Derivatives losses of at least $2 billion at JPMorgan Chase& Co. show the need for extending Dodd-Frank Act swapregulations to overseas trades, said Gary Gensler, chairman of theU.S. Commodity Futures Trading Commission.

“We've had another stark reminder of how trades overseas canquickly reverberate with losses coming back to the United States,”Gensler said today in a speech at a Financial Industry RegulatoryAuthority conference in Washington. “The bank here in the U.S. isabsorbing these losses” on trades conducted at JPMorgan in London,he said.

JPMorgan, Goldman Sachs Group Inc. and other U.S. banks havesaid Dodd-Frank rules designed to bolster oversight of thederivatives market will hurt their ability to compete withforeign-based rivals if the rules are applied to overseas offices.The debate over the reach of Dodd-Frank overseas is among the mostcontroversial elements of the 2010 financial overhaul.

“I think it's a reminder that when we go forward with thecross-border application of Dodd-Frank, that we not accept some ofthe industry's comments that we exempt those from Dodd-Frankreforms,” Gensler said. In comments after his speech, Genslerconfirmed that the CFTC is investigating the credit derivativestransactions that led to the JPMorgan loss.

Applying Dodd-Frank margin requirements to overseas swaps would“eviscerate our ability to serve clients overseas and cede theglobal market to foreign competitors,” JPMorgan Associate GeneralCounsel Don Thompson said at a House Financial Services Committeehearing Feb. 8. The International Swaps and Derivatives AssociationInc. and Institute for International Bankers backed Houselegislation seeking to limit the international reach ofDodd-Frank.

The House Agriculture Committee last week delayed a committeevote on the legislation, citing a need to take more time to debatepotential unintended consequences of the measure.

The CFTC will soon propose guidelines for when Dodd-Frank rulesapply to overseas transactions and swap dealers, Gensler said.

“In the midst of a default or a crisis, there is no satisfactoryway to really separate the risk of a bank and its branches,”Gensler said in the speech. “Likewise, I believe this must includetransactions with overseas affiliates that are guaranteed by a U.S.entity, as well as the overseas affiliates operating as conduitsfor a U.S. entity's swap activity.”

Extent of Guidelines

Under the guidelines, Dodd-Frank clearing and collateral rulesmay not apply to trades between overseas affiliates of U.S. firmsand foreign-based companies that don't have a guarantee fromanother U.S. company, Gensler said.

“We've seen time and again that U.S. overseas branches, overseasaffiliates guaranteed by a U.S. entity, and overseas affiliatesacting as conduits for U.S. entities bring risk crashing back ontoU.S. shores,” Gensler said.

Gensler said he has concerns about the so-called Volcker rule'srestrictions on proprietary trading being undermined by exemptionsfor hedging.

“You wouldn't want the permitted hedging to swallow up theprohibition,” Gensler told reporters. “From my own experience, thechallenge when somebody uses a word like 'portfolio hedging' is itcan mutate and morph into many things beyond hedging specificpositions, and though the statute uses the word aggregate, I takeit to mean still something specific — that there is real positionsthere.”

Bloomberg News

Copyright 2018 Bloomberg. All rightsreserved. This material may not be published, broadcast, rewritten,or redistributed.