The Federal Reserve Board’s Physical Commodities Proposal: Comparison Table Explaining Proposed Activity Restrictions and New Risk-based Capital Charges

On Friday, the Federal Reserve Board issued its latest proposal to impose new risk-based capital charges and activities restrictions on the physical commodity activities of bank holding companies and financial holding companies, as previewed in the Dodd-Frank Section 620 Report issued earlier this month.

The notice of proposed rulemaking (the “FRB Proposal”) also considers comments from a wide range of industry participants following the Federal Reserve Board’s ANPR issued in January 2014.

The FRB Proposal would:

• Increase risk-based capital requirements, for US banking organizations subject to the Federal Reserve Board’s capital rules, on (1) holdings of physical commodities with potential environmental liability under Federal or state law, and (2) merchant banking investments in companies engaged in certain physical commodities activities;
• Significantly increase capital charges on investments in physical commodities, infrastructure assets and equity held by two financial holding companies (Goldman Sachs and Morgan Stanley) in reliance on their “grandfathered” rights in BHCA § 4(o);
• Tighten the quantitative limit for physical commodities held under complementary authority;
• Rescind the complementary authority for energy management and energy tolling agreements;
• Remove copper from the list of precious metals that all bank holding companies can hold, trade and store; and
• Create new reporting requirements for physical commodity activities.

The attached table compares the current authority and requirements for certain physical commodity activities to the new restrictions in the FRB Proposal.  In addition, the table compares existing capital charges for physical commodity holdings and merchant banking investments with those in the FRB Proposal.  Finally, the table surveys certain other existing authorities to hold commodities or to invest in companies that may be engaged in physical commodity activities.

Comments on the FRB Proposal are due December 22, 2016.