JPMorgan Chase (NYSE:JPM) generates more revenue from commodities than any other financial institution in the business. According to industry data provided by the research company Coalition, the bank ended 2012 on top, and that trend continued through the first quarter.
But allegations brought by the Federal Energy Regulatory Commission — that JPMorgan’s commodities chief Blythe Masters misled industry regulators — provided a sign that the agency is taking a more aggressive approach to regulating energy markets, a move that could reign in profits.
The notice the FERC sent JPMorgan in March accused the bank of misrepresenting the prices of electricity contracts in California and the Midwest, which resulted in overpayments. In response, the company disputed the charges.
Sources familiar with the case told The Wall Street Journal that the bank is expected to agree to an approximately $410 million settlement to put charges that JPMorgan manipulated energy markets in California and the Midwest to rest. The bank would also give up $200 million in unpaid claims from electricity buyers in California, but no sanctions will be placed on the three energy traders involved or on Masters, the source added.
Both the size of the fine and the exclusion of sanctions are good news for JPMorgan. Earlier in the negotiations, regulators were considering a penalty of as much as $1 billion, according to the Journal, although The New York Times did report earlier than Masters would likely not be penalized.
As David Doot, president of the 2,600-member Energy Bar Association, told the Journal, the FERC only seems to take action against individuals when egregious conduct is involved, or the individual showed a conscious disregard for market rules. However, the rules of conduct are much less well-defined for the “still-evolving electricity markets” than they are for the stock markets, which are regulated by the Securities and Exchange Commission, he added.
Banks and trading firms started buying and selling power in the United States deregulated energy markets after the California energy crisis of 2001, which led to the federal government granting the FERC more powers to examine and deal with any manipulations, or suspected manipulations, of the energy market.
In addition, the Federal Reserve announced Friday that it is reconsidering a ten-year-old policy that allowed banks to do business in the physical commodity arena, a sign that businesses will have to deal with further attempts by regulators to limit the involvement of Wall Street firms in holdings of physical commodities.
Barclays (NYSE:BCS) has found itself in a similar position to JPMorgan, and according to the publication, will likely go to court in an attempt to avoid paying a $435 million fine to the FERC. The fines levied against both banks represent a significant increase when compared to the previous record settlement, which was the $245 million fine handed to Constellation Energy Commodities Group in March 2012.
Indicative of the “still-evolving electricity markets” regulations, Masters believed that the commodities unit and the traders involved in the incident did nothing wrong, sources told the Journal.
It was under Masters’ leadership that JPMorgan’s commodities unit grew and flourished. Between 2006, when Chief Executive Officer James Dimon promoted her to the head of the unit, and 2009, commodities revenue doubled. The unit missed expectations in 2010 — thanks to a loss on a coal bet — recovered slightly in 2011 and 2012, but has shown signs that it will be unable to hit this year’s year-end target of $1.6 billion, because of a worldwide slowing in commodities.
“I think she is an immensely talented and ethical person and has a great future in front of her,” Masters’s former boss, James Staley, who left JPMorgan this year, told the Journal.
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