Analysis: Wall Street's commodities trading under fire, rivals creep in

Wed Jul 24, 2013 12:17am EDT
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By Jeanine Prezioso

NEW YORK (Reuters) - Just as Wall Street's commodity titans face intensifying pressure over their trading operations, nimble rivals are stepping up efforts to chip away at their bedrock business of financing the world's raw materials industry.

Minutes before senators in Washington began questioning why the biggest U.S. banks were straying so deeply into the murky world of commodities, privately owned merchant trading group Freepoint Commodities announced on Tuesday it had completed its first deal to finance oil and gas output.

The Volumetric Production Payment, a once-popular type of structured deal created by Enron and eagerly adopted by Wall Street, was a timely illustration of how merchants are pushing deeper into traditional banking territory while regulators threaten to make it harder for behemoths like JP Morgan (JPM.N: Quote) and Goldman Sachs (GS.N: Quote) to compete in physical markets.

While the merchants, many like Freepoint now backed by private equity and staffed by former bank traders, are unlikely to be able to match the funding rates that the banks provide, the deal served as a reminder of why banks are so determined to maintain the oil traders, power schedulers and metals brokers that allow them to combine deep market insight with low-cost capital.

"The size and complexity of this transaction demonstrate the ability of Freepoint's platform to deliver customized financing solutions to the upstream oil and gas sector," according to Freepoint's head of structured finance Brian Cumming, who worked for Deutsche Bank until last year.

The Senate Banking Committee questioned experts and lawyers about whether commercial banks should control oil pipelines, power plants and metals warehouses, and be able to use such infrastructure to trade commodities.

The hearing came just days after the Federal Reserve shocked the industry by saying it was reviewing a landmark 2003 decision that first allowed commercial banks to trade raw materials.

For banks already coping with new regulations barring proprietary trading and raising capital requirements, the political focus on commodities is an unwelcome reminder that competitors like Freepoint and its Stamford, Connecticut neighbor Castleton Commodities are waiting in the wings.   Continued...

A street sign for Wall Street hangs in front of the New York Stock Exchange May 8, 2013.REUTERS/Lucas Jackson