Bloomberg reports that the Fed is examining all legal and regulatory exemptions that allow banks to participate in the commodities markets, said a person briefed on the process who asked not to be named because the review is confidential.
The appraisal, intended to minimize potential risks to the financial system, widened since the Fed said in July that it’s reconsidering its landmark 2003 decision to grant some lenders, such as Citigroup and JPMorgan, permission to expand into raw materials.
U.S. law restricts banks from owning non-financial businesses unless they get special exemptions. Goldman Sachs and Morgan Stanley were the two biggest U.S. securities firms until they converted into banks in 2008. A 1999 law 'grandfathers' any commodities operations they had before 30th September 1997.
'The way I read the statute, all commodities activities are grandfathered forever, subject to appropriate risk-management controls', said Randy Guynn, head of the financial institutions group at law firm Davis Polk & Wardwell, whose clients include Morgan Stanley and Goldman Sachs.
The breadth of the Fed’s review indicates the central bank could narrow its interpretation of what’s grandfathered, potentially limiting Goldman Sachs and Morgan Stanley’s commodities operations to exactly what was held in 1997.
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