into the commodity finance market, insisting access to finance from the banking sector remains robust. 

Tharman Shanmugaratnam, a senior government minister in charge of the Monetary Authority of Singapore (MAS), said this week that demand for working capital has increased among commodity traders due to higher margin requirements. 

As a result, traders “have had to use derivatives more widely to hedge their exposures against price volatility”, he said in response to a parliamentary question on risks to the financial sector. “Firms which do not manage their risks well may run into difficulty in servicing their loans.” 

In addition, virus containment measures introduced in China are expected to disrupt production and supply chains, causing “spillover effects” on the city-state’s trading activity, Shanmugaratnam said. 

The total exposure to commodity finance transactions among Singapore’s banks totalled S$109bn (US$79bn) at the end of last year, equivalent to around 9% of their overall credit exposure, he added. 

Shanmugaratnam noted that banks have increased scrutiny of borrowers that may be affected by market developments, including supply chain disruption, high prices and energy shortages, for instance by carrying out balance sheet stress tests. 

However, despite concerns over the availability of working capital, the minister said the regulator believes there is “no need… to provide liquidity to commodity firms”. 

“MAS would at most times prefer not to engage in direct provision of liquidity to corporate borrowers. The banking system continues to provide credit to the commodity trading sector to meet firms’ liquidity needs,” the minister said. 

“Enterprise Singapore’s interactions with the commodities sector also suggest that financing conditions for commodity traders remain stable. Commodity traders also tap on a diverse pool of financing, including banks overseas and international capital markets.” 

Multiple industry sources have told GTR they are surprised by the conclusions reached by the MAS. Singapore’s commodities market has become divided in recent years, with large traders reporting record earnings and robust access to financing, but with small and medium-sized firms struggling to access facilities from nervous banks. 

The issues stem in part from the fraud scandals that hit the city-state in 2020, which prompted many lenders to scale back their exposure to the sector. 

The collapses of Agritrade and Hin Leong, two large independent trading houses, were quickly followed by allegations of serious wrongdoing, including obtaining finance multiple times for the same trade transactions or for trades that did not exist in reality. 

Since then, extreme price volatility has increased traders’ dependence on financial markets to hedge risk, an option not typically open to smaller firms. 

The trend is not limited to Singapore, with several energy and commodities traders in Europe appealing for emergency liquidity support from governments and central banks. 

Paris-based Allianz Trade said in a March research note that “traders who usually buy physical materials and sell futures to hedge themselves from price risk have been facing increased margin calls”, with short-term futures contracts trading at a higher premium than longer-term ones. 

Russia’s invasion of Ukraine, and the subsequent imposition of sanctions by governments in Europe, Asia and the US, have also resulted in shifting supply and demand patterns, driving prices higher still. 

The situation has caught the attention of other authorities, including the US Federal Reserve. The Fed’s most recent financial stability report, published this week, says it is working with regulators internationally to understand “the exposure of commodity market participants and their linkages with the core financial system”. 

“Russia’s unprovoked war in Ukraine has sparked large price movements and margin calls in commodities market[s] and highlighted a potential channel through which large financial institutions could be exposed to contagion,” says governor Lael Brainard. 

The Fed’s report echoes a letter penned by Financial Stability Board (FSB) chairman Klaas Knot, sent to G20 finance ministers and central banks on April 14, which described commodity trading as the “epicentre” of price volatility in the global financial markets. 

“Prices have swung wildly, with liquidity temporarily evaporating in some commodity derivatives market segments and a number of traders coming under strain, including from large margin calls,” Knot writes. 

Knot says that in response, the FSB is carrying out “in-depth analysis and assessment of specific potential vulnerabilities, with a particular focus on commodity markets, margining and leverage”.