WASHINGTON (Reuters) - The head of the Commodity Futures Trading Commission confirmed on Monday that the regulator is investigating JPMorgan Chase & Co’s $2 billion in losses tied to credit derivatives.
The agency’s probe will supplement ongoing investigations by the FBI and the Securities and Exchange Commission into the losses at the largest U.S. bank.
“We have an investigation related to credit derivative products traded by JPMorgan’s Chief Investment Office,” Gary Gensler told reporters on the sidelines of a Financial Industry Regulatory Authority conference in Washington.
Gensler said he could not provide further detail about the investigation, but said the authority to conduct it was granted by the 2010 Dodd-Frank financial reform law. That law tasked the agency with boosting transparency and limiting risk in the $708 trillion global over-the-counter swaps market.
The CFTC’s probe into JPMorgan was first reported on Friday.
In his speech to the conference, Gensler said the trades highlight the need for tough overseas swaps regulations, calling the losses a “stark reminder” of how overseas trading can transfer risk back to the United States.
While the loss was incurred in London, “it appears that the bank here in the U.S. is absorbing these losses,” he said.
Risky derivatives trading at overseas subsidiaries of firms like insurer American International Group, severely damaged the U.S. financial system during the 2007-2009 financial crisis and led to multi-billion-dollar taxpayer bailouts. It has also prompted some U.S. regulators and lawmakers to push for a swaps regime with broad overseas application.
“We’ve seen time and again that U.S. overseas branches, overseas affiliates guaranteed by a U.S. entity, and overseas affiliates acting as conduits for U.S. entities, bring risk crashing back onto U.S. shores,” Gensler said.
Gensler and Securities and Exchange Commission Chairman Mary Schapiro are scheduled to testify before the Senate Banking Committee on Tuesday.
Lawmakers are expected to press the two regulators about the JPMorgan losses and whether any laws or rules may have been broken.
In his speech, Gensler also criticized a bill offered by Connecticut Democratic Representative Jim Himes, which is supported by Republicans, that would limit the scope of Dodd-Frank swaps rules by excluding from many U.S. regulations the swaps transactions between overseas branches of U.S. banks and offshore entities.
“It would substantially reduce transparency and increase risk to our financial system and the economy,” Gensler said.
A House Agriculture Committee vote on the bill was canceled last week after JPMorgan’s announced losses led to renewed calls for tougher financial reform.
On Monday, Gensler also outlined key elements of guidance the agency plans to release shortly that will shed light on how the Dodd-Frank swaps rule will apply to overseas transactions.
For example, Gensler said that transactions between a foreign entity and either an overseas branch or a guaranteed affiliate of a U.S. firm will face U.S. regulation.
He said capital, risk management and record-keeping rules will apply to all major swaps players.
Editing by Andrea Ricci and Tim Dobbyn