Are Commodities Crashing? (11/14)

According to the article below, the Fed is working on new rules to regulate the banks regarding their commodity investments. The commodity ETF (DBC) fell 4.6% on the last trading day of this month, leaving it down 20% year-to-date through November 30.

Many investors debate the importance of including commodities in a broadly diversified portfolio.

See InvestableBenchmarks.com and “The Best ETFs for Growth.”

Fed Plans to Tighten Commodities Rules for Banks

Nathaniel Popper, 11/21/14

WASHINGTON – The Federal Reserve is preparing to unveil new restrictions aimed at making it harder for Wall Street banks to make big bets in the commodities markets, according to testimony on Friday from the Fed governor Daniel K. Tarullo.

Mr. Tarullo struck an unexpectedly aggressive stance in his appearance on Friday in front of a Senate subcommittee that has been investigating the involvement of big banks in the markets for basic materials like coal, aluminum and gas.

Mr. Tarullo said that the Fed expected to issue a formal notice of potential new rules in the first quarter of next year. Those new regulations could force banks to amass more capital to protect against losses on holdings of commodities and restrict banks from some types of commodities operations that they are currently allowed to do.

In his unscripted remarks, Mr. Tarullo, the Fed governor who oversees regulatory policies, also outlined a number of other areas where he said he wanted the Fed and other regulators to increase oversight of bank activities.

Referring to recent problems involving banks’ foreign exchange and interest rate trading desks, Mr. Tarullo said, “In general the compliance procedures, and expectations within firms for abiding by laws, are not adequate in many cases.”

The testimony from the Federal Reserve governor came during the second day of hearings held by the Senate Permanent Subcommittee on Investigations. The subcommittee released a 400-page report this week that detailed cases in which banks had made enormous investments in the commodities markets that allowed the banks to influence the prices of commonly used materials.

“This is reminiscent of the days of the robber barons,” Senator John McCain, the top Republican on the subcommittee, said Friday morning.

The subcommittee found that regulators were, in some cases, not aware of the extent of the commodities holdings of the banks.

In other cases, regulators found that the banks did not have adequate insurance and capital to protect themselves against legal problems that could result from an environmental or natural disaster.

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