Jpmorgan Chase

JPMorgan Chase

Melissa McDaniel

Demetrius Abraham

LEG 100

March 1, 2013

JPMorgan Chase

Federal regulatory agencies involved in consumer protection are either independent commissions or executive branch agencies. Independent commissions include the Federal Trade Commission, the Federal communications commission, the Securities and Exchange Commission, the Federal Reserve board, and the consumer product safety commission.

The Federal Trade Commission has five commissioners appointed by the president and confirmed by the senate for seven-year terms. No more than three of them can be from the same political party. The commissioners make decisions by majority vote and issue rules.

The U.S. Securities Exchange Act of 1934 prevents a broker-dealer from using its customers’ securities to finance its proprietary activities; the broker-dealer may use, or re-hypothecate, an amount up to 140 percent of the customer’s debit balance. By contrast, there are no limits on re-hypothecation. It is said that the reason that hedge funds opted for funding in Europe is that leverage is not capped. In the United Kingdom, prime brokers can re-hypothecate their customers’ assets along with their own as collateral for securities, including repurchase, and their customers’ securities and cash in prime brokerage accounts can be commingled with the prime broker’s asset. If a prime broker in the United Kingdom becomes insolvent, the client may no longer secure creditors. This is not the case in United States, where the Securities Investor Protection Act protects investors.

In financial systems in which balance sheets are valued at market, a rise in asset prices as a result of an increase in demand boosts the balance sheets of banks (and leveraged firms such as JPMorgan). This in turn creates further demand for assets, and the resulting increase in asset prices further boosts balance sheets in a positive feedback effect. This is the result of procyclical leverage. In other words,...