Trading Surge in Index Behind JPMorgan Loss Signaling Unwind

JPMorgan Chase CEO Jamie Dimon
Jamie Dimon, chief executive officer of JPMorgan Chase & Co., testifies at a House Financial Services Committee hearing in Washington, D.C. on June 19, 2012. Photographer: Andrew Harrer/Bloomberg

Trading in the credit derivatives index that contributed to JPMorgan Chase & Co.’s losses in its London chief investment office soared to a record yesterday in a sign that the biggest U.S. bank may be unwinding its position, according to data cited by Credit Suisse Group AG.

Volume in Series 9 of the Markit CDX North America Investment Grade Index surged the past two days, with a record $31 billion of the contracts, which expire December 2017, traded yesterday, Credit Suisse traders said today in an e-mail to market participants, citing data from Markit Group Ltd. That compares with an average of $2 billion to $3 billion, the traders said.

JPMorgan is seeking to stem at least $2 billion in trading losses from the U.K. operation, where Bruno Iksil, known as the London Whale, managed a portfolio of credit derivatives so large it distorted the market. A strategy by the unit to reduce risks from hedges backfired and left the bank with even bigger and harder-to-manage exposures, Chief Executive Officer Jamie Dimon said last week before the Senate Banking Committee in Washington.

“They are trying to unwind, and they probably have been trying to do some of it on a quiet basis,” Scott MacDonald, head of research at MC Asset Management Holdings LLC in Stamford, Connecticut, said in a telephone interview. “When you put on a large trade, it’s hard for people not to notice what you’re doing. It’s been a very tough situation for them.”

Exiting Trade

The bank has sold 65 percent to 70 percent of its losing position and is still selling the rest, CNBC reported earlier today. Jennifer Zuccarelli, a spokeswoman for JPMorgan in New York, declined to comment.

Trading in the Markit CDX Series 9 the past three weeks is signaling that JPMorgan may have exited much of the position Iksil built this year. Dealers reduced the net amount of protection they sold on Series 9 of the index by 35 percent to $29.6 billion in the three weeks ended June 15, according to the Depository Trust & Clearing Corp. That amount had climbed 53 percent to $45.8 billion in the 20 weeks ended June 1.

The surge in trading in the index this week suggests more unwinds have occurred, the Credit Suisse traders wrote in the note they sent to market participants.

Unprecedented Bets

Total net wagers on CDX Series 9 surged an unprecedented 67 percent to $150 billion in the 17 weeks ended April 27 as Iksil was said to have amassed his position, DTCC data show.

Bloomberg News first reported April 5 that the trader’s bets, which Dimon has said was intended to reduce a hedge the bank had put on to protect against a financial crisis or deteriorating economy, were so large that market participants said he was distorting prices. The people asked not to be identified because they weren’t authorized to discuss the trades.

Dimon declined to disclose the size of the loss when he testified before Congress yesterday, saying the bank will provide that information along with more details of the position when JPMorgan reports earnings on July 13.

After Dimon disclosed the $2 billion loss on May 10, the cost of CDX Series 9 swaps expiring in December 2017, the contract market participants have said was at the heart of the losses, surged as hedge funds and other traders placed opposite bets that the bank would be forced to unwind its position.

Index Rises

After the disclosure, the index climbed as much as 49 basis points to 175 basis points on June 5, according to prices from data provider CMA. The contracts have since fallen back to 156 basis points, according to CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market.

“You want to unwind it without losing your shirt, and at the same time, everybody’s watching what you’re doing and betting against you, so it’s a treacherous landscape to be unwinding the trade in,” MC Asset Management’s MacDonald said.

Credit swaps protecting against a loss on JPMorgan, which also jumped after the loss was announced, fell today to the lowest since May 30. Five-year contracts declined 4.1 basis points to 144.6 basis points as of 11:54 a.m. in New York, according to prices compiled by Bloomberg.

The swaps, which typically fall as investor confidence improves and rise as it deteriorates, pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.

Of the six biggest U.S. banks, swaps tied to JPMorgan’s debt are higher only than Wells Fargo & Co., at 106.3 basis points, the data show.

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