Posts tagged 'Credit Derivatives'

Anti-Abacus, anti-BISTRO and anti-balance sheet synthetic securitisation


Close your eyes, lay back and imagine yourself as a regulator at the US Securities and Exchange Commission (do we have to? -ed). Read more

Introducing “ISDA risk” – it’s like basis risk, but more annoying

How many different types of risk can you name?

Operational risk, market risk, liquidity risk, legal risk, credit risk, etc. Now, let’s add “Isda risk” (pronounced Izzz-dah risk, it has the added benefit of making one’s risk manager sound like a rapper, which hopefully we all can agree is hilarious):

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This is the CIO! Take your silly market-making prices and [redacted] — Part 1

Time to start tackling the big question: how were such huge credit derivatives positions allowed to be put on by JPMorgan’s chief investment office (CIO) in a matter of mere months back at the start of 2012? Someone, or several someones, should have noticed that the synthetic credit portfolio (SCP) was headed for a disaster of epic proportions.

Weren’t there risk limits? Despite being a top of the range tool for crisis aversion, and being breached several times, the warning signs around these weren’t effectively responded to. Even worse, they were simply accommodated for. We’ll discuss that in future posts. Here, we want to talk about another tool that could have averted disaster: the marks on the book. The marks should have shown increasingly frightening losses, leading people to ask what the hell was going on. Read more

Oh look the CDS market isn’t working again

There can’t be many credit default swaps written on freshly nationalised SNS Bank. It isn’t among the publicly reported top 1000 single-entity CDS published by DTCC.

Nonetheless the question of whether the Dutch government’s expropriation of SNS subordinated debt constitutes a credit event, triggering payouts on the derivatives, is being debated on Tuesday by the Isda Determinations Committee, which serves as the ultimately arbiter in such cases.

By which we mean, they are debating it again — they decided the first time around to defer the question to get more information or something.

But why should anyone care about some contract that so few parties have an interest in?

Some possibilities below. Mentally circle any that apply. Read more

CDS end-users, a bit like unicorns

Whenever we come across a really real example of an actual client in the credit default swap market, it can be a little too exciting. Especially if they actually talk! They are ever so shy, you see.

But talk one did! To Nicholas Dunbar at Bloomberg. Read more

What’s a credit trader to do?

Friday’s rally in credit markets was no joke, as these charts from Markit Source shows:

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Unwinding with an invisibility cloak

JPMorgan is continuing to be coy about the management of its Chief Investment Office’s doomed synthetic credit portfolio. The positions lost $4.4bn in the second quarter, bringing the year-to-date loss to $5.8bn. It’s understandable that they don’t want to share more granular details — doing so would put them at a disadvantage in trying to manage the whole thing down.

We know the financial instruments in the portfolio themselves were nothing special. It’s that the whole portfolio of them became too complex and illiquid, in part due to their enormous size. Read more

Regulator captured, a case study

The WSJ reported on Thursday that JPMorgan’s regulators will conduct a thorough review of the bank’s models, according to “people close to the situation”.

Thanks to a letter from the the Office of the Comptroller of the Currency to Senator Sherrod Brown, we know that one particular model — the VaR model that JPMorgan’s Chief Investment Office switched to in January 2012, and which failed to alert management to outsized risks the division was taking — did not require regulatory approval before being used. Read more

Unwind? What unwind? – Part 2

In our previous post, we outlined our disappointment that the latest DTCC data released on Tuesday night did not seem to reveal any significant reductions in risk positions on major credit derivative indices and tranches. It would appear that JPMorgan hasn’t unwound its trades in a big way, as no especially remarkable movements appear in either the activity or volume data.

The reports last week that suggested JPMorgan had sold “65-70 per cent” of its “London Whale position” cited market sources. This was lent a certain credibility by a pop in activity of $31bn on the Markit CDX.NA.IG.9 — one of the few indices in which JPMorgan has a considerable position. Looking back at the data from the last week (in Part 1) showed that the pop was less remarkable than it seemed. Read more

Unwind? What unwind? – Part 1

FT Alphaville had a serious case of the F5 on Tuesday at 10pm London time, for it was at that hour that last week’s DTCC credit derivatives data was released to the masses.

