WASHINGTON—Federal regulators said Tuesday they are investigating recent trading losses at powerhouse bank J.P. Morgan Chase & Co., continuing the nearly two-year long debate on how to fund financial reform.
“We’re investigating right now whether their earnings statements and first-quarter financial reports are accurate and truthful,” Securities and Exchange Commission Chairman Mary L. Schapiro said.
The J.P. Morgan credit derivative loss is a “stark reminder of the financial crisis of 2008” Senate Banking Committee Chairman Sen. Tim Johnson, D-S.D., said. “This trading loss has been a wakeup call for many opponents of Wall Street reform.”
J.P. Morgan Chairman and Chief Executive Officer Jamie Dimon, who has been critical of tighter regulation, will testify before the committee in June. Dimon has been under fire since revealing a $2 billion loss on trades booked in London.
Johnson said he expects Dimon to explain the details of “a very complex trade” that has reignited fears that banks have not changed their practices much since the crisis of 2008. The overseas trades J.P. Morgan made could result in losses of up to $5 billion, analysts and the company itself have predicted.
Derivatives are a mechanism to mitigate risk through hedging, but firms are adding more risk in their portfolios with questionable uses of the financial tool.
As the J.P. Morgan trades illustrate, the risk can occur outside of U.S. jurisdictionout of reach of the oversight of both the SEC and the Commodity Futures Trading Commission. U.S. officials said they first learned of the J.P. Morgan trading loss from press reports.
Progress on financial regulatory form is coming slowly, as both the CFTC and the SEC have faced underfunding to take on the regulatory tasks required by the 2010 Dodd-Frank financial oversight law.
The CFTC is funded with just $205 million, but “…it is a good investment for the American public,” CFTC Chairman Gary Gensler said.
In 2008 there was no required reporting about swaps trading and today, Gensler said the trading regulator has made progress in implementation with the resources it has available. The CFTC completed rules and acceptable practices for designated contract markets (DCMs). DCMs will list and trade swaps and benefit by bringing transparency to the swaps marketplace. Gensler said the CFTC has completed rules establishing new derivatives clearing organization risk management requirements.
Just how the U.S. regulators will be able to assess and mitigate risk for foreign-subsidiaries of U.S.-based companies is undetermined. The CFTC seeks robust overseas regulation to control potential losses domestically, Gensler said.
The SEC’s Schapiro said that where “[reported] activity does not appear to have occurred in one of our regulated entities, the SEC would be primarily interested in and focused on the appropriateness and completeness of the company’s financial reporting and other public disclosures.”
The SEC has asked for funding for an additional 273 positions for fiscal year 2013, the year in which the SEC is expected to fully implement and oversee the regulation, Schapiro said.
“You have been given huge amounts of responsibilities…without the concomitant resources to fulfill all those responsibilities. That’s why things are taking longer than they should,” Sen. Charles E. Schumer, D-N.Y. said.
Opponents of regulation fear the backlash of too much rule-making, including more banks utilizing overseas entities to avoid U.S. regulators. Facing significant opposition from Republicans in Congress, a vote on swap reform that would require at least 85 percent of a contract’s trading to be executed in a centralized market is expected this summer.
“We have to be very careful…and yes, there are [regulatory] costs on financial institutions. The bigger cost is if we let the American taxpayer be at risk,” Gensler said.