WASHINGTON (Reuters) - The head of the U.S. Commodity Futures Trading Commission confirmed on Monday that the regulator is investigating JPMorgan Chase & Co’s (JPM.N) recent losses that may exceed $2 billion on trades tied to credit derivatives.
The CFTC’s probe will supplement 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 he pointed out that the authority to conduct it was granted by the 2010 Dodd-Frank financial reform law. That law gave the CFTC responsibility for increasing 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.
Dimon warned on May 10 that the trading losses could increase by $1 billion, or more, before the bank unwinds the trades, which could take the rest of this year. Some analysts have estimated the total losses could reach $5 billion.
On Monday, Dimon announced that the bank has suspended repurchases of its stock while it tries to get out of the money-losing derivatives trades.
The bank has not been accused of any wrongdoing. A JPMorgan spokesman declined comment.
In his speech at 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 (AIG.N) severely damaged the U.S. financial system during the 2007-2009 financial crisis and led to multibillion-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 SEC Chairman Mary Schapiro are scheduled to testify on Tuesday before the Senate Banking Committee.
Lawmakers are expected to press the two regulators about JPMorgan’s 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 disclosure of its losses led to renewed calls for tougher financial reform.
Gensler voiced concerns about the so-called Volcker rule — which restricts bank trading activities — and was also mandated by Dodd-Frank. It has received added scrutiny since the JPMorgan losses came to light.
The issue is how narrowly regulators should draw an exemption for trades meant to hedge risk. Questions have been raised as to whether JPMorgan’s trades would have been allowed under a proposed Volcker rule released in October.
Gensler said he shared the concerns of Senator Carl Levin and other critics of that proposal who say the hedging exemption is too broad.
“The challenge when somebody uses a word like ‘portfolio hedging’ is that it can mutate and morph into so many things beyond hedging specific positions,” Gensler told reporters.
The CFTC along with Fed Chairman Ben Bernanke, Treasury Secretary Timothy Geithner and other major financial supervisors are expected to discuss JPMorgan and the failure of its risk management when they meet on Tuesday, said a senior Obama administration official, who spoke on condition of anonymity.
Regulators will discuss how this example “will enable the Volcker rule-writers to make sure they come out with a Volcker rule that is strong, and make sure that proprietary trading by these banks does not happen,” the official said.
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. company will face U.S. regulation.
He said capital, risk management and record-keeping rules will apply to all major swaps players.
Additional reporting by Rachelle Younglai: Editing by Andrea Ricci, Tim Dobbyn, M.D. Golan and Jan Paschal