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2014 Part II Published Materials


Hi all, I tend to agree with @cdbsmith .

I don't know if this is of any help, but I have started weeks ago reading through some of the readings for P2.T9 (the so-called "Current Issues"), some seemed interesting to me, some not quite, anyhow, I tried to pick out the points/ideas which seemed to me the basic take-aways from the texts and I've written them in a word document (albeit in many cases it was just a mere "copy and paste" from the "Conclusion" sections or similar places in the texts). What I mean is it doesn't currently have the quality of the Study Notes provided by @David Harper CFA FRM CIPM , but it could save some people here the time that I took to skim through the texts (the JPMorgan Whale Trade text had over 300 pages...:confused:) and if anyone wants to adapt/expand the document - feel free. :) It's not really ready though, I planned to upload it in this thread/this forum at the beginning of next week - that is unless @David Harper CFA FRM CIPM or anyone here tends to disagree with this.
As I said, it's basically an attempt to boil the total of ~600 pages of all the current readings input by GARP with no intention of completeness/100% accuracy.
Hi @Alex_1,

Would you kindly send the current issues doc to me? Thanks!


Active Member
Would you kindly send the current issues doc to me? Thanks!

I just want the material that helps me pass, as time gets nearer to the exam I'm less concerned about the stuff "practitioners need to know to perform their job" but then again, I'm pretty practical like that.

Just for my information. Is FRM part 2 overhauled? everything seems less thought out than for frm part 1... or maybe that's just my feeling.
Well, @Pfilf, if the FRM exam is done correctly, it should be based on what FRM candidates need to know. So, my statement was about both the exam AND real life for would-be FRM practitioners. Frankly, all of the material is potentially testable. So, if you are interested in passing the exam, you should read the actual GARP-assigned readings, note summarized notes. It is fools gold to just assume that you exam will just be based on the prep notes. There is always a chance that something on the exam is not covered in the prep material. So, again, if you want the only the material that will help you pass the exam, you SHOULD READ THE GARP-ASSIGNED READINGS as all of the testable material is included.

I think you just took out all the nuances out of my post. Anyway everyone learns differently. I'm probably going to have a better chance with the notes and vids than with the assigned readings.

Anyone who pays for exam prep, must understand that they are getting prep material based on the prep provider's best guess about what may appear on the exam. So, naturally, some (perhaps, many) details are lost since we are using prep notes and not the actual reading material. So, for me, the biggest bang for my buck is to get help deciphering the more complex formula-based material, which are highly like to be tested on the exam. I think we can all agree that, given the 10% exam-weighting assigned to "Current Issues", we can potentially miss all of those questions and still pass the exam. So, if you fail, it won't just be because of current issues. But, if you are able to master the other 90% of exam-weighted material, you will have an excellent chance of passing the exam.
I understand. But since it's a prep for the exam, I'm more interested in the value added towards the exam. As for best guess, I'm confident that David knows better than me what and how things are going to be tested.
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Hi all, I tend to agree with @cdbsmith .

I don't know if this is of any help, but I have started weeks ago reading through some of the readings for P2.T9 (the so-called "Current Issues"), some seemed interesting to me, some not quite, anyhow, I tried to pick out the points/ideas which seemed to me the basic take-aways from the texts and I've written them in a word document (albeit in many cases it was just a mere "copy and paste" from the "Conclusion" sections or similar places in the texts). What I mean is it doesn't currently have the quality of the Study Notes provided by @David Harper CFA FRM CIPM , but it could save some people here the time that I took to skim through the texts (the JPMorgan Whale Trade text had over 300 pages...:confused:) and if anyone wants to adapt/expand the document - feel free. :) It's not really ready though, I planned to upload it in this thread/this forum at the beginning of next week - that is unless @David Harper CFA FRM CIPM or anyone here tends to disagree with this.
As I said, it's basically an attempt to boil the total of ~600 pages of all the current readings input by GARP with no intention of completeness/100% accuracy.

