Change U.S. law on banks and commodities, regulator says

Reuters

By Douwe Miedema

WASHINGTON, Oct 4 (Reuters) - Congress should limit WallStreet's controversial role in commodity markets, and rewrite alaw that gives banks broad leeway to own oil, metals and otherraw materials, a senior U.S. regulator said on Friday.

The Federal Reserve, the top U.S. bank watchdog, isrethinking its policy of allowing banks to operate in commoditymarkets amid accusations they inflate the prices of items suchas aluminum and electricity.

"I plan to urge that the law be amended by simply reversingthe policies that allow for bank ownership," said Bart Chilton,a commissioner at the Commodity Futures Trading Commission(CFTC), the top U.S. derivatives regulator.

The law also gives some banks an advantage over others,Chilton said, in reference to Morgan Stanley and GoldmanSachs Group Inc, which only came under Fed supervision in2008 at the height of the financial crisis.

Because the two changed their legal status at that time, thelaw treats them more leniently than their rivals, allowing themto hold any commodity businesses they had before Sept. 30, 1997,through a so-called grandfather clause.

"There are two banks that are using yet another exception tothe law," Chilton said in a speech.

Chilton had planned to address lawmakers critical of WallStreet's role in commodities at a panel meeting of the SenateBanking Committee scheduled for Oct. 8, although the date is nowmoot because of the government shutdown.

The lawmakers, led by Senator Sherrod Brown, a Democrat fromOhio, will also grill Fed officials attending the meeting - thesecond one they are holding on the matter.

Banks that cannot use the grandfather clause because theywere already under Fed supervision when the law was written in1999 need special approval to enter the commodity market, andthe conditions are tighter.

One crucial difference is that, while banks such asCitigroup Inc and Bank of America Corp are allowedown oil, metals and other commodities, they cannot store,distribute, refine or transport them.

But Morgan Stanley owns TransMontaigne, a large oil terminaland logistics subsidiary estimated to be the 17th-largestprivate company in the United States.

Banks that own such entities also control the supply ofcommodities they trade, creating a conflict of interest, Chiltonadded.

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