Have US commodity market regulators sprung the ANZ bank in a bit of speculation in wheat and cotton, which breaches US laws at a time when the prices of both commodities hit record levels in 2010 and 2011?

It would seem the ANZ managed to exceed US regulations while trying to “short” cotton and “long” wheat at a time when prices of the commodities had hit all-time highs (wheat by 25% in August, 2010 alone). Regulators at the Commodity Futures Trading Commission hit the ANZ with a $US350,000 fine, one of the largest so far levied for trading breaches.

But that was something you didn’t see mentioned in the nice publicity for the bank and its CEO Mike Smith in the weekend edition of The Australian Financial Review, and again today in The AFR with the bank said to be sceptical about making a bid for rival Standard Chartered, as some coat-tuggers among the broking and investment banking ranks wants the ANZ to do.

News of the almost unnoticed report issued by the key regulator of US commodity markets late last week came the same day as the biggest US bank, JP Morgan, was also fined. The ANZ’s fine was just over half the $US600,000 fine imposed on JP Morgan. Both fines are among the largest from the Commodity Futures Trading Commission.

The ANZ was guilty of two breaches, according to the CFTC. Cotton was a “net short position” (i.e. selling something that the ANZ didn’t have physical possession of, hoping to buyback in at a lower price and make a profit). In the case of the wheat positions, it seems the bank had too many “speculative” positions in excess of regulatory limits. And it wasn’t a small trading blip: the ANZ position in wheat had a market value of well over $US200 million. If Australian banking regulator APRA is on its game and working today or tomorrow (it’s a holiday in Sydney today where APRA is based), it should ask the ANZ for a please explain. In terms of the US, the fine is a small black mark for the ANZ.

What will be worrying for local regulators is that the ANZ’s risk and compliance teams didn’t pick the wheat or cotton trading position breaches, nor did they notice that the position in wheat occurred on what the regulator called “multiple occasions”. The Commodity Futures Trading Commission said in a press release:

“The US Commodity Futures Trading Commission (CFTC) today announced the filing and simultaneous settlement of charges against Australia and New Zealand Banking Group Ltd. (ANZ), an Australia-based financial services company, for exceeding speculative position limits in wheat and cotton futures contracts in trading on the Chicago Board of Trade and the Intercontinental Exchange US (ICE Futures US). The CFTC order requires ANZ to pay a $350,000 civil monetary penalty and cease and desist from further violations of the position limits provisions of the Commodity Exchange Act and CFTC regulations.”

Now just why the ANZ was trading cotton (it is a bank and has an active commodities division) in the US and found the need to go short needs an explanation. It sounds very much like an investment banking activity and not a retail or commercial banking activity. Likewise with the wheat trading. The ANZ could have been trading cotton futures generally for Australian and other clients. Australia is a reasonably sized producer of cotton. What wasn’t explained was the short position and how the ANZ allowed the situation to occur.

Could the answer be found in what was happening in commodity markets at the time? Cotton prices hit all-time record highs of more than $US2 a pound in February of of 2011 and the ANZ, or a client clearly felt that prices had peaked and there was money to be made by going short to try to lock in the prices to benefit from a possible fall in prices. The price spike occurred as bad floods in Pakistan and Australia cut the amount of cotton available for the market. With 500 pounds to each bale of cotton in US markets, the ANZ’s short position of more than 5000 bales looks like it was well over $US5 million.

The wheat position came in August of 2010 when global prices for the grain soared as Russia (a major producer and exporter) was hit by drought, huge fires and then a ban on exports that shocked markets and sent prices even higher. The standard Chicago Board of Trade wheat futures contract is 5000 bushels or 136 tonnes. The ANZ had more than 6500 of those and its position therefore was more than 3.2 million bushels or 884,000 tonnes. The average price in Chicago for wheat in August 2010 was $US246 a tonne, up 25% in the month. That gave the ANZ a position worth well in excess of $US217 million.

From the statement from the CFTC, the ANZ’s short positions exceeded the regulations for no real reason. That is in contrast to a fine levied on the trading arm of JP Morgan Chase Bank (JPMCB), the biggest bank in the US. It agreed to paid the $US600,000 fine for exceeding position limits in the cotton market in September and October of 2010. In a statement on Friday, the ANZ’s chief risk officer Nigel Williams was quoted as saying:

“These breaches of CFTC regulations were inadvertent, technical in nature and confined to a small number of transactions. However, ensuring we are compliant with regulations is a key priority in every part of ANZ.”

Peter Fray

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