U.S. financial regulators will boost scrutiny of banks’ commodities holdings and use their authority to pursue evidence of fraud and manipulation, the heads of two agencies told lawmakers today.
“We’re a market regulator overseeing the commodity futures, swaps markets and have clear authority to police markets for fraud, manipulation and other abuses,” Commodity Futures Trading Commission Chairman Gary Gensler said at a Senate Banking Committee hearing where he testified alongside Securities and Exchange Commission Chairman Mary Jo White. “We will use those authorities appropriately where we see abuses and pursue it.”
Gensler and White, who said she would ask the SEC staff to weigh changes to disclosure requirements, responded to questions raised by Senator Sherrod Brown about whether markets and consumers are being harmed under rules that permit lenders including JPMorgan Chase & Co. to own and trade commodities. New York-based JPMorgan, the biggest U.S. bank, agreed today to pay $410 million over claims that it manipulated power markets in 2010 and 2011.
“It seems like there’s a huge amount of conflict of interest and a huge amount of market manipulation and it doesn’t seem like much action,” Senator Jeff Merkley, an Oregon Democrat, said in a follow-up to questions from Brown, an Ohio Democrat. “When these prices go up it’s a huge tax on the economy whether it’s in the price of a beer can or aluminum siding.”
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 Group Inc. ranked No. 1 in all commodities revenue, including derivatives, followed by JPMorgan.
Goldman Sachs and Morgan Stanley were in the commodity business before converting to bank holding companies during the 2008 credit crisis. The New York-based companies are permitted under a 1999 law to keep commodities businesses they were in before 1997.
The Federal Reserve said this month that it will review a decade-old decision letting banks trade commodities seen as complementary to banking. JPMorgan said on July 26 that it will sell or spin off commodity holdings including warehouses, stakes in power plants and traders of gas and coal.
Gensler, declining to comment on specific investigations, said his agency has legal authority to pursue manipulation of markets for metals and other commodities. His agency has sent letters to companies asking them not to destroy documents relating to warehouses registered by exchanges such as the London Metal Exchange or Chicago Mercantile Exchange, according to a copy of the letter obtained by Bloomberg.