Hi, just to make sure...
I thought that for JPMorgan Whale Trade only Executive summary (pg. 2- 17) is assigned reading.
Not all 300 pages!

Also, for reading MFGlobal - 75 pages (not 101)

From FRM Study guide 2014:
73. U.S. House of Representatives Subcommittee Report on MF Global (through p. 75), November 2012.*
74. “JPMorgan Chase Whale Trades: A Case History of Derivatives Risks and Abuses—Executive Summary,” U.S. Senate Subcommittee on Investigations, April 2013.*
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Active Member
Hi guys,

@irenab thanks for the hint, I didn't realize that and I have almost read all the paper on JPMorgan some weeks ago...

Anyway attached is my "work-in-progress" document which I actually wanted to post next week, but since some of you requested to see the current version I am uploading it now.

Some remarks:
  • JPM: really interesting paper, especially the conversations between the traders, I sometimes felt like an NSA agent reading confidential recordings :cool: Also this is the summary I have probably invested the most time in.
  • MFGlobal: I frankly don't understand why the AIM states "through p. 75", as the findings and recommendations (which in my opinion are the most relevant parts for the FRM candidates) come after p. 75... Someone please contradict me with respect to this, I read almost the entire article, but up to page 75 there are too many details on the pre-Corzine era and what the meetings between MFGlobal and the regulators entailed etc., I think this is way too much detail. My document covers only the parts from p. 75 onwards. I frankly miss the time and the patience to rework this paper. :(
  • Towards better reference rate practices – a central bank perspective: almost only copy-and-paste from conclusions
  • OTC Derivatives - A comparative analysis of regulation in US, EU, Singapore: almost only copy-and-paste from conclusions, the remarks from @joacogimeno discouraged me somehow to dig deeper in this article (due to the innacuracies he/she pointed out)...
  • A New Look at the Role of Sovereign Credit Default Swaps: actually an interesting article (imo), I attempted to "summarize" the summary at the beginning and to highlight the content from the conclusion
  • Capital Planning at Large Bank Holding Companies - Supervisory Expectations and Range of Current Practice: not that captivating in my opinion, therefore for now I extracted the conclusion and attempted to map more details to the AIM (e.g. one of the AIMs is
    • "Describe practices which can result in a strong and effective capital adequacy process for a BHC in [...] Internal controls, including model review and validation" and I have added from the paper the bullet points on i) Scope of Internal Controls ii) Internal Audit etc. with the goal of filling the content there, but I did not get to that until now...)
So, what I can say, I hope this helps (somehow) and I am fully aware this is not a top-notch summary, but it's the best I could do with juggling full-time work and going through study notes, videos and PQs in the evenings/at night or during week-ends. As I mentioned earlier, any critique, remark, addition to the document is welcome, ideally someone who has gone in more depth in one or more of the papers can improve/add to the summaries and share with the forum. :D

I can't seem to upload it in the forum so I uploaded it in dropbox, hope you open it, if not let me know:


Best regards,

I became even more discouraged after I asked GARP about this matter. They replied that questions are based exclusively on the readings, and thus, if it came down to it, one would have to answer the (factually) "wrong" answer that is shown in the readings.

If you are not familiar with the topic I would recommend going through the reading and disregarding completely my input above.

PS: It is a "he"


Active Member
does anyone know if there is a global topic review for Risk Management & Investment Management?

also does anyone know if the chapter 17 litterman (risk monitoring and performance measurement) is the same as the chapter by Jacob Rosengarten en Peter Zangari?

it is the exact same chapter and has the exact same chapter title...
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Active Member
Thanks a lot @Alex_1 , does this cover all the assigned readings in current issues section?
Hi @Steve Jobs , well the document contains information on the readings from the current issues section (as laid out by GARP for 2014) except for the Caruana text, which was already covered by David. I am not so sure the wording "cover" applies best to my document, because it is certainly not as comprehensive as it would have been if David had written it. :) I just made an attempt at having some sort of wrap-up of the information which seemed most relevant to me.

