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* All-cash transaction to be completed by third quarter
* Metals brokerage business to stay with JPMorgan, sourcesays
* Mercuria is first trade house to absorb entire physicaldivision from a bank (Updates with comments from U.S. Senator Sherrod Brown inparagraphs 19-21)
By Dmitry Zhdannikov and Chris Peters
NEW YORK, March 19 (Reuters) - JPMorgan is sellingits physical commodities business to Mercuria for $3.5 billion,the U.S. bank said on Wednesday, sweeping the fast-growing Swisstrading house into the top league of commodities traders.
The all-cash transaction for one of the most powerful oiland metals desks on Wall Street is expected to close in thethird quarter, JPMorgan said in a statement.
In documents circulated to potential buyers last year,JPMorgan had valued its physical commodity business at $3.3billion, with an annual income of $750 million. JPMorgan paidnearly $2 billion to buy the largest part of the business fromRBS in 2010.
JPMorgan decided to sell its multibillion-dollar physicalcommodities division last year because of rising regulatory andpolitical pressure, and so it could concentrate on the bank'score business of lending.
"Our goal from the outset was to find a buyer that wasinterested in preserving the value of JPMorgan's physicalbusiness," said Blythe Masters, head of JPMorgan's globalcommodities business.
JPMorgan said it would still provide traditional bankingactivities in commodities markets, including financial productsand the vaulting and trading of precious metals.
It gave no further details of what exactly would be includedin the transaction, but a source close to the matter said thebank's metal brokerage business including its London MetalExchange (LME) ring dealing team would remain with JPMorgan.
However its Henry Bath metals warehousing unit was includedin the deal, the source added.
JPMorgan also has sizeable power, natural gas and carbontrading desks, largely operating from London, as well as owningpower plants.
FATE OF JPMORGAN EMPLOYEES
The fate of JPMorgan's Masters was too early to tell, thesource said, adding that she and her management team had beenprimarily focused on achieving the sale.
Others in the commodities units were waiting to hear abouttheir future.
"It will be interesting to see whether Mercuria will want tokeep us on or not, and whether they will attempt to move ourdesks to Geneva," one trader with the bank said.
"Most of us want to stay here (in London), so I suspect adrive to move us to Geneva would equate to a reduction of ourpower and gas trading desks," the trader added.
Many other banks, including Deutsche Bank, Bankof America Merrill Lynch and Barclays, haverecently scaled back or shut down their power, gas and carbontrading desks, citing unfavourable banking regulation as themain reason
In February, Reuters reported that Mercuria, led by twoformer Goldman Sachs executives Marco Dunand and DanielJaeggi, became the front-runner to buy the physical commoditiesunit, one of the most powerful oil and metals desks on WallStreet.
EXCLUSIVE TALKS
The bank went into exclusive talks with Mercuria inFebruary. In the weeks before that, the trade house had beencompeting with Australian bank Macquarie Group andprivate equity manager Blackstone Group LP to buyJPMorgan's unit, sources had said.
Private and lightly regulated trading houses have benefitedmost from a major retreat by banks from commodities trading overthe past two years.
Companies such as Glencore and Russian oil majorRosneft hired whole teams of traders from banks such as MorganStanley but Mercuria will become the first trading houseto absorb an entire physical division from a bank.
Following the news on Wednesday, Democratic U.S. SenatorSherrod Brown, who has been a staunch critic of Wall Street'sphysical commodity activities, renewed his call for U.S.regulators to clamp down on banks' ownership of metalswarehouses, oil pipelines and other commodity assets.
"Today's news is a welcome development, but this does notlet regulators off the hook," Brown said in a statement.
"The Fed, CFTC, and others must enact robust reforms to WallStreet's physical commodities activities and do more to protectend users and consumers of aluminum and other materials." (Reporting by Chris Peters, Dmitry Zhdannikov and Ron Bousso;Additional reporting by Susan Thomas, Veronica Brown and HenningGloystein in London and Josephine Mason in New York; Editing byAnna Willard and Lisa Shumaker)
