March 2015 - In the aftermath of the Great Financial Crisis, regulatory authorities have undertaken a searching review of firms throughout the financial markets to identify those that could pose systemic risks. This review has extended to include firms not typically thought of as part of the financial sector, even broadly construed such as Commodity Trading Firms (CTFs).

Some regulators have questioned whether some of these firms are “too big to fail,” and hence pose a threat to the stability of the financial system, necessitating subjecting them to additional regulation akin to that imposed on banks.

This white paper explains the functions of these firms and evaluates whether they pose systemic risks that would justify subjecting them to regulations (notably capital requirements) similar to those imposed on other entities such as banks which are deemed to be systemically important.

About the author

Craig Pirrong is a professor of finance and the Energy Markets Director for the Global Energy Management Institute at the Bauer College of Business at the University of Houston. His research focuses on the economics of commodity markets. He has published over thirty articles in professional publications and is the author of four books. He has also consulted widely for clients including electric utilities, commodity traders, processors and consumers and commodity exchanges.

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22 March 2015