David Harper CFA FRM

David Harper CFA FRM
Staff member
Hi, just a quick update:
  • We've published Study Note summaries of R73 (MF Global) and R74 (JPMorgan Chase Whale Trades). The summary (curation, really: I retained most of the source text and emphasized selection and highlighting for quick processing) for the Whale Trades took me longer than I expected (I spent the better part of the last three days editing it). I could not agree more with @Alex_1, the JPM is fascinating. But it's a challenging text to summarize/curate. I will be working on the rest of T9 Current Issues through the weekend and into next week (in addition to other notes we are trying to publish, and forum support, and writing next week's practice questions, and writing the trivia, because I refuse to give up on fun stuff). But I do expect to be able to finish up the T9 summaries next week (we'll publish them up one at a time)
  • @Pflik Re: "does anyone know if there is a global topic review for Risk Management & Investment Management?" I just this week finished the last question set for a fresh T8. Investment Global Topic Review, so yes, we have that and Nicole will be publishing it ASAP (within a few days I'd expect). Thanks,


David Harper CFA FRM

David Harper CFA FRM
Staff member
Thanks @Alex_1 I really appreciate that (and your other support!). I was shocked (and disgusted) by the findings of the JPM subcommittee investigation, I did not realize how bad it was. I also did not realize the JPM CIO was $350 billion (assets not notional, really?) and yet it was so mismanaged. And the lack of ethics (e.g., plainly false public statement) is truly disappointing, no wonder many people take a dim view of the industry. I remember keenly all the public talk about how it was a "hedge" gone wrong but the facts were contrary to most of the public assertions about that (the committee, as i read it, didn't even have to confront a plausible hedge narrative, whaaaattt ?????); that's some audacious lack of leadership.

David Harper CFA FRM

David Harper CFA FRM
Staff member
@mali_shailesh There will not be any additional mock exams before upcoming May exam. I am still writing fresh questions on new topics (e.g., Gregory Counterparty currently, then I shift to a new sequence of Basel III), so I won't shift to mocks until will "fill some of those gaps." We'll add new mocks ahead of the November exam; related, our developers are starting to build on online (dynamic) quiz model, so the new mocks will deliver (in addition to PDF) in an online ("simulated exam") format. Thanks,


New Member
Thank you David for the continued updates. I am a little puzzled by your summary of the JPM Whale piece, however. The executive summary, the only assigned portion of the reading, was merely 17 pages long. Your summary, however, is 43 pages long. Is your summary delving into the details of the 300+ page piece beyond the executive summary? If so, isn't this beyond the scope of the test? Granted, the piece is quite interesting (in fact, much more so than many of the dry assigned readings), but I wonder if your limited time (and ours) wouldn't be better served addressing holes in your coverage of the core testable curriculum, i.e. a video for the 4 chapters of Gregory or new Basel readings that are currently missing.

David Harper CFA FRM

David Harper CFA FRM
Staff member
Hi @WiseSnail I don't think the Exec Summary necessarily elaborates on the AIM. For example, consider the AIM "Identify the five key risk metrics used by the CIO and explain how the CIO responded to breaches of these metrics in the SCP portfolio." And here is what's in the 17-page Exec Summary with respect to "Identify the five key risk metrics used by the CIO:"
The CIO used five key metrics and limits to gauge and control the risks associated with its trading activities, including the Value-at-Risk (VaR) limit, Credit Spread Widening 01 (CS01) limit, Credit Spread Widening 10% (CSW10%) limit, stress loss limits, and stop loss advisories.
e.g., from the summary, we get zero definition of any of these metrics, did i miss it? My question for you is: based on the Executive Summary alone, would you be able to tell me?
  • What VaR approach JPM used?
  • The definition of CS01
  • The definition of CSW10%
You say "beyond the scope of the test" as if there is some clearly defined test boundary condition for these current readings (or any of the readings); e.g., why do you suppose there isn't a single Current Issues question in GARP's 2014 P2 Practice? (is it possible they weren't even sure about the scope when they wrote the practice paper). This notion of a precisely defined exam scope (my term is carefully chosen, I am not referring to depth or relevance etc) is a concept not supported by several facts.

