Monday, July 29, 2013

JP Morgan to Exit the Physical Commodities Business

By Tim Dulaney, PhD and Tim Husson, PhD

The Wall Street Journal is reporting that JP Morgan plans to sell their physical commodities assets "amid heightened regulatory scrutiny of Wall Street's ownership of such assets."1 JP Morgan joins several other investment banks, including Goldman Sachs and Morgan Stanley, who are looking to sell or wind down their stakes in physical commodities.

According to the WSJ, the sale by JP Morgan will include trading desks that trade metals, power and fossil fuels.  JP Morgan has drawn particular scrutiny for its role in the spot electricity market, which may lead to a record fine from the Federal Energy Regulatory Commission.  Goldman Sachs has likewise been accused of anti-competitive behavior in restricting the supply of aluminum to benefit its trading positions.

The Federal Reserve has been handing out permission for banks to hold physical commodities on a case-by-case basis since the 1990s and just last week we reviewed the effects of this approval.  JP Morgan began ramping up its commodities business in 2008, under intense competition from Goldman and Morgan Stanley.2 

It will be interesting to see if the banks will sell their physical commodities assets before the regulators step up to force the banks out this decidedly non-bank business.  It will also be interesting to see if hedge funds or other financial firms with more regulatory flexibility buy those assets.
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1 Late last year, we discussed how a JP Morgan physical copper ETF could be a big deal for the physical copper market.
2 Although JP Morgan has become a key player in commodities, revenue from this business-line contributed just 1.4% of the company's revenue for the first half of 2013.

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