WASHINGTON Regulators crafting the final language of the Volcker rule will confer on Tuesday and are expected to discuss how JPMorgan's $2 billion trading loss may impact their work, according to a person familiar with the matter.
The meeting, which is expected to include representatives from the major financial regulators, is a regular occurrence but will take on new meaning as more information emerges about JPMorgan's losing hedging strategy.
The Volcker rule, which was mandated by the 2010 Dodd-Frank financial reform law, bans banks from making speculative bets with firm money, but includes an exemption for trades done to hedge risk.
The proposal released in October was vague about the hedging carve-out. U.S. regulators have struggled to write an exemption that allows for bona fide hedges but prevents banks from using the exemption to disguise speculative bets.
The banking industry, including JPMorgan, has pushed for a wide exemption.
In its letter to regulators on February 13, JPMorgan argued that during the financial crisis, it successfully protected the firm against credit losses because it used derivatives to purchase and sell protection on high-yield credit default swap indices.
It said it was concerned that those trades would be prohibited under the Volcker rule because they were "forward-looking" and because they might not closely match the underlying risk.
The trades that recently blew up at JPMorgan also used derivatives to bet on credit default swap indices.
JPMorgan Chief Executive Jamie Dimon has said the losses from that trading strategy could grow by another $1 billion.
The person familiar with the meeting scheduled for Tuesday said regulators are sensitive to public scrutiny and don't want to be held to account for not learning lessons from JPMorgan's trading blunder. The source declined to be named because he was not authorized to speak on the record.
"Nobody wants to be the regulator that is called before Congress after the regulation is finalized to explain why this JPMorgan (hedge) was allowed," the person said.
Both the Office of the Comptroller of the Currency and the Federal Reserve on Monday said it was too soon to say whether the trades in question would have violated the Volcker rule as proposed.
A final rule is expected to be issued as early as this summer.
Republican Senator Bob Corker in an interview, however, said that over the weekend staff at the OCC, including the examiner in charge of JPMorgan, was "adamant" in discussions with his office that the trades would not have violated the proposed version of the Volcker rule.
Corker said that Comptroller of the Currency Thomas Curry called him on Monday to say that the agency is still examining the issue and has made no decisions over how the Volcker restrictions would have impacted the JPMorgan trades in question.
Supporters of financial reform have seized on JPMorgan's trading loss to push for tough interpretations of the reforms being finalized.
"We have got to be very careful that the regulators here are not undermined by this huge effort to weaken the rule by putting in a huge loophole which is called portfolio hedging," Senator Carl Levin, who helped write the legislative language on the Volcker rule, said on NBC's "Meet The Press" on Sunday.
President Barack Obama on Monday also pointed to the loss to highlight the need for tough Wall Street reforms.
"Jamie Dimon, the head of (JPMorgan), is one of the smartest bankers we got and they still lost $2 billion and counting," Obama said on ABC's "The View," according to a transcript released by the network.
"It's going to be investigated, but this is why we passed Wall Street Reform," he said.
(Reporting by Alexandra Alper and Dave Clarke; editing by Carol Bishopric)