* Risk worries push commodities trade to exchanges from OTC
* Industry data show surge in clearing of OTC business
* Cost of risk management, counter-party worries main driver
By Christopher Johnson
LONDON, Aug 7 (Reuters) - Increasing volumes of commodities will be bought and sold on formal financial exchanges rather than over-the-counter (OTC) markets even if regulators impose tighter limits on trading positions.
Spurred on by a public outcry over soaring oil and commodity prices in the last two years, U.S. regulators have been holding hearings expected to lead to attempts to rein in speculation on U.S. markets and possibly in Europe. [ID:nCFTCREG
Some exchange officials have said tighter controls on speculation could drive participants away from exchanges such as futures and options markets into darker "parallel markets."
Jeffrey Sprecher, head of the IntercontinentalExchange (ICE) , which runs the futures market for North Sea Brent crude oil, said applying trading limits could push investors off transparent platforms "into opaque portions of the market."
But worries over the quality of counterparties and the high cost of risk management on unregulated markets are likely to overwhelm almost any inconvenience from tougher regulations.
Olivier Jakob, managing director of Swiss-based oil consultancy Petromatrix, said if regulators clamped down heavily on financial flows it would impact exchange volumes, but he saw almost no risk of that happening.
LIQUIDITY
"Investors will go where there is liquidity and, if anything, better regulation is likely to encourage liquidity, not discourage it," Jakob said. "I can't see any problem."
Industry figures support this argument.
Data from ICE and other futures markets show the movement over the last two years has been towards public exchanges and away from unregulated OTC markets as firms try to reduce risk.
Following the collapse of U.S. investment bank Lehman Brothers last September, worries over the credit worthiness of counter parties in financial markets increased.
After an initial dip in trading on almost all commodities exchanges, volumes revived strongly and there was a marked increase in clearing of OTC business on regulated exchanges as traders' treasury departments imposed tighter risk management.
ICE cleared more than 5.6 million OTC global oil contracts in the second quarter of this year, double the volume in the same quarter last year and up from just 1.5 million in the fourth quarter of last year, ICE figures show.
Brokers say there has also been a steady movement of commodities traders towards exchanges and away from OTC markets.
The Futures and Options Association (FOA), the main derivatives industry trade organisation in Europe, opposes a tight, rules-based system for markets, preferring instead a gentler regime, relying on accountability and transparency.
But it sees little or no risk to traded volumes from tighter rules that may be imposed either by the U.S. regulator, the Commodity Futures Trading Commission (CFTC), or the UK financial watchdog, the Financial Services Authority.
SECURITY
"I don't see any thrust towards OTC markets from the drive towards greater regulation. In fact, the trend is going the other way," Anthony Belchambers, FOA chief executive said.
"People naturally want the greater transactional security and transparency of an exchange-traded market ... If they can use a standardised transaction they would rather do that."
Traders say the move towards regulated exchanges and away from less regulated markets is easily explained by cost.
Banks and treasury departments impose their own limits on OTC trading positions and lenders insist on higher capital requirements for off-exchange trades. Lenders also want conservative margin obligations placed on OTC dealings.
"Somebody has got to meet those margin calls, and you may also have much stricter more loss-resistant collateral required," Belchambers said. "There is a natural migration towards exchange-traded contracts."
Christopher Bellew, oil broker at Bache Commodities in London, said credit worthiness remained an absolute priority for trading firms despite an easing of the global crisis: "The clearing system protects traders using the oil markets."
Michael Lewis, head of commodities research at Deutsche Bank, said many companies were simply more comfortable with exchanges than OTC markets: "Counterparty risk is a major issue and it is not going away."
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(Editing by Peter Blackburn)