Fed postpones decision on bank commodity policy into 2014
(Reuters) – 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 banks, which fear the Fed may impose new constraints on a business that has already lost much of its luster and higher regulatory costs.
In July, JPMorgan Chase & Co. announced it was putting its physical commodity desk up for sale.
One core concern the Fed may have is the potential peril to a bank’s health from owning physical commodity assets such as oil tankers and drilling platforms, lawyers said, including litigation, contractual or criminal risk.
“The Fed is looking at the safety and soundness (of the banks), and litigation risk is one aspect of that. They will determine … whether capital and other prudential controls properly address it,” said Karen Shaw Petrou, a co-founder of Federal Financial Analytics, a consultancy firm.
The Fed may look at higher capital requirements for banks exposed to the physical commodity business, lawyers said, and the law gives it ample leeway to adjust the rules and tell banks in more detail how to run the businesses.
“They’ve got a lot of discretion in that area,” said one banking lawyer in Washington, asking not to be named in order to speak more freely. “Anywhere from suggesting you need more capital … to requiring other procedural protections or risk management to be put in place.”