JPMorgan Chase said Friday it is exploring the sale or spinoff of its physical commodities business, as Wall Street’s role in the trading of goods such as oil, sugar, corn and metals has come under increased scrutiny from regulators and lawmakers in Washington.
The bank said it would look into shedding its stakes in power plants, oil tank farms and warehouses as well as the trading desks that buy and sell oil, natural gas and coal. Those activities brought in about $700 million in revenue during the first half of this year, said a person familiar with the operations.
But the bank said it would remain “fully committed to its traditional banking activities in the commodity markets,” including financial derivatives and the trading of precious metals.
The announcement comes amid reports that JPMorgan is negotiating with the Federal Energy Regulatory Commission over settling possible charges for improper and manipulative trading.
FERC has already slapped JPMorgan with a six-month suspension, barring it from trading in U.S. electricity markets for giving the agency false information during an investigation of California power markets.
The bank’s exit from the commodities trading business would mark a reversal from a two-decade trend toward greater involvement of financial institutions in commodity markets.
Three years ago, JPMorgan bought the energy trading division of RBS Sempra. According to the analytics firm Coalition, the 10 largest banks generated an estimated $6 billion in commodities trading revenue last year.
From the mid-1980s through 2004, financial or “noncommercial” players in the oil futures markets grew 30-fold. According to the Commodity Futures Trading Commission, noncommercial traders routinely account for a third to more than half of open positions in different commodity markets.
The two largest trading investment banks, Goldman Sachs and Morgan Stanley, dove into commodities in the 1980s. Goldman bought commodities firm J. Aron in 1981 and Morgan Stanley went into oil trading in 1984, according to an article in the Argus Global Markets weekly newsletter. Both became banks during the financial crisis in 2008.
Citigroup has been involved in physical trading when it merged with Travellers, which owned the oil trading division, Phibro.
As their stakes in the commodity futures markets grew, many financial institutions decided to invest in some physical assets to give them the flexibility to accept physical delivery of commodities.
“Banks are hard-wired into the fabric of oil markets,” said an opinion piece in the Argus Global Markets.
Recently, however, banks have drawn criticism for their commodities trading as government officials question whether federally insured institutions should play such a broad role in the market.
In a case that analysts believe to be similar to JPMorgan’s, FERC has accused Barclays of taking positions in physical markets for the sole purpose of manipulating prices in financial markets and has imposed a $453 million civil fine for electricity market manipulation. Barclays is refusing to pay and vowing to fight it in federal court.
Many economists have debated the effects of financial institutions’ growing involvement in commodity markets. Some say that the banks provide liquidity that makes it easier for farmers or companies such as airlines to hedge prices and avoid sharp price swings that could threaten their businesses.
But others allege that the huge amounts of money being invested by big banks distort many of the commodity markets and in some cases can drive up prices.
The Federal Reserve is also taking a closer look at banks’ trading operations.
A 2003 decision by the Fed permitted commercial banks to engage in certain commodity trading activities that were deemed complementary to their financial activities. That decision allowed bank holding companies to own physical commodity assets, such as warehouses and oil pipelines, at the same time as they bought and sold metal and oil on the markets.
On July 19, however, the Fed said it was “reviewing the 2003 determination that certain commodity activities are complementary to financial activities and thus permissible for bank holding companies.”
In deciding to sell its physical commodities arm, JPMorgan considered the effect of new rules and regulation, said a person familiar with the operations who was not authorized to speak on the record.
“This could be good news for consumers and taxpayers,” said Sen Sherrod Brown, D-Ohio, in an e-mail. “Banks should focus on core banking activities. Our economy is strengthened when financial conflicts of interest and financial risk are reduced.”
In a statement, JPMorgan said that “the firm will explore a full range of options over time including, but not limited to a sale, spin off or strategic partnership of its physical commodities business.”