Congress and U.S. regulators should limit the international reach of Dodd-Frank Act swaps regulations, JPMorgan Chase & Co. (JPM) Chief Executive Officer Jamie Dimon said as he testified about at least $2 billion in losses on trades conducted by his bank in London.
“If JPMorgan overseas operates under different rules than our foreign competitors, we can no longer provide the best products and services to our U.S. clients or our foreign clients,” Dimon said yesterday at a House Financial Services Committee hearing on the losses. “The rules at the transaction level about margin reporting, all those requirements may enable Deutsche Bank to make the better deal.”
The U.S. Commodity Futures Trading Commission, the main derivatives regulator, is poised to propose guidance tomorrow that would extend swaps rules to foreign branches and subsidiaries of JPMorgan, Goldman Sachs Group Inc. (GS), Citigroup Inc. (C) and other U.S. banks. The international reach of Dodd-Frank rules is among the most controversial elements of the derivatives-regulation overhaul and has led to two years of debate between regulators and financial-industry lobby groups.
Gary Gensler, CFTC chairman, has testified to Congress and delivered speeches calling for oversight of U.S. banks’ overseas operations.
“I think if we were to leave 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,” Gensler said at the hearing before Dimon testified.
Senator Carl Levin, a Michigan Democrat who has sought to rein in risky bank derivatives trading, said Dodd-Frank was drafted to protect U.S. taxpayers from having to bail out banks that make bad bets, including at their overseas offices.
“It’s not surprising that a bank executive would push for a loophole to exempt his bank’s non-U.S. offices from Dodd- Frank, but it would be a colossal failure by our regulators to ignore the law and grant his wish,” he said in an e-mail yesterday.
Dodd-Frank was enacted to increase transparency in the global swaps market after largely unregulated trades helped fuel the 2008 credit crisis and the collapse of Lehman Brothers Holdings Inc. Bipartisan U.S. House legislation limiting the international reach of swaps rules was delayed after JPMorgan’s chief investment office losses were announced on May 10.
The trades involved in the investment office losses were conducted in London, even though most of the CIO is based in New York. “I don’t think this activity was in London because regulatory activity is less in London,” Dimon said at the hearing.
Global regulators set a goal of the end of 2012 to have swaps guaranteed by central clearinghouses and traded on more transparent platforms. Delays and inconsistencies between national regulations may compromise the deadline set by the Group of 20 nations, the Financial Stability Board said in a report on June 15.
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