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From Banking and Finance Law Daily, September 23, 2016

Fed proposes to restrict holding company commodities activities

By Richard A. Roth, J.D.

The Federal Reserve Board is proposing to add limits to financial holding companies’ physical commodity activities and impose related additional capital requirements. The proposal follows a joint report on financial company activities published by the Fed, Office of the Comptroller of the Currency, and Federal Deposit Insurance Corporation two weeks earlier. The OCC made a related proposal on the same day the joint report was released (see Banking and Finance Law DailySept. 9, 2016).

One of the Fed’s recommendations in its portion of the joint report was repeal of the authority for some FHCs to engage in commodities activities under Bank Holding Company Act Section 4(o) (12 U.S.C. §1843(o)), which would be accomplished by the new proposal. The Fed also recommended the elimination of FHCs’ merchant banking authority (see Banking and Finance Law Daily, Sept. 9, 2016).

According to the Fed, its proposal would:

  • require FHCs to hold extra capital against commodities activities for which liability would result if the commodity were released into the environment;
  • tighten the quantitative limit on the physical commodity trading activity FHCs may conduct;
  • rescind specific FHCs’ authority to engage in physical commodity activities involving power plants;
  • remove copper from the list of precious metals that bank holding companies are permitted to own and store; and
  • establish reporting requirements on the nature and extent of FHC physical commodity activities.

memo released by the Fed summarizes some of the specifics of the proposal. For example, a 1,250-percent risk weight would be imposed on commodities activities that could result in environmental liability. The same risk weight would apply to merchant banking investments in companies that engage in physical commodity activities other than complementary physical commodity trading activities; if the activities were permissible complementary physical commodity trading activities, there would be a 300-percent risk weight.

Also, comparable to the OCC’s proposal, copper would be removed from the list of metals that BHCs can own and store.

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