That provision became central to the Volcker rule debate after JPMorgan lost $6.2 billion last year in bets on credit derivatives. The so-called London Whale trades, conducted in the U.K. by the bank’s chief investment office and nicknamed for their market impact, were described by JPMorgan executives as a portfolio hedge.
“You have to be very clear and specific in terms of any use of the hedge,” said Kevin Petrasic, a partner at law firm Paul Hastings LLP. “Banks will need to document and justify those hedges. It allows for a significant degree of supervisory and regulatory second-guessing.”
‘Middle Ground’
Banks also made limited gains in provisions relating to their investments and dealings with so-called covered funds, which include private-equity and hedge funds. While fully owned subsidiaries and mutual funds were exempted from the Volcker rule’s definition of covered funds, venture capital and mezzanine credit funds were not, said Peter Fariel, a partner at law firm Rimon PC in Boston.
“The agencies took somewhat of a middle ground,” said Fariel, formerly an associate general counsel at Bank of America Corp. “I see it as better than the proposed regulations, but still, it will be a significant compliance obligation for bank fund sponsors going forward.”
Treasury Secretary Jacob J. Lew warned the top U.S. banks’ CEOs in a private meeting in October that the final Volcker rule would be tougher than Wall Street expected. Lew, who coordinated the regulators’ efforts, told executives that to get the rule right, he preferred to err on the side of making it tougher, a person familiar with the discussion said.
Details Withheld
“In terms of expectations management, the guys on the side of regulation began to get people so concerned about really draconian things,” said Michael Holland, chairman of Holland & Co., who oversees more than $4 billion, including shares of New York-based JPMorgan and Citigroup. When the rule was released, “it wasn’t nearly so draconian, in which case the stocks said, ‘Oh what a sigh of relief.’”
Concern that the rule would be onerous stemmed from the lack of detail large banks received in the final days before the rule’s release, three senior U.S. bankers said last week. The executives described the dearth of communication from regulators so close to the end of the rulemaking process as unusual.
“Uncertainty always creates a bit of a tail risk, so to us, the good news is some of the uncertainty is removed with no major surprises,” said Devin Ryan, a bank analyst at JMP Group Inc. in New York. “On the market-making front, where banks make most of their money, those activities will still be permitted.”