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Change U.S. law on banks and commodities, regulator says

A general view of the U.S. Federal Reserve building as the morning sky breaks over Washington, July 31, 2013. REUTERS/Jonathan Ernst
A general view of the U.S. Federal Reserve building as the morning sky breaks over Washington, July 31, 2013. REUTERS/Jonathan Ernst

By Douwe Miedema

WASHINGTON (Reuters) - Congress should limit Wall Street's controversial role in commodity markets, and rewrite a law that gives banks broad leeway to own oil, metals and other raw materials, a senior U.S. regulator said on Friday.

The Federal Reserve, the top U.S. bank watchdog, is rethinking its policy of allowing banks to operate in commodity markets amid accusations they inflate the prices of items such as aluminum and electricity.

"I plan to urge that the law be amended by simply reversing the policies that allow for bank ownership," said Bart Chilton, a commissioner at the Commodity Futures Trading Commission (CFTC), the top U.S. derivatives regulator.

The law also gives some banks an advantage over others, Chilton said, in reference to Morgan Stanley and Goldman Sachs Group Inc , which only came under Fed supervision in 2008 at the height of the financial crisis.

Because the two changed their legal status at that time, the law treats them more leniently than their rivals, allowing them to hold any commodity businesses they had before September 30, 1997, through a so-called grandfather clause.

"There are two banks that are using yet another exception to the law," Chilton said in a speech.

Chilton had planned to address lawmakers critical of Wall Street's role in commodities at a panel meeting of the Senate Banking Committee scheduled for October 8, although the date is now moot because of the government shutdown.

The lawmakers, led by Senator Sherrod Brown, a Democrat from Ohio, will also grill Fed officials attending the meeting - the second one they are holding on the matter.

Banks that cannot use the grandfather clause because they were already under Fed supervision when the law was written in 1999 need special approval to enter the commodity market, and the conditions are tighter.

One crucial difference is that, while banks such as Citigroup Inc and Bank of America Corp are allowed own oil, metals and other commodities, they cannot store, distribute, refine or transport them.

But Morgan Stanley owns TransMontaigne, a large oil terminal and logistics subsidiary estimated to be the 17th-largest private company in the United States.

Banks that own such entities also control the supply of commodities they trade, creating a conflict of interest, Chilton added.

(Reporting by Douwe Miedema. Editing by Andre Grenon)

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