Commodities push threatened by rules

Shanny Basar in New York

24 Jan 2011

Even as the chief executives of large US banks were revealing a fall in revenues from fixed-income sales and trading on their full-year results calls last week, they were announcing the measures to address the shortfall. For many this included a greater focus on commodities trading.

Jamie Dimon, chairman and chief executive of JP Morgan Chase, and Vikram Pandit, chief executive of Citigroup, said they would continue to hire in commodities. This month Société Générale Corporate & Investment Banking agreed to buy RBS Sempra’s North American power and natural gas business for an undisclosed sum.
There are hints of a new supercycle in commodities prices, which should result in large profits for banks with the necessary expertise. About $320bn of institutional and retail money is invested in commodities, compared with only $6bn a decade ago, according to Barclays Capital.
But the sector is also coming under greater scrutiny from regulators. Food and fuel prices are politically sensitive. Last week oil giant BP published its Energy Outlook 2030 report, in which it said that since 1900 the world population has more than quadrupled and primary energy consumption has grown by a factor of 22.5, driving prices up. Earlier this month the UN said world food prices are close to the levels that caused shortages and riots in some countries in 2008.
Politicians are often quick to blame commodity speculators when there are price spikes, and bankers are concerned that new rules could threaten a potentially lucrative business – just as they are making big investments in it.
The US Commodity Futures Trading Commission voted to establish position limits for some physical commodity derivatives. The move was trumpeted as an attempt to curb the activity of commodity speculators.
Joel Telpner, partner at law firm Jones Day, said the rules could change substantially before they are enacted. He said: “The legislation assumes that price rises have been caused by excessive speculation, but the 2000 Commodity Futures Modernization Act prohibited regulators from collecting data on commodity derivatives. So no one really knows.”
He added that commodities that do not have an active futures market have also experienced price increases and volatility.
Regulations under fire
The CFTC’s proposals to impose limits have received short shrift. The International Swaps and Derivatives Association and the Securities Industry and Financial Markets Association have written a joint letter in which they said they understood the regulator had to develop “appropriate” position limits under the Dodd-Frank Act, but expressed concern that the proposed rules would drive trading to overseas exchanges.
Tom LaSala, chief regulatory officer at the Chicago Mercantile Exchange, wrote on his blog that the CFTC proposal represented a step in the wrong direction.
He said: “Position limits do have a place – CME Group employs position limits in its agricultural commodities, as well as a combination of position limits and position accountability standards in its energy and metals contracts.
“Rather than hard limits, we believe exchange-position accountability rules are the most effective and appropriate tool for addressing any concerns, with respect to large positions in a contract prior to the expiration period.”

– How Royal Bank of Scotland offloaded Sempra

As part of an agreement with the European Commission, in October 2009 Royal Bank of Scotland was ordered to sell its stake in commodities trading business RBS Sempra, a joint venture between the bailed-out UK bank and US energy group Sempra.
With prices breaching record levels in several commodities, there has been no shortage of potential bidders for the operation, which contributed about 6% of group-wide profits in 2009.
Last February, JP Morgan Chase agreed to buy the Asian and European assets for $1.7bn, and this month Société Générale Corporate & Investment Banking agreed to buy RBS Sempra’s North American power and natural gas business for an undisclosed sum, adding 130 professionals to Société Générale’s gas commodity team, headed globally by Edouard Neviaski. Jacqueline Mitchell and Michael Goldstein from RBS Sempra will become co-chief executives of the new unit – Société Générale Energie – reporting to Gonzague Bataille, head of commodity markets in the Americas at Société Générale. The French bank has trebled staff in its US commodities team over the past five years, and the acquisition will achieve the same, according to sources.
JP Morgan bought Sempra’s trading book; Société Générale has acquired a physical operation to store and deliver gas and power to customers and a “state-of-the-art IT platform”. The rationale behind the deal is that the French bank can use its derivative expertise to help customers hedge risks, a capability traditional owners of physical assets, such as utilities, lack. Société Générale will have a physical operation, unlike most other banks, and boost its energy investment banking franchise by providing more intelligence and financing products, especially as more shale gas acquisitions are expected.


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