A top Federal Reserve official on Thursday urged U.S. lawmakers to consider overturning a decades-old rule that allows Morgan Stanley and Goldman Sachs to trade physical commodities, like crude oil cargoes and copper pallets.

Asked at a Senate Banking Committee hearing on bank regulation what rules could be strengthened, Fed Governor Daniel Tarullo referred directly to commodity rules that currently exempt two banks from restrictions, allowing them to trade oil, aluminum and natural gas.

Without naming the banks, the Fed's point person for bank regulation said it would be "very much worth considering treating firms that are exempted like other banking companies."

Morgan Stanley and Goldman have legal protection included in a clause in the 1999 landmark Gramm-Leach-Bliley Act that "grandfathered" any commodity trading and investment activities for investment banks who later converted to Fed authority.

Spokespeople for the two banks declined to comment.

Ditching that longstanding exemption would require legislative changes by Congress and would level the playing field for U.S. banks operating in commodities markets, legal experts said.

The Fed has said previously its ability to rein in the grandfathered banks was limited.

Increased scrutiny from U.S. regulators and lawmakers has prompted Goldman to sell its base metal warehousing business and Morgan agreed to sell its oil trading division, although the sale to Russia's Rosneft collapsed late last year.

Tarullo's comments come as the Fed prepares to announce the results of its much-anticipated review of banks and commodities that started almost two years ago.

Regulators are expected to increase capital and insurance requirements for banks with physical commodity arms.

Tarullo pledged in November to outline proposals by the end of the first quarter.