JP Morgan closes commodities prop desk

JP Morgan closes commodities prop desk

Its fixed income and equities prop desks might follow suit, Bloomberg suggested. JP Morgan did not comment.

The decision could herald a significant shift in the way US financial markets are organised.

The Dodd-Frank Act, passed in July, imposes curbs on US-headquartered banks trading on their own account – a provision known as the Volcker Rule, after the former Federal Reserve chairman Paul Volcker.

But the law’s complex wording, the scope left to regulators to write rules implementing it, and the long period allowed for banks to comply, mean that market participants are only beginning to understand what effects it will have.

For example, proprietary trading is allowed if it constitutes “risk-mitigating hedging activities” or occurs “in connection with underwriting or marketing-making-related activities, to the extent that any such activities... are designed not to exceed the reasonably expected near term demands of clients, customers, or counterparties”.

JP Morgan seems to have decided either that these loopholes would not give it enough scope to carry on proprietary commodity trading in the way it wants, or that it would be better off housing the activity in a different part of the bank, such as its $20bn hedge fund platform Highbridge Capital Management.

Sempra move

The decision may also reflect a change in focus for JP Morgan’s commodity business.

On July 1 it completed the $1.6bn purchase of some commodity trading businesses from RBS Sempra Commodities, a joint venture which is being restructured as a result of the state bailout of Royal Bank of Scotland.

It also remains to be seen what JP Morgan will do with Highbridge.

The Volcker Rule clamps down on bank ownership of hedge funds. Banks may only put up to 3% of their Tier 1 capital into hedge funds managed by the bank. Wells Fargo analysts calculated JP Morgan’s Tier 1 capital in April as about $130bn, meaning that the bank could put $3.9bn into such funds.

But the bank’s investment is also capped at 3% of any fund’s capital. This may not, however, preclude a bank from wholly owning a management company that operates hedge funds.

Some 20 JP Morgan commodity prop traders face being reassigned as a result of the desk closure, the Financial Times reports – 19 of them in London.

A market source outside the bank said it was possible that the traders could be moved to Highbridge, and pointed to the buoyant job market for commodities traders.

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