Exclusive - JPMorgan tried but failed to satisfy Fed on metals warehousing: letters

Wed Nov 27, 2013 12:04am EST
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By David Sheppard and Josephine Mason

LONDON/NEW YORK (Reuters) - The U.S. Federal Reserve was pressing JPMorgan Chase & Co (JPM.N: Quote) to distance itself from its metals warehousing business more than a year ago, documents seen by Reuters show, long before the issue became a focal point in the debate over Wall Street's role in physical commodities trading.

A series of letters between JPMorgan's lawyers and the Fed, released to Reuters through a Freedom of Information Act request, show Wall Street's primary regulator took a tough stance on the bank's efforts to hold onto the global network of Henry Bath & Sons warehouses, part of the larger RBS Sempra commodity trading business it bought in mid-2010.

The correspondence shows the Fed balked at JPMorgan's request to turn the one-time trading assets into a strictly arms-length financial investment back in June 2012, and told the bank it must provide quarterly updates on what it was doing to either comply with banking rules, or sell the business.

The Fed also pressured JPMorgan to dilute the amount of metal held by its own traders in Henry Bath, an issue that has riled major metal consumers and critics of a copper investment fund the bank was trying to launch.

Eventually, by May this year, JPMorgan had decided to simply sell the business, the letters show. Three months later, with broader pressure mounting over Wall Street's involvement in the raw materials supply chain, JPMorgan would put its entire physical commodity trading business on the block.

The documents, which consist of six letters over a period of 13 months, provide the deepest look yet at how the Federal Reserve has wrestled with the thorny regulatory question of banks and physical commodity markets.

They show the Fed has at times taken a tough line with banks in the sector, and may darken the outlook for Goldman Sachs (GS.N: Quote) and Morgan Stanley (MS.N: Quote), both of which still own physical commodity trading assets such as warehouses, pipelines and oil storage tanks. Both banks argue that a 1999 law gives them greater latitude to own and operate assets as they are former investment banks.

The letters also raise questions about the Fed's willingness to allow Wall Street to convert former trading assets into passive merchant investments that they can own for up to a decade. Both Goldman and Morgan Stanley have claimed this authority to retain or pursue new investments in recent years, Reuters reported last week.   Continued...

A sign is seen on the Canary Wharf offices of JP Morgan in London September 19, 2013. REUTERS/Neil Hall