Financial Services Spotlight

Comptroller of the Currency Finalizes Regulation Prohibiting Purchasing Industrial or Commercial Metals

Posted by Roy Andersen on Dec 29, 2016 12:00:00 PM

On December 28, 2016, the OCC posted its final rule to prohibit national banks from dealing in or investing in industrial or commercial metals.[1]  This rule was proposed by the OCC in September 2016, and was approved in substantially the same form as the proposal.

This rule reverses an authorization granted over 20 years ago for national banks to buy and sell copper on the grounds that trading copper was similar to trading gold, silver and other precious metals.  The authorization concluded that national banks could buy and sell copper under the express authority to buy and sell coin and bullion and as part of or incidental to the business of banking.

What is important to know about this new rule?

It ends the ability of banks to buy and sell copper.  Evidently, only a few banks were doing this, so this is not such a big deal.  The biggest sticking point of the new rule may be the potential restriction on using commodities metals reverse repurchase agreements to finance industrial metals.   Banks that have agreements that allow for rehypothecation or acceptance of commodity price risk may need to explain these deals in greater detail to the OCC for clearance.

What does the final rule prohibit?

The final rule states that buying and selling industrial and commercial metal for the purpose of dealing or investing in that metal would not be part of the business of banking or incidental to the business of banking. § 7.1022(c).  Banks are permitted by statute to buy and sell exchange, coin and bullion; however, the new rule states that industrial and commercial metal would not be treated as exchange coin or bullion as those terms are used to authorize bank purchase and sale of the same. § 7.1022(b).  The new rule would define industrial and commercial metal as metal in a physical form primarily suited to industrial and commercial use.  The final rule cites “copper cathodes” as an example.  § 7.1022(a).  The staff commentary includes gold jewelry as another example. Page 4.

What is clearly allowed under the final rule?

The final rule states that it does not affect a bank from “acquiring or selling metal in connection with its incidental authority to foreclose on loan collateral, compromise doubtful claims, or avoid loss in connection with a debt previously contracted.” § 7.1022(d).  Banks may continue buying and selling physical metal to hedge a derivative for which that metal is the reference asset so long as the amount of the physical metal used for hedging purposes is nominal. Id.  The commentary to the new rule explains that the OCC does not believe that buying or selling metal through a transitory title transfer entered into as part of a customer-driven financial intermediation business is prohibited. The OCC also notes that transitory title transfers must be part of a customer-driven financial intermediation business. The OCC stated that using a “standard commodity reverse repurchase agreement” to provide financing does not indicate dealing or investing in metal. However, as noted below, certain aspects of such financing arrangements may cause concern.  Similarly, national banks may buy and sell industrial or commercial metal as part of their leasing business.

What is in the Grey Area?

The OCC would not confirm that interests in unallocated metal accounts do not constitute physical holdings under the final rule.   The OCC will address these on a case-by-case basis.  The OCC would not bless certain leasing structures or consignment structures and again asked that these be brought to the agency for review.  The biggest question mark was reverse repos, discussed in more detail below.

Reverse Repurchase Agreements

In the proposal, the OCC was fairly clear that basic and traditional reverse repurchase agreements involving industrial metals were not indicative of dealing or investing in metals.   However, if such transactions veered from plain vanilla, the facts and circumstances of a transaction could lead to a different conclusion.  For example, the OCC suggested that if a bank incurs commodity price risk or pledges, sells, or rehypothecates metal acquired under reverse repurchase agreements, then the OCC may view the transaction to be dealing or investing in the metal.

In the final rule, the OCC stated that it still has concerns that reverse repurchase agreements could be dealing or investing activities.  The OCC recognizes, as a commenter suggested, that banks might enter into hedges to mitigate price risk that exists at the conclusion of certain reverse repurchase agreements and may pledge collateral for the purpose of funding its customer financing activities. Structuring a transaction in these ways could, in some circumstances, reduce indicia of investing or dealing activity. Nonetheless, the OCC is not planning to exempt these transactions in the final rule and wants to review them on a case-by-case basis to assess the facts and circumstances of these activities.

There was very little language change from the proposal to the final rule, but in the commentary or supplementary information there was a softening of the language to indicate that exposure to price risk or pledging metal was not an automatic disqualifier as seemed to be the case under the proposal.  The OCC also recognized that banks would almost surely engage in hedging any commodity price risk, so worries about that risk might be a red herring.



Topics: Commercial Metals, Purchasing, Banking, Industrial Metals, Copper, National Banks, OCC

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The Financial Services Spotlight examines the regulatory and technology developments impacting banks, asset managers and other financial services providers—where challenges meet opportunities.


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Roy C. Andersen, of counsel in Sullivan & Worcester's New York office, is a member of the Corporate Department. Mr. Andersen focuses on bank regulatory and compliance matters, including international banks and their branches and agencies in New York.

Joel Telpner, partner in the firm's New York office, is a seasoned advisor, strategist and problem solver. Mr. Telpner brings more than 30 years of legal experience in a career that includes time as an AmLaw 100 partner, the former U.S. general counsel of a global financial institution, and a venture capitalist. He is recognized for his ability to deftly manage complex financial transactions, especially those involving sophisticated structured finance and derivatives matters and has an extensive and unique combination of transactional and regulatory experience.

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