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September 27, 2016

Fed to Tighten Over Wall Street’s Commodity Holdings

After the Federal Reserve’s decision to leave its target interest at a rate of 0.25% to 0.50% - while suggesting a possible hike later this year – we have now received another report that the Fed will tighten the regulations around commodity holdings and related investments. The news came just a few hours ago and has been causing quite a stir across Wall Street.

A Challenging Market

The decision was made after a Senate probe stated that Goldman Sachs, Morgan Stanley and JPMorgan Chase & Co. are most likely enjoying an unfair advantage. The three investment companies are known for their heavy investments in the commodity markets, including their ownership of metals and other commodities.

Both Goldman Sachs and Morgan Stanley also have more abilities compared to other investment banks. The investment firms are grandfathered from newer regulations that govern the commodity markets, allowing them more freedom and fewer controls along the way.

This will soon change because the Fed is putting a 1,250% risk weight on the investments these companies can hold under the grandfathering. The new risk weight has been put in place to limit the above-mentioned advantage.

Big Changes to be Expected

The new risk weight, as small as it may seem, is actually impacting the market in a big way. Under the new 1,250% risk weight, the investment companies will have to provide $1 for every $1 in investment. The new regulation will also influence the existing investments these firms are holding, posting a big challenge and massive changes.

For firms that are not covered by the grandfathering, the risk weight is set at 300%. This means banks and other firms will have to maintain three times the capital needed to back up construction loans and corporate financing.

It will also push many banks and firms further from the commodity market. Morgan Stanley sold off its oil business last year and Goldman Sachs did the same with their coal-mining investments. The new risk weight will see more changes happening to the market.

A Move Towards the Right Direction

Despite our criticism on the risks created by holding interest rates at such a low level, it seems like the Fed is making the right decision this time. The change will simply eliminate investment firms ability to maintain an unfair advantage in the commodity markets.

“The proposal would help reduce the catastrophic, legal, reputational, and financial risks that physical commodity activities pose to financial holding companies,” according to the official statement. The move will also bring a whopping $4 billion of additional capital for Wall Street’s current financial activities.

The added capital and the follow-up regulations we are most likely to see in the coming days will help turn the economy towards a better state. We’ve already seen a steady increase in students enrolling on business degrees at a wide range of educational institutions. Christian University programs, state colleges, and distance learning programs have all seen an increase in figures across the country this year alone. The market will be ready for the new batch of skilled workers by the time they graduate, which means we’re on the right course towards steady growth and more investment opportunities.

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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Item Reviewed: Fed to Tighten Over Wall Street’s Commodity Holdings Rating: 5 Reviewed By: EconMatters