In a little noted action Friday, the Federal Reserve published a proposed rule that it said would toughen the existing requirements and limitations placed on investment banks and some other traders who speculate in the commodities market.
The Fed said it is proposing the action because of its concerns over potential “catastrophic, legal, reputational, and financial risks” these firms could suffer, possibly posing system risks to the financial system. Most likely policymakers have in mind the trading in mortgage backed securities that blew up in 2008.
The Fed notes that it is only a limited number of firms that engage in physical commodity trading. Still, it sees cause for concern.
“The possibility of an environmental accident due to these activities presents significant risks to the firms,” the Fed said in announcing a public comment period on the proposal.
Good for consumers
While the Fed is more concerned about the health of the financial system and the integrity of the firms that participate, consumers may have reason to cheer the proposal as well.
That's because it would make it more expensive for speculators to bid up the price of commodities, in particular oil. Lately, that hasn't been much of a problem, but in the past it was.
When the market believed that rapid growth in China and other developing nations would compete for limited oil supplies, the price of oil soared well over $100 a barrel in 2008, resulting in a national average gasoline price that topped $4 a gallon in July.
Could reduce future oil speculation
Since oil prices collapsed in 2014, speculators haven't been nearly as active in the oil market. The Fed rule, if enacted, would likely limit their activity in the future.
Speculators have been largely absent from the oil market since late 2014 because there has been little evidence that oil prices will sharply rebound. Crude oil is trading below $50 a barrel, less than half its all-time high.
The Fed rule would require participating companies to increase the amount of money they have in reserve when they deal in commodities activity, limiting the amount of trading activity they would have for physical commodities.
It would also establish greater transparency, requiring firms to expand reporting on the nature and extent of their physical commodity holdings and activity.