Investment bank structures came under fire today at a Commodity Futures Trading Commission (CFTC) hearing called to examine position limits and hedge exemptions in the energy sector.
Goldman Sachs and JP Morgan both spoke at today's hearing, coming out in support of federal position limits but arguing that hedge exemptions should be maintained for intermediaries acting on behalf of commercial players.
Speaking at the second of three hearings into this issue, Gary Gensler, CFTC chairman, acknowledged the contribution of large Wall Street firms such as Goldman Sachs and JP Morgan in their role as intermediaries for commercial players such as airlines, oil producers or agricultural entities. But he said he found it difficult to view organisations that broker billions of dollars in the energy markets as "passive mechanics".
Blythe Masters, managing director and head of the global commodities group at JP Morgan, argued that the investment house's different roles could be separated, with different rules applied to each part. "There are different parts to the business," she said. "Some are close to being passive mechanics. But there are areas where we are acting for ourselves when we should be subject to the same rules as everyone else."
Another issue discussed at the hearing was the use of "firewalls" to separate investment banks' commodity research departments and their proprietary trading desks, which generate profits from trading for the bank itself rather than third-party commercial players.
It has been argued that banks could pass the commodity market research they conduct for customers on to their own traders first or allow these traders to influence the research. But both Masters and Donald Casturo, managing director at Goldman Sachs, disputed this, saying their organisations enforce firewalls between commodity research divisions and proprietary trading desks.
However, Tyson Slocum, director of Public Citizen's Energy Programme, a non-profit public interest organisation, called such internal controls "totally meaningless" and said government regulators should draw up rules to enforce firewalls. Masters and Casturo indicated their organisations would be open to regulatory oversight in this area.
On the second day of public hearings called to investigate the role of excessive speculation in energy price volatility, Gensler reiterated the need for federal position limits to be applied to energy futures markets. He said three questions remain: "Who should set position limits; who should be exempt; and at what level should the limits be set?"
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