Yes, I do agree with you, as I implied above, that prioritizing T9 current readings is a tactical mistake. But some of our customers are relentless (we received another email yesterday and today) about "holes," as you call them, like the T9 summaries. My real problem, frankly, is the high cost of communication created by our transparent (forum) approach.

Re: the other "holes:" we already have some Gregory videos, new Gregory videos are coming in the second semester. I am eager to update and do the "missing" Basel reading, that's coming in the second semester (Nov), for sure. But not in the next two weeks. Just FYI.
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New Member
Understood, thanks. We all appreciate your hard work and the immense value-added of BT's active, open forums. As for "scope", I had assumed it to be what's in the assigned readings only, but I agree with you that the AIMs are not thoroughly addressed by what is assigned in this particular case.

Nicole Seaman

Chief Admin Officer
Staff member

Although I agree with you that maybe the T9 materials should not be prioritized quite as much, I do feel that the study notes we published were very informative and were not a waste of our time, as it is beneficial to know the whole story. Reading through the notes once to get the whole story and then focusing on the AIMs in the GARP curriculum is much more beneficial than not knowing the entire story. Especially as GARP tests concepts and substance (which often don't span literal reading boundaries).

This is just my opinion, but that is how I would want to study the reading. I would want to know the whole story, and have notes on the whole story, before I dive right into the AIMs. It is much easier to understand something if you know everything that happened, and if all of the details are in one place (i.e. our study notes). Like you said, it is an interesting piece and is a pretty easy read so having all of those study notes can be really beneficial. :)

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Active Member
Hi all,

@Steve Jobs told me that my dropbox link above is not functioning correctly.

Since I am not sure when I will have reliable access to dropbox (long story why...) I will attempt to copy the text from the Word document here. I am aware that the entire text will not fit into a message, but I'll split it up. If this solution is not ok for someone here I would kindly ask @Nicole Manley or @David Harper CFA FRM CIPM to give some advice regarding attaching documents (I couldn't attach the word document, I've tried this on several computers, modified the file type from *.docx to *.doc, still didn't work).

So PART I of the upload:
FRM – Part 2 – Current Issues in Financial Markets –Overview/Summary of Readings
General remarks
(no guarantees for completeness/accuracy)
· I’ve listed the titles of the current issues and then copied the FRM AIMs (as provided by GARP)
· My initial goal was to first summarize the papers and then attempt to “map” the content to the AIMs; unfortunately I have failed at this due to time constraints…
· Some passages are mere copy-and-paste from the conclusions/relevant sections
· Basically everything is still work in progress (as of 27.04.2014)
MF Global Staff Report
• Describe the unauthorized trading incident at MF Global and the events leading up to the appointment of Jon Corzine.
• Explain how the risk exposure at MF Global changed during Jon Corzine’s leadership.
• Explain the frictions associated with Corzine’s requests to increase MF Global’s European repurchase-to-maturity position limits, and the response by risk management and the board of directors to these requests.
• Summarize the evolution of MF Global's accounting practices for its European RTM positions, particularly in capturing the default risk of the RTM positions.
• Explain the increasing liquidity demands on MF Global and the company’s response to these demands.
• Describe the net capital rule and the effects of the capital charge imposed by FINRA, and summarize the events of the final days of MF Global.

