As JPMorgan’s Derivatives Blow-Up Shows, Trades May Be Difficult to Police in Future

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Just when the big financial institutions were pushing back on the dreaded Volcker rule, JP Morgan Chase blows up 1% of its capital, a miniscule amount, really. So, how to police this activity?

Just when the big financial institutions were pushing back on the dreaded Volcker rule, JP Morgan Chase blows up 1% of its capital, a miniscule amount, really. The company (Ticker: JPM) is expected to post $4 billion in earnings in its current fiscal quarter. Still, the timing of the trading snafu couldn’t have come at a worse time. See comments from the CFA Institute, who argue this will help prove the case for the Volcker Rule. My take? The regulators can’t stop stuff like this from happening if Jamie Dimon can’t. And I agree with Charlie Gasparino: Just how do you break up a JPM anyway?

The CFA Institute’s Jim Allen, says this today:

The JPMorgan mess highlights another problem, as well: the difficulty in distinguishing prop trading from other legitimate and permitted activities. In this case it was hedging, but there also are concerns with market making. When CFA Institute wrote its letter to U.S. regulators otherwise supporting the idea of the Volcker Rule, we expressed concern about its implementation, due to difficulties distinguishing prop trading from legitimate market making, particularly in the fixed-income markets. Rather than ban market making, we suggested moving such activities to a separately structured and capitalized broker/dealer affiliate, and insulate (ring-fence in the parlance of the Vickers Report) the bank — and taxpayers — from such trading activities.”

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