Reuters: Regulatory News: Volcker rule could have flagged JPM trades earlier

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Volcker rule could have flagged JPM trades earlier Jun 6th 2012, 16:36 Wed Jun 6, 2012 12:36pm EDT * Fed's Tarullo: Volcker will shed light on hedging trades * JPMorgan trading losses tied to failed hedging strategy * Senate Banking panel presses regulators on shortcomings * OCC's Curry says JPMorgan red flags apparent in hindsight By Dave Clarke and Alexandra Alper WASHINGTON, June 6 (Reuters) - U.S. bank regulators likely would have had an earlier look at JPMorgan Chase & Co's unraveling hedging strategy if the Volcker rule had been in place, Federal Reserve Governor Daniel Tarullo said on Wednesday. Tarullo argued that under a proposal released in October to implement the crackdown on proprietary trading, banks would have to produce documentation detailing a hedge that would be exempted from the Volcker rule. "If a firm said, 'We are doing this as a hedge', they would be required to explain to themselves internally as well as to the primary supervisor, what the hedging strategy was... and how they would make sure it didn't give rise to new exposures," he told the Senate Banking Committee on Wednesday. "I suspect we're going to find in this case that there was an absence of documentation both within the firm and in reporting to supervisors," said Tarullo. JPMorgan announced last month that a failed hedging strategy had morphed into something more speculative that has produced at least $2 billion in losses. JPMorgan Chief Executive Jamie Dimon, who will appear before the same Senate panel next week, has called the trades "sloppy" and "stupid". The announcement has shaken Wall Street and Washington, raising questions about whether banks are still taking too many risks following the 2007-2009 financial crisis. During the hearing on Wednesday, lawmakers pressed regulators on whether they fell down on the job and what sort of implications JPMorgan's losses have on financial reform. "Shouldn't the sheer size of these trades have been a huge red flag for the OCC?" asked Democratic Senator Robert Menendez to Thomas Curry, the head of the Office of the Comptroller of the Currency. The OCC is the primary regulator for JPMorgan's banking activities. "The concentrated nature of the trading and the liquidity of it are red flags that are clearly apparent now," Curry replied. VOLCKER RULE IN THE WORKS The losses have, in particular, put a renewed focus on regulators efforts to put the Volcker rule in place, which prohibits banks from making trades with their own money for profit. The goal of the rule is to prevent banks that enjoy government backstops like deposit insurance from making risky trades that could ultimately endanger taxpayer and depositor funds. A proposed Volcker rule was released in October and a final rule is expected in the next few months. The 2010 Dodd-Frank financial oversight law allows for some exemptions to the Volcker rule, including making trades to hedge against risks. Supporters of the restrictions are pressuring regulators to tighten the hedging exemption, arguing the JPMorgan losses are evidence that the October draft would provide too much leeway. Curry told the panel that the trading losses speak more to risk management problems at the bank that go beyond individual rules. "It's still a risk management issue regardless of the Volcker rule," he said. Link this Share this Digg this Email Reprints

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