ALEXANDRIA, Va. – Yesterday’s news of a massive $2.3 billion loss by JP Morgan Chase is expected to slow NCUA’s plans to deregulate financial derivatives by allowing credit unions more powers to enter into financial hedging contracts, like interest rate options, swaps and options.
The Wall Street bank announced last night it lost an estimated $2.3 billion on financial derivatives it had marked as hedges on large positions accumulated by a London trader known in financial circles as “the whale,” for the size of his trades.
Preliminary reports are that the brunt of the losses occurred on credit-default swaps, or CDS. NCUA said this morning its proposal does not specifically address CDS, but focuses on interest rate swaps. Still, several lobbyists suggested this morning that NCUA will be taking a second look at the proposal, issued twice already as a notice of advanced rulemaking, a preliminary step to a formal rulemaking. “They’d be crazy if they didn’t,” said one Washington lobbyist.
NCUA said this morning it is aware of the JP Morgan incident and stressed the difference between the CDS losses and its proposal focusing on interest rate instruments. It said there is no timetable for the Board to vote a proposal.
The latest Wall Street scandal comes as NCUA, which has restricted derivatives trading to a small group of closely monitored credit unions, is planning to open up the practice to a broader group of healthy credit unions. “Our intent is to safely allow more credit unions to use derivatives responsibly as a hedge against interest rate risks,” said NCUA Chairman Debbie Matz at a January NCUA Board meeting.
A handful of large credit unions that have been trading in interest rate instruments for several years have joined the wider credit union lobby and a variety of brokerages and investment firms in lobbying NCUA for a broad deregulation.
NCUA had treaded carefully so far, largely because of the huge losses accrued to the corporate credit unions who traded in a variety of derivatives and because of periodic incidents like the JP Morgan losses. NCUA has claimed in civil suits filed over the past year that Wall Street banks like Morgan took advantage of the corporates’ lack of sophistication by selling them poor investments. At least two of the corporates, WesCorp and U.S. Central owned large derivatives portfolios focused on mortgages and interest rate instruments.
NCUA is looking at a variety of parameters that would guide the broader program, such as minimum standards for financial health and net worth and expertise and limits on specific types of instruments. A final rule will restrict the use of derivatives to hedging and prohibit speculative use of derivatives. However, the distinction between the two is often blurry.
