JP Morgan Chase plans US power trading foray

JP Morgan Chase is establishing a New York-based electricity trading desk, joining a growing number of banks that have entered the sector in the past year.

The US bank's head of foreign exchange and commodity derivatives, David Puth, said it was too early to comment on development. "We are still very much in the planning phase."The development follows a decision by the US Federal Energy Regulatory Commission (Ferc) to effectively overturn rules that made power trading a prohibitive business for commercial banks.

Ferc had previously set a 5% equity limit on the amount any banks active in the power trading markets could hold in any one utility. UBS and Bank of America (BoA) - banks with power trading operations - lobbied to alter the rule.

Ferc’s decision could lead to a flurry of banks entering the power trading area.

The majority of energy merchants left the power trading business due to a series of credit rating downgrades related to trading losses and market manipulation scandals. Although many analysts had expected banks to pick up where the merchants had left off, their ability to inject vigour into the power trading was, until now, stifled by Ferc’s utility stockholding limits.

In August, UBS and BoA submitted a joint request to the regulator seeking to change the rules that prohibit banks from holding a 5% stake in any electricity producing utility. Ferc had already raised the limit from 1% to 5% on June 5. The regulator imposed these limits as it feared banks could exert unfair control on utilities if they were allowed to trade electricity as well as owning sizeable parts of utilities.

But BoA and UBS argued onerous stockholding limits would prevent them owning or trading utility shares – a core part of their equity capital markets and asset management business lines.

Market sources told RiskNews' sister publication Energy Risk (formerly Energy & Power Risk Management ) that Ferc’s decision to alter its rules just two months after the rehearing request was surprising given the complexities involved. A source close to the situation had predicted that any rehearing process would drag on, since Ferc would have to delve into banking regulations – a largely unfamiliar territory for the regulator.

BoA and UBS had argued Ferc’s initial rules contained a misapprehension with respect to federal banking law concerning equity derivative holdings. Under Ferc’s June order, equity securities held as a hedge for the banks’ derivatives activities were not excluded from the 5% limitation.

UBS and BoA argued that hedging transactions are intended to reduce the risk to the bank of engaging in its permissible derivatives business. The application of the 5% limitation to the bank’s equity securities for hedging purposes would be inconsistent, and possibly at cross-purposes with bank regulatory regimes, the banks contended.