U.S. CFTC Considers Tighter Volcker Rule After JPMorgan Loss

The U.S. Commodity Futures Trading Commission is seeking input on whether to narrow exemptions in a proposed proprietary-trading ban after JPMorgan Chase & Co. announced at least $2 billion in losses on credit derivatives.

CFTC staff members are hearing today from former Federal Deposit Insurance Corp. chairman Sheila Bair, Barclays Plc Managing Director Keith Bailey and Credit Suisse Chief Risk Officer for American equities Dan Rodriguez at a meeting in Washington as they prepare to craft revisions to the so-called Volcker rule. The main U.S. derivatives regulator is among five agencies charged with implementing the Dodd-Frank Act measure.

“In adopting the Volcker rule, Congress prohibited banking entities from proprietary trading while at the same time permitting banking entities to engage in certain activities, such as market-making and risk-mitigating hedging,” CFTC Chairman Gary Gensler said in his opening remarks. “One of the challenges in finalizing this rule is achieving these multiple objectives.”

The CFTC, along with the Federal Reserve, Securities and Exchange Commission and FDIC have faced pressure to tighten the Volcker rule since JPMorgan Chairman and Chief Executive Officer Jamie Dimon disclosed the trading loss on May 10.

The rule -- named for former Fed Chairman Paul Volcker, who championed the idea as an adviser to President Barack Obama -- is intended to reduce risky trading by banks with federally insured deposits and access to the Fed’s discount window. Participants in today’s CFTC discussion include advocates for a stronger ban, such as Simon Johnson, a Massachusetts Institute of Technology professor and Bloomberg View columnist.

Planned Before Loss

The roundtable was planned before JPMorgan announced its trading loss. JPMorgan, Goldman Sachs Group Inc. and Morgan Stanley initially indicated they would send representatives but later declined, according to a person familiar with the matter who requested anonymity. The banks are members of the Securities Industry and Financial Markets Association and International Swaps and Derivatives Association Inc., which both sent representatives to the meeting.

The three banks have urged regulators to delay and relax parts of the rule. The 298-page proposal was released by five regulators in October.

“For a lot of our clients we actually provide derivatives especially now in the recent environment for protection on their portfolio or providing risk-mitigating products for clients,” Rodriguez said at the meeting. “In order to mitigate the problems that can be caused by derivatives you need better supervision.”

‘Wake Up Call’

Senate Banking Committee Chairman Tim Johnson, a South Dakota Democrat, said May 22 that JPMorgan’s losses bolster the case for the regulations included in the Dodd-Frank measure and serves as a “wake up call for many opponents” of the law’s provisions.

“All five of the regulators working on this are informed by market events on a daily basis,” Gensler said today in a Bloomberg Television interview before the meeting. “It is appropriate to use these as learning moments.”

Bair, who pushed for strong restrictions while serving as FDIC chairman, said regulators must ensure risk-taking is separated from bankers’ pay.

“You don’t want compensation based on hedging profits period,” Bair said. “They’re supposed to be hedging underlying risk.”

Not For Profit

In an interview with Bloomberg TV, she added that “hedging is not there to generate profits, it’s there to mitigate risk. There are plenty of other ways the big corporations can make money.”

Bair has “it exactly right,” Bart Chilton, a Democratic member of the CFTC, said in an e-mail. “I think regulators do what regulators all too often do: They over-thought Volcker. We need some discretion, but we should lock down a few basics -- like ensuring that such discretion never permits the chance of becoming a flawed fissure for the bankers to excavate into a large loophole. We should also make very clear that we ban compensation based on trading profits.”