The Volcker Rule
Commodity trading houses are set to emerge as beneficiaries of US president Barack Obama's clampdown on Wall Street as they escape proposed rules designed to hit banks.
Mr Obama's plan, known as the Volcker rule, would stop banks from trading on their own accounts if the business is unrelated to customers, potentially hitting their raw materials businesses. While details are fuzzy, executives at banks and the publicity-shy merchants of oil, metals, coal and foodstuff are bracing for a shake-up of the commodity order.
A ban on proprietary bets could present unique wrinkles in commodities, an important source of trading revenue for banks including Goldman Sachs and Morgan Stanley. Beyond trading abstract derivatives such as futures and swaps, several banks also buy and sell actual shipments of oil, gas, industrial metals and other physical assets.
While the physical trading may be helpful to bank customers, some of this trading is clearly speculative. For example, some leading Wall Street groups last year stored diesel aboard tankers to profit when fuel prices rebounded.
Unlike the banks, commodity trading companies, which include Glencore, Vitol and Trafigura, face no pending rules. The US plan could present a chance to grab market share as uncertainty looms. "Obama's crackdown on Wall Street is largely positive to the trading houses," a senior executive at a large Europe-based trading company told the Financial Times.
"I think it is good for us," added a senior executive at a smaller trading house in Europe. "The banks will most likely cut back on physical business."
Commodity trading has grown among banks seeking a piece of a business long dominated by Goldman and Morgan Stanley.
JPMorgan, after acquiring commodity businesses from Bear Stearns and UBS, is in exclusive talks to buy RBS Sempra Commodities, a joint venture part-owned by Royal Bank of Scotland, the rescued UK bank. RBS Sempra has reduced its reliance on proprietary trading and and now has more customer business, traders say, potentially giving JPMorgan a deeper book of clients.
In energy, the largest of the commodity futures markets, banks already face the prospect of a ban on "speculative" trading under rules proposed this month by the US Commodity Futures Trading Commission.
But it remains unclear how non-US banks would be touched by the rules. In recent years Europe-based banks including RBS, Société Générale, Barclays and Deutsche Bank have received US approval to trade physical commodities when it complements their derivatives businesses.
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President Obama is pushing hard for stricter financial regulation, promising in his first State of the Union address that he would not sign a bill that “does not meet the test of real reform.” This has left Wall Street wondering how much Mr. Obama’s regulatory proposal, known as the Volcker Rule, will cut into its profits.
The proposal, named for Paul A. Volcker, the former Federal Reserve chairman, would limit a bank’s ability to trade on its own account and would ban banks from investing in hedge funds and private equity funds. It could put an end to the huge Wall Street profit machines that emerged in the last decade since financial deregulation. Some analysts are already offering estimates about how costly the Volcker Rule could be.
In general, most analysts feel that Goldman Sachs has the most to lose if Congress passes some form of the Volcker Rule. David A. Viniar, Goldman’s chief financial officer, told analysts last week that the firm derives about 10 percent of its revenue from proprietary trading.
As such, Citigroup estimates that the Volcker Rule would cost Goldman $4.5 billion in revenue based on its 2010 estimates, translating to a $1 billion drop in profit. Analysts at JPMorgan Chase said the Volcker Rule would knock about $4.67 billion off Goldman’s future revenue stream, but they came to their projection a different way, estimating that the firm would experience a 20 percent decrease in its overall trading revenue.
I could pretend to care about this but... Meh. (Really I'm just a tad distracted. Stunned by Bernanke news? Not quite.)