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

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We had a small number of positions where they fell outside these tolerances and
hence the adjustment that was passed.” 809
In another email, the same analyst wrote: “At March month end the CIO FO [front office]
marked their book at the most advantageous levels based on the positions they held in specific
indices and tranches.” 810
These emails show that, by late April, the Controller’s office was fully
aware that, in March 2012, the CIO had used the “most advantageous” prices “at the boundary”
of the relevant bid-ask spread to value its derivative positions, and that the CIO prices differed
from the values being assigned to the same positions by “independent” pricing services.
As part of its review, the Controller’s office analyzed key credit derivative positions in
the SCP book during the covered time period. Specifically, of the more than 100 credit
derivative positions that appeared in the SCP book, the Controller’s office selected 18 that were
present in the portfolio throughout the covered period. For each of those 18 positions, together
with other information, the Controller’s office compiled data on the value or “mark” that
appeared in the SCP book on the last day of each of the relevant months, the corresponding
midpoint price and price range (bid-ask spread) for that same day, and whether the CIO mark –
compared to the midpoint price – provided more or less of a financial benefit to the SCP book.
The memorandum summarizing the special review presented the data in four charts, each
of which presented data on the selected CIO marks on the last days in January, February, March,
and April. 811
Excerpts from three of those charts are presented below, covering the months of
January, February, and March 2012. In each chart, the first column identifies the relevant credit
derivative, and the second column presents the relevant CIO daily mark. The next three columns
contain the extreme low end of the daily price range (bid-ask spread), the midpoint price, and the
extreme high end of the daily price range (bid-ask spread). The sixth column, which the
Controller’s office entitled “Benefit,” indicates what type of price (compared to the midpoint)
would have produced a more favorable financial result for the SCP.
CIO Marks of 18 Positions as of January 31, 2012
Credit Default Swap Indices CIO Broker Broker Broker Benefit
and Tranches Mark Bid Mid Price Offer
CDX.NA.HY 10-15% S08 05Y 70.000 69.625 70.313 71.000 lower price
CDX.NA.HY 10-15% S10 07Y 20.750 19.700 20.538 21.375 higher price
CDX.NA.HY 15-25% S10 05Y 93.375 92.875 93.313 93.750 higher price
CDX.NA.HY 15-25% S11 05Y 86.250 85.438 86.063 86.688 higher price
CDX.NA.HY 35-100% S10 05Y 106.313 106.170 106.315 106.460 higher price
CDX.NA.HY IDX S11 07Y 101.000 100.688 101.000 101.313 higher price
CDX.NA.HY IDX S14 05Y 100.625 100.375 100.625 100.875 lower price
CDX.NA.HY IDX S15 05Y 100.125 99.938 100.125 100.313 lower price
CDX.NA.IG 0-3% S09 05Y 26.813 26.460 26.680 26.900 lower price
809
4/20/2012 email from Jason Hughes, CIO, to Rory O’Neill, JPMorgan Chase, and others, “URGENT ::: Huge
Difference for iTraxx & CDX trades,” JPM-CIO 0003582-587, at 586.
810
See 4/20/2012 email from Jason Hughes to Edward Kastl, “Credit Index and Tranche Book,” JPM-CIO-PSI-H
0006636-639, at 637.
811
See 5/10/2012 JPMorgan Chase Controller’s special assessment of CIO’s marks, January to April 2012, at 17,
JPM-CIO 0003637-654, at 653. These marks do not encompass all of the credit derivative positions in the synthetic
credit book.