Which regulations are commodity traders happy with?

With no mercantile exchanges, which regulations are next for Swiss commodity traders? Keystone

As home to some of the largest commodities trading companies in the world, Switzerland is taking steps to bring legislation more in line with major business partners. While recently adopted measures are seemingly welcomed by the industry, other more stringent steps are being considered with slightly more trepidation.

This content was published on July 19, 2015 - 11:00
Paula Dupraz-Dobias, Geneva

For Stéphane Graber, secretary general of the STSA (Swiss Trading and Shipping Association), Parliament’s adoption of the Financial Market Infrastructure Act was essential for the industry he represents.

The legislation, which governs the organisation and operation of financial markets, aims to align Switzerland to regulations, particularly in the United States and the European Union, to control manipulations of large trades.

The newer international legislation, such as Europe’s MiFID II, adopted in 2014, include derivatives, previously overlooked.

Derivatives - contracts that take their value from underlying assets such as commodities - are a central part of the industry. 

“We need to have a regime that is recognised by the EU as commodity traders have international activities, in the EU and the US, so we need to make sure that the Financial Market Infrastructure Act is equivalent to MiFID II. If Switzerland is not recognised as a regulated country, we will have difficulty operating in Europe”, Graber told at an industry conference in Geneva.

In Switzerland, commodities trading accounts for approximately 10,000 jobs and 3.5% of gross domestic product (GDP), or some CHF20 billion, according to official estimates. Glencore, Gunvor, Vitol and Trafigura are among some of the largest commodities groups based in Switzerland.

Official pragmatism

The issue of “position limits”, which would have put a cap on volumes held speculatively by traders, was resolved in Parliament by giving the cabinet the authority to introduce such limits when necessary.

Some politicians had expressed concern about speculative traders interfering with the price of basic food staples and essential raw materials.

Traders argued that “position limits” in European and other legislation applied more to mercantile exchanges than to individual trades executed by the Swiss-based businesses.

The adoption of an exception to regulations on the matter was hailed by Graber as understanding the situation in Switzerland. “We are in a different situation than financial users of derivatives because we are using physically settled derivatives as an insurance tool… a hedging tool.”

Swiss authorities, he said, “are trying to be pragmatic and consistent with regulations, and keep a favourable, flexible approach which is of interest to the industry”.

Not all ready for transparency initiative

But further and more restrictive regulations focussing or greater transparency and accountability of companies involved in bringing energy and mineral to the market, are looming for commodities traders.

Late last year, Trafigura surprised its Swiss peers when it announced it would join the Extractive Industries Transparency InitiativeExternal link (EITI),  and publish payments it had made to governments to buy and sell oil.

The EITI, whose multi-stakeholder board consists of representatives from governments, extractive companies and civil society, aims at enforcing greater transparency by requiring disclosure of payments made in the extraction of oil, gas and minerals. Governments are required to report project-by-project on how much companies pay to exploit and extract such commodities.

Greater accountability by governments and companies was seen by EITI as a way of combatting corruption in countries suffering from the so-called resource curse, where an abundance of minerals is accompanied by lower economic growth and poverty.

Andrew Gowers, Trafigura’s head of corporate affairs, explained to that: “This was a very specific area of focus for the NGO community and for governments and companies, and we decided last year to engage in that by talking to the EITI. We are happy that this was the right forum. Previous decisions with other parts of the industry had not been able to reach a consensus, so we decided to take the lead”.

He said a number of other traders had contacted them “for more information about how we arrived at our decision and what the EITI entails".

In April, Gowers told a United Nations conference in Geneva that the industry in Switzerland had done a “pretty poor job” in explaining itself to the public. “We recognise we can’t escape scrutiny and we aim to meet increased scrutiny with an increased level of disclosure.”

Regulations unclear

NGOs nonetheless feel that many questions still remain on how EITI will be applied. For the extractive industries, EITI requires that companies report on individual projects, such as royalties, taxes and fees paid to governments for mining concessions.

Requirements for trading companies are less clear, as Olivier Longchamps of the Bern Declaration explained. “Trafigura says they will be compliant with EITI, but the necessary EITI rules do not yet exist. So according to the amount of detail present in regulations, it could be useful, or not useful at all”.

The Berne Declaration is a non-profit organisation which campaigns for equitable relations between Switzerland and developing countries.

Voluntary adherence to EITI is another issue for the NGO’s spokesperson. “While Trafigura says it will join, there are a whole series of other companies who will not do so. EITI therefore needs to be compulsory. It has to apply for all firms, not just those that say that they have nothing to reproach.”

He explained that if a non-EITI compliant company purchases commodities from a government, and then sells these to an EITI compliant company, the latter would not be obligated to report, as it did not purchase directly from the state.

In its “Background Report on CommoditiesExternal link”, the State Secretariat for Economic Affairs (SECO) recommended that Switzerland join EITI.

EITI’s board is expected to convene in Bern in October to discuss greater engagement of the commodities trading business in the initiative.

Under pressure

STSA’s spokesman was nonetheless clear that legal requirements have added pressures to Swiss-based businesses: “Unfortunately, it is not only expected for firms to be good companies and pay taxes, generate growth and provide jobs in the countries where they operate, but there is now another pressure on industries to have proper due diligence and compliance to environmental regulations.”

Speaking to commodities traders and shippers at the recent Marine MoneyExternal link conference in Geneva,  Graber said such challenges entail “costs for companies, and costs on developing our abilities and to continue to develop activities.”

Also, tighter access to trade finance, in part due to stricter compliance on international sanctions, particularly after US authorities fined BNP Paribas $9 billion for processing loans to Sudan and Iran, has meant further strains for smaller traders.

In recent years, higher costs due to a stronger franc, increased regulation and attractive fiscal regimes particularly in Singapore have had some traders pack up to what they perceived to be more welcoming destinations. In 2012, Trafigura moved headquarters for its trading operations to the Southeast Asian financial centre.

Up to a certain point

Also present at the Geneva conference, Stanislav Todorov of Quadra Commodities interpreted the industry’s reluctance to adopt newer, more stringent regulations: “The whole world is unified to a certain point, but the first mover is always at a disadvantage. When you do it first, people go elsewhere, and later there is nowhere else to go. People then come back, but bringing people back is hard.”

“It’s a difficult situation”, commented another independent trader who wished not to be named. “The more regulation you impose, the more legal loop-holes will be sought by traders”.


The Financial Markets Infrastructure Act was adopted by both houses of parliament in mid-June, and is expected to come into effect between the end of 2015 and the start of 2016.

The legislation regulates derivatives trading, and follows a lead taken on the matter in the United States with Dodd-Frank and MiFID II in the European Union. Regulations had been adopted as a step to avoid another financial crisis, as in 2008. 

Swiss legislation exempts commodity derivatives with physical settlement, as they are viewed as a smaller risk for the financial sector.

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