In a handful of early submissions on potential new rules, industry
groups and big corporations like UPS and refiner Alon USA Energy Inc
urged the Fed not to push banks out of physical markets. They warned
that the unregulated commodity trading houses who are now expanding
in the space may pose credit and counterparty risks that financial
firms do not.
The arguments illustrate the complexity of regulating an activity
that critics say was never meant to exist, but which proponents say
fills a crucial market need: banks' trading of physical commodities
like crude oil and electricity, often with customers wanting to
hedge prices for years into the future.
"The banks are well-capitalized, well-regulated, great
counterparties," said Andrew Soto, vice-president of regulatory
affairs at the American Gas Association, which represents more than
200 local energy companies serving over 90 percent of the 71 million
natural gas customers in the United States.
"They recognize that our utilities have solid balance sheet as well.
The relationship is based on a lot of credit strength."
The letters were submitted to the Fed ahead of an April 16 deadline
for public comments on an Advanced Notice of Proposed Rulemaking, a
preliminary step toward potential new regulations following months
of public and political pressure to check banks' decade-long
expansion into the raw materials supply chain.
In the ANPR, the Fed questioned the rationale for allowing the
industry's two former investment banks to own, operate and invest in
physical assets such as oil tanks and metals warehouses, a
particularly contentious issue after allegations that such
investments have inflated prices.
In its submission, the International Wrought Copper Council, which
represents metal users, urged authorities to go beyond new
regulations and to "fully investigate" the issue and take
"appropriate and swift action" to restore markets.
Next week is also the start of the quarterly earnings season, when
some banks may provide insight on how they fared through a winter of
unusually intense energy market volatility. Agribusiness giant
Cargill said this week that its earnings were hit by an unquantified
trading loss in power markets.
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Thus far, just under 100 comments have been submitted, most of those
from individuals registering their disapproval. Key industry groups
representing banks are expected to submit their comments shortly
before the April 16 deadline.
Energy industry groups representing the American Gas Association,
America's Natural Gas Alliance, the American Exploration and
Production Council said in one letter that a bank exodus from the
commodities markets will increase market concentration, causing
energy companies' hedging costs to rise. Those costs will then be
passed onto Main Street consumers.
In its nine-page letter, they also say that only banks can offer the
kinds of customized derivative transactions needed by energy
companies, which often include hedging against a mix of commodity,
interest rate and foreign exchange risk. The U.S. Chamber of
Commerce echoed those concerns.
Alon USA Energy, which has a multiyear deal with Goldman's
commodities arm J Aron to supply crude and sell refined fuels from
its facilities, said the current regime was adequate. Major coal
producer Murray Energy said an exit by banks would weigh on sales
volume and potentially cause job losses.
United Parcel Service Inc, a major fuel user for its aircraft and
trucks, also warned that higher hedging costs could result in fuel
surcharges for consumers.
Since the first bank was granted a license to trade physical
commodities in 2003, a dozen banks have become substantial players
in the markets for some of the most commonly-traded commodities,
including oil and electricity. They joined former investment banks
Morgan Stanley and Goldman Sachs and Deutsche Bank have quit
physical trading, citing both intensifying regulation and lower
profits. Total commodity trading revenue at banks has fallen to a
third of their $14 billion peak in 2008.
Goldman Sachs has said it will remain in the business, calling it
"too important" to its clients to leave. Morgan Stanley is selling
its physical oil business but will keep power and natural gas.
(Reporting by Anna Louie Sussman; editing by Andrew Hay)
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