One day after the Federal Reserve System (Fed) issued an advance notice of proposed rulemaking (ANOPR) seeking comment on how to limit risk involved in the physical commodity activity of financial holding companies, members of a Senate Banking subcommittee voiced skepticism about the effort and its timing.
"The Fed's proposal yesterday was a timid step," said Financial Institutions and Consumer Protection subcommittee chairman Sherrod Brown (D-OH) during a hearing Wednesday in Washington, DC. "It was too slow in coming. There's still too much that we don't know about these activities and investments."
Brown said he was "incredulous" at the amount of time it took for the ANPR to be issued. In a statement issued Tuesday, Brown said "each day that we wait to rein in these activities means that end users and consumers will pay higher commodity and energy prices, and taxpayers will continue to be exposed to excessive risks at ‘Too Big to Fail’ banks."
Citing disasters involving commodities, from the Macondo oil spill in the Gulf of Mexico to recent crude oil tanker train crashes to the Three Mile Island nuclear leak in Pennsylvania in 1979, the Fed on Tuesday said it was re-examining the risk involved in the physical commodity activity of financial holding companies (see Daily GPI, Jan. 14). The banking agency issued an advance notice of proposed rulemaking seeking comment on how to limit risk.
With the near collapse of the banking system in 2008 and the subsequent Dodd-Frank Financial Reform Act as a backdrop, the Fed said it aims to ensure that associated commodities activities by financial companies do not endanger an institution's viability or threaten the rest of the financial system.
"It was certainly a step forward, but a meager one," Sen. Elizabeth Warren (D-MA) said of the ANOPR. "I think we already have ample evidence that the Fed needs to place additional restrictions on how banks trade and warehouse physical commodities to reduce systemic risk and to protect consumers from market manipulation, and I hope that once the public comment period ends that the Fed will act quickly to get those restrictions in place."
Sen. Jeff Merkley (D-OR) said the Federal Energy Regulatory Commission (FERC) appears to have been paying attention to commodity issues for some time, while "the Fed was asleep." And members of the subcommittee indicated pessimism at the concept of "Chinese walls" within large corporations, separating, for example, one division that owns commodities and the means to deliver them from another division that is involved in commodities trading.
Under questioning from Merkley, witnesses representing FERC, the Commodity Futures Trading Commission (CFTC) and the Fed all agreed that Chinese walls are imperfect protection from market manipulation.
"I would hesitate to rely on that alone," said Norman Bay, director of FERC's Office of Enforcement.
During the same hearing, Bay and Vince McGonagle, who directs CFTC's Division of Market Oversight, said the CFTC has made the large trader report available to FERC employees since the agencies signed off on two memoranda of understanding (MOU) to address overlapping jurisdiction and information sharing in connection with market surveillance and investigations into potential market manipulation, fraud or abuse (see Daily GPI, Jan. 3).
That had not been clear in the agencies' announcement two weeks ago, according to Warren, who said that the two agencies appear to have cleared up confidentiality issues related to the MOU but still have some technical data issues to resolve.
"Market manipulators don't respect jurisdictional boundaries between agencies," Warren said. "In fact, they try to exploit those boundaries and take advantage of gaps in oversight and in data sharing. And that's why it's absolutely critical that the Commodity Futures Trading Commission be willing to share these data in an ongoing, timely basis with FERC. And so the reason I asked about this is that I want to hear that we're going to protect consumers, we're going to protect the public, by making sure that these data are shared."
Last April, Sens. Dianne Feinstein (D-CA), Ron Wyden (D-OR) and Lisa Murkowski (R-AK) called on FERC and the CFTC to execute more robust MOUs to resolve their jurisdictional disputes, which the lawmakers said were hampering oversight of the nation's energy markets (see Daily GPI, May 1, 2013).
While federal statute divides the jurisdiction of FERC and the CFTC between cash markets and futures markets, respectively, federal law also recognizes that detecting many forms of manipulation in these integrated markets requires the active oversight of both markets in an integrated fashion, the senators said a letter to the heads of both agencies. Dodd-Frank directed FERC and CFTC to negotiate an MOU that would integrate market oversight efforts and improve information sharing between the rival agencies.