Wall Street Commodity Trading Gets Fed Review
English: Morgan Stanley’s office on Times Square (Photo credit: Wikipedia)
Several major lenders, including JPMorgan and Chase, Morgan Stanley and Goldman Sachs have been targeted by the Federal Reserve as it re-considers whether or not banks should be allowed to trade in commodities.
The Fed issued a statement ahead of a hearing that will take place at the Senate subcommittee tomorrow. The central bank plans to review a decade-old ruling which allows banks to trade in physical commodities. If the rule is reversed, then it would be one of the biggest changes to market rules since the lifting of the law against banks joining with securities firms. The Fed believes that lenders should not expose themselves to the risk of handling commodities.
The Fed has a record of resisting reversals of such major decisions, but it is thought that they may do so if they receive enough pressure from outside sources. According to a recent commodity market report, the ten biggest banks on Wall Street generated around six billion in revenue thanks to commodities in 2012 alone. The top earner was Goldman Sachs, with JPMorgan a close second.
Stockpiles And Price Problems
Such massive changes to the commodities market would likely have a massive impact on other traders. When JPMorgan was allowed to expand into the world of physical commodities, it was expected that allowing them to trade commodities might create a concentration of recourses and create unfair competition. Suddenly re-introduction restrictions could have the opposite effect, flooding the market. However, in the short term that could be a good thing. Currently, there is a daily minimum requirement for how much metal must leave a warehouse, but there is no limit on how much metal can enter a warehouse. This creates a situation where wealthy banks can stockpile resources, driving up prices and making it difficult for companies that need metal to get it.
A Grace Period
The Bank Holding Company Act, which existed for more than five decades, forbade federally guaranteed lenders from participating directly in the commodity market. Investment banks were not covered by this rule. Former investment banks, such as Morgan Stanley and Goldman Sachs, which made the move to being bank holding companies in 2008, were given a grace period of five years to sort out their activities. The dealings of these companies are complex and difficult for outside analysts to understand. This is one thing that the Fed will be investigating over the next several months. Both Morgan Stanley and Goldman Sachs will have their activities reviewed in September of this year, when their grace period expires.
Most analysts believe that the Fed is planning “a real dialling back” and that they want to send a signal to lenders. It will be interesting to see how the changes affect the next commodity market report. The financial industry is far more complex today than it was in the 90s. Today, the four biggest banks collectively have more than 11,000 subsidiaries and regulating a market of that size is an almost impossible task.
Author Bio:
Bob Stanger is a commodities market analyst from Penrith. He regularly attends CRU Events, where he enjoys networking and following the latest developments in the basic materials sector. He believes that fertilizers are the future and that the world’s growing population will bolster demand for many years to come.
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Category: Investing
