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

168
“The Firm calculates VaR to estimate possible economic outcomes for its current
positions using historical simulation, which measures risk across instruments and
portfolios in a consistent, comparable way. The simulation is based on data for
the previous 12 months. This approach assumes that historical changes in market
values are representative of the distribution of potential outcomes in the
immediate future. VaR is calculated using a one day time horizon and an
expected tail-loss methodology, and approximates a 95% confidence level. This
means that, assuming current changes in the market are consistent with the
historical changes used in the simulation, the Firm would expect to incur losses
greater than that predicted by VaR estimates five times in every 100 trading days,
or about 12 to 13 times a year. However, differences between current and
historical market price volatility may result in fewer or greater VaR exceptions
than the number indicated by the historical simulation. The firm’s VaR
calculation is highly granular and incorporates numerous risk factors, which are
selected based on the risk profile of each portfolio.” 935
According to the OCC’s Examiner-in-Charge at JPMorgan Chase, the bank’s 10Q VaR estimated
the potential loss to the bank’s portfolio over the course of a day by looking at the previous 264
trading days and taking the average loss of the worst 33 days. 936
At JPMorgan Chase, risk models, including VaR models, were normally developed or
overseen by the Model Risk and Development (MRAD) group, also referred to as the
Quantitative Research (QR) team within the bank’s risk management division. 937 Some models
required review and testing by MRAD before they were put into effect; tier two models were
scheduled for periodic review and could be implemented by business units prior to approval by
MRAD. 938 In addition, the Subcommittee was told that, normally, a new model is analyzed
concurrently with an existing model for several months to evaluate how the new model performs
and examine any diverging results between the two. 939
(b) Developing a New VaR Model
JPMorgan Chase told the Subcommittee that the new VaR model adopted by the CIO in
January 2012, was not produced at short notice, but was the product of more than a year of
planning and development.
The bank told the Subcommittee that the CIO had embarked upon the project to
reformulate the methodology for calculating its VaR results in 2011. 940
The CIO 10-Q VaR
model then in effect had been designed by Keith Stephan, a member of the CIO’s risk
935
3/30/2012, “2011 Annual Report,” JPMorgan Chase publication, at 158,
http://files.shareholder.com/downloads/ONE/1839748086x0x556139/75b4bd59-02e7-4495-a84c-
06e0b19d6990/JPMC_2011_annual_report_complete.pdf.
936
Subcommittee interview of Scott Waterhouse, OCC (9/17/2012); see also Subcommittee briefing by JPMorgan
Chase (8/15/2012).
937
Subcommittee interview of C.S. Venkatakrishnan, JPMorgan Chase (10/25/2012).
938
Id.
939
Id.
940
Subcommittee briefing by JPMorgan Chase (8/15/2012) (Greg Baer).