Singapore, 28 January 2010

U.S. President Barack Obama's proposed tightening of bank trading rules could squeeze liquidity and ramp up volatility in commodity markets, creating a divergence between physical and futures prices, ANZ said on Thursday.

Last week, Obama outlined a plan to cut down on proprietary trading and curb financial market risk-taking at some of the largest U.S. banks, including Morgan Stanley (MS.N) and Goldman Sachs (GS.N), which daily wager tens of millions of their own dollars on energy and commodity markets.

The President's State of the Union address on Wednesday emphasised the need for serious financial reform but did not give the institutions a heavy tongue-lashing.

"To limit the amount of proprietary trading in the commodity market, it means effectively borrowing much less, and stealing liquidity from that market," Geoff Clear, Head of Asia Commodities at Australia and New Zealand Banking Group Ltd (ANZ.AX), told Reuters.

"If you take away liquidity, volatility increases, the price between buyer and seller will have a wider gap, and that reduces the efficiency of the market," he said on the sidelines of a coal conference in Singapore.

Clear also pointed to wheat futures prices on the Chicago Board of Trade (CBOT), which differed from physical-delivered prices by a significant margin recently. "That gap created a lot of questions about what is the relevance of the futures market to the physical market, and that would be the sort of issues that could come up in the future," he added.

While Obama's concerns are valid, the potential fallout from the scheme needs to be tempered, Clear said. "It's not a slam dunk, but needs a lot of careful thought and a lot of discussions with the industry on how it may be implemented."

Ends --

Reporting by Jennifer Tan; Editing by Ramthan Hussain, Reuters - for Commodities Now