HFSC Discusses Bank Supervision and Risk Management in Light of JPMC Trading Loss
AT TODAY’S HOUSE FINANCIAL SERVICES COMMITTEE HEARING, lawmakers heard from regulators and JPMorgan Chase CEO Jamie Dimon on the firm’s recent trading loss. Fresh off his appearance before the Senate Banking Committee just last week, Dimon fielded another round of questioning ranging from the transparency of risk models used in the trades to his opinion on proposed regulatory reform measures. Many Republicans used the hearing as an opportunity to highlight perceived ways in which the Dodd-Frank Act will not be effective in making the financial system safer while Democrats sought to prove that, had most Dodd-Frank provisions been in place, the trading losses would not have occurred. Recurring questions that were raised by members on both sides of the aisle, included the Volcker Rule and the “London loophole” issue, which deals with the extent to which U.S. derivatives regulation will be applied extraterritorially.
Chairman Spencer Bachus (R-Ala.) convened the hearing by noting the strength of JPMorgan’s balance sheet and emphasized the central role capital plays in the safety and soundness of individual banks. He said regulars should be “complimented” for the fact that the firm suffers no capital or liquidity problems. Bachus acknowledged the increased workload and budgetary restraints banking agencies are currently functioning under, specifically pointing to the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC).
Ranking Member Barney Frank (D-Mass.) responded to Republican criticism that the regulatory environment is too complex and Republican’s claims that proposals were offered in previous years to consolidate regulators. Frank said he was not aware of any substantive Republican proposals to merge banking agencies and did note that during debate of the Dodd-Frank reform law, he would have supported merging the SEC and CFTC. He said the “biggest problem we have are two agencies sharing jurisdiction over derivatives regulation,” but that such a move would have not been “politically possible given the cultural differences within our country that it reflects.” He also called the House Appropriations Committee’s proposed budget measure to cut funding for the CFTC a “grave error” and criticized a bipartisan measure (H.R. 3283) that would clarify the exterritorial scope of Title VII regulation of the Dodd-Frank Act, noting the bill was approved by the Financial Services Committee earlier this year despite his objections.
Rep. Maxine Waters (D-Calif.) said the JPMorgan loss is a reminder of the potential for an even greater loss at U.S. financial firms and noted how full implementation of the Dodd-Frank Act would make the financial system stronger and safer. However, she said full implementation has not been achieved due in large part to industry lobbying. “…there is a death by a thousand cuts approach to undermining financial reform, which includes pushing bills to undermine Dodd-Frank right here in Congress, lobbying our agencies to weaken the rules and suing our regulators when they don’t like the rules they eventually do put forward,” Waters said. She then urged regulators to “resist the pressure they face to weaken the rules and finish their rulemaking.”
Testimony
In his opening statement, Comptroller of the Currency, Thomas Curry gave a broad overview of the Office of the Comptroller of the Currency’s (OCC) large bank supervisory program and its response to JPMorgan’s recent losses. He said the OCC maintains onsite examination teams that report on banks’ objectives, risk levels, and risk management. Noting the critical importance of large banks to the vitality of the economy, he highlighted several areas in which the OCC holds large banks to higher standards, including stronger capital and liquidity standards and more thorough corporate governance and oversight.
In his opening statement, Thomas Curry, Comptroller of the Currency, gave a broad overview of the OCC’s implementation of Dodd-Frank regulations and its response to JPMorgan’s recent losses. He said the OCC has recently approved replacing credit ratings with investment grades as well as proposals to implement Basel III, and reviewed comment letters in regards to the Volcker Rule and Dodd-Frank in general. He said the OCC has worked to translate reforms into a fair banking system by increasing awareness of the risks that banks face, ensuring that risk is well-managed, raising expectations for management, and increasing capital reserves and liquidity governance.
