Fed Should Reverse Commodity-Trading Policy, CFTC’s Chilton Says

WASHINGTON (Aug 5) The Federal Reserve should reverse a decade-old ruling that allows banks to trade physical commodities, said Bart Chilton, a Commodity Futures Trading Commission member.

The central bank’s 2003 decision and subsequent ones allowed firms including Citigroup Inc., JPMorgan Chase & Co. and Morgan Stanley  to expand into commodities markets. The Fed said last month that it’s reviewing the policy amid Senate scrutiny of whether it allows Wall Street firms to control prices.

“I don’t want a bank owning an electric service, or cotton, corn or feedlots,” Chilton, a Democrat, said in a speech 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.

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.

“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.

Additional Hearings

Banks’ ownership of commodity interests already has drawn scrutiny from the CFTC and the Securities and Exchange Commission, while U.S. Senate Democrats plan 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. 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 News