Fed rules seen speeding commodity trader exodus from banks

[NEW YORK] The spread of business and talent out of Wall Street and into merchant trading firms will probably accelerate after the Federal Reserve's new bid to restrict bank commodity holdings, according to one employment specialist.

The rules proposed Friday will be another boon for merchant houses including Trafigura Group Pte Ltd and Vitol SA, which already are luring employees away with the promise of better pay and less red tape, said Ross Gregory, managing consultant at Commodity Search Partners, a London-based employment company.

"It's going to be another sign for these guys who think, 'It's just more rope around our necks,' which is already pushing more of them to go work at trading houses," Mr Gregory said in a telephone interview from New York, where he's based.

The Fed proposal would require banks to put up more capital to support investments in physical commodities, limit the amount of trading and restrict ownership of power plants and copper. The central bank estimated the plan would require about US$4 billion in additional capital from firms including Goldman Sachs Group Inc. and Morgan Stanley. The goal is to reduce the financial risks posed by such trading, Fed officials said.

Lenders including JPMorgan Chase & Co and Deutsche Bank AG have been paring back their commodity units in recent years, as regulators tightened restrictions following the financial crisis.

The merchant trading houses have stepped into their place. US-based Castleton Commodities International LLC bought Morgan Stanley's physical oil trading arm last year, while JPMorgan sold its physical trading business to Swiss-based Mercuria Energy Group Ltd in 2014.

Meanwhile, former commodities executives have left Wall Street to establish their own firms. David Silbert, who built the commodities business at Deutsche Bank, founded TrailStone Group in 2013 with financing from private equity.

Ben Freeman, a former Goldman Sachs oil derivatives trader, created HudsonField LLC with the support of AllianceBernstein Holding LP, with the aim of catering to middle-market oil firms no longer served by the banks.

"This is going to redound to the benefit of the merchant traders," said Craig Pirrong, a professor at the University of Houston's Bauer College of Business. "It's very clear that the Fed does not want banks touching physical commodities, no way, no how."

The Fed proposal should come as little surprise to most players after years of debate over the banks' influence on commodity markets, Mr Pirrong said in a telephone interview. If there's a downside for trading houses, it's that it may get harder for them to tap banks to finance long-term trades and asset purchases, he said.

Mr Gregory, the employment specialist, estimated about 10 to 20 per cent of the banks' teams are leaving each year to join trading houses.

Salaries offered by trading houses and banks are roughly comparable, at about US$250,000 for a "strong" senior trader, Mr Gregory said. But trading houses give a bigger cut of profits on top of salary. Merchant houses typically pay traders about 12 per cent of the annual profits they generate, while banks offer closer to 5 per cent, he said.

"Some people are locked into the banks with golden handcuffs because their deferred bonuses are large, but they would take an option to get out if they can find it," he said. In addition to individual workers, whole trading businesses may be on the move as well, according to Mr Gregory.

"It wouldn't surprise me if some of these trading houses see an opportunity to say to the banks, 'Hey, do you guys want me to take this off your hands?'"

BLOOMBERG