Fed Should Reverse Commodity Policy, CFTC’s Chilton Says

The Federal Reserve should reverse a decade-old ruling that lets banks trade physical commodities, Commodity Futures Trading Commission member Bart Chilton said.

“I don’t want a bank owning an electric service, or cotton, corn or feedlots,” Chilton, a Democrat, said in remarks prepared for delivery today at a conference of U.S. cotton growers in Lake Tahoe, California. “I don’t want banks owning warehouses, whether they have aluminum, gold, silver or anything else in them.” The Fed “can and should reverse” the policy, he said.

Banks including Citigroup Inc. (C), JPMorgan Chase & Co. (JPM) and Morgan Stanley (MS), all based in New York, have been permitted to expand into commodities markets under a 2003 Fed decision and subsequent ones. The central bank said last month that it’s reviewing the policy amid Senate scrutiny of whether such involvement allows Wall Street firms to control prices.

JPMorgan, the biggest U.S. bank by assets, said days after a congressional hearing on the matter last month that it’s weighing whether to sell or spin off holdings in physical commodities. The 10 largest Wall Street firms reaped about $6 billion in revenue from commodities in 2012, including dealings in physical materials as well as related financial products, analytics company Coalition Ltd. said in a Feb. 15 report.

Falling Revenue

Commodities revenue at the 10 largest investment banks fell 25 percent in the first half of this year, putting those units on pace for the worst annual performance in more than five years, Coalition said today. Revenue fell to about $2.7 billion in the first six months from $3.6 billion in the same period of 2012, Coalition said today in an e-mail.

“The Federal Reserve regularly monitors the commodity activities of supervised firms and is reviewing the 2003 determination that certain commodity activities are complementary to financial activities and thus permissible for bank holding companies,” Barbara Hagenbaugh, a Fed spokeswoman, said on July 19. She declined to elaborate.

Banks’ ownership of commodity interests already has drawn scrutiny from the CFTC and the Securities and Exchange Commission, and Senate Democrats are planning additional hearings on the issue.

CFTC Chairman Gary Gensler, declining to comment on specific investigations, said at a Senate hearing on July 29 that his agency has legal authority to pursue manipulation of markets for metals and other commodities. The CFTC 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 News.

Volcker Rule

In a letter to Fed Chairman Ben S. Bernanke dated Aug. 2, Chilton urged additional restrictions as part of a proposed ban on proprietary trading. The rule named for former Fed Chairman Paul Volcker, who championed it as an adviser to President Barack Obama, should have a narrow definition of banks’ hedging activities that takes account for their ownership of physical commodities.

“Without clear prohibitory guidelines, if a bank owns physical commodities, it could contend (with a certain degree of justification) that the Volcker rule and position limits simply aren’t applicable to them, as the commodity ownership and trading pertains to ‘hedging’ their physical business risks,” Chilton said in the letter.

Regulators have said they are seeking to complete the Volcker rule by the end of the year.

To contact the reporter on this story: Silla Brush in Washington at sbrush@bloomberg.net

To contact the editor responsible for this story: Maura Reynolds at mreynolds34@bloomberg.net

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