Reform Group Questions Fed On Big Bank Commodity Ownership

Reform Group Questions Fed On Big Bank Commodity Ownership
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Should banks own and trade commodities? Citing a recent trend towards manipulative behavior, Americans for Financial Reform argues that the Fed should take for strong action to reduce bank ownership of physical commodities.

Who benefits, the public or the banks?

“Episodes of market abuse raise serious questions as to whether bank participation in commodities provides a clear public benefit, questions that the Board has not adequately answered,” the financial reformers said in a letter to the US Federal Reserve.

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Saying the US Federal Reserve has a legal obligation to “weigh public benefits of commodity ownership” of the banks against “the safety and soundness of the financial system,” the letter sought to reverse permissions the US Federal Reserve had granted banks to own and trade commodities.

Numerous examples of market manipulation should preclude banks

Citing examples of market manipulation, now commonplace and committed during a period of history when little if any regulatory deterrence existed, the letter drew correlations.  An “increase in commodity ownership by banks has been associated with several episodes of market abuse, calling into question claims (the banks make) of public benefit.”

  • JPMorgan Chase & Co. (NYSE:JPM) was fined $410 million in an energy rate-manipulation case, the largest penalty since Enron.[1]
  • British authorities have questioned JPMorgan’s control of metals business.[2]
  • Goldman Sachs Group Inc (NYSE:GS) Detroit metals warehouse business prompted considerable media attention and reported federal investigations for price manipulation.[3]
  • Morgan Stanley (NYSE:MS) oil ownership drew similar concern over pricing schemes.[4]

In a November 2013 interview with Opalesque, then-Commodity Futures Trading Commission Commissioner Bart Chilton had exposed the fact the US Federal Reserve would not share big bank commodity ownership details with the CFTC.  Today’s letter from a noted financial reform organization takes the issue one step further.

Documenting big bank rise in control

Banks were prohibited from investing in commodities as part of a separation of banking and commerce that was a successful response to the great depression.  That separation of banking from control of other industries would change and a decided power shift occurred.  The most significant legislative change was the enactment of the Gramm Leach Bliley Financial Modernization Act of 1999, followed by the Commodity Modernization act, both of which gutted common sense and simple regulatory restrictions on a bank’s speculative activities.  These legislative wins for the bank lobby came one year after a regulatory message of control was sent.  In 1998 Brooksley Born had been rudely ousted from the CFTC for requesting a study of the unregulated derivatives which ultimately blew up the economic structure in 2008.

“Potential liabilities from commodities-related catastrophes far exceed the asset valuation based metric the Board has used to regulate permissible levels of commodity ownership, indicating that levels of commodity ownership currently permitted by the Board do threaten bank safety and soundness,” the letter said.  While the letter did not specifically address it, the larger catastrophe is the over the counter SWAPs the banks have written against interest rates, estimated near $600 trillion total.

The letter concluded by noting the ever expanding “too big to fail” government guarantee.  “Americans for Financial Reform supports the separation of banking and commerce as a foundational principle, motivated both by considerations of preserving fairness in competition with non-bank firms who do not have access to the prudential safety net, and by considerations of financial safety and soundness.”

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Mark Melin is an alternative investment practitioner whose specialty is recognizing a trading program’s strategy and mapping it to a market environment and performance driver. He provides analysis of managed futures investment performance and commentary regarding related managed futures market environment. A portfolio and industry consultant, he was an adjunct instructor in managed futures at Northwestern University / Chicago and has written or edited three books, including High Performance Managed Futures (Wiley 2010) and The Chicago Board of Trade’s Handbook of Futures and Options (McGraw-Hill 2008). Mark was director of the managed futures division at Alaron Trading until they were acquired by Peregrine Financial Group in 2009, where he was a registered associated person (National Futures Association NFA ID#: 0348336). Mark has also worked as a Commodity Trading Advisor himself, trading a short volatility options portfolio across the yield curve, and was an independent consultant to various broker dealers and futures exchanges, including OneChicago, the single stock futures exchange, and the Chicago Board of Trade. He is also Editor, Opalesque Futures Intelligence and Editor, Opalesque Futures Strategies. - Contact: Mmelin(at)

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