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

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acquired a complex mix of long and short credit instruments with varying reference assets and
maturities, and the portfolio began to trigger breaches of the CIO’s stress loss limit. 1265
For example, in the first half of 2011, the CIO reported multiple, sustained breaches of its
stress limits and attributed those breaches to increased activity in its “synthetic credit (tranche)
1266
book.” The CIO’s stress limits were triggered eight times, sometimes for weeks at a stretch,
from January to June 2011. 1267 The bank notified the OCC about those stress limit breaches, like
other internal risk limit breaches, in the bank’s regular Market Risk Management (MRM)
Reporting emails which listed risk limit breaches and in its weekly Market Risk Stress Testing
reports. 1268 In those reports, the CIO attributed all of the CIO’s stress limit breaches to changes
in its “synthetic credit (tranche book).” 1269 In the first breach of the year, for example, which
occurred on January 27, 2011, the CIO continued to breach the limit for seven weeks in a row,
peaking at 50% over the limit. 1270
The CIO’s stress limit breaches were dramatic and sustained during the first half of 2011,
yet when the OCC inquired into the reason for the breaches, the bank “failed to offer any details
1271
about the source,” and the OCC did not pursue additional information. In hindsight, the OCC
identified its failure to follow up on the results of the stress limit breaches – whose very purpose
was to identify portfolio risk – as “one of our misses.” 1272 In fact, it was a major misstep. By
failing to insist on bank answers about the synthetic credit tranche book, the OCC missed a key
opportunity to examine and perhaps curb the excesses of the SCP prior to its incurring losses in
2012. The OCC also told the Subcommittee that the multiple breaches of the 2011 stress limit
provided evidence that the SCP was not, even then, providing stress loss protection to the bank,
or acting as a hedge, but was engaging in a strategy to earn profits for the bank. 1273
Later in 2011, the SCP entered into a high risk derivatives bet which, due to an American
Airlines declaration of bankruptcy, produced roughly $400 million in unexpected revenues for
1274
the CIO in late November. One of the CIO traders, Bruno Iksil, purchased tranches in a
soon-to-expire credit index series, which leveraged the CIO’s position to produce the gain. The
1265 Stress loss limits are dollar amounts representing plausible losses under specified “adverse and abnormal market
environments.” 2013 JPMorgan Chase Task Force Report, at 82. Stress testing was applied on a weekly basis to the
SCP to determine whether it would exceed its stress loss limit. If the limit was exceeded, the CIO was supposed to
reconfigure the SCP to end the breach. For more information, see Chapter V.
1266
Subcommittee interview of Michael Sullivan and Doug McLaughlin, OCC (8/30/2012); 10/26/2012 OCC
Confidential Supervisory Report, Appendix 4 (summary of CIO limit exceptions Jan. – June 2011) at PSI-OCC-13-
000067 [Sealed Exhibit].
1267
See 10/26/2012 OCC Confidential Supervisory Report, Appendix 4 (summary of CIO limit exceptions Jan. –
June 2011) at PSI-OCC-13-000067 [Sealed Exhibit].
1268
Id.
1269
Id.
1270
Subcommittee interview of Michael Sullivan and Doug McLaughlin, OCC (8/30/2012); 10/26/2012 OCC
Confidential Supervisory Report, Appendix 4 (summary of CIO limit exceptions Jan. – June 2011) at PSI-OCC-13-
000067 [Sealed Exhibit].
1271
See 10/26/2012 OCC Confidential Supervisory Report, at PSI-OCC-13-000042 [Sealed Exhibit].
1272
Subcommittee interview of Michael Sullivan and Doug McLaughlin, OCC (8/30/2012) (Doug McLaughlin).
1273
Subcommittee interview of Michael Sullivan and Doug McLaughlin, OCC (8/30/2012).
1274
See 4/5/2012 email from Ina Drew, CIO, to Jamie Dimon, JPMorgan Chase, and others, “CIO,” JPM-CIO-PSI
0000539 (“The fourth quarter 400 million gain was the result of the unexpected american airlines default.”). For
more information about this bet, see Chapter 3.