Fed reviewing banks' physical commodities trading

The Federal Reserve is "reviewing" a landmark 2003 decision that first allowed bank holding companies to trade in physical commodity markets, it said on Friday, a move that may send new shudders through Wall Street.

While it is well known that the Fed is considering whether or not to allow regulated banks like Morgan Stanley and JPMorgan to own trading assets like storage tanks or warehouses, Friday's one-sentence statement suggests that it is also reconsidering the full scope of all banks' activities in physical commodity markets.

It is also the first public statement the Federal Reserve has made on the issue since it first came to light in a Reuters report last March.

"The Federal Reserve regularly monitors the commodity activities of supervised firms and is reviewing the 2003 determination that certain commodity activities are complementary to financial activities and thus permissible for bank holding companies," the Federal Reserve said in a statement.

The statement refers to the 2003 letter that the Federal Reserve issued to Citigroup, which was seeking permission from the Fed to allow its Phibro unit -- acquired in 1998 -- to continue trading in physical energy markets.

It was the first bank to seek permission under the Bank Holding Company Act (BHC Act) to trade physical commodities rather than only paper derivatives.

Since becoming bank holding companies at the peak of the financial crisis to get access to emergency Fed funds, Goldman Sachs and Morgan Stanley have also been subject to the rules, and have faced questions over their continued ownership of physical commodity assets.

On Tuesday the Senate Banking Committee is holding its first hearing on the issue, asking if banks should be allowed to control power plants, warehouses and oil refineries.

Large industrial consumers of aluminum have accused banks of boosting prices of the metal through their control of London Metal Exchange warehouses, which have been slow to deliver metal to customers, boosting rents and premiums for physical metal.

Four U.S. Congressmen wrote to Federal Reserve Chairman Ben Bernanke on June 27 expressing their concern about the issue, and asking for more information on the Fed's position.

(Additional reporting by Jonathan Leff, Josephine Mason and Jeanine Prezioso in New York; Editing by Bob Burgdorfer)