Here we would be able to see signs of what CNBC had reported last Wednesday: that JPMorgan had sold “65 percent to 70 percent of the so-called London Whale position, a hedging strategy gone so wrong that in early May JPMorgan conceded it had already lost $2 billion.” Read more

Credit derivative crowdsourcing #fail

The credit derivatives industry has gone through the mother of all clean-ups over the last four years. It has standardised. The build-up of redundant contracts has been kept down. Hell, people even know which counterparties they are facing these days!

To make it even easier, there are quite specific rules to deal with various mechanics. Is it time to give the industry a pat on the back for a job well done? Read more

Approaching the beach [updated]

CNBC is reporting on Wednesday that JPMorgan has sold a substantial amount of its loss-making synthetic credit portfolio:

JPMorgan Chase has sold off 65 percent to 70 percent of its losing “London Whale” position, which led to a multibillion-dollar trading loss for the bank, CNBC reported on Wednesday. Read more

Where the OCC should have looked

Isn’t it a problem if bank regulators depend, seemingly exclusively, on the banks themselves for information? Weren’t trade information warehouses, such as DTCC’s for credit derivatives, built in part to give regulators a bird’s eye view of markets? If so, why the hell does it sound like they aren’t being used?

JPMorgan management have put their hands up since the announcement of $2bn of losses, effectively saying, ‘yeah, whoops, we totally messed that one up. Buck stops here. We’re looking into preventing that from ever happening again. We’ve learned that no matter how good a division’s past performance, one simply cannot ever be complacent.’ They are taking their (very, very sizable) share of the blame. Read more

Oh, so now it’s a $5bn loss?

Morgan Stanley’s research team came out with a note on Friday, guesstimating that JPMorgan’s losses on the synthetic credit portfolio held by its Chief Investment Office will come to $5bn by the end of the year, which is $2bn more than CEO Jamie Dimon seemed to think they’d come to when the announcement of the losses was first made on May 10.

Here are the analysts on why they don’t believe Dimon’s estimate (emphasis ours): Read more

Tracking trades down

The last twenty-four hours have brought us some interesting insights into the JPMorgan chief investment office’s $2bn loss story. The FT revealed that the CIO has been a huge player in certain structured asset markets. Some surmise that the trading activity from the unit has been so big that if it ceased participation in those markets, it could damage what liquidity there is in them.

There was also a story, this one written by the WSJ, about how CEO Jamie Dimon reacted when the stories about the “London Whale” first surfaced (pun intended). The article described how the positions were then investigated (internally) and the decision taken to delay a regulatory filing until the exact positions were better understood. Read more

The high yield tranche piece

Coverage of the $2bn $3bn loss emanating from JPMorgan’s Chief Investment Office on its synthetic credit portfolio continues a pace, and FT Alphaville’s tour continues too.

The desire to understand what the trade was and the rationale behind it continues to bug us and many others. Interestingly, some of the discussion of late has come full circle. Bloomberg kicked off the London Whale saga on April 6th, and their follow-up on April 9th contained a detail that has now come back into the narrative. This time, though, it’s more than a mere sidenote — more on this in a minute. Read more

Recap and tranche primer

There were small [losses] in the first quarter, but real ones that we talked about the $2 billion were all in the second quarter. And it kind of grew as the quarter went on.

That’s JPMorgan’s chief executive Jamie Dimon, in the conference call arranged after the bank’s 10-Q revealed substantial losses in a synthetic credit portfolio held by its Chief Investment Office. Read more

Two billion dollar ‘hedge’

Trust us, it isn’t easy to lose $2bn in a “synthetic credit portfolio” over five weeks from the beginning of April, as JPMorgan’s Chief Investment Office managed to do. A lot of analysts are scratching their heads wondering just how this feat was accomplished.

One would need a number of ingredients to even get close to pulling this off. A good helping of models that were trusted too much, as it seems the CIO’s value-at-risk (VaR) model was, is a good start. But one needs a bit more than that. Per BloombergRead more

What position transparency?

