Gary Gensler, chairman of the commission, cited the losses incurred at a JPMorgan office in London to argue for tighter regulation of trading in derivatives — and against carving out a loophole for foreign affiliates of U.S. firms.
Both the 2008 financial crisis and the recent trouble “strongly suggest this would be a retreat from much-needed reform,” Gensler said of the offshore exception in written testimony to the Senate banking committee.
The blowup at JPMorgan Chase hit as regulators struggle to write detailed rules to put in place the two-year-old Dodd-Frank Act, which was passed in response to the financial crisis.
Some rules would restrict financial bets by banks that are federally insured, and others would govern historically unregulated instruments known as derivatives that contributed to the crisis.
Alluding to lobbying by the financial industry, Gensler said regulators have been told that “if a transaction is done offshore, it should not come under Dodd-Frank.”
The embarrassment at the big bank has the potential to influence regulators decisions.
“I think it’s a good reminder that risks in London can come back here, and we can’t have the U.S. taxpayer stand behind them,” Gensler told lawmakers.
“When one affiliate of a large, international financial group has problems, it’s accepted in the markets that this will infect the rest of the group,” he said in written remarks.
The Senate panel, which convened the hearing on regulation of derivatives, is planning another hearing with JPMorgan Chase chief executive Jamie Dimon.
Sen. Tim Johnson (D-S.D.), the committee’s chairman, called the bank’s massive loss “a wake-up call for many opponents of Wall Street reform.”
The trading commission’s probe of JPMorgan focuses on credit derivatives traded by the firm’s chief investment office, Gensler said. Securities and Exchange Commission Chairman Mary Schapiro told the panel that the agency is investigating the accuracy of the firm’s financial disclosures.
The hearing spotlighted another potential loophole.
Business groups have argued that companies should get a break from restrictions where they are using derivatives to hedge against particular business risks rather than to make speculative investments. Regulators said they are trying to draw a line between the two activities.