He said the OCC is the primary regulator and prudential supervisor of JPMorgan Chase and that examiners met with JPMorgan’s management team to discuss transaction activity in April, when the state of its investment position “deteriorated rapidly.” He said the OCC is currently compiling a two-pronged review of supervisory activities, focusing on the adequacy of risk controls at JPMorgan and how to apply the lessons learned from this loss to enhance risk management for other banks. Curry said the OCC is also evaluating the functions of the Chief Investment Officer, and will pursue “formal and informal remedial measures” if necessary. He also assuaged fears of contagion or losses to customers, pointing to the bank’s strong capital position and indicating that losses will only affect JPMorgan’s earnings.
In her opening statement, SEC Chairman Mary Schapiro provided an overview of the SEC’s disclosure regulation. She explained that because the losses did not occur in the JPMorgan’s U.S. securities branch, the SEC’s primary authority in this matter “relates to the appropriateness and completeness of the entity’s financial reporting and other public disclosures, as well as its financial accounting and internal control over financial reporting.” Expanding on regulatory details, Schapiro highlighted Item 305 of Regulation S-K, which requires quarterly quantitative and qualitative disclosure of the company’s primary market risk exposures. She also cited SEC rules that call for full annual disclosure of “compensation policies and practices for employees that are reasonably likely to have a material adverse effect on the company.”
In his opening statement, CFTC Chairman Gary Gensler compared swaps market regulation to driving and traffic rules, saying he would “sleep better if the complex roads of the swap market were well-lit with transparency.” Acknowledging the importance of swaps in managing risk, he stressed the need for market transparency and greater central clearing. He said the CTFC has already completed 33 Dodd-Frank rules and has fewer than 20 left to implement. On the issue of extraterritoriality, Gensler said the global nature of financial markets means that even swaps U.S. institutions conducted overseas can still “send risk straight back to our shores.” He noted several CFTC recommendations for regulating extraterritorial swaps that may be included in the upcoming cross-border guidance proposal, including caps on the size of unregulated transactions, a tiered approach for overseas swap dealer requirements, entity-level substituted compliance, and requirements for all U.S.-facing transactions at the transaction level.
Federal Deposit Insurance Corporation (FDIC) Acting Chairman Martin Gruenberg focused on the importance of real-time monitoring of financial institutions in his opening statement. He said the FDIC met daily with JPMorgan and other regulators immediately after the losses were announced to gain an understanding of the events. He also discussed the FDIC’s current review of JPMorgan’s policies and practices, specifically risk reporting, models used in the Chief Investment Office (CIO), the strength of the CIO’s risk management, and steps the firm is taking to prevent a recurrence. Gruenberg concluded by stressing the need for regulatory agencies to “have access to timely risk-related information about derivatives and other market-sensitive exposures, to analyze the data effectively, and to regularly share findings and observations.”
In his opening statement, Scott Alvarez, General Counsel for the Federal Reserve, discussed recent Fed actions to help implement Dodd-Frank reforms and advocated for strong capital standards. He said the Fed is currently assisting JPMorgan in eliminating risk from their portfolio and working with the FDIC to ensure areas of “unnecessary risk” are addressed. Stressing JPMorgan’s losses as “a strong reminder of the importance of capital requirements,” he said sufficient capital absorbs unanticipated losses and ensures that losses are borne by shareholders instead of taxpayers. Alvarez also discussed several steps the Fed has taken to implement Basel III and Dodd-Frank capital reforms, noting that the weighted tier I common ratio average of America’s largest banks has doubled in the last three years to 10.9 percent.
In his opening statement, Dimon provided an overview of the causes and extent of JPMorgan’s recent trading loss. He explained that while the primary function of the Chief
Investment Office is to manage a $350 billion portfolio and control long-term interest rate and currency exposure, the CIO also maintains a smaller synthetic credit portfolio that protects the company from a systemic event. He said when the CIO was instructed to reduce its risk exposures, they followed a “poorly conceived” strategy that entailed hedging the synthetic credit portfolio with more assets instead of reducing their existing position. Noting that personnel in the CIO were in transition and that risk controls were largely ineffective, Dimon added that the CIO traders did not have the “requisite understanding” of the risk of its trades.
