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By Douwe Miedema
WASHINGTON, July 30 (Reuters) - Wall Street banks face theprospect of increased scrutiny of their commodity businesses asU.S. regulators and lawmakers on Tuesday pressed for a closerlook at their roles in owning warehouses and in tradingeverything from oil to metals
Under pressure from a handful of lawmakers to explain whybanks including JPMorgan Chase & Co. and Goldman Sachs have been allowed to own warehouses and trade physicalcommodities, regulators have scrambled this month to demonstratethat they are tackling the issue.
On Tuesday, Securities and Exchange Commission ChairwomanMary Jo White said for the first time that the SEC was lookinginto the question of insider trading, a concept that has neverbeen formally applied to the broad commodity markets.
Meanwhile a leading lawmaker called on the Commodity FuturesTrading Commission (CFTC) to explain what kind of oversight ithad of metals warehouses within the London Metals Exchange (LME)network, many now owned by big banks and traders. Metals userstestified before a Senate panel last week that the owners aredriving up costs by moving slowly to deliver the metal.
The scrutiny of banks' commodity desks, which has beenapparent since last year, abruptly intensified this month,raising the possibility that banks may have to spin off or shutdown their multibillion-dollar operations.
JPMorgan moved first last week, saying it would quitphysical trading. Earlier on Tuesday it also paid $410 millionto settle a long-running dispute with U.S. power regulators overalleged market manipulation, a penalty likely to increase callsfor better oversight.
Senator Sherrod Brown, an Ohio Democrat and banking critic,at a senate hearing asked top regulators including White whetherbanks should be allowed to own oil tankers and metal warehouseswhile at the same time trading in related commodities.
"It's a subject matter that once it came to my attention,and that's fairly recently, I've actually asked the staff toexamine that question, or a series of questions," White told theU.S. Senate Banking Committee.
She also said that "a range of possible disclosures ...could be involved," but gave no further details.
The European Union has just agreed to overhaul its marketabuse law to include stricter rules on commodity trading andtougher sanctions generally for insider dealing, and bringoffences like rigging of market benchmarks like Libor within thescope of the EU law for the first time. The revised law isexpected to take effect by November.
A spokesman for the SEC later said that White had askedstaff to provide her with a briefing on the subjects raised,because of the recent attention on the issue.
SUDDEN PRESSURE
The pressure on banks has ratcheted up in the past fewweeks, particularly after the Federal Reserve shocked theindustry by saying it was "reviewing" a landmark 2003 decisionthat first allowed banks to trade in physical markets.
But some degree of inquiry has been underway since the endof last year, when the Senate's Permanent Subcommittee onInvestigations first began questioning some large banks abouttheir commodity businesses, according to two sources. Theinquiry was earlier reported by the Wall Street Journal.
Sen. Carl Levin, who heads the committee, declined tocomment on or confirm the initial inquiry, but said he too had"real concerns" about the involvement of banks in this area.
"There's great potential there for conflicts and I thinkthere's great potential there for speculation, which banksshould not be engaged in," Levin told reporters.
The stakes went up last week, when big aluminum buyersrepresented by MillerCoors - America's second-largest brewer -told senators that banks' control of metals warehouses drove upthe brewers' costs by as much as $3 billion last year.
A few days later, JP Morgan said it was exiting physicalcommodities trading, as the profits were too slight for therisks and costs of dealing with regulators in a slew ofdifferent countries.
It was a sharp and unexpected reversal for a bank that haspushed aggressively into the sector since 2008, when it firstinherited a host of power trading assets through its acquisitionof Bear Stearns during the financial crisis.
Such moves reflect a wider and growing unease of combiningbanking and commodities trading, with both the Department ofJustice and the U.S. Commodity Futures Trading Commission havinglaunched probes into metal warehousing.
CFTC TOO
Sen. Debbie Stabenow, who heads the Senate AgricultureCommittee, also weighed in on the issue in a letter to GaryGensler, who heads the Commodity Futures Trading Commission, thederivatives regulator Stabenow's committee oversees.
"I am writing to encourage you to further review this issueand clarify the role and responsibility of the Commodity FuturesTrading Commission," Stabenow said.
One question Stabenow said she wanted answered is whatjurisdiction the CFTC has in overseeing the London MetalsExchange, the operator that oversees most the metals warehousesowned by the largest banks.
Gensler, also testifying in the Tuesday hearing, stressedthat his agency, while not directly overseeing physicalcommodity markets, had a clear authority to police derivativesfor fraud, manipulation, and other abuses.
The rules for insider trading in commodity markets are farlighter than in securities markets, and have traditionally beenmuch less of a concern because of the fragmented nature oftrading, market participants said.
Rich Feltes, an analyst at futures broker RJ O'Brien, saidthe authors of the 2010 Dodd-Frank overhaul of Wall Street -designed to prevent a repeat of the financial crisis - refrainedfrom tightening the rules for that reason.
"Any rule was significantly scaled back because commodityinformation is so diverse and so broad based... it was just seenas unworkable," Feltes said.
