Two US Senate Democrats on Tuesday said the world's largest banks are unduly influencing the prices of oil, natural gas and other commodities through their increasing ownership of oil tankers, electric transmission rights, pipelines and warehouses.
"It appears that this is manipulation, at the very least abuse," said Senator Sherrod Brown, Democrat-Ohio, said at a Banking, Housing and Urban Affairs Committee hearing on Wall Street reforms.
The panel last week held a first hearing into the issue of banks and financial institutions owning or controlling physical commodities and how such control is affecting prices for everything from gasoline to aluminum.
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Testifying at Tuesday's hearing, US Commodity Futures Trading Commission Chairman Gary Gensler said that while there is "clear authority" to go after potential market manipulation and conflicts of interest, there are practical considerations, including limited enforcement budgets, an adverse court ruling and regulatory leeway for hedging activities that make enforcement difficult.
"A grain elevator operator, a farmer and rancher may know something about their crop and want to hedge that," Gensler said. "We would not want to diminish that farmer, rancher or grain elevator operator to be able to hedge that risk even though, in a sense, they might be the only one to know that their crop is not yielding as well as they thought or yielding better than they thought."
What concerns Brown and Senator Jeff Merkley, Democrat-Oregon, is that banks have numerous physical commodity holdings as well as the means to deliver those commodities, including oil tankers, transmission rights and pipelines, while they at the same time trade on energy prices in futures and swaps markets.
Big banks can buy "vast quantities" of commodities and pipelines, tankers and warehouses, said Merkley. This gives them "a huge amount of market information that's very advantageous in trading" and gives them a "thumb on the scale in the terms of supply and demand and being able to have some influence over the price," he said.
"If you're simultaneously allowed to bet on the price and you're allowed to have your thumb on the scale in reflecting the price it's a huge conflict of interest," he said.
"Financial institutions own fleets of oil tankers and can withhold delivery, while wagering on the price of oil or they can speculate on the price of energy while controlling supply," Brown said.
This, the senators said, is a clear conflict of interest that is driving up commodity prices.
While he declined to comment on whether there was an investigation into manipulation of energy markets by banks, Gensler suggested that his agency's role in preventing manipulation is being hampered by budget cuts and a recent court decision.
Congress gave the CFTC "strong tools" to combat fraud and manipulation in the Dodd-Frank Wall Street Reform and Consumer Protection Act, Gensler said, but has yet to give the agency enough funding to adequately implement these tools.
At the same time, the agency is appealing a September federal court ruling that overturned the agency's rule that would have imposed speculative position limits in the markets it oversees, something Gensler said would curb the influence any one entity could have on prices.
JP Morgan announced last week that it would no longer trade in physical commodities and on Tuesday the US Federal Energy Regulatory Commission said it had reached a $410 million settlement with the bank over alleged market manipulation of wholesale power markets in California and Michigan.
--Brian Scheid, firstname.lastname@example.org
--Edited by Jeff Barber, email@example.com