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 come after months of
public and political outcry over the risks of allowing banks to
trade physical commodities such as tankers of crude oil and
pallets of copper.
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.
In 2013, banks including JPMorgan Chase and Barclays
have paid hundreds of millions of dollars in fines for
manipulating energy markets.
The U.S. Federal Energy Regulatory Commission (FERC), which
regulates energy markets, will be represented at Wednesday's
hearing by Norman Bay, a former New Mexico district attorney who
has led a series of high-profile market manipulation cases
against big traders in the U.S. power and gas markets, including
a record $410 million penalty agreed with JPMorgan.
The other two witnesses are the CFTC's market oversight
chief, Vince McGonagle, and Michael Gibson, the Fed's director
of banking supervision and regulation.
WHAT ARE THEY THINKING?
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.
An ANPR can range from being a simple list of questions
designed to elicit information to something more like a concept
paper, said Hugh Conroy, Jr., a banking lawyer at Cleary
Gottlieb Steen & Hamilton. In any case, Tuesday's document will
provide the first glimpse into the Fed's thinking since
lawmakers and the public have put the issue in the spotlight.
"Usually an ANPR would be done in a context where they're
trying to get people to give them more ideas, versus a proposed
rule text where they just want people to comment on what they
have already put in writing," he said.
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 derivatives.
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."
ANPRs are a preliminary step on the rulemaking path, said
Conroy, adding that even more advanced documents, like draft
rules or interpretive statements, can fall by the wayside.
"Generally, even notices of proposed rulemaking and
interpretive statements sometimes don't end up becoming rules,
so an ANPR may not end up becoming a rule," he said.
"But it indicates they are moving towards that."