By Anna Louie Sussman and Emily Stephenson
NEW YORK/WASHINGTON Jan 13 The U.S. Federal
Reserve is set to take its first formal step toward limiting the
role of Wall Street banks in physical commodities markets this
week by issuing a notice to seek public comment on the topic,
sources familiar with the matter said on Monday.
The Fed will publish an "advance notice of proposed
rulemaking" on Tuesday, laying out the issues it is considering,
one day before a second Senate banking committee hearing on the
matter, the sources said.
The notice and Wednesday's hearing will provide the first
glimpse into the Fed's response to growing public and political
outcry over the risks of allowing banks to trade physical
commodities such as tankers of crude oil and pallets of copper.
It is not clear what measures the Fed may propose. The
public is expected to have 60 to 90 days to submit comment
letters, which the Fed can use to formulate its rules.
A Federal Reserve spokeswoman declined to comment.
Over the past year, lawmakers have pressed the Fed to
examine whether Wall Street's biggest banks, including JPMorgan
Chase & Co and Goldman Sachs Group Inc, should be
allowed to own assets such as metals warehouses and oil tankers,
and to trade physical commodities alongside commodity
At a Senate hearing in July, witnesses testified that the
activities pose a risk to the financial system in the event of a
catastrophic accident. Metals consumers complained that banks'
ownership of physical storage assets enabled them to inflate
prices for commodities such as aluminum.
The notice by the Fed may touch on the issue of capital
surcharges for certain activities, an issue that arose in media
reports but was never clarified by the Fed.
SOME BANKS EXITING COMMODITIES
In July, the Fed said it would be reviewing the role of
banks in physical commodities trading, something that it has
allowed a range of banks to engage in since 2003.
Karen Shaw Petrou of Federal Financial Analytics in
Washington said the notice would likely seek comment on how the
risk varies by commodity, and would consider the systemic impact
of various physical trading activities.
"This is hard, and the Fed is busy," Petrou said. "It is
really complicated. If you want to have a simple capital rule,
then you would have an across-the-board charge for certain
commodities activities, but it's true that some of them are a
lot riskier than others."
It is unclear whether the Fed will also address a related
but distinct question: whether former investment banks Goldman
and Morgan Stanley should be allowed to carry on owning
commodity-related assets, such as metals warehouses and oil
pipeline, due to a "grandfathering" clause in a 1999 law.
Regardless of the scope of the Fed's statements, they are
certain to be scrutinized by industry executives and their
lawyers, who have been frustrated by the lack of clarity over a
possible crack-down that could further roil Wall Street's
multibillion-dollar trading operations.
Some banks have not waited for a final word. JPMorgan is in
the final stage of a months-long process to sell its entire
physical commodity desk, and Morgan Stanley agreed last month to
sell its physical oil trading operation to Rosneft.
"One thing I'd want to look at is their justifications for
such a proposal. I think for it to be an appropriately reasoned
rule-making, it should address how the charges address the
risks," said a banking lawyer who declined to be named.
"I would also want to see what they said about their
supervisory experience over the time they have allowed financial
companies to do this."