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Jason Laws, from the University’s Management School: “On face value the recent losses at JP Morgan mean bad news for US institutions with the threat of increasingly punitive regulation and full scale Volckerisation and the separation of traditional banking and investment banking.
“As the story unwinds it would seem that the loss is a classic case of Operational Risk, that is losses occurring due to the break down of an internal process or actions of an individual. Ironically JP Morgan are the original architects of the technique known as Value at Risk (VaR), a dollar measure of daily market risk, and as per usual were tracking the daily VaR.
“Just as with Nick Leeson trading in Singapore in 1992, the London Whale, like Nick Leeson, before him started off with good intentions through providing portfolio insurance against credit losses but eventually he thought he was bigger than the market. More worrying for regulators is that unlike 1992 data is much more freely available and in fact 99% of the credit derivatives market is recorded by the Depository Trust and Clearing Corporation (DTCC). The data was there and looking back it is clear to everyone that since the Autumn of 2011 there has been significant increases in the amount of net notional credit derivative contracts in existence. Unfortunately it would seem that the regulator either chose not to look or did not know how to interpret this dramatic rise.
“If regulation becomes tighter due to the introduction of the Volker Rule, banks could become even more ingenious in developing strategies that are allowable under the Volker framework, leaving the regulator to play catch up once again.”
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