On January 14, 2014, the Board of Governors of the Federal Reserve System issued an advance notice of proposed rulemaking (ANPR) requesting public comment on the regulation and possible restriction of the physical commodities activities of financial holding companies (FHCs), which are bank holding companies (BHCs) that meet more stringent regulatory capital standards. The Fed's stated goal in requesting comment is to determine whether additional restrictions would help ensure that authorized bank physical commodities activities are conducted in "a safe and sound manner" and do not pose a threat to financial stability.

However, allegations of commodity price manipulation by certain banks, as well as recent Senate hearings on these matters, also appears to be a factor in the examination of these activities. The ANPR also cites a string of recent commodity-related disasters, including the BP Deepwater Horizon Gulf oil spill, and notes that a similar disaster at a bank-held commodity facility could pose risk to the bank's affiliated insured depository institution (IDI) and threaten the stability of the financial system.

As reported by Reuters, the Fed has also ordered JPMorgan Chase & Co. to sell certain of its commodity warehousing facilities.

The activities under review include permitted physical commodities activities that have been found to be “complementary to a financial activity” under section 4(k)(1)(B) of the Bank Holding Company Act (BHC Act), investment activity under section 4(k)(4)(H) of the BHC Act, and physical commodity activities grandfathered under section 4(o) of the BHC Act (collectively referred to as "Complementary Commodities Activities"). The Fed reasoned that permitting these activities in physical commodities would allow banks to "transact more efficiently with customers." Under this authority, the Fed has approved requests by FHCs to engage in three types of complementary activities:

In approving bank requests to engage in these activities, the Fed has historically considered whether the activity may reasonably be expected to produce benefits to the public, such as greater convenience, increased competition, or gains in efficiency, which outweigh possible adverse effects, such as undue concentration of resources, decreased or unfair competition, conflicts of interests, unsound banking practices or risk to the stability of the US banking or financial system.

The ANPR requests comment on:

Comments on the ANPR must be received no later than March 15, 2014. After reviewing the comments, the Fed will consider what further action or rulemaking may be warranted.

Background detail on this issue is provided courtesy of Reuters.