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

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provide his judgment and estimate the value of positions, not rely on the price to exit. Mr. Iksil
said that there was a difference between what Mr. Martin-Artajo and the bank expected him to
do.” 639
Valuation Control Group. Due to the importance of derivative valuations, which can
encompass a large set of assets that affect bankwide profit and loss calculations on a daily basis,
all banks are required to set up an internal process to crosscheck the accuracy of the values
reported internally. 640 At JPMorgan Chase, this process was administered by the Valuation
Control Group (VCG). VCGs at the level of the bank’s lines of business reported to the Chief
Financial Officer at the line of business, who in turn reported to the bank’s Chief Financial
Officer, Douglas Braunstein. 641 At the end of each month, each VCG was required to validate
the asset valuations in the relevant books, including the CIO’s VCG which reviewed the credit
derivative marks in the SCP book. 642
According to the bank, the CIO VCG “independently price test[ed] the front office marks
at each month end and determine[d] necessary adjustments to arrive at fair value for the purposes
of US GAAP books and records.” 643 The bank has also explained that, to test the accuracy of the
booked values, the VCG examined, for each position, transaction data, dealer quotes, and
independent pricing service data on the last day of the month, and then selected a value that fell
within that day’s price range (bid-ask spread). 644
That value was called the “VCG mid price.”
The VCG then compared the booked price on the last day of the month to the VCG mid price.
Because both GAAP and bank policy permitted lines of business to exercise subjective
judgments when calculating the fair value of their derivatives, the CIO VCG explicitly allowed
the CIO to deviate from the VCG mid prices. 645 The extent of the permitted deviation varied
depending upon the type of credit index or tranche position at issue. 646 Some of the permitted
deviations were so extensive that they allowed the CIO to select from a wide range of prices
which, when applied to the SCP’s large positions, then translated into valuations which,
collectively, could vary by tens or even hundreds of millions of dollars from the VCG mid
prices. In addition to reviewing the SCP book, the VCG was responsible for calculating and
monitoring the amount and categorization of any liquidity and concentration reserves established
for the SCP derivatives. 647
639 JPMorgan Chase Task Force interview of Bruno Iksil, CIO (partial read out to Subcommittee on 8/27/2012).
640 See 1/29/2013 email from OCC legal counsel to the Subcommittee, PSI-OCC-23-000001.
641 Subcommittee interview of Douglas Braunstein, JPMorgan Chase (9/12/2012). See also 2013 JPMorgan Chase
Task Force Report, at 53.
642 See 5/21/2010 CIO-VCG Procedure: Valuation Process, OCC-SPI-00052685.
643 See 5/10/2012 JPMorgan Chase Controllers special assessment of CIO’s marks, January to April 2012, at 5,
JPM-CIO 0003637-654, at 642.
644 See 2013 JPMorgan Chase Task Force Report, at 53.
645 See, e.g., 5/21/2010 CIO-VCG Procedure: Valuation Process, OCC-SPI-00052685, at 6.
646 See, e.g., 4/20/2012 email from Jason Hughes, CIO, to Edward Kastl, JPMorgan Chase, “Credit Index and
Tranche Book,” JPM-CIO-PSI-H 0006636-639, at 636 (listing price deviations allowed from VCG mid prices for 18
credit derivative positions). See also 2013 JPMorgan Chase Task Force Report, at 54.
647 See 5/21/2010 CIO-VCG Procedure: Valuation Process, OCC-SPI-00052685, at 6 (“In assessing the
reasonableness of fair value measurements that are subject to testing, VCG will consider whether such
measurements appropriately reflect liquidity risk, particularly in the case of instruments for which CIO maintains
either a significant/concentrated position and/or if the market for given instrument can be observed to be less liquid.