JPMorgan, Hedge Funds May Lose as Derivatives Proposal Advances

By Dawn Kopecki


President Barack Obama sent Congress his plan to rein in the $592 trillion over-the-counter derivatives industry, a measure that would cut into a profitable market for banks led by Goldman Sachs Group Inc. and JPMorgan Chase & Co. The proposal issued yesterday would pressure derivatives users such as banks and hedge funds to move away from opaque customized contracts by imposing higher capital and margin requirements on the instruments. Standardized derivatives would be moved to regulated exchanges or trading platforms and sent through official clearinghouses, according to the draft measure. The draft legislation would require the Securities and Exchange Commission and the Commodity Futures Trading Commission to set capital and margin requirements for non-bank swap dealers and “major swap participants” that are “as strict or stricter” than those set for U.S. depository institutions by federal bank examiners, according to the proposal. Hedge funds and private equity firms would be among the hardest hit, said Karen Shaw Petrou, a managing partner at research firm Federal Financial Analytics in Washington. Unlike federally insured banks, hedge funds and other corporations aren’t currently subject to capital standards. “A lot of the big counterparties, like AIG, lack the capital to back their bets,” Petrou said.