WASHINGTON The head of the U.S. Securities and Exchange Commission told lawmakers on Tuesday that her agency is probing JPMorgan Chase and Co's (JPM.N) financial reporting and emphasized that big banks are required to publicly disclose changes to the models they use to measure risk.
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 (1.26 billion pounds) 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 bets.
"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 modelling 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 trading loss.
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 what happened.
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 committee.
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 stability.
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 United States.
The trades at the centre 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.