Derivatives losses of at least $2 billion at JPMorgan Chase & Co. show the need for extending Dodd-Frank Act swap regulations to overseas trades, said Gary Gensler, chairman of the U.S. Commodity Futures Trading Commission.
“We’ve had another stark reminder of how trades overseas can quickly reverberate with losses coming back to the United States,” Gensler said today in a speech at a Financial Industry Regulatory Authority conference in Washington. “The bank here in the U.S. is absorbing these losses” on trades conducted at JPMorgan in London, he said.
JPMorgan, Goldman Sachs Group Inc. and other U.S. banks have said Dodd-Frank rules designed to bolster oversight of the derivatives market will hurt their ability to compete with foreign-based rivals if the rules are applied to overseas offices. The debate over the reach of Dodd-Frank overseas is among the most controversial elements of the 2010 financial overhaul.
“I think it’s a reminder that when we go forward with the cross-border application of Dodd-Frank, that we not accept some of the industry’s comments that we exempt those from Dodd-Frank reforms,” Gensler said. In comments after his speech, Gensler confirmed that the CFTC is investigating the credit derivatives transactions that led to the JPMorgan loss.
Applying Dodd-Frank margin requirements to overseas swaps would “eviscerate our ability to serve clients overseas and cede the global market to foreign competitors,” JPMorgan Associate General Counsel Don Thompson said at a House Financial Services Committee hearing Feb. 8. The International Swaps and Derivatives Association Inc. and Institute for International Bankers backed House legislation seeking to limit the international reach of Dodd-Frank.
The House Agriculture Committee last week delayed a committee vote on the legislation, citing a need to take more time to debate potential unintended consequences of the measure.
The CFTC will soon propose guidelines for when Dodd-Frank rules apply to overseas transactions and swap dealers, Gensler said.
“In the midst of a default or a crisis, there is no satisfactory way to really separate the risk of a bank and its branches,” Gensler said in the speech. “Likewise, I believe this must include transactions with overseas affiliates that are guaranteed by a U.S. entity, as well as the overseas affiliates operating as conduits for a U.S. entity’s swap activity.”
Under the guidelines, Dodd-Frank clearing and collateral rules may not apply to trades between overseas affiliates of U.S. firms and foreign-based companies that don’t have a guarantee from another U.S. company, Gensler said.
“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.
Gensler said he has concerns about the so-called Volcker rule’s restrictions on proprietary trading being undermined by exemptions for hedging.
“You wouldn’t want the permitted hedging to swallow up the prohibition,” Gensler told reporters. “From my own experience, the challenge when somebody uses a word like ‘portfolio hedging’ is it can mutate and morph into many things beyond hedging specific positions, and though the statute uses the word aggregate, I take it to mean still something specific -- that there is real positions there.”