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

52
Notionals more than tripled in the first quarter, then tripled again in the second quarter to reach
$42 billion. 317
Towards the end of 2011, JPMorgan Chase became concerned about the level of the
318
CIO’s Risk Weighted Assets (RWA) and ordered a reduction in its RWA. RWA is a dollar
measure of a bank’s assets, adjusted according to the assets’ risk. 319 It is used to calculate the
bank’s minimum capital requirements, with a greater ratio of equity-based capital required for
banks with higher RWA. 320 Mr. Iksil strategized that the SCP could go long on credit risk, use
the longs to offset the portfolio’s shorts, and thereby reduce the CIO’s overall RWA. 321 He
wrote: “We can reduce [RWA] by simply selling protection but then the pnl [profit and loss]
volatility will increase potentially.” 322
His supervisor, Mr. Martin-Artajo, responded that the CIO should not go outright long on
323
its credit assets because it would breach the CIO’s stress loss limit. Instead, Mr. Martin-
Artajo instructed Mr. Iksil to do “forward trades.” 324 The type of forward trade he was
suggesting occurs when a trader buys a long credit position with a long-term maturity date, and a
short credit position with a short-term maturity date, in order to be hedged in the shorter term but
gain exposure to credit risk in the longer term. 325
The CIO traders adopted that trading strategy.
Whether that trading strategy helped reduce the CIO’s RWA in 2011 is unclear. The
records that have been produced to the Subcommittee tracing the SCP’s RWA in 2011 and 2012
are incomplete and contradictory. For example, one January 2012 OCC document reported that
326
the SCP’s RWA at the end of 2011 was $70 billion, while other materials reported that, by the
beginning of 2012, the CIO’s RWA was around $40 billion. 327
When asked by the
317
See “Summary of Positions by Type,” prepared by JPMorgan Chase in response to a Subcommittee request,
JPM-CIO-PSI 0037609.
318
Testimony of Jamie Dimon, “A Breakdown in Risk Management: What Went Wrong at JPMorgan Chase?”
before the U.S. Senate Committee on Banking, Housing, and Urban Affairs, S.Hrg. 112-715 (June 13, 2012)(“In
December 2011, as part of a firm wide effort and in anticipation of new Basel Cap[ital] requirements, we instructed
CIO to reduce risk weighted assets and associated risk.”); 2013 JPMorgan Chase Task Force Report, at 2.
319
For more information about RWA, see Chapter II.
320
Id.. See also 2013 JPMorgan Chase Task Force Report, at 26-27.
321
JPMorgan Chase Task Force interview of Bruno Iksil, CIO (partial readout to Subcommittee on 8/27/2012);
12/22/2011 email from Bruno Iksil to Achilles Macris and Javier Martin-Artajo, “urgent -----: Rwa,” JPM-CIO-PSI
0001227. See also FDIC presentation, “JPMC & COMPANY CIO Synthetic Credit Portfolio,” at 2, FDICPROD-
0001783 (“The firm believed that due to the historical correlation (beta) of the tranches of the IG-9 index, they were
getting into a neutral position by going long 4-5 times the high yield short positions.”).
322
12/22/2011 email from Bruno Iksil to Achilles Macris and Javier Martin-Artajo, “urgent -----: Rwa,” JPM-CIO-
PSI 0001227. The profit and loss volatility would potentially increase, because, as the portfolio grew larger, even
small changes in the price of individual holdings could translate into large variations in the portfolio’s overall value.
323
JPMorgan Chase Task Force interview of Bruno Iksil, CIO (partial readout to Subcommittee on 8/27/2012).
324
Id.
325
Subcommittee briefing by JPMorgan Chase (8/15/2012) (Jeannette Boot).
326
See 1/31/2012 email from Jaymin Berg, OCC, to Fred Crumlish, OCC, “CIO Quarterly Meeting,” OCC-SPI-
00004695 (summarizing quarterly meeting with CIO in which CIO Chief Financial Officer John Wilmot indicated
that, in 2012, the CIO expected to reduce the RWA of its “MTM” book, which included the SCP, from “$70B
[billion] to $40B”).
327
See 1/18/2012 email from Bruno Iksil, CIO, to Julien Grout, CIO, “Meeting materials for 11am meeting,”
conveying presentation entitled, “Core Credit Book Highlights,” prepared by Mr. Iksil, at JPM-CIO-PSI 0000100
(indicating CIO’s RWA was then $40.3 billion); JPMorgan Chase Task Force Report, at 28, footnote 30 (indicating