It has come as a shock to many in Wall Street that an innocent hedge, from a bank known for its ability to manage risk, could go so horribly wrong. Dig deeper and the story is a bit different.

Many argue that a hedging position taken to offset a certain risk could in fact be more risky. There are so many moving parts in a multi-leg position that a hedge is not so straightforward. The notion that hedge is risk mitigating is just a text book concept. There is, in real world, no risk limiting hedge.

A different forum argues that the hedging loss happened in JP Morgan’s Chief Investment Office, a “buy side” part of the bank that may not have as stringent risk and regulatory controls as the “sell side” part of the bank. The counter argument is that the core risk systems are same for all parts of the bank but JP Morgan tried to make a profit from a hedge by deploying a complex strategy. No one knows for sure.

So where are all those regulations that are supposed to make banks more watchful with tax payer’s money?

The Volcker Rule is supposed to prohibit any ‘banking entity’ – with access to Fed discount window and federally insured deposits – from dealing in proprietary trading. However the rule also exempts underwriting, hedging and market making from proprietary trading. What this means is that JPMC would not have violated any regulations with their hedging positions even after The Volcker Rule is implemented!