[ by Melanie Gretchen ] U.S. lawmakers and regulators have identified London as a source of financial crises, citing recent hits to the U.S. market by British units - most notably, the $2+ billion of trading losses at JPMorgan Chase's CIO in London.  To address this issue, there are assurances of protective measures - including the adoption of stricter cross-border rules. Limiting Exposure. Gary Gensler, Chairman of the CFTC, told House Financial Services Committee members on Tuesday that that the U.S. was exposed to risky activity in London.  Case in point: AIG's financial products unit in London, and Citigroup's special purpose investment vehicles in the U.K. capital.

"So often it comes right back here, crashing to our shores ... if the American taxpayer bails out JPMorgan, they’d be bailing out that London entity as well." -- Mr. Gensler.

London Loopholes. JPMorgan seeks to prevent its London derivatives operation from being regulated by the CFTC, on the grounds that the more stringent U.S. regulatory requirements  - e.g., such as requiring banks to demand collateral from clients - will scare away clients to foreign banks, like Barclays and Deutsche Bank. Yet, the last thing Mr. Gensler wants to see is the creation of "another London loophole."  He added that rules due out this week would safeguard that from happening. The London Way. Even prior to the financial crisis, Wall Street institutions were exerting pressure on Congress to revise U.S. regulations, so that they would be more in line with those of U.K. regulator, the FSA (Financial Services Authority).  FSA's approach is commonly described as "light-touch." Congressional regard for the U.K. brand of regulation is very low at the present time - as reflected by this statement from Rep. Carolyn Maloney (D-NY), which referred to a "disturbing pattern in the last few years of London literally becoming the center of financial trading disasters." However, there appears to have been a shift in attitudes in London, indicating that London is responding to the criticism.  For one thing, the light-touch approach has been abandoned for more intrusive supervision.  Case in point: JPMorgan's London-based trading unit, while it was part of JPM's U.K. branch, it was regulated by U.S. officials.  This demonstrated how exposed the U.S. economy is exposed to London's vulnerabilities. Taking Measures. For its part, the FSA has taken issue with the current regulatory set up for the London units of giant U.S. and Swiss banks.  If they were to run large parts of their U.K. businesses as locally authorized "subsidiaries," rather than as "branches," they would be subject to more supervision by the U.K. – and thus less vulnerable to outside elements. Hector Sants, CEO of the FSA, expressed his concerns this week, with this statement:    What is deeply unsatisfactory is that we have very little prudential oversight of a branch." Yet, before stepping down as FSA chief at the end of the month, he forewarned that the U.K., in reviewing its regulatory structure next year, "has to be clear and public about its reliance on overseas regulators or it should consider [forcing] subsidiarization." Limiting JPMorgan. Going forward, senior JPMorgan executives are examining whether it was right to base the unit in London - i.e., out of range from the bank's New York base.  In the Office of the Comptroller of the Currency, head Thomas Currency, who is responsible for overseeing JPMorgan's UK Branch, will "re-evaluate the numbers and strength of the personnel in our London office."  [CI Note: Could they close the unit?]

"It just goes to show that faith in massive regulatory bureaucracies and excessive regulation is misplaced." -- Sen. Richard Shelby , senior Republican on Senate Banking Committee.

For further details, go to [FT via CNBC, 6/20/12].