Wall Street challenges U.S. regulator over proposed commodities rule

Wall Street is detesting against a proposed rule to force U.S. banks like Goldman Sachs Group Inc to hold more capital against investments in commodities, identifying what some perceive as an excessively restrictive limit on banks’ connection to the sector.

The industry claims the proposed rule would damage the economy; fears about environmental dangers from physical commodities activities are magnified.  The U.S. Federal Reserve passed down the proposal in September, after public recoil deriving from the belief that big banks’ involvement in commodities markets damaged consumers by inflating prices. The comment letter, filed by the Securities Industry and Financial Markets Association and the Institution of International Bankers and seen by Reuters, comes as big banks encounter an unpredictable future in Washington. Even though President Donald Trump has said he favors deregulation and has hired several Wall Street executives as advisers, it is uncertain how he or the new Congress will approach these rules.

Besides Goldman Sachs, few banks have huge exposure to physical commodities. At one time, it was a profitable business for both Goldman and Morgan Stanley, due to a fault in their regulatory structure. Other banks, including JPMorgan Chase & Co, eventually embarked into the business as well, but exited as global capital requirements got more difficult, making such investments too expensive to maintain.

The Fed’s suggested rule would validate and increase those standards, executing a 1,250 percent risk weighting on banks that own, trade and move physical commodities. Among other measures, $ 1 in capital would need to be held for every $ 1 investment, the regulator’s highest charge for the riskiest investments.  The rule could possibly force banks to exit the commodities business altogether, because such capital charges would intensely hurt returns.

In its proposal, the Fed said new measures would protect banks and the wider financial system from a costly accident like the 2010 Deepwater Horizon oil spill in the Gulf of Mexico. Advocates say the rule is also needed to help alleviate commodity price changes and social conflicts that are caused from commodity-related activities.
In the staement filed on Friday, the bank-affiliated groups said the rule would damage “competition, end users, the liquidity of commodities markets … and thus the real economy.” A number of utility and power companies, including Calpine Corp, have also mentioned liquidity and price concerns.

Big banks have been using similar disputes in promoting to roll back existing rules, including the Volcker rule limiting risky, speculative trading and the Durbin rule, which caps the fees they can charge retailers for processing debit card transactions.
Industry sources say the competition against the Fed’s proposal is more about reclaiming a competitive edge than protecting an existing source of revenue. Between 2007 and 2009, commodities trading accounted for as much as one-fifth of revenue for Morgan Stanley and Goldman Sachs.

But over the past five years, Morgan Stanley has reduced its physical commodity assets to $ 179 million from $ 9.7 billion. Goldman Sachs has shed much of its energy infrastructure as well. It it is still a dominant trader of fossil fuels, trading more natural gas than both Chevron Corp and ExxonMobil Corp in certain quarters, according to Natural Gas Intelligence.

As regulated banks have climbed back, specialists like Glencore Plc, Vitol Group and Mercuria Energy Group have gained ground.

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