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The news that commodities trading houses may face sterner regulation has been met with scepticism in the industry.

Earlier in May, the Financial Stability Board (FSB) established by the G-20 to tighten up global financial regulation, suggested that regional and national regulators explore whether traders should be more tightly-governed.

The FSB classes commodities traders alongside hedge funds and money market funds as non-banking lenders (or “shadow bankers”), given that some trading houses have attempted to replace gaps in the lending markets left by withdrawing banks by making loans from their own books.

While acknowledging that trade finance remains a drop in the ocean for the likes of Trafigura and Glencore, regulators have been asked to consider whether more transparency is needed in the notoriously secretive industry, and whether it should be covered by a minimum capital holding requirement rule, similar to the one about to hit banks.

However, various industry figures spoken to by GTR doubt whether any such rules would be possible to enforce. Furthermore, some have questioned whether the regulation is needed and whether it would have a positive outcome.

Speaking of the mooted minimum capital-holding requirements, one trade financier says that the end consumer would be the one to lose out. “If you’re forcing trading houses to hold a minimum amount of capital,” he says, “that’s going to cut back on their margins. So the first thing they’ll do is raise the prices of commodities.”

Gavin Lavelle, CEO of commodity trading software house Brady, tells GTR that the nimbleness of the commodity trading industry, compared to the banking industry, may make it difficult to enforce uniform global rules.

He explains: “These are global markets, with trade happening all over the planet. It’s even more diversified than banking, which takes place in the main money centres of London, New York, Tokyo, etc.

A lot of the commodity intermediaries are not in the main financial centres. They’re good private businesses and the visibility is a lot lower already and it would be more difficult to tie global rules to it. A lot of the trading organisations are much smaller, discreet and mobile and capable of moving. I’m not sure how you’d regulate that.”

A senior executive within a commodities trading group, who asked not to be named, challenges the motives of those behind the regulation, as well as their competence. The trader’s business is highly active in the secondary market, selling tickets on syndicated trade finance deals, usually of around US$10mn. Currently, his team is trying to resell tickets on nine transactions.

He tells GTR: “Regulation is usually driven by politics – usually by people taking a populist short-term approach, and it’s also usually late. Take a trade finance transaction: for example, I’m exporting a cargo of oil from Angola. What is my risk? You can’t regulate without understanding the risk. Is it Angola, the price of crude, the trading company or the US refinery? Trade finance is a tripartite agreement – not bilateral like conventional finance. Until they get this, they’re not going to get anywhere.”

Brady’s Lavelle also questions the legitimacy of applying regulation to the industry. While the industry has certainly been taking on more principal lending, it is secured by physical assets (the commodities), and the houses are typically not very highly-leveraged. “They operate on fairly thin margins and I don’t think that’s the problem,” he says. “I would strongly argue that making loans into the metals and food markets is something to be encouraged. People need metals and food more than they need credit default swaps.”

The industry has come into the spotlight over the past few months, with the main criticism being its secrecy. A recent article in the Financial Times said that “the net income of the largest trading houses since 2003 surpasses that of the combination of mighty Wall Street banks Goldman Sachs, JP Morgan Chase and Morgan Stanley, or that of an industrial giant like General Electric. They made more money than Toyota, Volkswagen, Ford Motor, BMW and Renault combined”.

Commodities trader Glencore’s US$33bn merger with miner Xstrata, which was completed late in April, further thrust the industry into the public eye. It took the deal well over a year to complete, having been beset with controversy throughout negotiations. Issues arose over the involvement of Qatar’s sovereign wealth fund, while concerns over South Africa’s coal supply also led to delays. Even with the merger complete, it has refused to leave the headlines, with executive director Sir Steve Robson’s resigning with immediate effect in May.

In December 2012, Hillary Joffe, spokesperson for South Africa’s power utility company Eskom, told GTR: “We have highlighted our concerns in relation to the security and cost of coal supply, and they relate not only to the fact that the merged entities would account for about 15% of Eskom’s total coal, but also to the fact that the merging entities would be one of the largest traders of coal on the market, and in that way could influence the market. We’ve not asked for prohibition in any sense, but we’ve proposed some conditions.”

Brady’s Lavelle says the merger will provide greater competition for the mining industry behemoths – the likes of BHP Billiton, Rio Tinto and Vitol. The first results Glencore Xstrata has announced since the merger seem to back up his claims. Total own-sourced copper is up 18% on last year, with African own-sourced copper up by 44%. Australian zinc production is up by 11%, with the company reporting that “energy saw markedly improved profitability during Q1 2013”.

Meanwhile, GTR’s source within the commodities trading group welcomes the merger. “For us it’s good news,” he explains. “Glencore is going to be more of an industrial operator than a trader, which is fantastic for us as we’re traders. The size of the mining industry is a handicap. They have huge overheads and when you have huge overheads you’re trading activities will be flawed. We’re looking at bottom-up but with their costs they’re now going to be looking at top-down.”