“Synthetic credit portfolio”. That’s the book where the $2bn in mark-to-market losses took place for JP Morgan, according to an announcement made on Thursday. A result which has now cost them a their AA- rating from Fitch and landed them on negative outlook with S&P, as announced late on Friday.

FT Alphaville has analysed the credit trades that might be in that portfolio, in an attempt to reason through what may have gone on. The fact, however, remains that we know precious little. Why is that? Is this acceptable that after the financial crisis that this can happen to a bank, let alone a systemically important one like JP Morgan? Read more

Too Big To Hedge

Throughout FT Alphaville’s coverage of the credit trades of JP Morgan’s Chief Investment Office, there were two thoughts that kept nagging us. We’d think about them whenever we wrote about the technicals the trades might be creating. One was: could this really happen under CEO Jamie Dimon’s watch? The other was: where the hell are the regulators in all of this?

We’ll get to these questions a bit later, as we would first like to review how the $2bn mark-to-market loss announced on Thursday may have happened… Read more

CDX tranches, now trading without delta near you!

Back up a moment to remember what first brought JP Morgan’s Chief Investment Office to our attention.

It was a bunch of hedge funds complaining to journalists that big trades done by the CIO were causing the Markit CDX.NA.IG.9 credit index to become a lot cheaper than its component parts. Read more

Those increasing iTraxx tranches, behind the scenes

The Chief Investment Office of JP Morgan was the inspiration for FT Alphaville’s recent Whale Watching Tour.

It also prompted us to take a closer look at the recent, and rather remarkable, growth in trading in standardised credit tranches since the beginning of 2012. Such trades are effectively highly leveraged bets/hedges on the creditworthiness of corporations. Read more

Accounting for credit risk before the crisis – a case of a gateway drug?

“The question is,” said Alice, “whether you can make words mean so many different things.”

In a recent Alphaville post, I made the claim that if the monolines had been required to mark the credit risk that they had taken to market, they would not have played such a prominent role in the financial crisis. Here I want to provide some support for that claim. Read more

Shamu in the swimming pool

Hedge funds are not happy.

Don’t everyone run to their defence at once now. Read more

The curve trade

A “tempest in a teapot. That’s how JP Morgan CEO Jamie Dimon described the fuss caused by the bank’s Chief Investment Office apparently entering into large credit trades. It may well be teapot-sized, for him. The point for some hedge funds is that even if it was a swimming pool, you’d feel a bit cramped if Shamu joined you for your morning laps.

Which is to say that, for those actually trading credit indices, the thing that is such a big deal is whether the trading behaviour of JP Morgan’s CIO distorted the market. Less of a big deal is whether JP Morgan is going to land itself in trouble if the trades aren’t actually hedges but proprietary bets, hence go against the Volcker Rule. Read more

Thar she blows!

Whale-watching in the credit default swap market has become something of a pastime for pundits and market participants alike.

For the uninitiated, the short version of this story is that many believe that a trader (aka “The London Whale”, or “Voldemort”) in JP Morgan’s Chief Investment Office (CIO) has been amassing such large positions in various credit indices that it is potentially: Read more

JP Morgan’s giant unwitting catalyst trade

For those new to the story, Bloomberg and WSJ reported on Friday that a handful of hedge funds and dealers claimed that a trader in JP Morgan’s Chief Investment Office has been selling so much protection on the Markit CDX.NA.IG.9 credit index that it was “distorting” the market — making the index too cheap.

While FT Alphaville thinks that a lot of this is getting way overblown, the story is performing a few useful useful functions. Namely, it’s: Read more

Hedge funds and the Whale, credit index edition

What is this a story of? Bloomberg’s headline:

JPMorgan Trader’s Positions Said to Distort Credit Indexes

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Quanto CDS, the widow-maker

In the space of less than a year, the headline in the International Financing Review went from “Quanto CDS flows return” to “Dealers hope for the death of quanto CDS“.

What gives? Read more

An (EFSF) credit derivative is born

Anyone remember the EFSF’s ersatz CDS?

They announced it back in November 2011. Another measure to eke the bailout fund’s resources out a bit more in a bad patch of the eurozone crisis. Read more