NEW YORK The
U.S. Federal Reserve has announced a consultation on the role
of banks in physical commodities ahead of a second Senate
hearing. If the comments the Fed receives are anything like
those presented at a U.S. Senate hearing on the same topic in
July, it could signal the forced exit of banks from physical
The results of the
consultation, which ends March 15, will affect the activities
of a dozen banks including Goldman Sachs Group Inc., JPMorgan
Chase & Co., Morgan Stanley, Barclays Bank Plc,
Société Générale SA and Deutsche
These banks have been
granted the authority to engage in physical commodities
activities and will be subject to the decision resulting from
the Fed review.
Sen. Sherrod Brown
(D., Ohio) criticized the Fed at the last hearing for failing
to provide a time table for its bank review, which may have
prompted the announcement the day before the Senates next
The Fed may completely
force out the banks that are active in the market or allow
exemptions to operate assets. It might decide to ban the
ownership of assets, but allow trading activities.
Alternatively, the Fed could decide to let the status quo
The role of banks in
physical commodities came under scrutiny in July, when former
U.S. Commodity Futures Trading Commission Commissioner Bart
Chilton led the charge against Goldman Sachs and its peers
during a U.S. Senate hearing.
Chilton, who has since
left the CFTC, was opposed to banks having any role in physical
In fact, Chilton was
pushing the Senate to repeal the Gramm-Leach-Bliley Act of
1999, which granted banks the ability to engage in physical
commodities in the first place.
His absence from the
CFTC may temper those arguments and it remains to be seen
whether anyone else within the regulator picks up the
Some banks have
already decided that its getting increasingly tricky to
operate in physical commodities within the confines of new
regulation and have opted to quit the business altogether.
JPMorgan plans to exit physical commodities trading as well as
ownership of assets such as its warehousing company Henry Bath
LLC. Bids were due last week, according to sources familiar
with the matter, and a decision on the sale of at least part of
the business could be imminent.
New York-based Morgan
Stanley is selling its global oil merchanting unit to
Moscow-based OAO Rosneft and is selling other physical
commodities units as well.
Germany-based Deutsche Bank has exited commodities entirely,
while London-based Barclays took a step back from metals
trading when it moved off the floor of the London Metal
New York-based Goldman
Sachs, however, said it is sticking with its physical
But a world in which
U.S. banks have no role to play in the ownership of some of the
countrys key strategic assets such as power plants and
oil storage facilities is something that will likely attract
from trading those assets also seems unlikely.
Perhaps a solution
lies in capital requirements.
For instance, what are
the advantages and disadvantages of imposing "additional safety
and soundness, capital, liquidity, reporting, or disclosure
requirements" for banks engaging in physical commodity
activities, the Fed asks in its consultation.
Banks are required to
limit the aggregate market value of commodities held as a
result of physical commodity trading to no more than 5 percent
of its consolidated Tier 1 capitalthe banks core
capital, including equity capital and disclosed reserves.
The same 5-percent
limit goes for capacity payments under energy tolling
agreements, after taking into account investments due to
physical trading, as well as revenue resulting from energy
The Fed states quite
clearly that current capital requirements may be lacking.
requirements would potentially provide the increased layer of
security the Fed is seeking for the financial system.
It would also allow
banks to continue to play a yet-to-be-determined role in
The second U.S. Senate
hearing on the matter will kick off the debate for 2014.