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

250
On January 14, 2012, the OCC took a formal enforcement action by issuing a Cease and
Desist order against the bank, to which the bank consented. 1426 The OCC is authorized to issue
Cease and Desist orders under 12 U.S.C. § 1818(b), which allows the OCC to take action if it has
reasonable cause to believe that an insured depository institution has violated a law or regulation,
or engaged in unsafe business practices. 1427 The order requires and the bank has consented to
undertake a number of actions to strengthen its risk management and derivatives trading
practices, actions which the OCC will need to monitor to ensure needed reforms are made. For
example, in one case, the bank has promised to respond to risk limit breaches by requiring “the
business [to] promptly take steps to reduce exposure to within limit, unless a one-off approval for
a limited period of time is granted,” 1428
a measure which merely restates the same policy the
bank had in place prior to the whale trades. Regulators must ensure our largest financial
institution strengthens its procedures and policies.
In addition, Comptroller Curry has taken steps to strengthen the OCC’s regulatory
culture. As a first step, he initiated an independent internal review of both the bank and the OCC
1429
supervision, looking to gain “lessons learned.” With respect to the bank, the OCC’s internal
review identified a number of problems with both the CIO and JPMorgan Chase, such as the
bank’s use of certain unapproved risk models, and the poor performance of the bank’s
Legal/Compliance department, which delayed responses to OCC inquiries and provided
sometimes incomplete or even incorrect answers. 1430 The OCC appears to have begun the hard
work of recalibrating its relationship with JPMorgan Chase to ensure the bank meets its
regulatory obligations. For its part, JPMorgan Chase has stated in its Task Force Report that it is
working towards a more transparent relationship with its regulators. 1431
The OCC internal review also presented six recommendations for improvements to its
Large Bank Supervision division, which accepted all six. The recommendations required the
Large Bank Supervision division to improve its use of appropriate resources, such as derivatives
trading experts; incorporate practices to minimize regulatory surprises to the OCC, such as by
periodically reviewing desk level reports to catch inconsistencies in information given to senior
management; proactively examine banks’ regulatory capital models; and institute more
1432
disciplined MRA follow-up, among other reforms. The internal report’s analysis and
recommendations have been the subject of presentations by the OCC to both U.S. and
international regulators in addition to internal OCC groups of examination staff. 1433
1426
1/14/2013 In the Matter of JPMorgan Chase, N.A., OCC Consent Order, http://occ.gov/news-issuances/newsreleases/2013/nr-occ-2013-7a.pdf
1427
12 U.S.C. § 1818(b) (2011).
1428
1/11/2013 letter from John Hogan, JPMorgan Chase, to Scott Waterhouse, OCC, “JPM-2012-66 CIO Oversight
and Governance Examination,” PSI-OCC-22-000001, at 006.
1429
10/26/2012 OCC Confidential Supervisory Report, at PSI-OCC-13-000014 [Sealed Exhibit]; Subcommittee
interview of Michael Sullivan, OCC (8/30/2012) (report sought by Mr. Curry).
1430
10/26/2012 OCC Confidential Supervisory Report, at PSI-OCC-13-000037-038 [Sealed Exhibit].
1431
2013 JPMorgan Chase Task Force Report, at 111.
1432
10/26/2012 memorandum from Sally Belshaw, OCC, to Mike Brosnan, OCC, “Surrounding Losses at CIO and
Lessons Learned,” PSI-OCC-13-000001-013 [Sealed Exhibit].
1433
Id.