Although the Dodd-Frank Act prohibits banks from proprietary trading, the regulators' proposed rule creates a new loophole that could allow proprietary trading to continue even after the law goes into effect. This JP Morgan Loophole would likely allow
"We again urge you to remove ill-advised loopholes and implement a strong Volcker Rule without further delay," wrote the Senators. "In recent days, we've seen exactly what 'portfolio hedging' might mean. This 'JPMorgan Loophole' is big enough to drive a 'London Whale' through."
"So long as banks have the incentives to make these types of bets and are permitted to do so, they will. As we have learned time and time again, establishing clear, strong rules of the road is critical for the healthy functioning of markets and our economy."
The Volcker Rule, which was written by Merkley and Levin to create a firewall between banks and hedge-fund style trading, goes into effect this July, but regulators have not yet finalized their rules. The legislation was explicitly drafted to prevent the loophole, with hedging permitted "solely to reduce risks" that were related to specific positions or holdings. Merkley and Levin urged regulators to close this loophole and others in a comment letter http://www.levin.senate.gov/download/?id=942e3f51-aac5-4988-aa8b-88a68f1f19f6 [PDF - 1.64 MB] in February, and warned about the JPMorganChase desk as a likely violation of the Volcker Rule in April.
The full letter can be viewed here http://www.levin.senate.gov/download/?id=bbfdcd6b-e848-45d2-903e-602bfde6edd9 [PDF - 492 KB].
Read this original document at: http://www.levin.senate.gov/newsroom/press/release/merkley-levin-call-on-regulators-to-close-jpmorgan-loophole/?section=alltypes
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