Financial regulators are scheduled to answer questions from a Senate panel during a second hearing next week regarding the role of Wall Street in the physical commodity markets.


Lawmakers called the hearing following the Federal Reserve’s decision to reconsider the exemptions given to banks allowing the financial institutions to trade physical commodities (previously prohibited) since the early 2000s.

The Senate Banking Committee chaired by Democratic Sen. Tim Johnson of South Dakota scheduled the hearing on January 15.  The witnesses during the hearing include Mr. Norman Bay, director of the Office of Enforcement at the Federal Energy Regulatory Commission (FERC); Mr. Vince McGonagle, director of the Division of Market Oversight, Commodity Futures Trading Commission (CFTC), and Mr. Michael Gibson, director of Division of Banking Supervision and Regulation, Board of Governors of the Federal Reserve System.

Banks’ ownership in physical commodities poses risk

Democratic Sen. Sherrod Brown of Ohio stated during a hearing in July last year that banks’ ownership of oil pipelines, metals warehouses and other commodity assets poses substantial risk to the financial system. The three largest banks in the country, Goldman Sachs Group Inc (NYSE:GS), JPMorgan Chase & Co. (NYSE:JPM), and Morgan Stanley (NYSE:MS) owned around $35.5 billion in physical commodities by the end of 2012.

Senate questions

Sen. Brown raised the question whether the largest banks at Wall Street should be allowed to own physical commodity assets. Back in July, the lawmaker asked, “What do we want our banks to do, make small-business loans or refine and transport oil? Issue mortgages or corner the metals market?”

With regard to the hearing next week, banking industry lawyer, Arthur Long at Gibson, Dunn & Crutcher opined that lawmakers will likely ask the Federal Reserve to explain how the involvement of banks in the commodity market could harm its “safety and soundness.”

Scrutiny forced banks to exit or reduce ownership

JPMorgan Chase & Co. (NYSE:JPM) and Morgan Stanley (NYSE:MS) and other major banks in the country were forced to exit or reduce their commodities businesses amid strong regulatory and political scrutiny.

In July, last year, JPMorgan Chase & Co. (NYSE:JPM) announced its plans to sell its physical commodities business. The bank made its decision before settling a complaint with the FERC related to its alleged manipulation of power markets in California and the Midwest.

On the other hand, Morgan Stanley (NYSE:MS) sold the majority of its global physical oil trading operations to Rosneft’ NK OAO (MCX:ROSN) last month.