February 5, 2014 / 6:13 PM / 6 years ago

FACTBOX-JPMorgan to Deutsche: banks exit physical commodities trade

Feb 5 (Reuters) - JPMorgan Chase & Co is in exclusive talks to sell its vast physical commodities trading division to Swiss trader Mercuria, two sources have told Reuters, marking the latest Wall Street retreat from the once-lucrative business.

Higher capital requirements and unprecedented political and regulatory scrutiny have eroded profits from trading raw materials and forced several big banks to divest assets and operations.

The following is a summary of recent moves by Wall Street and European banks to exit or scale back physical commodities trading:

DEUTSCHE BANK: Deutsche Bank AG was the first major bank to pull the plug on its global commodities trading business, announcing its exit from trading in energy, agriculture, base metals, coal and iron ore in early December.

The move cut 200 jobs mostly in London and New York. Colin Fan, co-head of Corporate Banking & Securities cited tougher regulations and diminished profits behind its decision to get out.

Deutsche Bank, Germany’s largest bank and one of the top-five financial players in commodities, said it will retain only precious metals and a limited number of financial derivatives traders.

The bank will wind down or sell off parts of the business over the next two years, with the process being led by current co-heads Louise Kitchen and Richard Jefferson.

MORGAN STANLEY: In late December, Morgan Stanley agreed to sell the majority of its global physical oil trading operations to Russian state-run oil major Rosneft.

The bank had been trying to sell or spin off its physical commodity business for over a year as it faced increased regulatory pressure and higher capital requirements.

The deal included more than 100 traders and shipping specialists in London, New York and Singapore, over $1 billion worth of oil, and the bank’s 49 percent stake in tanker company Heidmar.

The purchase excluded the oil storage, pipeline and terminaling firm, TransMontaigne Inc, which may help avoid scrutiny in Washington. Morgan Stanley has said separately it is looking to sell TransMontaigne.

The bank remains in gas and power trading and owns three power plants in the United States. It will also retain a client oil trading business that can execute both physical and financial deals.

GOLDMAN SACHS GROUP INC: The bank, which pioneered Wall Street’s entry into commodity markets alongside Morgan Stanley almost three decades ago, has sold some parts of its business in recent years, but has repeatedly affirmed a commitment to physical commodity trading.

Goldman has shed many of the physical trading assets it owned in 2008, when it fell under the Federal Reserve’s jurisdiction by becoming a bank holding company.

In 2012 it sold its power plant business Cogentrix to the Carlyle Group LP, the private equity firm. Its U.S. power sales have fallen since then, according to filings with the Federal Energy Regulatory Commission (FERC), and are less than one-sixth of their peak in 2005.

It is already a much smaller player in global crude oil markets than it was in the 1990s.

Despite launching a metals trading desk in 2010 after its purchase of metals warehousing firm Metro International Trade Services, it has struggled to compete against big merchant commodity firms like Glencore Xstrata PLC and Trafigura AG, trading sources have said.

It explored a sale of Metro amid intense regulatory and political scrutiny last year.

Goldman remains active in natural gas trading. It has grown from a small presence to be a Top 10 physical gas trader in North America since 2010, after its purchase of Nexen Inc’s trading book.

BANK OF AMERICA-MERRILL LYNCH : In early January, the bank shut its European power and gas sales and trading operation, becoming the fourth major player to close parts of its commodities business.

It retains one of the largest U.S. physical electricity trading businesses on Wall Street, according to filings with FERC.

Its physical power and gas trading business is largely a legacy of its 2004 purchase of Texas-based Entergy-Koch. It also has a substantial coal trading business. (Compiled by Anna Louie Sussman; Reporting by Jonathan Leff, David Sheppard and Sussman; Editing by Jeffrey Benkoe)

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