CFTC ponders stronger Volcker Rule in wake of JPMorgan loss

May 31 (Bloomberg) -- The U.S. Commodity Futures Trading Commission (CFTC) 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 Managing Director Peter Antico 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 -- aims 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.

Banks Urge Easing

JPMorgan, Goldman Sachs Group Inc. and Morgan Stanley have urged regulators to delay and relax parts of the rule. The 298- page proposal was released by five regulators in October.

Senate Banking Committee Chairman Tim Johnson said May 22 that JPMorgan’s losses bolster the case for the regulations included in the Dodd-Frank Act 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.”

Bloomberg News

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