Updated 5:00 p.m.
In a perverse way, JPMorgan Chase & Co.'s $2 billion-plus trading loss might have been a blessing in disguise, suggested one member of the U.S. Senate Banking Committee today in a hearing featuring the heads of the Securities and Exchange Commission and the Commodity Futures Trading Commission.
"It happened with the strongest financial institution we have in the country…[with] no systemic risk or risk to the institution," said Sen. Mark Warner (D-Va.). And it coincides with efforts by the financial regulatory agencies to complete rules on key aspects of the Dodd Frank Act dealing with hedging and proprietary trading.
JPMorgan is “a real life, real world example of what can happen,” said SEC Chairman Mary Schapiro. “We’ll use this example and see what the impact would be of all the things we’re proposing.”
Both Schapiro and CFTC Chairman Gary Gensler confirmed that investigations into JPMorgan are underway at their agencies.
Schapiro said that the SEC’s jurisdiction is limited because the trading activity occurred in a London branch, not at the firm’s U.S.-based broker-dealer that’s supervised by the SEC. “We’re primarily interested and focused on the appropriateness and comprehensiveness of [the company’s] public reporting and disclosure,” Schapiro said – specifically, whether the “earnings release and Q1 financial report were accurate and truthful.”
As for the CFTC, Gensler was less specific, but confirmed that agency’s “division of enforcement has opened an investigation into the credit derivative products traded by JPMorgan Chase’s chief investment office….These are credit default swap indices that are under our jurisdiction for anti-fraud and anti-manipulation.”
Sen. Richard Shelby (R-Ala.) criticized the agencies for being “in the dark. You didn’t know what was going at JPMorgan.”
Gensler acknowledged that he learned of the problem trades from press reports – but he also pointed out that the CFTC doesn’t yet regulate JPMorgan as swaps dealer – though the company is expected to register as one later this year, and that the agency’s oversight of clearinghouses is also still incomplete. He also noted that JPMorgan is overseen by the banking regulators – the Office of the Comptroller of Currency and the Federal Reserve.
“As marker regulators, we will stand up and oversee swap dealing activity in a bank or affiliate of a bank or securities-based swap dealing activity, but…currently the American public is not protected in that way,” he said.
Sen. Bob Corker (R-Tenn.) said he was concerned that the current focus on JPMorgan will distort the pending rulemakings, notably the Volcker rule, which bans banks from making proprietary trades but permits hedging and market making. “I fear that you’re under pressure, a lot of calls are being made…and what you’re going to do is end up causing the Volcker rule to be something it was never intended to be,” he said.
Gensler responded, “Firms will fail in the future as they have in the past. The critical thing is they have the freedom to fail and the American public doesn’t stand behind them.”
“I look at it as more about cross-border application than the Volcker area, if I can say respectfully,” Gensler said. “It’s a good reminder that risks in London can come back here and we can’t have the U.S. taxpayers stand behind them.”