JPMORGAN CHASE WHALE TRADES: A CASE HISTORY OF DERIVATIVES RISKS AND ABUSES
JPMORGAN CHASE WHALE TRADES: A CASE HISTORY OF DERIVATIVES RISKS AND ABUSES
JPMORGAN CHASE WHALE TRADES: A CASE HISTORY OF DERIVATIVES RISKS AND ABUSES
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<strong>JPMORGAN</strong> <strong>CHASE</strong> <strong>WHALE</strong> <strong>TRADES</strong>:<br />
A <strong>CASE</strong> <strong>HISTORY</strong> <strong>OF</strong> <strong>DERIVATIVES</strong> <strong>RISKS</strong> <strong>AND</strong> <strong>ABUSES</strong><br />
TABLE <strong>OF</strong> CONTENTS<br />
I. EXECUTIVE SUMMARY ................................................. 2<br />
A. Subcommittee Investigation. . . . .......................................... 2<br />
B. Overview . . . .......................................................... 3<br />
(1) Increasing Risk. . . . ................................................. 3<br />
(2) Hiding Losses. . . ................................................... 5<br />
(3) Disregarding Risk .................................................. 7<br />
(4) Avoiding and Conducting OCC Oversight . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8<br />
(5) Misinforming Investors, Regulators, and the Public . . . . . . . . . . . . . . . . . . . . . . . . 10<br />
C. Whale Trade Case History ............................................... 14<br />
D. Findings of Facts . ..................................................... 15<br />
(1) Increased Risk Without Notice to Regulators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15<br />
(2) Mischaracterized High Risk Trading as Hedging . . . . . . . . . . . . . . . . . . . . . . . . . . 15<br />
(3) Hid Massive Losses ................................................. 15<br />
(4) Disregarded Risk ................................................... 15<br />
(5) Dodged OCC Oversight.............................................. 15<br />
(6) Failed Regulatory Oversight .......................................... 16<br />
(7) Mischaracterized the Portfolio......................................... 16<br />
E. Recommendations ...................................................... 16<br />
(1) Require Derivatives Performance Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16<br />
(2) Require Contemporaneous Hedge Documentation . . . . . . . . . . . . . . . . . . . . . . . . . 16<br />
(3) Strengthen Credit Derivative Valuations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16<br />
(4) Investigate Risk Limit Breaches ....................................... 17<br />
(5) Investigate Models That Substantially Lower Risk . . . . . . . . . . . . . . . . . . . . . . . . . 17<br />
(6) Implement Merkley-Levin Provisions ................................... 17<br />
(7) Enhance Derivative Capital Charges .................................... 17<br />
II. BACKGROUND .......................................................... 18<br />
A. JPMorgan Chase & Company ............................................ 18<br />
B. Chief Investment Office ................................................. 21<br />
C. Office of the Comptroller of the Currency .................................. 25<br />
D. Capital Requirements ................................................... 27<br />
D. Credit Derivatives ...................................................... 29<br />
III. INCREASING RISK ...................................................... 35<br />
A. Origins of the Synthetic Credit Portfolio ................................... 36<br />
B. Purpose of the Synthetic Credit Portfolio: Undocumented, Unclear, and<br />
Subject to Change ...................................................... 42<br />
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