By Alexandra Alper

WASHINGTON (Reuters) - U.S. banks should face the same curbs on their physical commodities trades that the Volcker rule will place on financial products, one of the authors of the ban on proprietary trading said on Tuesday.

Senator Jeff Merkley, an Oregon Democrat who helped draft the part of the 2010 Dodd Frank financial law curbing banks' trading for their own book, said that regulators should broaden the proposed rule to ensure it covers their operation in physical markets.

"Clearly under the philosophy they should be(covered)," Merkley told Reuters. "If you are going to be in the investment world, go be in the investment world, go be in the hedge fund world. But don't do it with subsidized deposits."

The Volcker rule is designed to prevent banks that receive government backstops like deposit insurance from making risky trades that could endanger customers' cash and savings.

The proposed rule, drafted by regulators in October, covers bank trades in securities, futures, and even commodity forwards -- contracts to buy or sell a certain amount of a commodity at a particular point in the future.

But banks like Goldman Sachs, Morgan Stanley and JPMorgan which dominate physical commodity trading on Wall Street, have pushed back hard against the inclusion of forwards in the rule, let alone curbs on the spot market, where many physical deals take place.

Without leeway to trade, banks say they would have little reason to retain the metal warehouses, power plants, pipelines, and oil storage tanks that are the crown jewels of their commodity empires.

All three have argued that their recent deals with independent refiners known as 'supply and offtake' agreements, providing them with crude oil while marketing the gasoline and diesel they produce, has helped many stay open despite pressure on their margins. Continued...