Heavy recently-disclosed losses at JP Morgan reinforce the
case to regulate the market for credit default swaps, a widely used form of
derivative, more heavily, according to a senior former US regulator
Sheila Bair.

JP Morgan recently disclosed that it lost more than $2
billion amid faulty hedging strategies concerning the use of CDS instruments. The
problems add to concerns that were expressed after the 2008 financial crisis
that such derivatives magnify, rather than disperse, financial risks of
defaults. The episode has also highlighted the risks that some say arise when
an investment bank sits in the same corporate structure as a private and retail
banking operation.

"I'd push them (CDS's) off the planet," Bair, who
was head of the Federal Deposit Insurance Corporation for five years before
stepping down last summer, told the UK’s Daily
Telegraph newspaper. "The CDS market is very volatile and very opaque.
From a safety and soundness point of view, I'm uncomfortable with that."

The Dodd-Frank Act that was enacted in 2010 has called for
the majority of the derivative market, including CDS, to be traded on exchanges
and for transactions to go through clearing houses. The rules have yet to be
finalised and enforced.

Bair says that regulators need to go further to stop the explosive
growth in the instruments that have become popular because they allow traders
and investors to buy insurance without having to own the underlying asset.
(This is a practice different from, say, household insurance, where the
insurance contract purchaser has to have a material interest in the underlying
asset being insured.)

"People shouldn't be able to buy this stuff unless than
they a tangible economic interest in the underlying asset," said Bair.
"People are just playing the market," she said.