JPMORGAN CHASE WHALE TRADES: A CASE HISTORY OF DERIVATIVES RISKS AND ABUSES

which it holds a concentrated block of assets, and the uncertainties associated with its pricing
methodology. 619
101
(2) Valuing Derivatives at JPMorgan Chase
Because JPMorgan Chase is one of the largest derivative dealers and traders in the world
and the value of its derivatives holdings affect its financial results, it has longstanding policies
and procedures on how to price its derivative holdings and report their fair value on the
company’s books. Its policies and procedures generally adhere closely to GAAP principles.
To determine fair value, for example, as summarized in a 2012 internal report examining
SCP pricing, JPMorgan Chase policies reflect GAAP’s accounting principles:
“General
Fair value is the price to sell an asset or transfer a liability in the principal (or
most advantageous) market for the asset or liability (an exit price). The sale or
transfer assumes an orderly transaction between market participants.
Data Sources and Adjustments
Valuation techniques used to measure the fair value of an asset or liability
maximize the use of observable inputs, that is, inputs that reflect the assumptions
market participants would use in pricing the asset or liability developed based on
market data obtained from independent sources. Valuations consider current
market conditions and available market information and will, therefore, represent
a market-based, not firm-specific, measurement.
Where available, quoted market prices are the principal reference point for
establishing fair value. Market quotation may come from a variety of sources, but
emphasis is given to executable quotes and actual market transactions (over
indicative or similar non-binding price quotes). In certain circumstances
valuation adjustments (such as liquidity adjustments) may be necessary to ensure
that financial instruments are recorded at fair value.
Bid-offer spread and position size
As further described in US GAAP Accounting Standards Codification Topic 820
Fair Value Measurement (‘ASC 820’), the objective of a fair value measurement
is to arrive at an appropriate exit price within the bid-offer spread, and ASC 820
notes that mid-market pricing may (but is not required to) be used a practical
expedient.” 620
619 Subcommittee briefing by Public Company Accounting Oversight Board (9/14/2012).
620 5/10/2012 JPMorgan Chase Controllers special assessment of CIO’s marks, January through April 2012, at 4,
JPM-CIO 0003637-654, at 640. See also 11/8/2007 Controllers Corporate Accounting Policies, “Fair Value
Measurements,” prepared by JPMorgan Chase, OCC-SPI-00056794 at 4 (“The transaction to sell the asset or
transfer the liability is a hypothetical transaction at the measurement date, considered from the perspective of a
market participant that holds the asset or owes the liability. Therefore, the objective of a fair value measurement is
to determine the price that would be received to sell the asset or paid to transfer the liability at the measurement date
(an exit price).”).