Staley Sees Rule Harmony After London Built City on Arbitrage

Jes Staley, chief executive officer of JPMorgan Chase & Co.’s investment bank, said U.S. regulators know what’s at stake in harmonizing global trading rules because they’ve seen regulations push business overseas.

“In many ways, the City of London was built on regulatory arbitrage,” Staley said at an investor conference yesterday. He used the examples of loan-syndication desks moving to London to avoid U.S. withholding taxes on interest and firms expanding in the capital because the U.K. didn’t have an equivalent to the Glass-Steagall Act, which mandated separation of commercial and investment banking.

“The industry is going to respond if there’s a regulatory arbitrage, not because we’re devious or trying to get around something, but because it’s self-evident and the regulators themselves will identify it as they did most effectively in the U.K. a number of decades ago,” Staley said.

Other nations probably won’t adopt equivalents to the so-called Volcker rule, which seeks to bar U.S. banks from making bets with their own money, Staley said. Differences still exist over regulations requiring firms to move many derivatives to central clearinghouses, he said.

While New York-based JPMorgan hasn’t seen a decline in business related to moving derivatives to central clearinghouses, Staley said, a Germany-based firm may choose to do a swap with Deutsche Bank AG rather than JPMorgan if it has to post margin with the U.S. company and not with Deutsche Bank.

JPMorgan, the largest U.S. bank by assets, has received “tremendous assurances” that lawmakers understand concerns about what the industry calls “extraterritoriality” and he expects global regulators to work toward common agreement, Staley said.

‘The Right Place’

“They are going to get the inconsistencies ironed out, because they recognize the challenge to the global financial system if they allow the arbitrage to exist,” Staley said. “They will ultimately get to the right place because they won’t allow those arbitrages to exist to the level that I think they’ve occurred in the last couple of decades.”

The U.S. has faced concern that more onerous rules were causing New York to lose ground to London. A study by consulting firm McKinsey & Co. released in January 2007 concluded that the U.S. would lose its place as the leading financial center in the next decade without legal and regulatory changes. Henry Paulson, then U.S. Treasury secretary, said in March 2007 that keeping the country the world’s dominant capital market “is a high priority for me.”

Banks and other investors may face “discriminatory” and competing sets of rules when they trade in derivatives because of a lack of coordination between the U.S. and European Union, trade associations said last year in a letter to Michel Barnier, the EU’s financial services chief, and Timothy F. Geithner, the U.S. Treasury secretary.

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