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The Commodity Futures Trading Commission’s (CFTC) enforcement division has issued subpoenas to JPMorgan Chase & Co. (JPM - Analyst Report) regarding the $2 billion trading loss, which the company incurred during the first six weeks of the second quarter. The company has been asked to furnish all the related emails and other internal documents to the CFTC.

The CFTC is the most recent addition to the list of agencies conducting investigation of losses at JPMorgan. Other organizations involved in this inquisition include the Securities and Exchange Commission (SEC) and the Federal Bureau of Investigation (FBI).

The CFTC’s probe into the matter, as regards to what went wrong with the complicated bets that were put on derivatives, is still in the initial stage. Moreover, it seems unlikely that any civil enforcement action will be taken up against the company or any of its employees. The investigation will complement the findings of the SEC as well as the FBI.

JPMorgan adopted intricate hedging strategies as it tried to hedge corporate bonds through series of derivatives. By doing so, it started running into losses that continued to expand resulting in such a huge financial mess. JPMorgan’s Chief Investment Office in London executed this unsuccessful strategy.

This huge trading loss led to lawsuits being filed by the company’s shareholders against its CEO and top management, claiming misrepresentations of facts and seeking an undisclosed amount in compensation. Moreover, JPMorgan suspended its plans of $15 billion worth of share repurchases in the wake of hedging losses.

Conclusion

With JPMorgan’s huge losses in overseas swaps, the CFTC is resolved to take a firm stance. This will likely result into stricter regulatory guidelines under the 2010 Dodd-Frank Financial Oversight Law for overseas swaps and would safeguard the investor interest as well as that of the whole economy.

It may also be mentioned that JPMorgan’s hedging strategy may have violated the SEC’s proposed Volcker rule. This rule aims at fencing the proprietary trading activities by the banks.

We expect that the losses incurred by JPMorgan will affect its financials profoundly and the enquiries set up by several regulatory authorities will dent its reputation.

Currently, JPMorgan retains a Zacks #3 Rank, which translates into a short-term Hold rating. Moreover, one of its peers, Bank of America Corporation (BAC - Analyst Report) also retains a Zacks #3 Rank.

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