Recently, Bloomberg reported JPMorgan Chase & Co.’s (JPM) purchase of over-the-counter (OTC) commodity derivatives portfolio from UBS AG (UBS). Though the financial details were not disclosed, the deal includes on-exchange hedge positions. Notably, the precious metals and index-based products are not part of the transaction.
JPMorgan has assumed the market risk on the portfolio. Moreover, together with UBS, the company will be working with the clients to fully assign contracts for trades.
UBS has been exiting most of its commodities trading operations as part of the restructuring efforts. Further, given the lower profits and heightened regulatory scrutiny, banks are scaling back their physical commodities trading operations.
Last month, JPMorgan announced its plans to exit the physical commodity business, including stakes of commodities assets and physical trading operations. Moreover, the company reached an agreement with the Federal Energy Regulatory Commission (FERC) to resolve the investigation by the agency for alleged manipulation of electricity prices in California and the Midwest region. The company will pay $410 million, without admitting or denying any wrongdoing.
Further, like JPMorgan, Morgan Stanley (MS) and The Goldman Sachs Group, Inc. (GS) have been trying to sell their physical commodity business for more than a year now. Additionally, more stringent regulations and low volatility have dampened interest in commodity trading.
In the meantime, JPMorgan’s decision to buy OTC derivatives portfolio seems prudent. The company will be able to garner profit from such OTC trades, which could help in partially offsetting the possible loss JPMorgan might face from sale of the physical commodity business.
Currently, JPMorgan carries a Zacks Rank #2 (Buy).
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