Dimon also discussed the steps JPMorgan has taken to prevent further losses, including appointing new leadership for the CIO, analyzing and reducing existing risk, establishing a new risk committee structure for the CIO, and conducting a review of the incident. While he apologized for losing shareholder money, Dimon stressed that the loss did not, and will not affect clients, customers, or taxpayers. He emphasized the strength of JPMorgan’s capital ratios and the success of the bank’s capital position in minimizing the impact of unexpected losses. In closing, Dimon said JPMorgan will “learn from these losses, and emerge from this moment a stronger, smarter, better company.”
Q&A Panel I
Bachus asked Curry whether statements made by JPMorgan executives during the firm’s April 13 analyst call regarding the “comfort” with their positions at that time were accurate. Curry noted the OCC generally has wide access to the firm’s management reports and said the investigations are focusing on whether such reporting was sufficiently granular. He did acknowledge that in hindsight, more robust reporting may have helped examiners gain a better understanding of the positions.
Frank asked Gensler what effect H.R. 3283 would have on the JPMorgan transactions in question had the bill been passed into law. Gensler called the bill a “major retreat from reform,” noting the trades executed in the firm’s London branch would not be covered under the law.
Frank asked for clarification on Gensler’s statement and noted how under H.R. 3283, the trades would “presumably” be subject to “some bank supervision” but would be outside the derivatives regulatory regime. Gensler said it “depends on how one provision in that statute is interpreted” but that he believed Frank’s portrayal to be accurate.
Frank followed up by asking what the impact would be on the trades in question if Title VII regulation were fully implemented and the CFTC was properly staffed. Gensler said the trades would be in central clearing and more transparent pricing would be provided. He added that “risk tends to be better managed when you have public market transparency.”
Waters cited Gensler’s recent comments on the CFTC’ proposed upcoming guidance on the extraterritorial application of Title VII and asked Schapiro when the SEC expects to release their proposal. Schapiro said the SEC hopes to release its proposal for public comment “sometime later this summer.” She said staff of the SEC and CFTC have been working very closely together on the issue and that the SEC plans a release that “holistically looks at the extraterritorial application of each and every Dodd-Frank rule.”
Rep. Carolyn Maloney (D-N.Y.) referenced a “disturbing pattern” she has noticed over the last few years of “London literally becoming the center of financial trading disasters.” She questioned whether London has lower regulatory standards or tax structures that incentivize such activity.
Gensler said London has some “time zone advantages” being in between the U.S. and Asia and said that while Europe has done an “excellent job” implementing derivatives regulation similar to Dodd-Frank, it does not yet have the “pieces of public market transparency” that Congress adopted. Gensler added that leaving the “London branches of the U.S. banks or even the guaranteed affiliates out it would be, so to speak, another loophole and a retreat from reform where risk would come crashing back to our taxpayers and our Federal Reserve.”
Rep. Nydia Velazquez (D-N.Y.) noted how JPMorgan Chase changed its Value at Risk (VaR) models a number of times over the past six months and asked if there are penalties for failing to disclose those changes to investors. Schapiro stated that federal securities law requires changes to the VaR model to be disclosed and noted the extent of that disclosure was part of what the SEC is investigating with regard to the trading loss. She added that the SEC has a “wide panoply of sanctions available” but that it’s “hard to guess where we [SEC] might land” in terms of whether penalties are appropriate until the full investigation is completed.
Rep. Stephen Lynch (D-Mass.) asked Gensler how his “oversight toolbox” differs when trades are executed overseas as opposed to the U.S. Gensler pointed to Section 722(d) of the Dodd-Frank Act which gives regulators the ability to bring trades under their jurisdiction that have a “direct and significant” effect on U.S. commerce or activities. He said the CFTC will vote on its cross-border guidance proposal on June 21 and said he hoped the Commission will vote out a measure that does not “in essence create another London loophole.”
