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

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market making groups in the Investment Bank, that where CIO hold the same
positions the adjustments are also discussed with/applied to CIO.” 625
In 2010, a CIO internal procedure for testing the accuracy of CIO asset valuations stated
that “[i]ndependent and reliable direct price feeds are the preferred method for assessing
valuation. In general, third party prices/broker quotes are considered the next best pricing
source.” 626 It also indicated that the CIO’s price testing group obtained independent and reliable
direct price feeds from the “Finance Valuation & Policy Group (‘FVP’) within the Investment
Bank” for “select CIO products,” and that in other cases, the “IB FVP team conducts price
testing of select positions” for the CIO. It also noted that “[i]ndependent prices are obtained
from various external sources (Markit, Totem, etc.) and applied to CIO positions for price testing
purposes.” 627
These documents indicate that, to value its credit derivatives, the CIO was to use the
same “prices and valuation inputs” as the Investment Bank and to work closely with the
Investment Bank’s valuation team, drawing in part on independent pricing information from
valuation services like Markit and Totem. The evidence indicates, however, that was not how
the CIO actually operated in the case of the Synthetic Credit Portfolio in 2012.
In 2012, there was little or no evidence that CIO personnel valuing SCP credit derivatives
coordinated their review with the Investment Bank, used Investment Bank prices, or relied on
daily prices supplied by independent pricing valuation services. Instead, CIO personnel
unilaterally reviewed the market data each business day for each of its credit derivatives,
estimated their fair value, and then, on a daily basis, entered the fair value of each derivative
position in the CIO’s Synthetic Credit Portfolio trading book. 628
As explained in a later bank
report on the CIO’s derivatives pricing practices:
“CIO’s valuation process reflects how and to whom CIO would exit positions by
typically seeking price quotes from the dealers with whom CIO would most
frequently transact and with whom CIO would seek to exit positions, rather than
looking for more broad based consensus pricing from a wide variety of dealers
not active in these credit markets. … CIO necessarily uses judgment to identify
the point within the bid-offer spread that best represents the level a which CIO
reasonably believes it could exit its positions, considering available broker quotes,
market liquidity, recent price volatility and other factors.” 629
625
CIO Executive Summary, “Chief Investment Office New Business Initiative Approval” on “Credit and Equity
Capability,” (undated, but in 2006), at 11, OCC-SPI-00081631.
626
5/21/2010 CIO-VCG Procedure: Valuation Process, OCC-SPI-00052685, at 1.
627
Id. at 3.
628
See 2013 JPMorgan Chase Task Force Report, at 46.
629
5/10/2012 JPMorgan Chase Controllers special assessment of CIO’s marks, January to April 2012, at 5, JPM-
CIO 0003637-654, at 641. See also 2013 JPMorgan Chase Task Force Report, at 46-47.