MQG Macquarie Group Limited

By Christian Berthelsen 

After the Federal Reserve pledged to crack down on banks engaged in the lucrative business of commodities trading, most big Wall Street firms got out.

Macquarie Group Ltd. took the opposite approach.

Australia's largest investment bank has been buying and selling increasing amounts of oil, natural gas and fuel in the U.S., taking advantage of the opening as its competitors backed away.

It now is North America's third-largest trader of physical gas, trailing only industry giants BP PLC and Royal Dutch Shell PLC, according to industry publications Platts and Natural Gas Intelligence.

Macquarie investment funds own and manage electric utilities in Seattle and Pittsburgh, a gas distributor in Hawaii, a merchant power-generation company in Rhode Island and petroleum storage tanks along the U.S. Gulf Coast. It imports Canadian oil into the U.S. by pipeline and in January imported 200,000 barrels of crude by tanker from the Republic of Congo, U.S. records show.

It all has been possible because the Federal Reserve doesn't consider Macquarie's U.S. unit a bank. By avoiding certain activities like taking customer deposits, the Sydney-based firm, with more than half of its $147 billion in assets in the Americas, is instead classified as a representative office of a foreign company.

"There's no question Macquarie has taken advantage of" that classification, said James Newsome, a former chairman of the U.S. Commodity Futures Trading Commission whose firm, Delta Strategy Group, represents banks in dealings with regulators. "The fact they're not registered as a bank-holding company in the U.S. gives them the ability to stay active in these markets."

Macquarie officials say the firm doesn't have to be treated as a bank in the U.S. because it doesn't have a banking license, has no access to Fed funding and doesn't take deposits.

Big banks jumped into commodities trading in the 1980s, buying up pipelines, metals warehouses and power plants to trade barrels of oil, megawatts of electricity and ingots of aluminum. Morgan Stanley, Goldman Sachs Group Inc. and J.P. Morgan Chase & Co. became the heavyweights of a group known as the Wall Street refiners.

The banks presided over an unprecedented commodity boom during the 2000s. But the business slumped in recent years after a steep and broad-based commodities-market decline and waning investor interest.

Regulators and Congress began examining bank activities in the commodity markets in 2013. They feared damage to the financial system if a calamity occurred, and worried that the trading information gave the firms unfair advantages.

In 2014 testimony before a U.S. Senate committee, Fed governor Daniel Tarullo said the central bank planned to unveil strict new limits on bank activity in commodity markets in early 2015.

While that hasn't happened, the Fed still is considering what rules to introduce, people familiar with the matter say.

The threat of new regulation was enough to deter most banks. Deutsche Bank AG, Credit Suisse Group AG, Morgan Stanley and J.P. Morgan all closed or curtailed commodity operations. Commodity revenue at the top 12 global investment banks has declined by two-thirds since 2008, according to London research-consultancy Coalition.

Macquarie was founded in 1969 to provide investment-banking and merger-advisory services in Australia. It obtained its Australian banking license in 1985.

Macquarie became a U.S. representative office in 2005. Its global commodities revenue hit $960 million in its most recent reporting year through March, up 75% since its reporting year ended March 2013.

While it doesn't break out its U.S. results, nearly half the firm's commodity- and financial-market revenue comes from the Americas.

Macquarie's expanding presence in raw-materials markets also has helped it boost business in parts of the company that handle more traditional banking activities, particularly for U.S. companies in the oil, gas and energy industries.

The firm's ranking in U.S. energy-stock underwriting jumped to 12th in 2015 from 29th in 2009, managing six deals with a value of $471 million, according to Dealogic. And though representative offices are prohibited from making loans, Macquarie has become a provider to the U.S. energy industry of a particular kind of high-risk credit, extending $3 billion in leveraged loans in the past five years. It has done so by building relationships with U.S. companies and having foreign offices handle the closing on the loan agreements, which is allowed under U.S. law.

While trading for clients and with the firm's own balance sheet has been profitable for Macquarie, it isn't without risk. Commodities markets are volatile and can lead to sharp losses for financial traders who suddenly find the market moving against them.

It also exposes traders to the sort of perils that may be unfamiliar to banks, from pipeline explosions to hazardous spills when transporting oil. In addition to disrupting the business, such incidents can lead to costly lawsuits.

Corrections & Amplifications

Australian bank Macquarie Group Ltd. has $147 billion in assets. A previous version of this article incorrectly stated the bank's assets are $350 billion. Macquarie isn't one of the largest providers of leveraged loans to the U.S. energy industry. The article incorrectly said it was. Macquarie investment funds own and manage utilities and other energy assets in the U.S. The story incorrectly stated the bank owned these assets. (June 9, 2016)

Write to Christian Berthelsen at christian.berthelsen@wsj.com

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June 09, 2016 15:33 ET (19:33 GMT)

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