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

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index known as the “XO” index. 165 As with the CDX indices, Markit issues a new series of the
iTraxx indices every six months, with revised reference lists and varying maturities. 166
When a new credit index series is issued, it is referred to as the “on-the-run” series. 167
Earlier series of the index are then referred to as “off-the-run.” 168 They continue to trade until
their maturity dates, but are typically less actively traded. 169
The CDX and iTraxx indices typically required an initial payment upfront that reflected
the value of the index at the time of acquisition; four quarterly fixed “coupon” payments on
March 20, June 20, September 20, and December 20; and a final payment reflecting the value of
the index at the close of the trade. 170
Credit Index Tranches. A third, still more complicated type of credit derivative
involves credit tranches. The credit tranches that were traded by the CIO typically related to
Markit credit indices. 171 Each of the Markit credit indices tracked the value of a specified basket
of credit instruments. 172 Instead of requiring bets on the creditworthiness of the entire basket, for
some credit indices, Markit offered instruments that enabled parties to place bets on just a
portion of the basket, offering four tranches with different degrees of vulnerability to default. 173
The riskiest tranche, called the “equity tranche,” was immediately affected by any default at any
company in the basket. 174 The next tranche, called the “mezzanine,” was affected only by losses
that exceeded 15% of the loss distribution. 175 Those losses usually required one or more defaults
to take place. The next tranche, called the “senior” tranche, was affected only by losses that
exceeded 25% of the loss distribution. 176 The last and most secure tranche, the “super senior
tranche,” was affected only by losses that exceeded 35% of the loss distribution. 177
Those losses
typically required multiple defaults to take place.
Credit tranche instruments, like other credit derivatives, typically required the short party
to make an upfront payment and periodic payments during the covered time period, although the
riskiest tranches often did not require any premiums. 178
These instruments also typically
required the parties to make a final payment when the swap expired or the trade otherwise
165
See 2013 JPMorgan Chase Task Force Report, at 24.
166
See 2/6/2009 presentation prepared by JPMorgan Chase in response to a Subcommittee request, “CDO Briefing,”
at 23-25, PSI-JPM-30-000001; Markit Credit Indices: A Primer, at 19.
167
Markit Credit Indices: A Primer, at 9.
168
Id., Appendix 4, at 35. One JPMorgan document used a more restrictive definition, defining “off-the-run”
indices as “any index older than 4 series – for example, the current on the run CDX series are 13, therefore, all
indices series 9 and older are considered off the run”). 5/21/2010 “CIO-VCG Procedure: Valuation Process,” OCC-
SPI-00052685, at 15.
169
Id. at 9; see also 2013 JPMorgan Chase Task Force Report, at 24-25.
170
Markit Credit Indices: A Primer, at 9, 11.
171
See 4/10/2012 email from Julien Grout to “CIO Credit Positions” email group, “CIO CORE Credit Positions:
10-Apr-12,” JPM-CIO-PSI 0023061.
172
Markit Credit Indices: A Primer, Appendix 1, at 18–21.
173
Id. at 15.
174
Id. at 15, Appendix 4 at 37.
175
Id.
176
Id.
177
Id.
178
Id. at 28.