Reuters: Regulatory News: UPDATE 1-JPMorgan loss shows global swaps rule need-Gensler

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UPDATE 1-JPMorgan loss shows global swaps rule need-Gensler May 21st 2012, 15:23 Mon May 21, 2012 11:23am EDT * Gensler to preview guidance on global reach of swaps rules * CFTC has opened investigation into JPM trades - source * Gensler, Schapiro to testify Tuesday before Senate panel By Alexandra Alper WASHINGTON, May 21 (Reuters) - JPMorgan Chase and Co's recently announced trading loss of more than $2 billion is a "stark reminder" of how overseas trading can transfer risk back to the United States, the top U.S. futures regulator plans to say on Monday. Speaking at a Conference held by the Financial Industry Regulatory Authority, Commodity Futures Trading Commission Chairman Gary Gensler will point to the loss - which involved credit default swaps - to highlight the need for a tough approach to global swaps regulation. While the loss was incurred in London, "it appears that the bank here in the U.S. is absorbing these losses," he will say, according to prepared remarks. The CFTC has been tasked by the 2010 Dodd-Frank financial oversight law with boosting transparency and limiting risk in the $708 trillion over-the-counter swaps market. Risky derivatives trading at overseas subsidiaries of firms like insurer American International Group, severely damaged the U.S. financial system during the 2007-2009 crisis and led to multi-billion dollar taxpayer bailouts. It has also prompted some U.S. regulators and lawmakers to push for a swaps regime with broad overseas application. "We've seen time and again that U.S. overseas branches, overseas affiliates guaranteed by a U.S. entity, and overseas affiliates acting as conduits for U.S. entities bring risk crashing back onto U.S. shores," Gensler said in prepared remarks. The agency has opened an investigation into possible wrongdoing at JPMorgan in connection with the largest U.S. bank's multi-billion-dollar trading loss, a source familiar with the probe told Reuters on Friday. The agency will soon publicly disclose the existence of the investigation, the source said. Gensler and Securities and Exchange Commission Chairman Mary Schapiro are scheduled to testify before the Senate Banking Committee on Tuesday. Lawmakers are expected to press the two regulators about the losses and whether any laws or rules may have been broken. In his speech, Gensler criticized a bill offered by Connecticut Democratic Representative Jim Himes, which is supported by Republicans, that would limit the scope of Dodd-Frank swaps rules by excluding from many U.S. regulations the swaps transactions between overseas branches of U.S. banks and offshore entities. "It would substantially reduce transparency and increase risk to our financial system and the economy," Gensler will say. A House Agriculture Committee vote on the bill was canceled last week after JPMorgan's announced losses led to renewed calls for tougher financial reform. SWAP GUIDANCE SOON On Monday, Gensler will also outline key elements of guidance the agency plans to release shortly that will shed light on how the Dodd-Frank swaps rule will apply to overseas transactions. For example, Gensler will say that transactions between a foreign entity and either an overseas branch or a guaranteed affiliate of a U.S. firm will face U.S. regulation. He will say that capital, risk management and record keeping rules will apply to all major swaps players. The agency is working to develop a balanced approach that prevents banks from importing risk from overseas, but which does not duplicate or conflict with foreign regulators' rules. Link this Share this Digg this Email Reprints

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