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Fed agrees to extend study of banks’ role

Keywords: Tags  Federal Reserve, American Bankers Association, banks, physical commodities, JP Morgan, Goldman Sachs, Morgan Stanley, Barclays Société Générale

NEW YORK — The U.S. Federal Reserve Board has extended its consultation on the role of banks in physical commodity activities by 30 days at the request of the American Bankers Association (ABA). Comments are now due April 16.

"The board is considering whether additional restrictions would help ensure that physical commodities activities of financial holding companies are conducted in a safe and sound manner and do not pose a threat to financial stability," it said. "The board extended the comment period to allow interested persons more time to analyze the issues and prepare their comments."

The ABA, which represents banks of all sizes and is the voice for the $14-trillion banking industry in the United States, had asked the Fed for a 60-day extension.

Depending on how the review ends, there could be pressure to eject U.S.-regulated banks from the physical commodities business.

Banks including JPMorgan Chase & Co., Goldman Sachs Group Inc., Morgan Stanley (all based in New York), London-based Barclays Bank Plc, Paris-based Société Générale SA and Frankfurt, Germany-based Deutsche Bank AG will be subject to the decision resulting from the Fed review.

Currently, those banks are allowed to engage in physical commodity trading involving the purchase and sale of commodities in the spot market and taking and making delivery of physical commodities to settle commodity derivatives.

The review could reverse the authority granted to those banks in the sector or place tighter restrictions on their activities.

The Fed also is seeking comment on whether banks have potential conflicts of interest by being involved in physical commodities, as well as weighing the pros and cons of imposing additional capital requirements or other restrictions on the commodity activities of banks.

Western banks’ appetite for commodities has been waning amid increased regulatory scrutiny. There has been interest in the asset class, particularly in physical commodities, from a number of non-western banks as well as physical merchants and trading houses.

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