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Wall St. Exploits Ethanol Credits, and Prices Spike

Submitted by on September 16, 2013 – 4:11 pmNo Comment

by Gretchen Morgenson and Robert Gebeloff (The New York Times)  …But a little known market in ethanol credits has also become a hot new game on Wall Street.

…But many people believe that is what happened this year when the price of the ethanol credits skyrocketed 20-fold in just six months, according to an analysis of regulatory documents and interviews with more than 40 people involved in the market, including industry executives, brokers, traders and analysts.

Traders for big banks and other financial institutions, these people say, amassed millions of the credits just as refiners were looking to buy more of them to meet an expanding federal requirement. Industry executives familiar with JPMorgan Chase’s activities, for example, told The Times that the bank offered to sell them hundreds of millions of the credits earlier this summer. When asked how the bank had amassed such a stake, the executives said they were told by the bank that it had stockpiled the credits.

But other market participants, including Thomas D. O’Malley, chairman of PBF Energy in Parsippany, N.J., identified JPMorgan Chase and other financial institutions as being active sellers of the credits this year. He said the institutions had helped transform an environmental program into a profit machine, contributing to the market frenzy this year. “These things were designed to monitor the inclusion of ethanol in the gasoline pool,” Mr. O’Malley said. “They weren’t designed to become a speculative item. For the life of me I can’t see the justification for it.”

A review by The Times of a federal registry of nearly 1,500 businesses and individuals in the renewable fuel market found big Wall Street banks as well as a handful of people with troubled legal histories among the participants. Several high-profile cases of fraud have emerged.

But rules that apply to almost every other market — on transparency, disclosure and position limits, for example — are not imposed on the trade of RINs, making Wall Street’s role harder to gauge.

Until 1999, regulations barred banks from owning nonfinancial companies like commodities operations. This was meant to keep banks from self-dealing or pursuing monopolistic practices in their financial operations that could benefit their nonfinancial affiliates. Separating these operations, regulators believed, would also protect a bank’s core lending and deposit-taking businesses from risky trading by nonfinancial units.  Those restrictions fell by the wayside with the passage of the Gramm-Leach-Bliley Act, which struck down Depression-era banking laws. Now, however, the Federal Reserve is reviewing commodities ownership by banks.

In the case of JPMorgan, the industry executives familiar with its activities in the RINs market said they were told by a top banker in its commodities operation about the stockpiling. The executives said the banker maintained that one of JPMorgan’s traders had urged the bank to buy up every available credit. The executives spoke on the condition of anonymity for fear of harming business relationships.

Price movements on other commodities futures are limited by the exchanges on which they trade as a check on speculation. But the biofuel credits are not traded on an exchange: their prices are unbridled. And, unlike in the broader financial industry, no formal qualification or license is required before a broker can start trading.

“There is a RINs trading desk at any major brokerage now,” said Paul Niznik, bio-fuels manager for Hart Energy, based in Houston. “There are people who are not refiners that are buying and selling RINs like a commodity. They treat it like something to be traded, to be day-traded.”

Margo T. Oge, who oversaw the creation of the ethanol credit program at the E.P.A., says that the rising price of RINs — no matter the cause — is good news and an indication that the program’s goals are being met.

As the credits get more expensive, she says, oil and gas companies have a financial incentive to add more ethanol to fuel rather than buy credits. That, in turn, reduces oil imports and emissions — which was the point of creating the system in the first place.   READ MORE and MORE and  MORE (Biofuels Digest) and MORE (The Hill E2Wire) and MORE (Ethanol Producer Magazine) and MORE (The American Interest) and MORE (Argus Leader)

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