Q&A Panel II
Frank asked Dimon if believes Congress should enact H.R. 3283. Dimon said yes, arguing the measure would help ensure a level playing field for U.S. firms and their foreign competitors. He added that the trades in question were visible and regulated by the Federal Reserve and OCC, and pointed to the fact that 60 percent of those trades were cleared and all were fully collateralized.
Waters followed up on the same line of questioning and Dimon reiterated his position that if his firm were to operate under a different set of rules than those of foreign competitors, JPMorgan’s clients would go elsewhere to find the best deal possible. He stressed the importance of ensuring regulatory reform rules are crafted in a manner that does not negatively impact U.S. capital markets.
Maloney asked why the losses were incurred in the firm’s London unit and again questioned why such activity was taking place overseas and not the U.S. Dimon said the loss could have happened anywhere and that such activity was not a result of migrating toward a lighter regulatory regime.
A number of members, including Reps. David Schweikert (R-Ariz.), Francisco Canseco (R-Texas), Gary Ackerman (D-N.Y.), and Michael Fitzpatrick (R-Pa.) asked how the trades in question would be impacted if the Volcker Rule was fully implemented and what the rule should look like. Dimon said the Volcker Rule allows portfolio hedging and stressed the importance of ensuring the provision does not negatively impact U.S. capital markets by hindering the market making abilities of financial firms.
Rep. Patrick McHenry (R-N.C.) asked Dimon whether he could distinguish between hedging and proprietary trading. Dimon said a hedge is “meant to protect you if something goes wrong in a decision you make.” He said every time the firm extends a loan, it is taking a proprietary risk.
McHenry followed up by asking whether there is a bright line distinction between hedging and proprietary trading. Dimon said that in “some cases” there is a bright line distinction but suggested that to make the financial system safer, proper capital and liquidity requirements must be in place and the ability to hedge and portfolio hedge must be allowed.
For testimony and a webcast of the hearing, please click here.
,Blog Tags:,Blog Categories:,Blog TrackBack:,Blog Pingback:No,Hearing Summaries Issues:Capital/Resolution Authority/SIFIs,Hearing Summaries Agency:House Financial Services Committee,Publish Year:2012
AT TODAY’S HOUSE FINANCIAL SERVICES COMMITTEE HEARING, lawmakers heard from regulators and JPMorgan Chase CEO Jamie Dimon on the firm’s recent trading loss. Fresh off his appearance before the Senate Banking Committee just last week, Dimon fielded another round of questioning ranging from the transparency of risk models used in the trades to his opinion on proposed regulatory reform measures. Many Republicans used the hearing as an opportunity to highlight perceived ways in which the Dodd-Frank Act will not be effective in making the financial system safer while Democrats sought to prove that, had most Dodd-Frank provisions been in place, the trading losses would not have occurred. Recurring questions that were raised by members on both sides of the aisle, included the Volcker Rule and the “London loophole” issue, which deals with the extent to which U.S. derivatives regulation will be applied extraterritorially.
Chairman Spencer Bachus (R-Ala.) convened the hearing by noting the strength of JPMorgan’s balance sheet and emphasized the central role capital plays in the safety and soundness of individual banks. He said regulars should be “complimented” for the fact that the firm suffers no capital or liquidity problems. Bachus acknowledged the increased workload and budgetary restraints banking agencies are currently functioning under, specifically pointing to the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC).
Ranking Member Barney Frank (D-Mass.) responded to Republican criticism that the regulatory environment is too complex and Republican’s claims that proposals were offered in previous years to consolidate regulators. Frank said he was not aware of any substantive Republican proposals to merge banking agencies and did note that during debate of the Dodd-Frank reform law, he would have supported merging the SEC and CFTC. He said the “biggest problem we have are two agencies sharing jurisdiction over derivatives regulation,” but that such a move would have not been “politically possible given the cultural differences within our country that it reflects.” He also called the House Appropriations Committee’s proposed budget measure to cut funding for the CFTC a “grave error” and criticized a bipartisan measure (H.R. 3283) that would clarify the exterritorial scope of Title VII regulation of the Dodd-Frank Act, noting the bill was approved by the Financial Services Committee earlier this year despite his objections.
