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

sources, and inadequate procedures for requiring reserves. 805 For example, the internal audit
report rated the following as “Needs Improvement” 806
:
141
“CIO VCG practices where a number of risk & valuation models have not been
reviewed by Model Review Group and included the absence of a formally applied
price sourcing hierarchy, insufficient consideration of potentially applicable fair
value adjustments (e.g. concentration reserves for significant credit indices
positions) and the lack of formally documented/consistently applied price testing
thresholds.” 807
With respect to price testing “thresholds,” which determined how much a booked value could
deviate from a specified midprice, the internal audit report concluded that the CIO VCG
thresholds had been applied “without sufficient transparency or evidence.” It also found that the
“root cause” of the problems with the CIO VCG’s price testing practices was an “insufficient
assessment/formalization of certain price testing methodologies and poorly documented CIO
VCG practices.” 808
The audit report should have encouraged the VCG to conduct a more careful review of the CIO
valuations at quarter’s end. In addition, the CIO itself was experiencing an unusual series of
escalating losses and an unprecedented amount of collateral disputes, both of which also should
have raised red flags about the CIO’s valuations and led to a more careful review. Adding still
more sensitivity was that both the VCG quarter-end review and the Controller’s special
assessment were undertaken in April 2012, just after the whale trades attracted media attention
and raised multiple concerns within the bank.
Controller’s Assessment. The Controller’s office began its work reviewing the CIO’s
marks in early April 2012. In a late April email responding to a bank colleague’s inquiry into the
CIO’s valuation practices, an analyst described how the CIO had valued the SCP positions in
March:
“There were differences between the [CIO] desk and the independent marks at
month end. The desk marked the book at the boundary of the bid/offer spread
depending on whether the position was long or short. We then applied a tolerance
to make sure the prices were within tolerance and the majority of positions were.
805
See March 2012 Continuous Audit Quarterly Summary of Global Chief Investment Office, OCC-SPI-00033688,
at 692.
806
JPMorgan’s internal audit group used three ratings in its reports: Satisfactory, Needs Improvement, and
Inadequate. “The latter two are considered ‘adverse’ ratings.” 2013 JPMorgan Chase Task Force Report, at 55,
footnote 69.
807
See March 2012 Continuous Audit Quarterly Summary of Global Chief Investment Office, OCC-SPI-00033688,
at 692. The internal audit report also noted that the CIO’s London office was “using unapproved models in the
calculation of risk including VaR,” and that “associated risk measurement methodologies ha[d] not been
appropriately documented and or catalogued.” Id.
808
Id. See also 2013 JPMorgan Chase Task Force Report, at 55-56.