Wall St's grandfathers of commodities to survive Fed revamp better than others

Wed Feb 12, 2014 12:08am EST
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By Anna Louie Sussman

NEW YORK (Reuters) - As the U.S. Federal Reserve considers new ways of reining in banks' trading in what it sees as risky physical commodity markets, Wall Street's two oldest and biggest players may ultimately gain in stature.

Thanks to a longstanding legal exemption that Fed officials say limits their regulatory capacity, Morgan Stanley (MS.N: Quote) and Goldman Sachs (GS.N: Quote) may yet emerge from the regulatory upheaval that is upending banks' commodities trading better-off than their peers, who face potentially tougher new rules.

Although Morgan Stanley is selling its large physical oil trading desk and Goldman has said it may be open to selling its metals warehousing unit, which it was alleged to have used to inflate metal costs, they show little sign of pulling back from other big physical markets such as power, natural gas and metals.

Their determination to stick with vast parts of the business may irritate rivals, such as Bank of America Corp's Merrill Lynch (BAC.N: Quote) and Citigroup Inc (C.N: Quote), who have long complained about the uneven playing field created by a 1999 banking law.

During the financial crisis more than five years ago, the two former investment banks traded their freedom from Fed oversight for the benefit of its last-resort lending.

In becoming bank holding companies, they became subject to the same regulatory scrutiny as commercial banks, barring several significant exceptions, one of which focused on commodities

Thanks to a 15-year-old legal statute, they alone enjoy special "grandfather" status in the realm of commodity trading and investment.

That allows them far more latitude than the rest of the U.S. banking industry, whose ability to trade things like crude oil cargoes and copper pallets was granted directly by the Fed over the past decade, and is now subject to revision.   Continued...

The corporate logo of financial firm Morgan Stanley is pictured on a building in San Diego, California September 24, 2013. REUTERS/Mike Blake