Revenue from JP Morgan Chase & Co (NYSE: JPM) could drop by as much as $3 billion if the bulk of its derivative trades move to exchanges, said an analyst at Sanford C. Bernstein & Co. said on Wednesday.
The figure that Bernstein released is the firm’s “worst case scenario” that could occur under a potential overhaul of derivatives trading that’s being discussed in Washington. Under some proposals that are on the table, major investors and dealers would trade common derivatives on regulated exchanges rather than on the less regulated over-the-counter market.
A loss of $3 billion would deplete as much as 20 cents per share from JP Morgan’s predicted earnings next year, said Bernstein analyst John McDonald on a Wednesday note to his clients. Derivatives trading revenues accounted for about 8% of JP Morgan’s total revenue between 2006 and 2008 or about $6 billion per year in profit, the analyst noted.
The market did not respond positively on Tuesday to Bernstein’s estimate and Treasury Secretary Tim Geitner’s reiteration of his proposal to bring new regulations to the over-the-counter derivatives remark. As a result, the financial sector dropped as a whole with JP Morgan losing 1.6% of its value by the end of the day.
In a prepared statement to the Senate Agriculture Committee, Geithner said that “The lack of transparency in the OTC derivative markets, combined with insufficient regulatory power to police these markets, left our financial system more vulnerable to fraud and manipulation.”
