Wall Street launches defense of physical commodities role

Thu Sep 19, 2013 2:22pm EDT
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By David Sheppard

NEW YORK (Reuters) - Wall Street launched its first concerted defense of its role in physical commodity markets on Thursday, funding a report that highlighted the risks of banks being pushed out of the sector by political and regulatory pressure, and gaining support from an influential trade group.

The report commissioned by Wall Street's largest lobby group, the Securities Industry and Financial Markets Association (SIFMA), said banks play a small but vital role in the natural resources supply chain. Their ability to trade in the underlying commodities - not just financial derivatives - helped markets function.

"Banks play an essential role in assuring the smooth functioning of the commodity markets which underpin the $16.6 trillion U.S. economy, and on which consumers ultimately rely," said the report by IHS IHS.N, a major global research, analysis and specialist information group that in recent years has bought some of the world's foremost energy consultancies.

The report comes weeks before the U.S. Senate Banking Committee is expected to hold its second hearing on the issue of Wall Street's deepened involvement in physical markets, which has come under intense public scrutiny over allegations that bank-owned metal warehouses have inflated prices.

Regulators and politicians are also questioning whether Wall Street's involvement in risky commercial activities could pose a threat to their financial soundness.

The Electric Power Supply Association (EPSA) also wrote an open letter to the Federal Reserve on Wednesday, asking the Fed to consider Wall Street's usefulness in electricity markets, in the first public sign that the banks' clients are concerned about losing access to the banks' services.

Electricity hedging and trading, "is best carried out in robust commodity markets that allow for and promote access to a variety of credit-worthy counterparties, including banks," the letter said.

EPSA's members include energy majors like BP Plc and Shell's North American arm, as well public power providers like New Jersey's PSE&G.   Continued...

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