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Banking

JPMorgan faces derivatives regulation hit

Revenues heavily weighted to OTC derivatives Worst-case guidance: JPM could face revenue loss of $3 billion a year

For a bank that weathered the financial crisis better than most of its peers it might seem slightly incongruous that JPMorgan should suffer the most from regulation aimed at curbing past excesses.

The biggest counterparty in the OTC derivatives market last month gave the first indications of how proposed regulation of derivatives traded outside exchanges could affect revenues. In a briefing with Sanford Bernstein banking analyst John McDonald, JPMorgan’s investment bank chairman Steve Black said the firm would face earnings headwinds if lawmakers had their way and moved trading of OTC derivatives such as interest rate swaps and credit default swaps onto exchanges. McDonald said JPMorgan’s investment bank revenues in a worst-case situation might fall by between $2 billion and $3 billion. That, after expenses, reserving costs and taxes, could reduce earnings per share by between 13 cents and 20 cents.

Percentage notional totals by type, Q2 2009

Source: JPMorgan


Black, who recently moved to his newly created position of chairman, emphasized that JPMorgan could quickly adapt its business model to the new regulatory environment, once the guidelines become clear, to mitigate the revenue leakage.


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