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

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closed. 179 CIO documents show that the CIO traded credit tranches as well as credit indices and
credit default swaps. 180
Thinly Traded Market. Due to the complexity and riskiness of credit derivative
transactions, the credit derivative market has relatively few participants and, as a result, is thinly
traded. Markit identifies only 14 banks in the world that buy and sell its credit indices. 181
Markets with a limited number of participants pose special risks, due to the relative paucity of
buyers and sellers. While buyers are often able to buy credit derivatives easily, selling them can
be difficult. A seller may have to dramatically reduce the price of a credit derivative to attract a
buyer. If the seller wants to dispose of a large number of credit derivatives, even a slightly lower
price can translate into large losses.
OCC data shows that, of the commercial banks it tracks, just four U.S. banks account for
more than 90% of credit derivative trading and holdings, with JPMorgan Chase as the largest
participant by far. 182 The resulting market is so small that, when the CIO reported a $3.7 billion
loss to the OCC in June 2012, those losses caused overall credit derivative trading revenues for
all U.S. commercial banks to decline by 372% from the prior year; it also caused their derivative
trading revenues as a whole to drop by 73%. 183
179
Id. at 15.
180
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.
181
See “Markit CDX Contributing Banks,” Markit website, http://www.markit.com/en/products/data/indices/creditand-loan-indices/cdx/contributing-banks.page;
“Markit iTraxx Contributing Banks,” Markit website,
http://www.markit.com/en/products/data/indices/credit-and-loan-indices/itraxx/contributing-banks.page?.
182
See OCC Quarterly Report on Bank Trading and Derivatives Activity Second Quarter 2012, at 1, Graph 1 and 4,
Tables 11 and 12, http://www2.occ.gov/topics/capital-markets/financial-markets/trading/derivatives/dq212.pdf.
183
OCC Quarterly Report on Bank Trading and Derivatives Activity Second Quarter 2012, at 1-2,
http://www2.occ.gov/topics/capital-markets/financial-markets/trading/derivatives/dq212.pdf. Holding companies
tracked by the OCC saw a decline of 126% in their credit derivatives trading revenues and a drop of 46% in their
overall derivatives trading revenues, compared to the year before. Id. at 3.