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

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combine them into a single dollar value for the entire basket. 138 Parties then enter into swaps
that reference the index value. 139 The long party bets the index value will increase; 140 the short
party bets it will fall. 141
Investing in a credit index, whose value reflects multiple credit instruments, can be
142
analogized to investing in a portfolio of bonds or loans. The short buyer of a credit index, as
with a credit default swap, typically makes an upfront payment reflecting the value of the index
and then makes fixed periodic payments to the long party over a specified timeframe. 143 Those
periodic payments are, again, typically referred to as premiums, coupon payments, or credit
spreads. 144 When the instrument matures or expires, or a trade otherwise closes, the short party
may be required to make a final payment reflecting the change in the value of the instrument. 145
On the other hand, if a credit event takes place during the covered time period, it triggers a
typically substantial payout by the long party to the short party. 146 After the credit event, the
defaulting credit instrument is effectively eliminated from the index. 147
Credit index transactions are typically entered into “over the counter” (meaning outside
of a regulated exchange) between a licensed swap dealer and an investor, using standardized
148
documents. Once the initial index swap is executed, as the value changes, either party can
trade or unwind its side of the bet. The index’s changing value typically reflects the initial index
price or premium amount, which is also called the credit spread. 149 The parties holding a swap
when the referenced index expires are typically required to make a final payment reflecting the
value of the index at the time of expiration. 150
IG9, HY, and iTraxx Indices. The CIO traded a variety of credit indices. CIO profitloss
reports indicate that, by March 2012, the CIO held more than 100 different types of credit
151
derivative instruments. Its largest holdings involved indices administered by the Markit
Group, Ltd., a global financial information services company that administers multiple index
products. 152 Markit owns and operates the indices, and performs a variety of services related to
them, including calculating the index values and publishing the daily index prices on its
website. 153
138
Markit Credit Indices: A Primer, at 12-13.
139
Id. at 11.
140
Id., Appendix 4, at 34.
141
Id., Appendix 4, at 36.
142
See 2/6/2009 presentation prepared by JPMorgan Chase in response to a Subcommittee request, “CDO Briefing,”
at 16, PSI-JPM-30-000001; see also Markit Credit Indices: A Primer, at 11.
143
Markit Credit Indices: A Primer, at 11.
144
Markit Credit Indices: A Primer, Appendix 4, at 30.
145
Id. at 11.
146
Id. at 13.
147
Id. at 14.
148
Id. at 11.
149
Id.
150
Id.
151
See, e.g., 4/10/2012 email from Julien Grout to “CIO Credit Positions” email group, “CIO CORE Credit
Positions: 10-Apr-12,” JPM-CIO-PSI 0023061 (estimating the fair value of numerous credit derivative positions).
152
See Markit Credit Indices: A Primer, Appendix 1, at 19-21; see also 4/10/2012 email from Julien Grout to “CIO
Credit Positions” email group, “CIO CORE Credit Positions: 10-Apr-12,” JPM-CIO-PSI 0023061.
153
Markit Credit Indices: A Primer, at 7. The prices are freely accessible to the public at www.markit.com. Id. at
12.