JP Morgan trade shows ultra transparency replaces need for Volcker Rule

The Wall Street Journal ran an article that confirms that when market participants have visibility into a trade they will exert market discipline.

Market discipline based on disclosure is important because it cuts through the need to determine under the Volcker Rule what is a proprietary trade versus what is a legitimate hedge.

If a bank is required to provide ultra transparency and disclose on an on-going basis its current asset, liability and off-balance sheet exposure details, market participants can assess the riskiness of the bank and the trade and exert discipline accordingly.

A J.P. Morgan Chase & Co. trader whose massive derivatives sales in recent months earned him the nickname the "London whale" has stopped making those trades, for now. But investors that were squeezed in his earlier action remain engaged in high-stakes strategies against the trader. 

Dozens of hedge funds are believed to have placed bets in the derivatives markets that pit them against positions taken by Bruno Iksil, the French-born trader who works for the bank's Chief Investment Office in London, according to people familiar with the matter. 

Funds that traded against Mr. Iksil earlier this year recorded big paper losses as his trades helped push down one credit index. The losses made Mr. Iksil a target for some hedge funds, who felt they could capitalize on his outsize position, these people say. 

The funds' wagers against Mr. Iksil's positions have become increasingly profitable in recent weeks as prices in the credit-derivatives index that was at the center of one of Mr. Iksil's trades rose after his trades ceased. 

"I view the entire market as a chess match playing against this guy," said a person who is familiar with Mr. Iksil's positions and is trading against him.

The idea that the entire market is playing a chess match against a trader confirms that market discipline will be exerted if banks are required to provide ultra transparency.