by Richard Nemec
U.S. Sens. Sherrod Brown (D-OH) and Elizabeth Warren (D-MA) Wednesday urged the Federal Reserve to curb banks from owning commodities businesses, including energy commodities, to prevent them from potentially hurting global supply chains. Energy companies, on the other hand, have said further restrictions on FHCs could harm commodities markets.
In a 15-page letter to the Federal Reserve Board of Governors, Brown and Warren urged the U.S. central banker to address risks associated with financial holding company (FHC) ownership of physical commodities. In response to the Fed’s advanced notice of a proposed rulemaking, the senators urged that FHCs be prevented from owning physical assets.
“As a general matter, FHCs should be prohibited from owning physical assets like warehouses, pipelines and tankers,” the senators wrote. “These activities pose significant safety and soundness, legal and reputational risks to institutions.”
In January, the Fed announced it was collecting comments on possibly curtailing banks’ involvement in the physical commodity businesses and other nonbanking activity (see Daily GPI, Jan. 14). It cited disasters involving commodities, from the Macondo well blowout and oil spill in the Gulf of Mexico to recent crude oil tanker train crashes to the Three Mile Island nuclear leak of 1979.
Brown held congressional hearings last year preceding the Fed’s review of commodities activities at about a dozen large banks. In addition, Sen. Carl Levin (D-MI) is investigating possible conflicts of interest and alleged manipulation of markets as part of the Senate Permanent Subcommittee on Investigations, which he heads.
Levin also sent a letter to the Fed board, asserting that banks should be further restricted but drawing short of advocating an outright ban.
“We are concerned that commercial commodities and energy activities expose regulated financial institutions to unprecedented and unmanageable financial, legal, environmental and reporting risks,” Brown and Warren wrote.
They don’t want the banks owning companies that are involved in the “extraction, transportation, storage and distribution of commodities and energy.”
An apparent backdrop for the Fed’s ongoing review is the near collapse of the banking system in 2008 and the subsequent Dodd Frank Financial Reform Act. In this context, the Federal Reserve has aimed to ensure that associated commodities activities by financial companies do not endanger an institution’s viability or threaten the rest of the financial system.
In response to the argument that the regulated banking system is the preferable place to allow commodities activities and physical asset ownership, compared to the more lightly regulated commodities trading outlets, Brown and Warren told the Fed “this should not be a significant concern.
“As a general matter, the Commodities Futures Trading Commission maintains authority to police fraud and manipulation in the commodities markets, regardless of the party engaging in such behavior.”
Barclays is reportedly planning to withdraw from parts of the energy, metals and agricultural commodities markets due to slumping revenues and increased regulatory scrutiny. The British bank is expected to make a formal announcement on Tuesday, according to several published reports. That news comes on the heels of JPMorgan Chase & Co.’s announcement that it would sell its physical commodities business to Mercuria Energy Group Ltd. in a $3.5 billion all-cash transaction (see Daily GPI, March 19). Morgan Stanley has also scaled back its commodities business, and Deutsche Bank recently eliminated dedicated trading desks for energy, agriculture, base metals and dry bulk (seeDaily GPI, Dec. 5, 2013).
Before the comment period for the Fed’s advanced notice of proposed rulemaking to limit risk involved in the physical commodity activity of FHC’s closed last week, several natural gas and oil companies warned that the regulations could harm commodity markets.
“We believe that the proposed new restrictions on FHCs’ ability to transact in the physical commodities markets can negatively impact non-financial companies’ ability to access efficient, transparent, liquid markets for managing their day-to-day physical commodity and related hedging needs,” a group of trade associations wrote in comments filed earlier this month. “Such a result would lead to greater systemic and commercial risk concentration and less liquidity in physical commodities and commodity derivatives markets. These results could lead to serious, unintended consequences for commercial market participants, giving them fewer and more expensive options for hedging and mitigating commercial risks.”
The associations — the American Gas Association, American Public Gas Association, Electric Power Supply Association, National Rural Electric Cooperative Association, U.S. Chamber of Commerce Center for Capital Markets Competitiveness and U.S. Chamber of Commerce Institute for 21st Century Energy — urged the Fed not to take steps that would compound challenges their members already face through the implementation of commodity market regulations under the Dodd-Frank Wall Street Reform and Consumer Protection Act.
The proposed rule could accelerate the pace of FHC’s exiting the physical commodities business, according to comments filed by Cheniere Energy.
“It is our opinion that further regulation of FHCs could hasten the process of additional FHCs exiting the business,” Cheniere said. That raises a series of concerns, including “the absence of sophisticated financial entities customizing physical commodities,” and the reduction of counterparties with the financial capability to enter into long-term transactions, the company said.