NEW YORK CITY: US regulators should tighten rules on bank ownership of physical commodity assets due to potential market manipulation and financial risk associated with the assets, a report said on Wednesday (Thursday in Manila).
The report focuses on cases like Goldman Sachs’s ownership of key aluminum storage assets that resulted in huge increases in delivery times for the metal at the same time bank was trading the commodity,
The report by the Senate Permanent Subcommittee on Investigations said, another highlighted point is that JPMorgan Chase held physical commodity assets equal to 12 percent of its capital under one regulatory benchmark, raising the bank’s financial vulnerability in case of fall in prices of the assets.
Several of the report’s recommendations were directed at the US Federal Reserve, including a call for the central bank to limit a financial firm’s physical commodity assets and to strengthen disclosures about the assets.
“Wall Street’s massive involvement in physical commodities puts our economy, our manufacturers and the integrity of our markets at risk,” said Sen. Carl Levin, chairman of the panel that released the report.
“It’s time to restore the separation between banking and commerce and to prevent Wall Street from using nonpublic information to profit at the expense of industry and consumers.”
JPMorgan, which has been working to reduce its physical commodity holdings, pointed to a recent sale of some assets to Mercuria Energy Group. It added that its holdings in commodities did not exceed regulatory limits.
Goldman Sachs did not immediately respond to a query.
The report comes ahead of two days of congressional hearings, which will include representatives from Goldman Sachs, JPMorgan and Morgan Stanley.
Federal Reserve Governor Daniel Tarullo is scheduled to testify Friday.