WASHINGTON Oct 28 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.