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

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Markit’s two primary credit index groups are the CDX, which is a group of indices
referencing corporations in North America and Emerging Markets; and the iTraxx, which is a
group of indices referencing corporations in Europe and Asia. 154 One key index traded by the
CIO is the CDX.NA.IG.9. 155 “CDX” refers to credit index. “NA” refers to North America. 156
“IG” refers to “investment grade,” because the index tracks credit default swaps (CDS) for 125
investment grade companies in North America. 157 Each year, Markit issues two series of this
index, updating it every six months with a revised reference list of 125 constituent CDS. 158 The
number “9” in “IG9” denotes the relevant series of the index. The IG9 series was issued in
2007. 159
Parties can bet on the index by entering into standardized swap agreements that reference
the IG9 series, providing varying maturities. For example, “IG9 5year” indicates that the swap
referencing the IG9 index will expire in 2012, five years after the IG9 index was issued. “IG9
10year” indicates that the swap will expire in 2017, 10 years after the IG9 index was issued.
Parties can trade the IG9 swaps until the relevant expiration date. Long parties essentially bet
that the value of the IG9 will increase; short parties bet that the value will fall. If an investor is
“long” the index, and a “credit event,” such as a bankruptcy or failure to pay, occurs at one of the
referenced companies during the covered period, the long party will have to make a payment to
160
the short party holding the credit protection.
161
The CIO also traded the CDX.NA.HY. “HY” refers to High Yield, because the index
tracks credit default swaps naming 100 North American companies that pose higher credit risks
and so produce higher returns to investors. 162 These companies are often rated as “HY”
companies because they carry non-investment grade or “junk bond” ratings. 163 A third index
that was traded by the CIO is the iTraxx Europe which tracks credit default swaps for 125
investment grade companies in Europe. 164
The iTraxx group of indices also had a high yield
154
See 2013 JPMorgan Chase Task Force Report, at 24.
155
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.
156
See, e.g., 3/16/2007 “CDS IndexCo and Markit Announce Official Name Change for New Series of CDX
Indices,” Markit, http://www.markit.com/en/media-centre/pressreleases/detail.page?dcr=/markit/PressRelease/data/2007/03/2007-03-16.
157
See 2/6/2009 presentation prepared by JPMorgan Chase in response to a Subcommittee request, “CDO Briefing,”
at 24, PSI-JPM-30-000001; Markit Credit Indices: A Primer, at 20; see also David Mengle, Credit Derivatives: An
Overview, Federal Reserve Bank of Atlanta Economic Review, Fourth Quarter 2007, at 3.
158
Markit Credit Indices: A Primer, at 21. Although each index starts with 125 companies, if a company
experiences a “credit event,” such as a bankruptcy, the company’s weight in the index will be changed to zero,
effectively deleting it from the index. Id. at 14.
159
See 2013 JPMorgan Chase Task Force Report, at 24.
160
See 2/6/2009 presentation prepared by JPMorgan Chase in response to a Subcommittee request, “CDO Briefing,”
at 17-18, PSI-JPM-30-000001; see also Markit Credit Indices: A Primer, at 5. The amount of the payment will
depend upon a market auction that sets the recovery rate on the company’s debt. Id.
161
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.
162
Markit Credit Indices: A Primer, at 20.
163
See “Junk Bond,” OCC February 2008 Comptroller’s Handbook: Leveraged Lending – Appendix B, at 63,
http://www.occ.gov/publications/publications-by-type/comptrollers-handbook/_pdf/leveragedlending.pdf.
164
See 2/6/2009 presentation prepared by JPMorgan Chase in response to a Subcommittee request, “CDO Briefing,”
at 25, PSI-JPM-30-000001; see also Markit Credit Indices: A Primer, at 19.