Fed may outline commodity policy for banks early 2014 -source

WASHINGTON Mon Oct 28, 2013 1:50pm EDT

WASHINGTON Oct 28 (Reuters) - The U.S. Federal Reserve may not unveil its plans for regulating Wall Street's commodity trading business until early next year, a person briefed on the matter said, deferring a decision on the politically fraught debate into 2014.

The timing confounds any expectations that the regulator would make its views known before a second Senate hearing expected next month into the rigging of aluminum and other markets, at which Fed officials are due to testify.

"I was told ... they would not make any determination by the end of the year, but maybe soon after that," the person said, asking not to be named because the talks were private.

A spokeswoman for the Fed declined to comment.

The Fed is reviewing a decade-old decision that has allowed Citigroup, Barclays and other banks to engage in the trading of physical commodities such as oil and metals, as well as its wider policy on containing the risks from the commodity business for banks. It has never publicly set a time frame or deadline for the review.

The new scrutiny of Wall Street's multibillion-dollar raw material trading operations has unsettled the banks, which fear the Fed may impose new constraints or add costs to a trading business that has already lost much of its luster due to diminished volatility and new capital rules. JPMorgan Chase & Co. has put its physical commodity desk up for sale.

The issue of banks' decade-long expansion into commodities hit the mainstream this summer after big aluminum buyers represented by MillerCoors - the second largest U.S. brewer - complained in a Senate hearing that some banks drove up the cost of supplies through their control of metal warehouses.

The Senate Banking Committee hearing was lead by Sherrod Brown, an Ohio Democrat who is canvassing for a bill for banks to hold far more capital, a measure that could trigger the break-up of the largest Wall Street firms.

However, in examining banks' commodity business the Fed is unlikely to concern itself with market manipulation, lawyers have said, something that is the remit of two other regulators, the Commodity Futures Trading Commission (CFTC) and the Federal Energy Regulatory Commission (FERC).

There also may be little the Fed can do about the fact that Morgan Stanley and Goldman Sachs have far wider leeway to operate in commodity markets than their rivals, because of a quirk in the banking law.

"They may reconsider some of their orders, but they won't seek a change in the law," the person said.

The two banks sought refuge with the Fed at the height of the financial crisis by changing their status to bank holding companies, and the move enabled them to use a grandfathering clause for their commodity activities.

The clause allows such investment banks who changed their status to bank holding company to keep any activities they already engaged in, including the storage and transportation of commodities, which other banks cannot take on.

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