Fed Proposes Tighter Requirements for Physical Commodities Activities

The Federal Reserve today announced a proposed rule that would impose tighter capital requirements and limitations on financial holding companies that engage in physical commodities activities. The proposal follows the Fed’s 2014 advanced notice of proposed rulemaking and the OCC’s recent proposal to prohibit national banks and federal savings associations from investing in industrial and commercial metals.

Current law permits certain FHCs to engage in physical commodities trading, energy management and energy tolling activities, and financial holding companies are also permitted to make merchant banking investments in companies engaged in activities involving physical commodities. The proposed rule would impose additional limitations on the physical commodities activities FHCs may engage in by revising the calculation used to determine the total value of commodities held by a FHC (which is currently limited to 5 percent of tier 1 capital) and clarifying existing prohibitions on certain activities.

It would also impose new risk-based capital requirements for activities that could expose the FHC to liability in the event that the physical commodity was released into the environment. Additionally, the proposed rule rescinds authorizations that allow certain financial holding companies to engage in physical commodity activities involving power plants, removes copper from the list of precious metals that all BHCs are permitted to own and store and establishes new reporting requirements for commodities holding.

In a joint statement today, ABA and other financial trade associations said that “it is both inappropriate and unfortunate that [the Federal Reserve] has proposed regulatory changes that are based upon wholly theoretical and unsubstantiated concerns rather than actual facts, evidence, or historical experience… By imposing unjustifiably higher capital on this important economic activity, end-users will ultimately pay the price, burdening business and hindering job creation, the formation of new businesses and economic growth.”

ABA is currently reviewing the details of the proposal. Comments are due 90 days after the proposed rule is published in the Federal Register. For more information, contact ABA’s Jason Shafer or Hu Benton.