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
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
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
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
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.