U.S. banks’ ownership and trading of physical commodities will face further scrutiny tomorrow when the heads of the Commodity Futures Trading Commission and Securities and Exchange Commission testify before lawmakers.
Senator Sherrod Brown, the Ohio Democrat who led a hearing on the issue last week, said he plans to question the CFTC’s Gary Gensler and the SEC’s Mary Jo White on their oversight when the two chairman appear before the chamber’s Banking Committee on implementation of Dodd-Frank Act reforms.
JPMorgan Chase & Co. is among lenders facing political pressure after the Federal Reserve said this month it will review a decade-old decision letting them trade commodities regarded as complementary to banking. JPMorgan, which was accused today by the Federal Energy Regulatory Commission of manipulating power markets in 2010 and 2011, said on July 26 that it plans to sell or spin off holdings including warehouses, stakes in power plants and traders of gas, power and coal.
“Banks should focus on core banking activities,” Brown said in an e-mail last week. “Our economy is strengthened when financial conflict of interest and financial risk are reduced.”
Meghan Dubyak, a spokesman for Brown, said the senator hopes to use tomorrow’s hearing to examine the CFTC’s authority to address anti-competitive practices such as aluminum hoarding and to encourage the agency to act.
“He is also likely to raise the fact that SEC’s disclosure rules for bank holding companies have not been updated since the 1970s, limiting the ability of the public and Congress to oversee opaque physical commodity practices,” Dubyak said.
Goldman Sachs Group Inc. and Morgan Stanley were in commodity business before converting to bank holding companies during the 2008 credit crisis. The Wall Street firms are permitted under a 1999 law to keep commodities businesses they were in before 1997.
Brown, whose Senate subcommittee heard last week from witnesses about the potential risks caused by allowing banks to hold physical commodities, has said the Fed needs to give clear guidance on what activities should be allowed “and consider placing limitations on those that expose banks and taxpayers to undue risk.”
Lawmakers and consumer groups have said banks can use their multiple roles to manipulate prices and get an information edge. They’ve also warned a catastrophe involving a bank-owned oil tanker or power plant could jeopardize a lender’s health and leave taxpayers on the hook for a bailout.
Senator Carl Levin, the Michigan Democrat who leads the Permanent Subcommittee on Investigations, has led reviews that faulted Goldman Sachs for its trading of mortgage-backed securities before the credit crisis and JPMorgan over London Whale losses. He said his panel, which has subpoena power, has been looking at the commodities issue for at least six months.
“The potential here for conflicts of interest and manipulating prices to benefit their own proprietary holdings is huge and it’s a very, very serious issue,” Levin said in an interview on July 23.
The 10 largest Wall Street banks generated about $1 billion from physical commodity units in 2012, and about $5 billion from commodity derivatives and financing, according to data from analytics company Coalition Ltd. Goldman Sachs ranked No. 1 in all commodities revenue, including derivatives, followed by JPMorgan.
White and Gensler are also likely to face questions from senators at tomorrow’s about implementation of Dodd-Frank’s derivativesrules, the status of the Volcker rule ban on banks’ proprietary trading and the SEC’s revised rule for money-market mutual funds.
“On derivatives, the SEC and CFTC should be proud of the progress made to date,” Senate Banking Committee Chairman Tim Johnson, a South Dakota Democrat, said in opening remarks prepared for the hearing. “Important rules governing clearing and swap data reporting have taken effect with the majority of other rules slated to be completed and take effect in the months ahead.”
Gensler said in his prepared remarks the CFTC is working with U.S. and overseas regulators on a global approach to margin requirements for uncleared swaps. He said he expects global regulators will follow the CFTC’s lead in excluding non- financial end-users from margin requirements for uncleared swaps.
White said in her statement that the SEC has proposed or adopted more than 80 percent of the 90 Dodd-Frank provisions that require rulemaking.