June 6, 2012 / 1:56 PM / in 8 years

Morgan Stanley may sell part of commodities unit - CNBC

(Reuters) - Morgan Stanley (MS.N) is considering selling a stake in its vaunted commodities trading division, according to a news report that, if true, would reflect the bank’s most radical plan yet to ease mounting regulatory and credit pressures.

The outside of the Morgan Stanley offices is seen in New York January 18, 2012. REUTERS/Shannon Stapleton

The investment bank has been exploring a partial sale since at least last year and has talked to several parties, including private equity firm Blackstone Group LP (BX.N), CNBC television reported Wednesday, citing sources.

A source familiar with the matter told Reuters that although Blackstone met with Morgan Stanley to discuss its commodities unit, it was not considering an investment in the business.

Morgan Stanley and Blackstone declined to comment.

The commodities unit at Morgan, one of the original “Wall Street refiners” that pioneered the modern energy derivatives market two decades ago, has earned the bank $17 billion (10.97 billion pounds) in estimated revenue over the past decade, trading both financial contracts and physical markets like diesel.

But with a deepening role in illiquid cash markets and physical assets through subsidiaries TransMontaigne Inc and Heidmar Inc, the unit has also become a weight on the bank’s capital base at a time it is facing a potential credit downgrade — one that could force a multibillion-dollar margin call.

Still, many analysts and rivals questioned whether it would ultimately agree to part with a piece of the valuable unit, which has long been one of the most dominant and profitable commodities trading operations on Wall Street.

“They made a mint at it for a long time,” said Dan Dicker, a former oil trader who is president of the wealth management firm MercBloc. “The business is changing, they’re not making as much money as they used to, but - holey croley, I know a lot of guys over on that desk and they’re still the best.”

CNBC cited regulatory reforms as the reason for a possible sale, without explaining how selling just a stake of the commodities business would help Morgan Stanley on the regulatory front since the bank would still be involved in trading.

Selling a stake could help the bank boost its capital base as it prepares for a costly credit downgrade by Moody’s Inc (MCO.N) that is expected this month. In a May securities filing, Morgan Stanley said it might have to post as much as $9.6 billion worth of additional collateral and terminations payments in the event of a three-notch downgrade, the biggest cut threatened by Moody’s.

Still there are signs that Morgan’s competitive position is slipping, with its division apparently suffering more than its rivals’ from weaker trading volumes as well as new regulations that will limit U.S. banks’ trading for their own account and may force them to divest commodity assets.

Morgan Stanley fell to fourth place in the over-the-counter market for commodity derivatives among corporations and investors, behind JPMorgan, Goldman and Barclays Plc (BARC.L), according to a recent survey by Greenwich Associates.

“The regulatory strictures and capital requirements are leading many banks, I’d imagine, to look at their commodities business and wonder if it’s still worthwhile,” said Sharon Brown-Hruksa, vice president at Nera Economic Consulting and a former acting chairman of the U.S. Commodities Futures Trading Commission. “The passage of Volcker, position limits and capital requirements may make it difficult to maintain the commodities business.”


Morgan Stanley and Goldman Sachs Group Inc (GS.N) were the leading commodity trading firms on Wall Street in the two decades preceding the financial crisis. Since then they have come under pressure from JPMorgan Chase & Co (JPM.N), which has expanded aggressively in the sector following their acquisition of Bear Stearns in 2008 and RBS Sempra in 2010.

Morgan Stanley’s commodities trading revenue dropped nearly 60 percent from 2009 to 2011. Based on Reuters’ calculations, revenues peaked at around $3 billion in 2008 and slumped to about $1.3 billion last year, the lowest since 2005. The bank attributed the decline to “lower levels of client activity.”

JPMorgan had commodity trading revenues of $2.8 billion last year, while Goldman reported $1.6 billion in commodity trading revenue. The figures exclude expenses, which can vary widely.

Private equity firms, unencumbered by new capital rules and trading restrictions, have eagerly pushed into the trading sphere in recent years. Stone Point Capital helped fund the start-up merchant Freepoint Commodities last year, while First Reserve has been a major investor in Caribbean oil storage facilities and refineries in Europe and the U.S. East Coast.

Blackstone Group has already shown interest in getting into commodity trading. In 2010 it gave $150 million in seed capital to George “Beau” Taylor, a former senior natural gas trader at JP Morgan and Credit Suisse, to launch a hedge fund.


Because of the nature of Morgan Stanley’s large physical commodities business, it may face greater regulatory pressure than some of its Wall Street peers, whose businesses are far more reliant on derivatives — or “paper” — trading.

One concern is the Volcker Rule, which would limit the ability of federally protected banking institutions from using their own money to trade in the markets, possibly preventing Morgan Stanley from taking risks in the illiquid, opaque cash markets for commodities. Regulators have issued a draft proposal for the Volcker rule, but it has not yet taken effect.

In a February letter to the U.S. Securities and Exchange Commission, Simon Greenshields, the global co-head of Morgan Stanley’s commodities unit, said the bank was “deeply concerned” about how the rule would affect the bank’s business.

“Commodity markets provide little opportunity for agency transactions, and customers depend upon the participation of large liquidity providers that are able to manage principal risk,” Greenshields said.

In agency transactions, market makers like Morgan Stanley would match buyers and sellers of an asset before agreeing to take on a trade. Greenshields described that approach as “unworkable” in commodity markets because there is not always an immediate buyer and because large transactions could negatively affect prices.

Separately, Federal Reserve regulations restricting non-bank investments could force Morgan Stanley to divest assets.


Morgan Stanley has long run the largest physical oil and energy trading desk on Wall Street, making it one of the biggest distillate importers in the United States. With its purchase six years ago of logistics firm TransMontaigne, it became a major player in the inland market at a time of bumper profits.

In the early 1990s, Morgan Stanley oil trader Olav Refvik earned the moniker “King of New York Harbour” by securing a host of leases on storage tanks at the key import hub, giving the company an enviable position in the market. Refvik left Morgan in 2008 and now works for commodity trader Noble. Morgan Stanley continues to lease and operate dozens of oil storage facilities across the United States through TransMontaigne.

Morgan Stanley’s physical commodities business has been squeezed by shifting trade patterns and the bank’s deteriorating credit rating. Morgan was traditionally a big player in the trans-Atlantic gasoline arbitrage market, but this business has declined sharply with the United States’ greatly reduced need to import gasoline.

At the same time, more costly credit has eaten into returns in other physical trading businesses. Better capitalized global commodities trading firms, as well as other banks like JP Morgan, have been able to grab market share.

Meanwhile the client business has suffered. Although Morgan Stanley does not have any major, branded commodity indices, it has one of the biggest operations in selling such indices to investors; however, demand for passive exposure to commodities has dwindled in recent years.

Reporting By Greg Roumeliotis, Matthew Robinson, David Sheppard, Jonathan Leff and Jeanine Prezioso; editing by Alwyn Scott, Jeffrey Benkoe, Alden Bentley and David Gregorio

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