Rep. Maxine Waters (D-Calif.) said the JPMorgan loss is a reminder of the potential for an even greater loss at U.S. financial firms and noted how full implementation of the Dodd-Frank Act would make the financial system stronger and safer. However, she said full implementation has not been achieved due in large part to industry lobbying. “…there is a death by a thousand cuts approach to undermining financial reform, which includes pushing bills to undermine Dodd-Frank right here in Congress, lobbying our agencies to weaken the rules and suing our regulators when they don’t like the rules they eventually do put forward,” Waters said. She then urged regulators to “resist the pressure they face to weaken the rules and finish their rulemaking.”
Testimony
In his opening statement, Comptroller of the Currency, Thomas Curry gave a broad overview of the Office of the Comptroller of the Currency’s (OCC) large bank supervisory program and its response to JPMorgan’s recent losses. He said the OCC maintains onsite examination teams that report on banks’ objectives, risk levels, and risk management. Noting the critical importance of large banks to the vitality of the economy, he highlighted several areas in which the OCC holds large banks to higher standards, including stronger capital and liquidity standards and more thorough corporate governance and oversight.
In his opening statement, Thomas Curry, Comptroller of the Currency, gave a broad overview of the OCC’s implementation of Dodd-Frank regulations and its response to JPMorgan’s recent losses. He said the OCC has recently approved replacing credit ratings with investment grades as well as proposals to implement Basel III, and reviewed comment letters in regards to the Volcker Rule and Dodd-Frank in general. He said the OCC has worked to translate reforms into a fair banking system by increasing awareness of the risks that banks face, ensuring that risk is well-managed, raising expectations for management, and increasing capital reserves and liquidity governance.
He said the OCC is the primary regulator and prudential supervisor of JPMorgan Chase and that examiners met with JPMorgan’s management team to discuss transaction activity in April, when the state of its investment position “deteriorated rapidly.” He said the OCC is currently compiling a two-pronged review of supervisory activities, focusing on the adequacy of risk controls at JPMorgan and how to apply the lessons learned from this loss to enhance risk management for other banks. Curry said the OCC is also evaluating the functions of the Chief Investment Officer, and will pursue “formal and informal remedial measures” if necessary. He also assuaged fears of contagion or losses to customers, pointing to the bank’s strong capital position and indicating that losses will only affect JPMorgan’s earnings.
In her opening statement, SEC Chairman Mary Schapiro provided an overview of the SEC’s disclosure regulation. She explained that because the losses did not occur in the JPMorgan’s U.S. securities branch, the SEC’s primary authority in this matter “relates to the appropriateness and completeness of the entity’s financial reporting and other public disclosures, as well as its financial accounting and internal control over financial reporting.” Expanding on regulatory details, Schapiro highlighted Item 305 of Regulation S-K, which requires quarterly quantitative and qualitative disclosure of the company’s primary market risk exposures. She also cited SEC rules that call for full annual disclosure of “compensation policies and practices for employees that are reasonably likely to have a material adverse effect on the company.”
In his opening statement, CFTC Chairman Gary Gensler compared swaps market regulation to driving and traffic rules, saying he would “sleep better if the complex roads of the swap market were well-lit with transparency.” Acknowledging the importance of swaps in managing risk, he stressed the need for market transparency and greater central clearing. He said the CTFC has already completed 33 Dodd-Frank rules and has fewer than 20 left to implement. On the issue of extraterritoriality, Gensler said the global nature of financial markets means that even swaps U.S. institutions conducted overseas can still “send risk straight back to our shores.” He noted several CFTC recommendations for regulating extraterritorial swaps that may be included in the upcoming cross-border guidance proposal, including caps on the size of unregulated transactions, a tiered approach for overseas swap dealer requirements, entity-level substituted compliance, and requirements for all U.S.-facing transactions at the transaction level.
