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

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bank reports about it and no indication that the OCC asked any questions about the model
change, lower VaR, or earlier breach. 1319
The OCC was also aware that, although the VaR model had changed, the bank had not
made any corresponding change in the VaR limit for the CIO, which meant that the CIO would
1320
be able to take on new risk. An OCC examiner told the Subcommittee that a model change
was “typically” accompanied by a limit change, and the VaR model change was a “significant”
one, so the VaR “limit should have changed” when the new VaR model was implemented. 1321
The OCC told the Subcommittee, however, that the bank proposed waiting to change the CIO
VaR limit until it had revised all of CIO’s risk limits, and the OCC did not challenge that
proposal. As a result, during the months of February, March, and April, the CIO’s VaR rose
steadily, unimpeded by a limit that was effectively 50% too high. The OCC raised no objection
and allowed the bank to continue to delay revising the CIO VaR limit.
Timely information on when a bank’s risk limits are breached provides a valuable, costeffective
tool for regulators to monitor risk at a large financial institution. Had the OCC
investigated the multiple breaches reported by the bank relating to the CIO, it is possible that the
agency would have uncovered the SCP’s rapidly expanding holdings, examined the risks being
incurred, and placed limits on the unsafe and unsound derivatives trading in the SCP. The OCC
1322
appears not to have reviewed this data, because it viewed the CIO as low risk. While OCC
has internally concluded that the bank’s risk reports were “poor and non-transparent,” 1323
it
needs to rectify its own approach to be more responsive to red flags where they do exist.
(4) Miscasting Long Acquisitions As Risk Reducing
Contemporaneous OCC documentation indicates that many senior OCC personnel
initially accepted the bank’s characterization of the SCP as a hedging mechanism intended to
reduce bank risk. When questions arose about how the SCP could be characterized as a hedge
when it purchased so many long credit derivative positions, OCC examiners initially accepted
the bank’s explanation that the long positions were acquired in order to offset, or hedge, the
SCP’s own existing short positions, which the CIO wanted to reduce, but viewed as too illiquid
to simply sell off. 1324
What was not offered as an explanation at the time, but which has become
1319
See 3/1/2012 Memo from Jaymin Berg, OCC, to OCC File, “Market Risk Reporting,” OCC-SPI-00035322, at
323 (memo from meeting with bank noted that “Firmwide VaR averaged $109mm in February versus $126mm in
January. The decrease is due to CIO credit tranche methodology changes, which were implemented on January
27 th .”); meeting minutes were circulated in 3/6/2012 email from Jaymin Berg, OCC, to Fred Crumlish, OCC, James
Hohl, OCC, and others, “Market Risk Minutes,” OCC-SPI-00035319-321.
1320 Subcommittee interviews of Fred Crumlish, OCC (8/28/2012) and Jairam Kamath, OCC (8/24/2012). For more
information, see Chapter V.
1321
Subcommittee interview of Jairam Kamath, OCC (8/24/2012); see also Subcommittee interview of Scott
Waterhouse, OCC (9/17/2012).
1322
10/26/2012 memorandum from Sally Belshaw, OCC, to Mike Brosnan, OCC, “Surrounding Losses at CIO and
Lessons Learned,” at PSI-OCC-13-000003 [Sealed Exhibit] (“Our CIO supervisory strategy had been focused on
what we perceived to be the higher risk areas. The CIO synthetic credit desk was understood to be a low risk,
hedge-management activity, and thus not a high supervisory priority.”).
1323
Id.
1324
See, e.g., 4/17/2012 email from Fred Crumlish, OCC, to Mike Brosnan, OCC, and others, “JPM/CIO / IG9
‘whale trade,’” OCC-00012521 (“CIO managers thought it wouldn’t be possible to reduce the high yield credit
derivative position by using the indices that created it; the best available hedge product was the IG 9 index…. This