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

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In early December 2011 these stop loss advisory limits were increased from $60 million to $70
million. 1159
However, like the CIO’s VaR, the procedure used by the CIO to calculate the losses for
purposes of complying with the stop loss advisories understated the risks; and like the CRM,
CS01 and CSW10% limits, even when the stop loss advisories were breached, the CIO made no
serious effort to investigate or remediate the breaches. If the CIO stop loss advisories had been
properly calculated and respected, the CIO losses could have been mitigated well before they
became international headlines.
Calculating the utilization and breach of stop loss advisories should be straightforward.
If a portfolio loses more money than the limit allows in a given day, for example, it has breached
the one-day advisory. At the CIO, from December 2011 through March 2012, the one-day stop
loss advisory for its mark-to-market portfolio was established at $70 million. 1160
Daily losses
that exceeded this amount should have been treated as a breach of the stop loss limit.
Calculating the five-day and twenty-day stop loss levels should have been as easy as adding up
the profit and loss reports for the SCP over five and twenty days, respectively. To the surprise of
their regulators, however, JPMorgan Chase calculated it differently.
After the CIO’s losses became public, OCC examiners reviewing JPMorgan Chase’s stoploss
calculations for the CIO portfolio noticed a discrepancy. On May 17, 2012, Jairam Kamath,
a junior OCC examiner on the Capital Markets team, emailed Lavine Surtani, a member of
JPMorgan Chase’s Corporate Market Risk Reporting group, to express his confusion:
“I know this should be fairly obvious but we’d like to know how MRM [Market
Risk Management] defines 1-day, 5-days, and 20-days stop loss thresholds. From
looking at some of the risk reports we are not getting a good sense of how the 5day
and 20-day stop loss numbers are derived.”
On May 23, Ms. Surtani replied to Mr. Kamath, explaining CIO’s methodology:
“The five day loss advisory is an arithmetic sum of the last 5 1-day utilizations.
Any of these underlying utilizations that have caused an excession are NOT
included in the sum for the following reason: including utilizations that caused
excessions would result in a double-penalty. A business would break both their 1
day and five day loss advisory. Rather, this type of loss advisory is used to
capture small leaks in loss over a larger period of time …. The same logic would
be implemented for the 20-day.” 1161
1159
12/01/2011 JPMorgan Chase spreadsheet “Position Limit and Loss Advisory Summary Report,” OCC-SPI-
00134805; 12/9/2011 JPMorgan Chase spreadsheet “Position Limit and Loss Advisory Summary Report,” OCC-
SPI-00134832.
1160
“Position Limit and Loss Advisory Summary Report,” OCC-SPI-00134902; “Position Limit and Loss Advisory
Summary Report,” OCC-SPI-00024212.
1161
5/23/2012 email from Lavine Surtani, JPMorgan Chase, to Jairam Kamath, OCC, and others, “Stop Loss
Definitions,” OCC-00003917. [emphasis in the original]