Federal Reserve Revisits FHC Commodities And Merchant Banking Activities

New advanced notice of proposed rulemaking requests public comments on physical commodities activities and merchant banking investments of financial holding companies.

The Board of Governors of the Federal Reserve System (Federal Reserve) issued an advance notice of proposed rulemaking (ANPR) on January 14, requesting public comment on issues related to physical commodities activities conducted by financial holding companies (FHCs).[1] Tucked into the ANPR is a section seeking comment on the permitted merchant banking investments of FHCs under section 4(k)(4)(H) of the Bank Holding Company Act (BHCA). This section, however, was not mentioned in the January 14 U.S. Senate testimony given by Michael Gibson, the Federal Reserve's Director of the Division of Banking and Supervision,[2] or in the press release announcing the ANPR.[3] It is not unexpected that the Federal Reserve would choose to address the issue of physical commodities activities at this time given the increased attention in national and trade media that the physical commodities activities of FHCs have received. However, there has been no prior indication that the Federal Reserve was going to revisit FHC merchant banking activities, and the merchant banking section of the ANPR, thus far, has not received much attention from trade press or other commentators.

Physical Commodities Activities of FHCs

Any physical commodities activities or physical commodities-related activities conducted by an FHC are subject to prior approval by the Federal Reserve (non-FHC bank holding companies are not permitted to conduct such activities). Currently, FHCs are permitted to engage in three types of physical commodities activities: (1) physical commodities trading involving the purchase and sale of commodities in the spot market and taking and making delivery of physical commodities to settle commodity derivatives (Physical Commodity Trading); (2) paying power plant owners fixed periodic payments that compensate the owner for its fixed costs in exchange for the right to all or part of the plant's power output (Energy Tolling); and (3) providing transactions and advisory services to power plant owners (Energy Management Services) (collectively, Complementary Commodities Activities).[4] The Federal Reserve has allowed FHCs to engage in these activities under its authority to approve nonfinancial activities that it finds to be "complementary to a financial activity" under section 4(k)(1)(B) of the...