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

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incorrect information, and at other points the OCC failed to notice and follow up on red flags
signaling increasing CIO risk in the reports it did receive from the bank. During 2011, for
example, the notional size of the SCP grew tenfold from about $4 billion to $51 billion, but the
bank never informed the OCC of the increase. At the same time, the bank did file risk reports
with the OCC disclosing that the CIO repeatedly breached the its stress limits in the first half of
2011, triggering them eight times, on occasion for weeks at a stretch, but the OCC failed to
follow up with the bank. Later in 2011, the CIO engaged in a $1 billion high risk, high stakes
credit derivatives bet that triggered a payout of roughly $400 million to the CIO. The OCC
learned of the $400 million gain, but did not inquire into the reason for it or the trading activity
behind it, and so did not learn of the extent of credit derivatives trading going on at the CIO.
In January 2012, in its first quarterly meeting with the OCC after disclosing the existence
of the SCP, the CIO downplayed the portfolio’s importance by misinforming the OCC that it
planned to reduce the SCP. Instead, over the course of the quarter, the CIO tripled the notional
size of the SCP from $51 billion to $157 billion, buying a high risk mix of short and long credit
derivatives with varying reference entities and maturities. The increase in the SCP’s size and
risk triggered a breach of the CIO’s and bankwide VaR limits, which the bank disclosed to the
OCC in routine risk reports at the time, but which did not trigger an agency inquiry. Also in
January, the bank sent routine risk management notices which informed the OCC of the bank’s
implementation of a new VaR model for the CIO that would dramatically lower the SCP’s risk
profile, but the OCC did not inquire into the reasons for the model change, its impact on risk, or
how the CIO was able to reduce its risk results overnight by 50%.
In February and March, the bank began to omit key CIO performance data from its
standard reports to the OCC, while simultaneously failing to provide timely copies of a new CIO
management report. The OCC failed to notice the missing reports or request the new CIO
management report until after the April 6 press articles exposed the CIO’s risky trades. By
minimizing the CIO data it provided to the OCC about the CIO and SCP, the bank left the OCC
misinformed about the SCP’s risky holdings and growing losses.
Beginning in January and continuing through April 2012, the SCP’s high risk
acquisitions triggered multiple breaches of CIO risk limits, including its VaR, credit spread,
stress loss, and stop loss limits. Those breaches were disclosed on an ongoing, timely basis in
standard risk reports provided by the bank to the OCC, yet produced no reaction at the time from
the agency. The Subcommittee found no evidence that the OCC reviewed the risk reports when
received, analyzed the breach data, or asked any questions about the trading activity causing the
breaches to occur.
On April 6, 2012, when media reports unmasked the role of JPMorgan Chase in the
whale trades, the OCC told the Subcommittee that it was surprised to read about the trades and
immediately directed inquiries to the bank for more information. The OCC indicated that it
initially received such limited data about the trades and such blanket reassurances from the bank
about them that, by the end of April, the OCC considered the matter closed.