| NEW YORK, April 9
NEW YORK, April 9 Energy companies are mounting
a last-ditch effort to prevent the Federal Reserve from cracking
down on physical commodity trading by major Wall Street banks,
saying more restriction may further damage liquidity and raise
In a handful of early submissions on potential new rules,
industry groups and big corporations like UPS and
refiner Alon USA Energy Inc urged the Fed not to push
banks out of physical markets. They warned that the unregulated
commodity trading houses who are now expanding in the space may
pose credit and counterparty risks that financial firms do not.
The arguments illustrate the complexity of regulating an
activity that critics say was never meant to exist, but which
proponents say fills a crucial market need: banks' trading of
physical commodities like crude oil and electricity, often with
customers wanting to hedge prices for years into the future.
"The banks are well-capitalized, well-regulated, great
counterparties," said Andrew Soto, vice-president of regulatory
affairs at the American Gas Association, which represents more
than 200 local energy companies serving over 90 percent of the
71 million natural gas customers in the United States.
"They recognize that our utilities have solid balance sheet
as well. The relationship is based on a lot of credit strength."
The letters were submitted to the Fed ahead of an April 16
deadline for public comments on an Advanced Notice of Proposed
Rulemaking, a preliminary step toward potential new regulations
following months of public and political pressure to check
banks' decade-long expansion into the raw materials supply
In the ANPR, the Fed questioned the rationale for allowing
the industry's two former investment banks to own, operate and
invest in physical assets such as oil tanks and metals
warehouses, a particularly contentious issue after allegations
that such investments have inflated prices.
In its submission, the International Wrought Copper Council,
which represents metal users, urged authorities to go beyond new
regulations and to "fully investigate" the issue and take
"appropriate and swift action" to restore markets.
Next week is also the start of the quarterly earnings
season, when some banks may provide insight on how they fared
through a winter of unusually intense energy market volatility.
Agribusiness giant Cargill said this week that its
earnings were hit by an unquantified trading loss in power
Thus far, just under 100 comments have been submitted, most
of those from individuals registering their disapproval. Key
industry groups representing banks are expected to submit their
comments shortly before the April 16 deadline.
Energy industry groups representing the American Gas
Association, America's Natural Gas Alliance, the American
Exploration and Production Council said in one letter that a
bank exodus from the commodities markets will increase market
concentration, causing energy companies' hedging costs to rise.
Those costs will then be passed onto Main Street consumers.
In its nine-page letter, they also say that only banks can
offer the kinds of customized derivative transactions needed by
energy companies, which often include hedging against a mix of
commodity, interest rate and foreign exchange risk. The U.S.
Chamber of Commerce echoed those concerns.
Alon USA Energy, which has a multiyear deal with Goldman's
commodities arm J Aron to supply crude and sell refined fuels
from its facilities, said the current regime was adequate. Major
coal producer Murray Energy said an exit by banks
would weigh on sales volume and potentially cause job losses.
United Parcel Service Inc, a major fuel user for its
aircraft and trucks, also warned that higher hedging costs could
result in fuel surcharges for consumers.
Since the first bank was granted a license to trade physical
commodities in 2003, a dozen banks have become substantial
players in the markets for some of the most commonly-traded
commodities, including oil and electricity. They joined former
investment banks Morgan Stanley and Goldman Sachs <GS.N
that have traded physical commodities for over three decades.
In the past year, Wall Street banks including JPMorgan Chase
and Deutsche Bank have quit physical
trading, citing both intensifying regulation and lower profits.
Total commodity trading revenue at banks has fallen to a third
of their $14 billion peak in 2008.
Goldman Sachs has said it will remain in the business,
calling it "too important" to its clients to leave. Morgan
Stanley is selling its physical oil business but will keep power
and natural gas.
(Reporting by Anna Louie Sussman; editing by Andrew Hay)