As the CFTC moves closer to implementing the Volcker Rule, a provision of the Dodd-Frank Act that would ban proprietary trading by commercial banks, critics and proponents of the rule are clashing over how to define hedging, which would be allowed under the regulation.
There is a general consensus that hedging individual positions in order to manage risk should be allowed. The question of whether to allow so-called aggregate hedging, is more controversial, with critics arguing that it is hedging in name only. “Aggregate hedging isn’t hedging, it’s a profit center,” Rep. Barney Frank, a co-sponsor of the Dodd-Frank Act, said. “They are talking about making money out of it,” whereas “hedges break even.”
The current draft of the rule permits “risk-mitigating hedging activities” for “aggregate positions.” Frank, however, along with other critics of aggregate hedging, believes that JPMorgan’s recent announcement of a $2 billion loss on what could be characterized as an aggregate hedge will lead to this type of trade being excluded from the Volcker Rule’s hedging exemption. In addition, the JPMorgan loss may push the CFTC to finalize the rule more quickly than it would have otherwise
