The head of the U.S. Commodity Futures Trading Commission said the recent London-based hedge trading losses by JPMorgan Chase amount to a “stark reminder” that tougher regulation is needed.
Gary Gensler, chairman of the CFTC, is referring to international credit swaps that now represent a $700 trillion global market.
Swaps were initially developed to help manage and lower risk for commercial companies.
But swaps also heighten risks for international financial institutions, as they did with insurance giant AIG, which was brought down by credit default swaps at the peak of the financial crisis in 2008.
AIG’s subsidiary, AIG Financial Products, originally organized in the United States, was run out of London.
The fast collapse of AIG, a Wall Street mainstay, was evidence of the markets’ “international interconnectedness,” Gensler said, in a speech before a Financial Industry Regulatory Authority conference.
“Sobering evidence, as well, of how transactions booked in London or anywhere around the globe can wreak havoc on the American public,” he said.
And when financial entities fail, swaps can contribute to rapidly spreading risk across borders, Gensler said.
“Recently, we’ve had another stark reminder of how trades overseas can quickly reverberate with losses coming back into the United States,” Gensler said. “The largest U.S. bank, JPMorgan Chase, just suffered a multi-billion dollar trading loss from transactions in London.”
The losses, total as much as $3 billion, involved credit default swaps and indexes tied to these securities.
The Dodd-Frank Wall Street reform laws enacted in 2010 include provisions for tighter controls of the swaps market.
These rules are suppose to:
- Bring public market transparency and the benefits of competition to the swaps marketplace;
- Protect against Wall Street’s risks by bringing standardized swaps into centralized clearing; and
- Ensure that swap dealers and major swap participants are specifically regulated for their swap activity.
The CFTC has already completed 33 rules implementing these swaps reforms, Gensler said.
“We are on schedule to complete the nearly 20 remaining reforms this year, but until we do, the public is not fully protected,” Gensler said.