When the US government started to talk about regulatory changes on commodity trading, there was a lot of discussion about how far any changes would go and the effect they would have, says Olivier Godin, Asia head of commodities at French bank Société Générale in Hong Kong.

A widely held view is that regulatory changes will be watered down from their initial form, but that they remain just the start of how legislation is likely to affect banks. For example, bankers seem resigned to the fact that capital requirements are bound to become tighter, but they are also concerned how level the playing field will be for market participants.

In the commodity space, says Godin, some of the most significant long-term concerns for banks are those surrounding proprietary-trading limits and off-exchange, non-cleared derivatives.

As for commodity-trading position limits, "there are clearly some areas where [such limits] might be an issue for the market," he says. Such limits have been mooted in the US, for instance, to help curb excessive speculation, raising concerns by some. While bankers "wait for more meat on the proposals", says Godin, European regulators seem less keen on the idea of position limits, say some market participants.

In the meantime, clients have not shown any reluctance towards commodity investments, despite potential regulatory changes, says Godin.

Following the big drop in structured-product volumes triggered by the Lehman minibonds crisis in 2008, the retail market has gradually been re-opening, he says. A lot of investment has been made through simple products, such as exchange-traded funds and notes, whether listed or as mutual fund-type assets. This is something other product providers seem to have noted, with Barclays Capital, for example, having listed a commodity index-based ETN on Singapore Exchange in December.

However, despite ETFs and ETNs being relatively simple to understand, commodity-related funds and notes that reference oil, for example, present the problem that they don't closely track the oil price. The issue is that ETF providers have to roll the index futures every month, which ends up being expensive -- particularly if the crude price is in contango -- and therefore negatively affects returns, says Godin. Hence, the bank is seeking to continue investor education on this area.

Nevertheless, the bulk of retail investment has been into gold and energy, he adds, whether purchase of the physical underlying, or through futures or index-based strategies.

With regard to energy in particular, SG and other product structurers have been proposing to distributors and investors ways of getting exposure to the forward curve. It is relatively expensive to do so, says Godin, since the curve is currently in contango -- that is, the futures price is above the expected future spot price.

For example, he says, commodity product structurers have been selling relative-value plays on indices -- long-short plays. Institutions, for instance, have been looking at volatility-target products, whereby the exposure is adjusted depending on the level of volatility -- that is, when price volatility is lower, exposure to the underlying is reduced, and vice versa.

"[Vol-target instruments] are quite interesting, because you can play a lot on the forward curves," Godin adds. "You can achieve a good Sharpe ratio on these products; the strategies are generally quite steady." He says SG has seen interest from various types of investors, including pension funds, sovereign wealth funds, insurers and asset managers.

Meanwhile, the high-net-worth market has been driven by very short-term investments, he says, typically with three- to four-month maturities. They have been trying to capture yield by taking directional bets. Given that commodity prices -- like stock markets -- have fallen in recent weeks, there has been another series of investments in those markets.

One example of a structure being sold by private banks is SG's 'twin win' auto-callable oil note, says Godin. It's a four-month product designed for investors with a "slightly bullish" view on oil.

Beyond the usual markets of energy and gold, Godin has seen interest in other commodities that had "lost their shine" in the past -- for example, soft commodities such as sugar. He notes that base metals have also been attracting attention recently, although admittedly far less so than gold or energy.