* Schapiro: looking at "completeness" of financial reports
* Says banks required to disclose changes to risk models
* JPMorgan said to have quietly changed risk models
* Regulators using JPMorgan trading loss to push reforms
(Adds lawmaker comments, Volcker rule discussion, column link)
By Sarah N. Lynch and Dave Clarke
WASHINGTON, May 22 The head of the U.S.
Securities and Exchange Commission told lawmakers on Tuesday
that her agency is probing JPMorgan Chase and Co's
financial reporting and emphasized that big banks are required
to publicly disclose changes to the models they use to measure
SEC Chairman Mary Schapiro assured the Senate Banking
Committee that the SEC is investigating JPMorgan's revelation
earlier this month that it suffered at least $2 billion in
losses on complex trades that started as hedges but morphed into
a risky bet.
"The SEC will be primarily interested in and focused on the
appropriateness and completeness of the entity's financial
reporting," Schapiro said.
She also addressed reports that JPMorgan changed its
value-at-risk (VaR) model, an estimate of losses that could
occur on a particular trade or portfolio of trades, in a way
that allowed the trading portfolio in question to appear safer
than it actually was and gave traders more leeway to make risky
"When there are changes to the VaR model - as newspapers
have reported was done at JPMorgan; they changed their VaR model
- those changes have to be disclosed," Schapiro said.
JPMorgan Chief Executive Jamie Dimon first announced that
the unit responsible for the trades had changed its VaR model
when he announced the trading losses on May 10.
The rest of the bank's divisions apparently kept to more
conservative modeling to measure the risk of trades.
Schapiro did not elaborate on whether this change is a
specific focus of the SEC inquiry into JPMorgan, the largest
U.S. bank by assets.
The Senate Banking Committee's hearing on Tuesday was the
first in a series of hearings scheduled to be held on JPMorgan's
Schapiro appeared alongside Gary Gensler, the chairman of
the Commodity Futures Trading Commission, which has also opened
a probe of the trading losses.
Gensler would not elaborate on the specifics of the probe,
but said the CFTC has the authority to look into the trades
"under our anti-fraud and anti-manipulation regime."
MORE HEARINGS TO COME
Dimon will likely testify before Congress next month, and
Senate Banking Committee Chairman Tim Johnson said the panel
wants him to provide details about the trades.
Regulators are also facing questions about how much they
knew about the trades and whether they raised any red flags.
Richard Shelby, the top Republican on the committee, asked
Schapiro and Gensler if their agencies were "in the dark" about
Both regulators were quick to say they are not the primary
regulator of the bank, but admitted that the trading positions
came to their attention in early April through news reports.
What regulators knew, and when, promises to a subject of
more intense scrutiny on June 6 when the Federal Reserve and the
Office of the Comptroller of the Currency, appear before the
The banking agencies have staff on site at large
institutions and take the lead role in making sure banks are not
taking risks that could threaten their stability.
Some analysts, lawmakers and former regulators have
suggested the losses show that the largest banks are too big to
manage, even if the losses at JPMorgan have not threatened its
Regulators and supporters of the 2010 Dodd-Frank financial
oversight law are using JPMorgan's trading blunder to advocate
for rigorous implementation of reforms required by the law.
Gensler said the trading losses highlighted the need for
tough overseas swaps regulations, calling the losses a "stark
reminder" of how overseas trading can transfer risk back to the
The trades at the center of the high-profile losses came
from JPMorgan's Chief Investment Office in London.
Wall Street critics are also pointing to the losses as
evidence that the so-called Volcker rule trading restrictions
should be tightly enforced.
Both Schapiro and Gensler expressed sympathy for this
argument on Tuesday but were careful not to get specific in what
a final rule should include.
The biggest issue is how broad of an exemption should be
made for hedging risk in the rule, which bans banks from trading
with their own funds for profit.
Volcker rule supporters argue a proposal released in October
provides too broad an exemption for hedging and would not have
prevented the JPMorgan trades.
"I think there's strong language there, and what we need to
do is take what happened at JPMorgan and view it through the
lens of those criteria and see how that helps to inform the
rulemaking going forward," Schapiro said.
(Reporting By Dave Clarke and Sarah N. Lynch; Editing by
Bernadette Baum, Dan Grebler and Tim Dobbyn)