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NEW YORK (Reuters) - 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 hedging costs.
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 chain.
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 markets.
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 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