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Following the footsteps of other major global banks, Barclays PLC (BCS - Free Report) is moving away from commodities market. As per a report first published in The Financial Times, the company has closed its power trading desks in London and New York.

Amid tightened regulations and lower profits, Barclays continues to restructure its commodities business. In 2013, the company moved away from the western U.S. power markets and at present, the other commodities operations are under review as part of its strategic revamp.

Notably, last year, the Federal Energy Regulatory Commission (FERC) ordered Barclays to pay $488 million in fines and penalties for the alleged manipulation of energy markets in Western U.S. from 2006 to 2008. However, the company decided to challenge the order. The final decision of the court regarding this is still pending.

Barclays’ decision to close power trading desks in the U.S. and Europe is not solely based on the above-mentioned case. Commodity trading, once the looked upon favorably by major banks, is fast losing its shine owing to stringent regulatory checks and unfavorable market conditions.

Further, the banks have to maintain a higher level of reserves to cushion possible losses in the commodity market. Moreover, the amount of raw material/energy resources that can be held by these banks is under the Federal Reserve’s scrutiny. Barclays had received the Fed’s approval to trade in the commodities market in 2004.

Similar to Barclays, from the past one year, other banks such as Bank of America Corp. (BAC - Free Report) , Deutsche Bank AG, Morgan Stanley (MS - Free Report) and JPMorgan Chase & Co. (JPM - Free Report) are winding down the commodities businesses.

We believe that Barclays’ move is a step in the right direction. The bank had reported a 42% decline in adjusted net income for 2013 due to substantial fall in investment banking revenues. Further, the company had announced nearly 12,000 job cuts to boost profitability and focus on core operations.

All these steps are expected to yield results going forward. Further, Barclays will likely be well positioned to meet regulatory requirements and remain profitable.

Currently, Barclays has a Zacks Rank #3 (Hold).


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