Regulators and Congress Focus on Banks’ Activities in Physical Commodity Transactions

There has been a focus within regulators and more recently Congress in regard to the activities of large Wall Street banks in physical commodity transactions. Earlier this year, the Federal Reserve released an Advanced Notice of Proposed Rulemaking (ANPR) that addressed the activities of large banks—referred to as Financial Holding Companies in the ANPR—as it pertained to the trading of physical commodities, including natural gas. Specifically, the ANPR proposed to restrict banks activities in physical commodities. The ANPR describes natural gas and other energy commodities as “environmentally sensitive commodities” and specifically implied that contact with natural gas and other environmentally sensitive commodities could expose Financial Holding Companies to unwarranted risks. More recently, on November 20 and 21, the Senate Permanent Subcommittee on Investigations held a two-day hearing on a report the subcommittee released into large bank activities in the physical commodity markets.

While the American Public Gas Association (APGA) does not have a stance on any potential action taken by Congress or regulators on large banks activities in the vast majority of physical commodities, we are extremely concerned about potential action that may be taken regarding those banks’ activities in physical natural gas commodity transactions. Natural gas is the lifeblood of our economy and millions of consumers depend on natural gas every day to meet their daily needs. APGA is deeply concerned that regulations potentially restricting banks’ activities relating to physical natural gas, which is a time-tested and successful complimentary commodity activity, would increase both the cost and associated risks of safe natural gas supplies to consumers, while solving few, if any, material problems.

Many public natural gas systems utilize large banks, and specifically Financial Holding Companies, as counterparties for a number of transactions, including natural gas prepays. Natural gas prepays are a mechanism, that has been addressed by Congress and the Department of Treasury, which allows the utilization of tax-exempt financing for the purchase of a long-term natural gas supply. Many public natural gas systems have depended on prepays to acquire long-term contracts to secure a reliable supply of natural gas for their communities at reasonable and competitive prices. The benefits of natural gas prepays are passed on to our members’ customers in the form of lower rates. These lower rates also serve as a critically important economic development tool for the numerous communities served by public natural gas systems.

In terms of the prepay market and the structuring of a prepay contract, large banks play a critical role because, for decades, they have been the only entities that have served as counterparties in the deal as the supplier of the physical natural gas. APGA is very concerned about any potential regulations and/or legislation that would prohibit, or inappropriately restrict, large banks from engaging in physical natural gas commodity transactions. Removal of large banks as potential counterparties for public natural gas systems in physical gas deals would harm market liquidity and competitiveness, potentially increase physical transaction costs, unnecessarily increase risks to public gas systems, and threaten the viability of beneficial consumer natural gas prepayment transactions.

If large banks are removed from the physical natural gas market, it is possible that new entities such as lower rated producers and global commodity traders may attempt to fill the important void. However, as a result of bank exclusion, municipal systems may only have access to suppliers with materially weaker credit that are, furthermore, subject to reduced prudential oversight and transparency.

APGA has been, and continues to be a strong supporter of market transparency and strong and effective market oversight; however, we are deeply concerned in regard to the consequences that banning large banks from participating in natural gas commodity transactions could have on natural gas consumers and the natural gas marketplace as a whole.




Morning Consult