inadequacies in their own oversight of banks. Dodd-Frank permits hedging on aggregated positions but critics suggest this should not be interpreted to allow hedging on a portfolio basis. Suggestions that portfolio hedges need to be correlated to individual underlying positions are both unworkable and overlook the reality that banks seek to hedge their overall mix of assets, and potential movements across an entire portfolio, rather than single movements of individual assets. Although not a part of then-President Barack Obama's original proposal for financial overhaul, the Volcker Rule was endorsed by Obama and added to the proposal by Congress in January 2010. For more on the Volcker Rule, read. The proposed regulatory language was so loose that the "London Whale" trades might have been permissible under the initial Volcker proposal. An analysis of the final hedging regulation reveals a mixed bag. In other words, the rule aims to discourage banks from taking too much risk by barring them from using their own funds to make these types of investments to increase profits.
History of the Volcker Rule, the rule's origins date back to 2009, when economist and former Fed Chair Paul Volcker proposed a piece of regulation in response to the ongoing financial crisis (and after the nation's largest banks accumulated large losses from their proprietary trading arms) that aimed. The rule, as it exists, allows banks to continue market making, underwriting, hedging, trading government securities, engaging in insurance company activities, offering hedge funds and private equity funds, and acting as agents, brokers or custodians. Unfortunately, the actual text of the final rule reveals quite a different story. Don't hold your breath. The vote by the Federal Reserve Board in late May of 2018 sets the stage for a broader unwinding of the Rule as it stands. Dimon himself said the strategy to offset the hedge was flawed, complex, poorly reviewed, poorly executed and poorly monitored. Before December 10, 2013, it seemed like the regulators in charge of finalizing the Volcker Rule would accede to those exhortations. Chamber of Commerce claimed in 2014 that a cost-benefit analysis was never done, and that the costs associated with the Volcker Rule outweigh its benefits.
In the summer of 2012, after a series of hearings and investigations into the "London Whale" losses, government officials began exhorting banking regulators to excise or severely limit the proposed Volcker Rule's exemption for portfolio hedging. Depending on their size, banks must meet varying levels of reporting requirements to disclose details of their covered trading activities to the government. How the Volcker Rule Affects You. Recent studies on hedging suggest that banks (like JPM) that used credit derivatives for hedging were able to maintain a higher level of lending during the financial crisis. JPMs trade began as a hedge against a deterioration in credit conditions. JPM's chief investment office suffered over 6 billion in trading losses on outsized positions involving complex credit default swap indices.
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