Month of March, 2007

On March 27, 2007, the United Kingdom-based Financial Services Authority (FSA) issued a report in which they warn about the increasing risks in commodity investing1. To briefly summarize their findings, the FSA warns that there is insufficient energy experience at many investment firms and that the existing experience is overstretched. Furthermore, they say that increased volatility in many commodity markets raises the "cost of trading and the risk of financial failure" and promote the concept of proper risk management including "thorough testing and modeling for algorithmic trading systems." But they go further in recognizing that many investment firms are now investing in commodities through physical assets (i.e., holding and trading physical position) such that their portfolios are "significantly altered and risk management systems must be appropriate and senior management must fully appreciate the risks they are assuming." Lastly, the FSA states that "consumers risk being exposed to unsuitable investments that they do not fully understand."