According to Commodity Futures Trading Commission Chairman Gary Gensler and Securities and Exchange Commission Chairman Mary Schapiro, the two federal agencies didn’t know that JPMorgan & Chase (JPM) had sustained $2 billion in trading losses until they heard about it through the press in April. Schapiro and Gensler testified in front of the Senate Banking Committee on May 22. Both agency heads noted that trading activities aren’t within the purview of the CFTC and the SEC. They also pointed out that the risky derivatives trading did not happen through JPMorgan’s futures commission merchant arm or broker-dealer arm.
The SEC has no authority over the credit default index derivatives that were involved in the trades, and although, per the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, the CFTC will eventually regulate the swap dealing activities of banks, the rules to make this authority law have not yet been written.
Now, the CFTC is probing JPMorgan’s trading transactions. It recently issued subpoenas asking for the firm’s internal documents related to the financial firm’s massive loss. The probe is being run by the agency’s enforcement division and, according to Reuters, will revolve around what JPMorgan traders told internal management staff and their supervisors as the bets began to sour. (However, per the Wall Street Journal, the inquiry is in the beginning phases and not limited to what traders said or didn’t say. It also doesn’t necessarily mean that JPMorgan or certain individuals will be subject to any civil enforcement action.)
Meantime, Schapiro has said that the SEC is also looking into whether JPMorgan’s financial reporting and public disclosure were accurate in regards to what the financial firm knew and when it had this knowledge. She told Sen. Robert Menendez (D-N.J.) that it was too early to tell whether JPMorgan’s activity would have violated the Volcker rule, which calls for banks to have their proprietary trading activity limited to risk-mitigation hedging. While JPMorgan has said that its transactions were hedges, experts are divided over this assessment. (The Volcker rule, which is part of Dodd-Frank, has not yet been implemented and there are critics fighting its current incarnation.) Menendez, in turn, said that Schapiro should look to JPMorgan’s trading loss as a reason for constructing strong verbiage when implementing the rule. However, Sen. Bob Corker (R-Tenn.), who was also at the hearing, wondered whether employing this approach might backfire-initially causing the legislation to “look good,” while ultimately creating a situation where highly complex institutions would be placed situations to “not appropriately hedge their activity.”
IMPLEMENTING DERIVATIVES REFORM: REDUCING SYSTEMIC RISK AND IMPROVING MARKET OVERSIGHT, Banking.Senate.gov, May 22, 2012
Regulators Say They Learned Of J.P. Morgan Losses from news reports, Los Angeles Times, May 22, 2012
CFTC subpoenas JPMorgan over trading loss: WSJ, The Republic, May 31, 2012
More Blog Posts:
Senate Democrats Want Volcker Rule’s “JP Morgan Loophole” Allowing Portfolio Hedging Blocked, Institutional Investor Securities Fraud, May 22, 2012
JPMorgan Chase Had No Treasurer When Chief Investment Office Made Trades Resulting In More than $2B Loss, Reports WSJ, Institutional Investor Securities Fraud, May 19, 2012
JP Morgan Chase To Pay $150M to Settle Securities Lawsuit Over Lending Program Losses of Union Pension Funds, Stockbroker Fraud Blog, March 26, 2012
If you are an investor who suspects that your investment losses are the fault of your broker, investment adviser, or brokerage firm, contact our securities lawyers at Shepherd Smith Edwards and Kantas, LTD, LLP today.