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

77
asked the OCC about those losses, the OCC explained that the bank had not informed it of either
the losses or the new trading strategy at the time, but since the CIO was already losing money
with its trading strategy, the traders should have stopped, rather than expanded its use. 487 The
OCC further told the Subcommittee that the CIO apparently did not stop, because it did not want
to take the additional, short-term losses that would have resulted from simply reducing the size
of the SCP. 488
The losses continued for the rest of January, including after Mr. Iksil began to execute the
January 26 strategy and increase the size of the SCP book. On January 30, 2012, Mr. Iksil sent
his supervisor, Mr. Martin-Artajo, an email warning of additional losses and poor liquidity in the
credit markets, and seeking guidance on what to do. He noted that the trading strategy called for
purchasing more credit instruments – adding “notionals” – which “increase[d] the issues with the
risks and the size” of the portfolio.
“[W]e have to report a loss in the widening today, much less because the book has
a long risk bias. Comes month end and we cannot really prevent the forward
spreads from moving up .... To trade ... is costly and leads to increase in
notionals. We need to discuss at this stage I guess: All I see is that liquidity is so
poor that we just add notionals with the stress. So that improves the outright final
P&L [profit and loss] number but this increases the issues with the risks and the
size, as well as our sensitivity to price moves and trading costs .... [T]he only one
I see is to stay as we are and let the book simply die ....” 489
In his email, Mr. Iksil singled out the “poor” liquidity then in the market, which meant
that he had difficulty locating buyers for the SCP’s assets. He also alluded to how purchasing
long credit instruments meant the book received premium payments from the short parties which
“improve[d] the outright final P&L number,” but at the same time increased the size of the
portfolio and its “sensitivity to price moves and trading costs.” In other words, buying new long
positions brought in more valuable positions as well as cash carry that could be used to offset the
book’s daily losses, but it also increased the portfolio size which meant that even small price
drops rolled into large daily losses. After noting the tradeoffs between the portfolio’s increasing
size and risk of loss, Mr. Iksil wrote that in his view the “only” course of action was “to stay as
we are and let the book simply die.” In other words, he advocated against buying additional
credit positions and allowing the existing positions to expire with the attendant losses.
In the same January 30 email, Mr. Iksil expressed concern about the danger of taking on
ever-increasing positions under the new trading strategy:
“[T]he control of the drawdown [loss] now is generating issues that make the
book only bigger in notionals …. [T]he notionals become scary and [the] upside
is limited unless we have really unexpected scenarios. In the meantime, we face
487
Subcommittee interview of Mike Sullivan, OCC (8/30/2012).
488
Subcommittee interview of Doug McLaughlin, OCC (8/30/2012).
489
1/30/2012 email from Bruno Iksil, CIO, to Javier Martin-Artajo, CIO, “update on core credit book,” JPM-CIO-
PSI 0001223.