Federal Deposit Insurance Corporation (FDIC) Acting Chairman Martin Gruenberg focused on the importance of real-time monitoring of financial institutions in his opening statement. He said the FDIC met daily with JPMorgan and other regulators immediately after the losses were announced to gain an understanding of the events. He also discussed the FDIC’s current review of JPMorgan’s policies and practices, specifically risk reporting, models used in the Chief Investment Office (CIO), the strength of the CIO’s risk management, and steps the firm is taking to prevent a recurrence. Gruenberg concluded by stressing the need for regulatory agencies to “have access to timely risk-related information about derivatives and other market-sensitive exposures, to analyze the data effectively, and to regularly share findings and observations.”
In his opening statement, Scott Alvarez, General Counsel for the Federal Reserve, discussed recent Fed actions to help implement Dodd-Frank reforms and advocated for strong capital standards. He said the Fed is currently assisting JPMorgan in eliminating risk from their portfolio and working with the FDIC to ensure areas of “unnecessary risk” are addressed. Stressing JPMorgan’s losses as “a strong reminder of the importance of capital requirements,” he said sufficient capital absorbs unanticipated losses and ensures that losses are borne by shareholders instead of taxpayers. Alvarez also discussed several steps the Fed has taken to implement Basel III and Dodd-Frank capital reforms, noting that the weighted tier I common ratio average of America’s largest banks has doubled in the last three years to 10.9 percent.
In his opening statement, Dimon provided an overview of the causes and extent of JPMorgan’s recent trading loss. He explained that while the primary function of the Chief
Investment Office is to manage a $350 billion portfolio and control long-term interest rate and currency exposure, the CIO also maintains a smaller synthetic credit portfolio that protects the company from a systemic event. He said when the CIO was instructed to reduce its risk exposures, they followed a “poorly conceived” strategy that entailed hedging the synthetic credit portfolio with more assets instead of reducing their existing position. Noting that personnel in the CIO were in transition and that risk controls were largely ineffective, Dimon added that the CIO traders did not have the “requisite understanding” of the risk of its trades.
Dimon also discussed the steps JPMorgan has taken to prevent further losses, including appointing new leadership for the CIO, analyzing and reducing existing risk, establishing a new risk committee structure for the CIO, and conducting a review of the incident. While he apologized for losing shareholder money, Dimon stressed that the loss did not, and will not affect clients, customers, or taxpayers. He emphasized the strength of JPMorgan’s capital ratios and the success of the bank’s capital position in minimizing the impact of unexpected losses. In closing, Dimon said JPMorgan will “learn from these losses, and emerge from this moment a stronger, smarter, better company.”
Q&A Panel I
Bachus asked Curry whether statements made by JPMorgan executives during the firm’s April 13 analyst call regarding the “comfort” with their positions at that time were accurate. Curry noted the OCC generally has wide access to the firm’s management reports and said the investigations are focusing on whether such reporting was sufficiently granular. He did acknowledge that in hindsight, more robust reporting may have helped examiners gain a better understanding of the positions.
Frank asked Gensler what effect H.R. 3283 would have on the JPMorgan transactions in question had the bill been passed into law. Gensler called the bill a “major retreat from reform,” noting the trades executed in the firm’s London branch would not be covered under the law.
Frank asked for clarification on Gensler’s statement and noted how under H.R. 3283, the trades would “presumably” be subject to “some bank supervision” but would be outside the derivatives regulatory regime. Gensler said it “depends on how one provision in that statute is interpreted” but that he believed Frank’s portrayal to be accurate.
Frank followed up by asking what the impact would be on the trades in question if Title VII regulation were fully implemented and the CFTC was properly staffed. Gensler said the trades would be in central clearing and more transparent pricing would be provided. He added that “risk tends to be better managed when you have public market transparency.”
