Comments on FRB’s Advance Notice of Proposed Rulemaking Regarding Physical Commodity Activities

In January 2014, the Board of Governors of the Federal Reserve System (“FRB”) issued an Advance Notice of Proposed Rulemaking (“ANPR”) soliciting comments on various issues related to physical commodity activities conducted by financial holding companies, including the risks that such activities pose to the safety and soundness of depository institutions and the financial system generally. The activities covered by the ANPR included physical commodities activities that have been found to be “complementary to a financial activity” under section 4(k)(1)(B) of the Bank Holding Company Act (“BHC Act”), investment activity under section 4(k)(4)(H) of the BHC Act and physical commodity activities grandfathered under section 4(o) of the BHC Act.

During the ANPR’s comment period, the FRB received a number of letters from various institutions, trade associations and individuals.  Among these were several letters from financial holding companies, including those from both the Goldman Sachs Group, Inc. (“Goldman”) and Morgan Stanley. Goldman’s letter noted the role that financial holding companies play as intermediaries in commodities markets, including serving as efficient means of providing financing and hedging products to producers and end users. The letter acknowledged that there are potential risks associated with such activities, but emphasized that those risks are manageable and not significantly different from those associated with other financial activities.

Morgan Stanley’s letter reviewed the scope of the activities covered by the ANPR and acknowledged the importance of conducting each of them pursuant to a robust risk management framework. The letter then discussed the public benefits of physical commodities activities, which Morgan Stanley stated are “real and significant,” and highlighted the risks faced by firms that produce, distribute and consume commodities, concluding that financial holding companies are uniquely positioned to provide financing and risk management solutions to such firms. The letter cited several specific scenarios such as helping renewable energy producers build wind farms, or helping an airline reduce fuel costs that were enabled by Morgan Stanley’s ability to engage in certain physical commodities activities.

See: Morgan Stanley’s Comment Letter; Goldman Sachs’ Comment Letter.
See also: FRB ANPR on Complementary Activities, Merchant Banking Activities and Other Activities of Financial Holding Companies Related to Physical Commodities.
Related news: Trade Associations Submit Joint Comment Letter to FRB Regarding Activities of Financial Holding Companies Related to Physical Commodities (April 21, 2014).