(Bloomberg) — JPMorgan Chase & Co. is reviewing its business with some commodity customers after the shrinking of short nickel positions last month, a move that threatens to remove more liquidity from the sector.
JPMorgan management asked teams around the world to conduct further due diligence on some existing customers, including metals operators and oil refiners, according to people familiar with the matter. Risk assessments are also being carried out in certain financing functions, said the sources, who asked not to be identified because the information is private.
The US bank is one of the major players in the world's commodity markets and by far the largest in metals. It was also a key player in the nickel price increase that rocked the London Metals Exchange last month, as it is the largest counterpart to Tsingshan Holding Group Co., the world's leading metal producer that is at the center of the contraction of short positions.
JPMorgan was already monitoring and adjusting its exposure to commodities in the wake of increased market volatility prior to the contraction of short nickel positions, according to another person familiar with the bank's stance. Since the rise in nickel prices in early March, the bank has carried out a deeper review, the source said.
“In line with prudent risk management, we have reviewed risks in the light of important market developments throughout this year and will continue to do so in all markets, but we remain committed to our commodity franchise,” JPMorgan said in a statement.
Any reduction by the bank would come at a particularly difficult time for commodity markets, which are already suffering from a sharp decline in liquidity as high prices and sharp swings force traders to stay out of the way.
Although the review covers clients across JPMorgan's commodities business, it focuses on base metals and businesses related to operations on the London Metal Exchange, people said. One of the issues the bank is considering is how to stress test its business in the event of unprecedented collisions such as the one with nickel, one person said.
It is not clear what the outcome of the review will be, people said, but it is possible that it could lead JPMorgan to reduce its activity in the commodity sector. The bank has already been decreasing its exposure to the nickel market, people said. It has also demanded additional management approval for new metals financing operations.
The contraction of short nickel positions shook the commodity sector, and LME said it had generated a “systemic risk” for the market. In response, some banks temporarily halted commodity financing in Asia earlier last month, according to physical operators in Singapore and China who often borrow from affected banks. Some of the operators are still unable to access financing from those banks, including JPMorgan, and have been told that it is because lenders are reviewing their commodity business, they said.
The operations that have been affected include buyback agreements with banks, in which merchants use their inventories to obtain financing.
About 50,000 tons of Tsingshan's total short nickel position, over 150,000 tons, was held through an over-the-counter position with JPMorgan, Bloomberg reported last month.
The Chinese company struggled to pay its margin adjustments after nickel rose to 250% in just over 24 hours, but gained a break after operations were suspended for a week, transactions were canceled at higher prices, and its banks — led by JPMorgan — agreed not to do more margin adjustments.
On the basis of the figure of 50,000 tons, Tsingshan would have owed JPMorgan some US$1 billion in margin the day before the nickel market stopped. If the price of nickel had been allowed to continue to rise, the bank's exposure to Tsingshan could have increased by billions of dollars more.
Original Note:
JPMorgan Is Reviewing Commodity Exposure After Nickel Chaos (1)
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