WASHINGTON -- Morgan Guaranty Trust Co. may physically take possession of commodities underlying derivatives contracts, the Comptroller of the Currency said in an order made public this week.
Morgan requested the authority because the ability to take delivery of a commodity, such as oil or corn, can help a bank better hedge its risk, the OCC explained.
"The OCC has concluded that such physical hedging activity is legally permissible for banks," the June 30 order stated.
Approvals to Be Case by Case
Before any other bank agrees to take delivery of a commodity, it must get approval from the Comptroller.
The agency said it wants to make sure that each bank entering this business has the necessary management capability and internal controls.
The Comptroller's office said Morgan may not use its new power to speculate on commodity price movements, noting that the bank could only agree to take delivery of a commodity on behalf of a customer.
The agency also decided that physical hedging could only make up a "nominal percentage" of the bank's total hedging activities.
Only for Large Banks
Morgan had to get OCC permission, despite its state charter, because the 1991 banking law restricts state bank activities to those allowed national banks. Morgan won the right to take delivery of commodities backing derivatives from the New York State Banking Department in September 1992.
The subsidiary of J.P. Morgan & Co. was not actually named in the OCC order, but industry sources confirmed it is the bank OCC was addressing. Only the largest banks are doing sophisticated deals that might require taking possession of commodities.
Very few banks are likely to follow Morgan's lead, said Doug Harris, special adviser to Comptroller Eugene A. Ludwig. Mr. Harris is in charge of derivatives regulation, and he worked at Morgan before joining the government in July.
"It takes a lot of careful analysis" to do this type of deal, Mr. Harris said. "Not a lot of banks are going to be able to commit the resources to do that kind of analysis."