Waters cited Gensler’s recent comments on the CFTC’ proposed upcoming guidance on the extraterritorial application of Title VII and asked Schapiro when the SEC expects to release their proposal. Schapiro said the SEC hopes to release its proposal for public comment “sometime later this summer.” She said staff of the SEC and CFTC have been working very closely together on the issue and that the SEC plans a release that “holistically looks at the extraterritorial application of each and every Dodd-Frank rule.”
Rep. Carolyn Maloney (D-N.Y.) referenced a “disturbing pattern” she has noticed over the last few years of “London literally becoming the center of financial trading disasters.” She questioned whether London has lower regulatory standards or tax structures that incentivize such activity.
Gensler said London has some “time zone advantages” being in between the U.S. and Asia and said that while Europe has done an “excellent job” implementing derivatives regulation similar to Dodd-Frank, it does not yet have the “pieces of public market transparency” that Congress adopted. Gensler added that leaving the “London branches of the U.S. banks or even the guaranteed affiliates out it would be, so to speak, another loophole and a retreat from reform where risk would come crashing back to our taxpayers and our Federal Reserve.”
Rep. Nydia Velazquez (D-N.Y.) noted how JPMorgan Chase changed its Value at Risk (VaR) models a number of times over the past six months and asked if there are penalties for failing to disclose those changes to investors. Schapiro stated that federal securities law requires changes to the VaR model to be disclosed and noted the extent of that disclosure was part of what the SEC is investigating with regard to the trading loss. She added that the SEC has a “wide panoply of sanctions available” but that it’s “hard to guess where we [SEC] might land” in terms of whether penalties are appropriate until the full investigation is completed.
Rep. Stephen Lynch (D-Mass.) asked Gensler how his “oversight toolbox” differs when trades are executed overseas as opposed to the U.S. Gensler pointed to Section 722(d) of the Dodd-Frank Act which gives regulators the ability to bring trades under their jurisdiction that have a “direct and significant” effect on U.S. commerce or activities. He said the CFTC will vote on its cross-border guidance proposal on June 21 and said he hoped the Commission will vote out a measure that does not “in essence create another London loophole.”
Q&A Panel II
Frank asked Dimon if believes Congress should enact H.R. 3283. Dimon said yes, arguing the measure would help ensure a level playing field for U.S. firms and their foreign competitors. He added that the trades in question were visible and regulated by the Federal Reserve and OCC, and pointed to the fact that 60 percent of those trades were cleared and all were fully collateralized.
Waters followed up on the same line of questioning and Dimon reiterated his position that if his firm were to operate under a different set of rules than those of foreign competitors, JPMorgan’s clients would go elsewhere to find the best deal possible. He stressed the importance of ensuring regulatory reform rules are crafted in a manner that does not negatively impact U.S. capital markets.
Maloney asked why the losses were incurred in the firm’s London unit and again questioned why such activity was taking place overseas and not the U.S. Dimon said the loss could have happened anywhere and that such activity was not a result of migrating toward a lighter regulatory regime.
A number of members, including Reps. David Schweikert (R-Ariz.), Francisco Canseco (R-Texas), Gary Ackerman (D-N.Y.), and Michael Fitzpatrick (R-Pa.) asked how the trades in question would be impacted if the Volcker Rule was fully implemented and what the rule should look like. Dimon said the Volcker Rule allows portfolio hedging and stressed the importance of ensuring the provision does not negatively impact U.S. capital markets by hindering the market making abilities of financial firms.
Rep. Patrick McHenry (R-N.C.) asked Dimon whether he could distinguish between hedging and proprietary trading. Dimon said a hedge is “meant to protect you if something goes wrong in a decision you make.” He said every time the firm extends a loan, it is taking a proprietary risk.
McHenry followed up by asking whether there is a bright line distinction between hedging and proprietary trading. Dimon said that in “some cases” there is a bright line distinction but suggested that to make the financial system safer, proper capital and liquidity requirements must be in place and the ability to hedge and portfolio hedge must be allowed.
For testimony and a webcast of the hearing, please click here.