WASHINGTON – A government agency is seeking to expand its authority to regulate risky trading overseas by affiliates of U.S. banks.
The proposal from the Commodity Futures Trading Commission comes just weeks after JPMorgan Chase & Co. announced it lost billions because of high-risk trades that took place at its London offices.
The CFTC commissioners voted this week without public debate to send the proposal out for public comment. It calls for extending the agency's oversight of derivatives to cover trading that takes place overseas.
Derivatives are financial instruments often used to hedge against future price fluctuations of an underlying commodity or security. But they have grown increasingly complex and risky. Losses stemming from a type of derivative known as credit-default swaps have been blamed for deepening the financial crisis.
The 2010 financial overhaul law gave the CFTC the authority to define which overseas transactions should be subject to oversight. The change would take effect in about a year.
The surprise loss at JPMorgan was "a stark reminder" of how trading overseas can bring losses back to the U.S., CFTC Chairman Gary Gensler said in a statement.
JPMorgan's initial estimate of the loss was $2 billion when the bank disclosed it in May, although CEO Jamie Dimon has said the amount could grow. The New York Times, citing an internal report at the bank, said this week that the loss could reach $9 billion. The loss at the biggest U.S. bank has raised concerns about the risks large banks can still pose to the financial system just four years after the financial crisis.
Giant insurer American International Group Inc., which nearly collapsed in 2008 and received the biggest bailout of the crisis, had traded derivatives through its affiliates in London and the Cayman Islands.
The CFTC's oversight would extend to foreign banks that do substantial trading of derivatives in the U.S. However, exceptions would be made for those banks if the regulations in their home countries are considered by the CFTC to be "comparable" to U.S. rules.
"We in the U.S. aren't seeking to be the boss of anyone," Commissioner Bart Chilton said a statement. "Nations around the world have their own laws, rules and regulations. ... (but) we do seek to ensure that our consumers, taxpayers, markets and our economy are protected."