Law Commons^™

Jpmorgan Chase London Whale H: Cross-Border Regulation, Arwin G. Zeissler, Andrew Metrick

Journal of Financial Crises

As a global financial service provider, JPMorgan Chase (JPM) is supervised by banking regulatory agencies in different countries. Bruno Iksil, the derivatives trader primarily responsible for the $6 billion trading loss in 2012, was based in JPM’s London office. This office was regulated both by the Office of the Comptroller of the Currency (OCC) of the United States (US) and by the Financial Services Authority (FSA), which served as the sole regulator of all financial services in the United Kingdom (UK). Banking regulators in the US and the UK have entered into agreements with one another to define basic parameters …

Jpmorgan Chase London Whale G: Hedging Versus Proprietary Trading, Arwin G. Zeissler, Andrew Metrick

Journal of Financial Crises

In December 2013, the primary United States financial regulatory agencies jointly adopted final rules to implement Section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which is often referred to as the “Volcker Rule”. Section 619 prohibits banks from engaging in activities considered to be particularly risky, including proprietary trading and owning hedge funds or private equity funds. Banking regulators designed the final rule against proprietary trading in part to prevent losses like the $6 billion London Whale loss that took place in 2012 at JPMorgan Chase. Given the controversial nature of the Volcker Rule, it is …

Jpmorgan Chase London Whale F: Required Securities Disclosures, Arwin G. Zeissler, Giulio Girardi, Andrew Metrick

Journal of Financial Crises

On April 13, 2012, JPMorgan Chase (JPM) Chief Financial Officer Douglas Braunstein took part in a conference call to discuss the bank’s first quarter 2012 earnings. Coming just a week after media reports first questioned the risks taken by JPM derivatives trader Bruno Iksil, Braunstein made a series of assertions about the trades. On May 10, JPM finalized its first quarter financial results, which included some disclosures regarding Iksil’s trading that were substantially different from Braunstein’s statements of April 13. At issue is whether the regulatory filings on April 13 and May 10, as well as verbal comments by Braunstein …

Jpmorgan Chase London Whale E: Supervisory Oversight, Arwin G. Zeissler, Andrew Metrick

Journal of Financial Crises

As a diversified financial service provider and the largest United States bank holding company, JPMorgan Chase (JPM) is supervised by multiple regulatory agencies. JPM’s commercial bank subsidiaries hold a national charter and therefore are regulated by the Office of the Comptroller of the Currency (OCC). Since the bank’s Chief Investment Office (CIO) invested the surplus deposits of JPM’s commercial bank units, the OCC was also CIO’s primary regulator. During the critical period from late January through March 2012, when CIO traders undertook the failed derivatives strategy that ultimately cost the bank $6 billion, JPM did not provide the OCC with …

Jpmorgan Chase London Whale D: Risk-Management Practices, Arwin G. Zeissler, Andrew Metrick

Journal of Financial Crises

JPMorgan Chase (JPM) prided itself on having the best risk-management practices in the financial industry, having survived the 2007-09 financial crisis in better shape than many competitors. Chief Executive Officer Jamie Dimon often spoke of the bank’s “fortress balance sheet.” A keen focus on risk management is vital to JPM’s longevity, as is the case with all highly leveraged financial institutions. However, the JPM Task Force that investigated the $6 billion 2012 London Whale trading loss concluded that risk-management practices at the bank’s Chief Investment Office (CIO), the unit in which the loss occurred, were given less scrutiny by senior …

Financial Regulation In The (Receding) Shadow Of Antitrust, Samuel N. Weinstein

Articles

Mounting evidence that a number of key industries in the U.S. economy have become less competitive in recent years is prompting a renewed national conversation about an enhanced role for antitrust enforcement. But there are limits on the anticompetitive conduct antitrust enforcers and private plaintiffs can reach, especially in regulated markets. This is due in part to the doctrine of implied antitrust immunity: when a court perceives a conflict between the antitrust laws (e.g., the Sherman Act) and a regulatory regime (e.g., the securities laws), it may find immunity for conduct that otherwise would violate the antitrust laws. Two Supreme …

The Lehman Brothers Bankruptcy G: The Special Case Of Derivatives, Rosalind Z. Wiggins, Andrew Metrick

Journal of Financial Crises

When it filed for bankruptcy protection in September 2008, Lehman Brothers was an active participant in the derivatives market and was party to 906,000 derivative transactions of all types under 6,120 ISDA Master Agreements with an estimated notional value of $35 trillion. The majority of Lehman’s derivatives were bilateral agreements not traded on an exchange but in the over-the-counter (OTC) market. Because derivatives enjoyed an exemption from the automatic stay provisions of the U.S. Bankruptcy Code, parties to Lehman’s derivatives could seek resolution and self-protection without the guidance and restraint of the bankruptcy court. The rush of counterparties to novate …

Going Unconventional In Foreign-Exchange Interventions, Marcelo M. Prates

Journal of International Business and Law

Much has been said about unconventional monetary policy. But what about unconventional exchange-rate policy? More specifically, what about central banks using derivatives to avoid excessive currency volatility? The Central Bank of Brazil (BCB) has resorted to it for more than 15 years now, as I reveal in this article.

Since 2002, the BCB uses swaps to provide stability to the foreign-exchange market -- the BCB FX swap. These swaps offer the BCB an alternative to trading U.S. dollars in the spot market, a traditional policy tool that can quickly lose its effectiveness when markets are frothy. By the end of …

Evaluating The Costs And Benefits Of A Smart Contract Blockchain Framework For Credit Default Swaps, Ryan Clements

William & Mary Business Law Review

Despite wide speculation about its use-value, there are very few large-scale Blockchain implementations, particularly in sophisticated financial applications and mature markets. The extent of Blockchain’s disruptive potential in these domains is uncertain. This Article considers Blockchain’s use-value for credit default swap contract execution, fulfillment, and post-trade processing by using, as an assessment base, a series of derivative industry whitepapers, academic and technological evaluative studies, and commentary relating to current market undertakings. In summary, when applied to credit default swaps, there are many barriers to implementation, as well as costs, fragmentation risks, technological deficiencies, and practical drawbacks. As a result, there …

Informed Trading And Cybersecurity Breaches, Joshua Mitts, Eric L. Talley

Faculty Scholarship

Cybersecurity has become a significant concern in corporate and commercial settings, and for good reason: a threatened or realized cybersecurity breach can materially affect firm value for capital investors. This paper explores whether market arbitrageurs appear systematically to exploit advance knowledge of such vulnerabilities. We make use of a novel data set tracking cybersecurity breach announcements among public companies to study trading patterns in the derivatives market preceding the announcement of a breach. Using a matched sample of unaffected control firms, we find significant trading abnormalities for hacked targets, measured in terms of both open interest and volume. Our results …