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

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One of the steps it took to address its shortcomings was to establish a suite of new risk
measures and limits for the CIO. 1188 According to the bank, the “CIO now has in place a total of
260 limits,” including “67 redesigned VaR, stress and non-statistical limits,” and new asset class,
single name, and country concentration limits. 1189 In addition, “29 new limits specific to the
Synthetic Credit Book have been implemented to create consistency with JPMC’s IB
[Investment Bank] approach.” 1190 All of these new SCP limits focused on the risks inherent in
credit derivatives. The new risk measures were designed to address six dimensions of risk:
directionality (exposure to spread widening), curve (long versus short), decompression (IG
versus HY), off-the-run (older versus newer credit derivative index issues), tranche risk (senior
versus equity tranches), and risks caused by individual corporate defaults. 1191
While these 260
risk limits promise to provide greater information to the bank’s risk managers, it is far from clear
how they will solve the CIO’s risk management problems; after all, when the SCP had just five
risk metrics, CIO management and risk personnel generally ignored or rationalized the breaches
that took place.
To ensure more attention is paid to the breaches that occur, the bank reported that it has
also “strengthened its processes across all businesses to deal with limit excessions.” It explained
that significant excessions would be escalated further and faster than before. For example, any
excessions of greater than 30% or lasting three days or longer would have to be escalated to the
line of business CEO, CRO, and Market Risk Head, “as well as to the Firm’s CEO, CRO, co-
COO and Deputy CRO/Head of Firm-wide Market Risk, and to the Firm-wide Risk
Committee.” 1192 In addition, the bank explained that the CIO Risk Committee had been
reconstituted as a CIO, Treasury and Corporate Risk Committee, requiring weekly meetings of
senior risk and corporate management. 1193
Escalating breaches to senior management and
broadening the CIO Risk Committee are of questionable utility, however, since the SCP breaches
were already escalated to Mr. Dimon and other senior bank and CIO management, but did not
result in anyone investigating or curbing the SCP’s risky holdings until the whale trades attracted
media attention. If limits are to be meaningful, then a better approach would have been to
require those alerted to a risk limit breach to investigate the cause, and to require the position
causing the breach to be reduced or unwound to ensure the breach is ended within a few days,
without raising the relevant risk limit.
A third set of risk management reforms reported by the bank focused on strengthening its
“model risk policy,” including by “minimize[ing] model differences for like products,”
cataloguing its models in a central database, and emphasizing “model implementation testing
and comparisons to benchmark models.” 1194
In addition, the bank reported that it had revamped
the CIO’s risk managers and risk committee, and established four new firmwide risk committees
focusing on risk policy and analytics, business activities, risk controls and audits, and risk
1188
See 6/2012 FDIC presentation, “JPMC & COMPANY CIO Synthetic Credit Portfolio,” at 34, FDICPROD-
0001783. 5/18/2011 Risk Policy memo, “Market Risk Limits, Firm-wide,” JPMC-Senate/Levin 000157
1189
2013 JPMorgan Chase Task Force Report, at 115.
1190
See 6/2012 FDIC presentation, “JPMC & COMPANY CIO Synthetic Credit Portfolio,” at 34, FDICPROD-
0001783.
1191
Id. at 26.
1192
2013 JPMorgan Chase Task Force Report, at 115.
1193
Id. at 116.
1194
Id. at 113.