On September 8, 2016, as required by Section 620 of the Dodd-Frank Act, the Board of Governors of the Federal Reserve System (the “Board”), the Office of the Comptroller of the Currency (the “OCC”) and the Federal Deposit Insurance Corporation (the “FDIC”) released a joint report to Congress and the Financial Stability Oversight Council (the “Report”), on the activities and investments that banking entities may engage in under applicable law.1 The Report discusses the OCC’s intention to address national banks’ authority to hold and trade copper as well as other physical commodities. The OCC published a Notice of Proposed Rulemaking (the “OCC Proposed Rule”) on the issue that same day which would prohibit national banks and federal savings associations (“FSAs”) in the United States from dealing and investing in industrial and commercial metal, including copper as well as other physical commodities.2 The OCC Proposed Rule would also apply indirectly to federal branches and agencies of foreign banks in the United States, and insured state banks and state savings associations.3
Additionally, on September 23, 2016, the Federal Reserve Board announced a proposed rule (the “Board Proposed Rule”) (the “Board Proposed Rule” and “OCC Proposed Rule,” collectively the “Proposed Rules”) that would strengthen existing requirements and limitations on the physical commodity activities of financial holding companies (“FHCs”) and bank holding companies (“BHCs”). This rule would (i) require FHCs to hold additional capital in connection with activities involving certain physical commodities4; (ii) require FHCs to tighten the quantitative limit on their amount of physical commodity trading activity; (iii) rescind authorizations that allow FHCs to engage in physical commodity activities involving power plants; (iv) remove copper from the list of precious metals that all BHCs are permitted to own and store5, and prohibit them from engaging in derivatives contracts that require physical delivery of copper (consistent with the OCC Proposed Rule for national banks); and (v) establish new public reporting requirements on the nature and extent of FHCs’ physical commodity holdings and activities. This Client Alert focuses on the aspect of the Board Proposed rule that would remove copper from the list of precious metals that BHCs that are not FHCs are permitted to own and store, and the prohibition on entering into derivatives contracts that require taking delivery of copper as principal.6 The Proposed Rules generally would not prohibit banks from receiving such interests as collateral in lending transactions, or taking hedging positions as part of customer-driven financial intermediation or reverse repos that are the economic equivalent of lending.
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Client Alert 2016-282