NEW YORK SHARES

WASHINGTON — The big question following JPMorgan Chase & Co.'s now-notorious derivative trade is whether it would have been permitted under the so-called 'Volcker Rule.' But the answer is clear cut to an advocacy group that has led calls for regulatory restrictions after the 2008 crisis.

In a conference call with reporters Friday, Americans for Financial Reform argued — counter to claims by the Wall Street giant — that the trades by the firm's London investment office resulting in at least $2 billion in losses is exactly the type of transaction that former Federal Reserve Chairman Paul Volcker's proposal was meant to stop. His idea, which bans commercial banks from proprietary trading, was enacted in the Dodd-Frank Act.

"That investment office was sold to regulators as a hedging operation, but what it in fact was was an in-house hedge fund," said Marcus Stanley, the policy director for Americans for Financial Reform. "What that fund was doing was running speculative spread trades that were absolutely designed to generate a profit. We know with certainty that JPMorgan was lobbying the regulators to be allowed to continue precisely these trades … under the Volcker Rule."

But whether JPMorgan Chase and other big banks will be able to continue such trades is ultimately up to U.S. bank regulators that are implementing the Dodd-Frank provision. Their regulatory proposal had indicated that institutions would still be able to carry out certain hedging and market-making transactions not considered the kind of risky trading targeted by the Volcker Rule.

Stanley said the regulators' final rule should firmly make clear that trades like that at the heart of JPMorgan Chase's big loss are not part of the exemption.

"It's very important that the regulators finalize a Volcker Rule that will not permit this," he said. "In fact, that should be fairly straightforward for them to do because there are … many, many differences between a speculative trade designed to generate profits, as this one was, and a true risk-reducing hedge."

In a shareholder meeting Tuesday, JPMorgan Chase chief executive Jamie Dimon indicated the bank agrees the London trades ran afoul of hedging.

"We continue to believe in the importance of being able to hedge risk as an institution. However, we also understand the need for rules and practices that ensure that hedging doesn't morph into something different," he said. "What this hedge morphed into violates our own principles in terms of complexity and risk."

The unrelenting and escalating sovereign debt crisis in Europe promises further losses ahead for the region’s already stressed equity markets, but a stock rebound could come sooner than many investors are expecting if Greece exits the eurozone, say analysts.

“The growing possibility of a Greek exit from the European Monetary Union suggests caution remains the watchword for now,” said John Higgins, an economist at Capital Economics. “But once the dust settles, stock markets could fare much better — even in Greece.”

Investors have redoubled their anxiety about eurozone economies that are drowning in government debt and struggling with severe austerity measures after taking a brief hiatus late last year through the early part of 2012.

The Euro Stoxx 50 index listing of the biggest stocks on the continent is down 17% since early February and regional benchmarks have posted even bigger losses. Spain’s IBEX 35 is down 26% over the same period and Greece’s ASE index is down 35%.

The only major European exchange that has made money for investors this year is Germany’s DAX, which, given its relatively superior economic performance, has become a refuge of sorts for investors.

Mr. Higgins said the sharp fall in equity prices has driven valuations down to attractive levels in many eurozone nations, both historically and relative to other countries.

While it’s too soon to expect eurozone stocks to recoup all of their lost ground, he thinks it wouldn’t be long before Greece’s stock market bounced back if the country leaves the single currency area. He said that’s because currency depreciation of a new Drachma would spur economic activity.

“Granted, it would probably be a rough ride in the short term as capital continued to flee the country and contagion fears prompted a world-wide increase in risk aversion,” Mr. Higgins said.

Mr. Higgins said stock markets of other weak countries that remained in the eurozone would also rebound after initially coming under further pressure. But gains would likely be less than those in Greek markets, because those countries would not benefit from significant currency depreciation.

Karen Olney, a strategist at UBS AG, said it is tempting to turn bullish on European equities, but doesn’t advise it at the moment.

In addition to Greece, she remains concerned about Spain’s banking sector — which remains undercapitalized despite additional provisions — and France’s change in leadership.

“[French President François] Hollande hasn’t announced any austerity measures,” she said. “If he does, someone suffers; if he doesn’t, the bond market could force it.”

Ms. Olney said the muted risk appetite of global investors also makes it hard for European stocks to rally, particularly when there’s not enough good news coming from the United States and China.

If and when confidence returns, she likes European value stocks, which have fared 40% worse than growth names since January 2011, and cyclicals that are down near their previous lows.

“Buy Europe over the United States given relative valuations look stretched,” she added. “Just not yet.”