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

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At first, the general downward trajectory of the IG9 prices over the first quarter of 2012
allowed the CIO to post mark-to-market gains on its IG9 holdings. The FDIC chart below
explains how based on a series of theoretical spreads. If the CIO entered into a contract to sell a
certain amount of IG9 protection at 200 basis points (meaning the counterparty would pay 200
basis points in periodic premiums to the CIO), and the market price for that protection
subsequently dropped to 190 basis points, the CIO would receive 200 basis points for protection
subsequently valued at 190 basis points – a mark-to-market gain of 10 basis points. If the CIO
then entered into another contract to sell protection at 190 basis points, and the market price
dropped to 180 basis points, the CIO would be able to post mark-to-market gains of 20 basis
points on the first contract, and 10 basis points on the second contract. In addition, the CIO sold
such massive amounts of credit protection that, according to some market participants, it drove
down the overall IG9 market price, which caused the CIO’s earlier acquisitions to continue to
gain in value and post even more mark-to-market gains.