British regulators may be powerless to act against JP Morgan over its chief investment office's huge, loss-making positions in credit derivatives because of the bank's structure, The Independent has learned.
Because JP Morgan's businesses are branches, UK authorities have only limited powers to act, with almost all authority resting with US watchdogs located more than 3,000 miles and several time zones away.
That stands in stark contrast to banks like HSBC. Its overseas operations are subsidiaries which have to be authorised by local watchdogs and must comply with their rules on capital.
The affair threatens to reignite a debate about whether banks should be forced to follow a model similar to that of HSBC, kicked off by the collapse of Icelandic banks such as Landsbanki. Its British branches were effectively exempt from Financial Services Authority (FSA) scrutiny.
The news came as fresh evidence of the size of the trading positions built up by JP Morgan's London-based chief investment office emerged in filings with US watchdogs.
According to Reuters, filings with the US Federal Reserve show that the bank's position in credit default swaps – a type of insurance taken out on the debt of other companies – surged eightfold from a net $10bn (£6.37bn) at the end of 2011 to a net $84bn at the end of the first quarter of this year.
That is a huge leap and supports rumours about the nature of the enormous positions built up in such contracts by Bruno Iksil, the so-called "London Whale". JP Morgan recently admitted that they had lost more than $3bn, and rising.
Analysts were goggle -eyed at the figures, which they described as huge even for a bank the size of JP Morgan.
Experts have warned that it will take JP Morgan a long time to wind down the positions because the type of contracts it has bought – or gone long on -– are not easily tradeable.
The bank's chief executive, Jamie Dimon, has admitted the bank may be in the "long haul" over the positions.
JP Morgan is now facing investigations from a number of US regulators.
The FSA has known about the positions for more than a month. Yesterday it would not comment on whether it had ordered the bank to commission a section 166 report on the trading. These reports can cost as much as £1m and tend to be compiled by teams from one of the big four accountancy firms.
However, even if the report reveals that the trading strategy was questionable, it is not clear if the FSA would be able to take any action. Sources close to the regulator admitted its powers were limited by JP Morgan's use of branches rather than subsidiaries.
The limited powers of national regulators to supervise the branches of foreign banks were highlighted by Lord Turner in his review into the financial crisis. Landsbanki was supervised out of Iceland and the FSA had few powers to act under EU law. Lord Turner has called for greater international co-operation among regulators.Reuse content