From what we eat to how we heat our homes and the transport choices we make, commodities are central to all our lives.
Not a day goes by without a news article reporting on a topic which affects international trade, be it changes in law, new regulations, mergers and acquisitions, or weather phenomena.
In recent months, there have been many news reports on soaring chocolate prices fuelled by increasing demand in Asia, where the chocolate market is worth around $12bn. Cocoa demand is outstripping feasible levels of supply by farmers.
Market fundamentals (the supply and demand of commodities) govern the various international commodities markets and contributing factors such as weather, demographics, political changes, export controls and other less obvious governmental policies and regulations abound.
The breadth of the commodities market extends far beyond the supply and demand of physical goods. In order to invest in new markets and/or trade in large volumes, trading houses need financing. This has meant a move away from traditional sources of financing, and means that innovative sources of finances have to be explored, such as financing receivables and using inventory as collateral. Further, as some banks are retreating from commodity based financing, trading houses have been forced to become more creative with pre-payment mechanisms.
The current hot topic splashed across the front covers of broadsheets is sanctions against Russia. One of the very aims of sanctions is to make it difficult for the sanctioned country to trade with the rest of the world. The risk of breaching sanctions is high. Different regimes applicable to the same sanctioned country can be motivated by different policies and political stances. Increasingly concerted action on cross-border sanctions and anti-bribery means market participants need to be particularly wary of ensuring appropriate compliance and due diligence.
New and revised regulations have been a source of market change. There has been a significant rise in regulatory reform on both sides of the Atlantic since the financial crisis in 2008 (for example, the Volcker Rule and Dodd-Frank Act in the US, EMIR and MiFID 2 in the EU and Basel III which can have global effect) with the aim to increase consumer protection and enhance reporting and transparency. The effect of this is most evident in the banking industry where there have been wholesale transfers of commodities trading businesses by banks and the closure of some proprietary trading desks.
This is an area of legal practice which is truly ever-evolving and global; it requires lawyers to be flexible and agile at keeping abreast of and negotiating change and flux.
Prajakt Samant is a partner and Sejal Ghandi is an associate at Reed Smith.