UPDATE 1-Fed considers new limits on banks in physical commodity trade

UPDATE 1-Fed considers new limits on banks in physical commodity trade
http://pixel.quantserve.com/pixel/p-89EKCgBk8MZdE.gif

Tue Jan 14, 2014 2:15pm EST

By Anna Louie Sussman and Emily Stephenson

NEW YORK/WASHINGTON Jan 14 (Reuters) – The U.S. Federal Reserve on Tuesday took a first formal step toward restricting the role of Wall Street banks in physical commodities markets, seeking feedback on ways to limit the “catastrophic” risks of dealing with oil tanks or power plants.

In a 6-0 vote, the Fed board agreed to publish a preliminary notice laying out its concerns and potential remedies, following months of growing public and political pressure to check banks’ decade-long expansion into the raw materials supply chain.

Facing a clearly uneasy regulator, some banks like JPMorgan Chase & Co are already quitting the business.

In a 19-page document that included two dozen questions, the Fed offered a host of reasons for imposing new restrictions in the interests of protecting the safety and soundness of the banking system, invoking incidents among which were BP’s Deepwater Horizon disaster and last summer’s oil-train tragedy in Quebec.

“The recent catastrophes accent that the costs of preventing accidents are high and the costs and liability related to physical commodity activities can be difficult to limit and higher than expected,” the Fed said in the notice.

It is the Fed’s first detailed public discussion since it shocked the banking industry last July by announcing a “review” of its 2003 authorization that first allowed commercial banks such as Citigroup to handle physical commodities.

It comes just one day before a senior Fed director goes before a second Senate banking committee hearing on the matter.

Beyond the financial risks, the Fed is also seeking comment on potential conflicts of interest for banks, and the risks and benefits of additional capital requirements or other restrictions — measures that have been hinted at in the past.

The Fed said that new limits on all three means by which banks may deal in physical commodities were up for debate: the authority to trade raw materials as “complementary” to derivatives; the investment in commodity-related business as arm’s-length merchant banking deals; and the “grandfather” clause that has allowed Morgan Stanley and Goldman Sachs much wider latitude than their peers.

The “advance notice of proposed rulemaking,” which is an optional initial step in the sometimes years-long process of making new regulations, seeks comments until March 15.

The Fed also questioned several previously cited justifications for allowing banks to trade in physical commodities such as crude oil cargoes and copper pallets.

It said, for instance, that although most banks are not allowed to actually own infrastructure assets, those that lease storage tanks or own physical commodities held by third parties may nonetheless face a “sudden and severe” loss of public confidence if they are involved in a catastrophe.

They also said that several banks’ recent moves to sell all or parts of their physical trading operations “may suggest that the relationship between commodities derivatives and physical commodities markets … may not be as close as previously claimed or expected.”

• Link this


• Share this


• Digg this


• Email


• Print


• Reprints

Reuters: Financial Services and Real Estate

Read more about UPDATE 1-Fed considers new limits on banks in physical commodity trade and other interesting subjects concerning Real Estate at TheDailyNewsReport.com

Fed considers new limits on banks in physical commodity trade

Fed considers new limits on banks in physical commodity trade
http://s1.reutersmedia.net/resources/r/?m=02&d=20140114&t=2&i=829473282&w=580&fh=&fw=&ll=&pl=&r=CBREA0C1TC100

By Anna Louie Sussman and Emily Stephenson

NEW YORK/WASHINGTON Tue Jan 14, 2014 2:49pm EST

U.S. Federal Reserve Vice Chair Janet Yellen testifies during a Senate Banking Committee confirmation hearing on her nomination to be the next chairman of the Federal Reserve, on Capitol Hill in Washington November 14, 2013.

Credit: Reuters/Jason Reed

NEW YORK/WASHINGTON (Reuters) – The U.S. Federal Reserve on Tuesday took a first formal step toward restricting the role of Wall Street banks in physical commodities markets, seeking feedback on ways to limit the “catastrophic” risks of dealing with oil tanks or power plants.

In a 6-0 vote, the Fed board agreed to publish a preliminary notice laying out its concerns and potential remedies, following months of growing public and political pressure to check banks’ decade-long expansion into the raw materials supply chain.

Facing a clearly uneasy regulator, some banks such as JPMorgan Chase & Co (JPM.N) are already quitting the commodity trade, a once-lucrative business that has reaped billions of dollars of revenue for Wall Street over the years but is now facing diminished margins and stiffer capital rules.

In a 19-page document that included two dozen questions, the Fed offered a host of reasons for imposing new restrictions in the interests of limiting potential conflicts of interest and protecting the safety and soundness of the banking system, invoking incidents including BP’s Deepwater Horizon disaster and last summer’s oil-train tragedy in Quebec.

“The recent catastrophes accent that the costs of preventing accidents are high and the costs and liability related to physical commodity activities can be difficult to limit and higher than expected,” the Fed said in the notice.

It is the Fed’s first detailed public discussion since it shocked the banking industry last July by announcing a “review” of its 2003 authorization that first allowed commercial banks such as Citigroup (C.N) to handle physical commodities.

It comes just one day before a senior Fed director goes before a second Senate banking committee hearing on the matter.

U.S. Senator Sherrod Brown of Ohio, who led the first such hearing last summer, said the measure was “overdue and insufficient”, warning that consumers and end-users risked paying higher commodity prices until new curbs are imposed.

