JPMorgan is examining its risk trading systems to avoid potential mismatches created by pending changes in the International Swaps and Derivatives Association's 2002 equity derivatives definitions. Tim Hailes, senior equities lawyer at JPMorgan, said if the systems that are used to hedge trades do not exactly match the counterparty contracts there is the potential for firms to lose money on trades. "This represents a real risk," Hailes said, explaining that until the problem hits the bottom line, as in a trader loses money, then no one takes notice. "It is no good implementing piecemeal bits of the jigsaw. There is a sufficient number of changes for us to feel it's important [to look at this area]."
One potential problem area is the expansion of the merger or potential adjustment events to five from three. This could mean the systems will have to be reconfigured.
Other firms contacted, however, do not think the new definitions will have a material effect on their risk systems. An official at Citigroup in London said there will be quite a long breaking-in period before the whole market understands these definitions.
