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Hedge Accounting Should Be Considered More Carefully Under Volcker

The Volcker Rule should more carefully consider hedge accounting to prevent lo

The current provisions outlined in the Volcker Rule allow plenty of wiggle room for investment banks to make the same kinds of risky bets that resulted in more than $2 billion in losses at JPMorgan Chase recently, according to a recent analysis in American Banker.

Accounting standards for derivatives and hedges are all but ignored under the Volcker Rule when it comes to what can or cannot be considered proprietary trading, according to the Banker. The credit default swaps that led to the JPMorgan losses would not technically fall under the purview of the accounting rules, and therefore would be allowed to slip through the cracks.

"I believe they should be considered proprietary trading on that basis alone," wrote Francine McKenna of American Banker. "The Volcker Rule hasn't been finalized yet, but the implementation proposal, published in the Federal Register in November, describes an approach that does not consider hedge accounting rules for deciding which trades are proprietary. That leaves plenty of opportunity for banks to arbitrage the possibilities."

Recently, the Federal Reserve indicated it would vote soon on Basel III rules, which would also curtail risky trading, reported Reuters. Under those rules, major banks would be required to carry capital reserves equivalent to at least 7 percent of their risk-bearing assets.