CONFLICTS, RISKS AND CAPITAL

Beyond the financial risks, the Fed is also seeking comment on potential conflicts of interest for banks, and the risks and benefits of additional capital requirements or other restrictions – measures that have been hinted at in the past.

The Fed said that new limits on ways in which banks may deal in physical commodities were up for debate: the authority to trade raw materials as “complementary” to derivatives; the investment in commodity-related business as arm’s-length merchant banking deals; and the “grandfather” clause that has allowed Morgan Stanley (MS.N) and Goldman Sachs (GS.N) much wider latitude than their peers.

The “advance notice of proposed rulemaking,” which is an optional initial step in the sometimes years-long process of making new regulations, seeks comments until March 15.

The Fed also questioned several previously cited justifications for allowing banks to trade in physical commodities such as crude oil cargoes and copper pallets.

It said, for instance, that although most banks are not allowed to actually own infrastructure assets, those that lease storage tanks or own physical commodities held by third parties may nonetheless face a “sudden and severe” loss of public confidence if they are involved in a catastrophe.

They also said that several banks’ recent moves to sell all or parts of their physical trading operations “may suggest that the relationship between commodities derivatives and physical commodities markets … may not be as close as previously claimed or expected.”

(Reporting By Karey Van Hall and Emily Stephenson; Editing by Leslie Adler and Grant McCool)

• Link this


• Share this


• Digg this


• Email


• Print


• Reprints

Reuters: Business News

Read more about Fed considers new limits on banks in physical commodity trade and other interesting subjects concerning Business at TheDailyNewsReport.com

The Biggest Physical Risk of Exploration Today Is Carpal Tunnel

Lunar module pilot Buzz Aldrin walks on the surface of the moon near the leg of the Lunar Module “Eagle.” Neil Armstrong, commander, took this photograph.

Courtesy of NASA

We’ve been to the moon and just about everywhere on Earth. So what’s left to discover? In September, Future Tense is publishing a series of articles in response to the question, “Is exploration dead?” Read more about modern-day exploration of the sea, space, land, and more unexpected areas.

“What an inconceivable experience it is to attain one’s ideal and, at the very same moment, to fulfill oneself. I was stirred to the depths of my being. Never had I felt happiness like this—so intense and yet so pure. That brown rock, the highest of them all, that ridge of ice—were these the goals of a lifetime? Or were they, rather, the limits of man’s pride?”

                                                                        – Maurice Herzog, 1952

When Maurice Herzog wrote these words, he was recalling his historic ascent of Nepal’s Annapurna—the first time anyone had stood more than 8,000 meters above sea level. On the summit, gasping for air, Herzog was testing the limits of strength and endurance, and bringing vast regions of the high Himalaya into the realm of human knowledge. He was tired, wind-whipped, oxygen-starved, but clearly exhilarated. After all, he was exploring.

Such was the reality of pre-21^st-century exploration. It wasn’t for the faint of heart, this life-risking blitz of derring-do, but it was the only way to grasp at the outer edge of the known world, to try and make sense of the universe through knowledge acquisition.

But as humanity’s technical prowess gained on our insatiable curiosity, something strange happened. It was no longer necessary to go places, dragging our corporal beings around, with their demands for oxygen, water, and an inconsiderately narrow temperature range. Instead, we could send robots to do the work, beaming back streams of 1s and 0s, seeing new vistas for us, enduring environmental hazards without complaint. And the digital spoils have been stunning: The Kepler spacecraft discovered more than 3,500 putative new worlds in four years. The Hubble Space Telescope peered 12 billion years back in time to the early stages of the universe. The Mars Reconnaissance Orbiter can spot rocks the size of a dinner plate on the surface of the Red Planet.

NASA’s Mars rover Curiosity cut a wheel scuff mark into a wind-formed ripple at the “Rocknest” site to give researchers a better opportunity to examine the particle-size distribution of the material forming the ripple, on Oct. 3, 2012.

Courtesy of NASA/JPL-Caltech

Exploration is, most certainly, not dead. On the contrary, more of the universe is open for our perusal than ever before, and the data deluge only continues to grow, a veritable Moore’s Law of curiosity-driven knowledge.

But is this modern, screen-mediated form of exploration recognizable as the same enterprise that led our ancestors to the ends of the Earth with poetry on their lips?

Historically, our first knowledge of a place (What plants grow here? Is there gold? Any savages in need of salvation?) has been coincident with our first feeling of it (Why does the light look different here? Why is it so hard to breathe at this altitude? Are these blood-sucking insects bad?), intimately linked with a humanistic, highly personalized quest for self-realization (What has my suffering taught me about the human condition? What are the limits of my abilities?). This cocktail of intellectual, sensory, and emotional discovery infused the ventures with an intoxicating blend of novelty: This was life at its most essential, a distillation of our caveman roots and hardwired wanderlust.

But the future of exploration will be different: From here on out, our first experiences of new places will be virtual, not physical. By the time the first person walks on Mars, we will know every pebble of the landing site. The subsurface contours of new caves may be mapped by ground-penetrating radar or acoustic backscatter. New oceanographic environments will first be seen through the cameras of a remotely operated vehicle, as scientists watch from a shipping container on a boat. 

Slate Articles

The Biggest Physical Risk of Exploration Today Is Carpal Tunnel