The Committee On Capital Markets Regulation (CCMR) Has Released A Statement In Response To Recent Calls To Tighten Restrictions On Hedging Under The Volcker Rule
WASHINGTON, June 20, 2012 /PRNewswire-USNewswire/ -- Following JPMorgan's recent trading loss, debate has heightened around hedging exemptions under Dodd-Frank and specifically, the proposed regulations regarding portfolio hedging. While Dodd-Frank permits hedging on aggregated positions, some believe the proposed rules should not permit hedging on a bank's overall portfolio. CCMR however believes portfolio hedging should be permitted.
Portfolio hedges are crucial tools for banks to manage their volatility and risk. Suggestions that hedges must be correlated to individual underlying positions are unworkable – they fail to recognize that banks must hedge their overall mix of assets and movements across a portfolio, and that hedging is a dynamic process.
If the ability to hedge is further restricted, bank risk will actually increase – contrary to the outcome the critics themselves are trying to avoid. Furthermore, banks will likely reduce their lending as a consequence, and will find themselves at a competitive disadvantage to domestic and international competitors who are able to hedge without restriction.
There are certainly lessons to be learned from the JPMorgan experience – regulators should guide banks to improve their internal risk management, and should address any inadequacies in their own oversight of banks. Furthermore, the JPMorgan trade has shown how difficult it can be to define a "hedge," even with 300 pages of proposed regulations. A more collaborative, supervisory approach between firms and their regulators could be the answer in helping to identify and distinguish permitted hedging and prohibited proprietary positions.
Hal S. Scott, President and Director of CCMR, said, "Regardless of the outcome of the JPMorgan trade, imposing further restrictions on hedging is not the answer."
The full statement will be available at: http://capmktsreg.org/
SOURCE Committee on Capital Markets Regulation
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