In order to raise institution’s profit, the newly appointed CEO (Jon Corzine) decided to employ a new strategy: entering into European RTM (repurchase-to-maturity) trades collateralized by European sovereign bonds.
MF Global disclosed that it “enters into securities financing transactions that mature on the same date as the underlying collateral” and that it “accounts for these transactions in accordance with the accounting standard for transfers and servicing and recognizes a gain or loss on the sale…of the collateral assets, and records a forward commitment [to repurchase the collateral]
MF Global neither recorded the derivatives as assets or liabilities on its consolidated balance sheet, nor did it reflect any losses or gains attributable to the derivatives on its income statement
Findings and Recommendations:
· Jon Corzine caused MF Global’s Bankruptcy and put Customer Funds at risk.
· The SEC and the CFTC failed to share critical information about MF Global with one another, leaving each regulator with an incomplete understanding of the Company’s financial health
· MF Global was not forthright with Regulators or the Public about the Degree of its Exposure to its European Bond Portfolio, nor was the Company forthright about its Liquidity Condition.
· Moody’s and S&P failed to identify the biggest risk to MF Global’s financial health.
· MF Global's use of the “Alternative Method” allowed the company to use some customer funds as a source of capital for the company's day-to-day operations, which subjected customers to the risk that MF Global would not be able to return those funds to customer accounts upon the Company’s insolvency.
· The New York Fed should have exercised greater caution in determining whether to designate MF Global as a Primary Dealer, given the Company’s prior risk management failures, chronic net losses, and evolving business strategy.
· Differences between foreign and U.S. law gave rise to the potential that MFGI (MF Global Inc.) global customers trading on foreign exchanges would experience a “shortfall” in funds owed to them, despite the fact that such funds were set aside in accounts designated as secured accounts.
· […Work in Progress…]

JPMorgan Chase “Whale Trade”
• Summarize the “London Whale” trades in JP Morgan’s Structured Credit Portfolio (SCP) between 2008 and mid-2012 and explain how portfolio size and portfolio risks increased over this period.
• Explain how the Chief Investment Office (CIO) changed its method of reporting SCP trades in 2012 and explain how losses reported by this method differed from the SCP’s internally reported losses during that time.
• Identify the five key risk metrics used by the CIO and explain how the CIO responded to breaches of these metrics in the SCP portfolio.
• Summarize the deficiencies in risk management practices related to the SCP, including the VaR model change.
• Compare how the CIO reported its SCP trading intentions and activity to its regulating authority, the OCC, with the actual trading activity which took place at the bank.
• Explain how investors, regulators, and the public were misinformed about the nature, activities, and riskiness of the SCP.

Executive Summary
A. Subcommittee Investigation
The JPM Whale Trade case first drew the attention of the public in April 2012. The JPM CEO testified in two hearings and answered questions on the case in June 2012. Between July 2012 and beginning of 2013 the US Senate Permanent Subcommittee on Investigation collected and reviewed several bank internal documents and communication transcripts and cooperated in the investigation with the Office of the Comptroller of the Currency (OCC), the Federal Deposit Insurance Corporation (FDIC) and the Securities Exchange Commission (SEC). The key employees involved in this case (Achilles Macris, Javier Martin-Artajo, Bruno Iksil and Julien Grout) declined requests for interviews and were beyond of the Subcommittee’s subpoena authority as non-US residents.
B. Overview
The JPMorgan Chief Investment Office (CIO) used its Synthetic Credit Portfolio (SCP) engaged in high-risk derivatives trading. “The Subcommittee’s investigation has exposed not only high risk
activities and troubling misconduct at JPMorgan Chase, but also broader, systemic problems
related to the valuation, risk analysis, disclosure, and oversight of synthetic credit derivatives
held by U.S. financial institutions.”
1) Increasing Risk
Ø The CIO was created as a separate unit within the bank in 2005 with the goal of investing JPM’s excess deposits
Ø In 2006 the CIO started trading synthetic credit derivatives, with this trading activity being named the Synthetic Credit Portfolio (SCP) as of 2 years later
Ø In 2011 the SCP’s net notional size grew more than ten times to 51bn USD
Ø In Dec. 2011 JPM Chase instructed the CIO to reduce its Risk Weighted Assets (RWA), but at the beginning of 2012 the CIO engaged in a purchase of additional long credit derivatives to offset its short derivative positions and lower its RWA (instead of disposing of the high risk assets). This took the portfolio into a net long position and eliminated the hedging protections the SCP should originally provide
Ø By Q1 2012 the net notional increased to over 150bn USD, but at the same time the CIO traders increased the SCP’s holdings, the portfolio was losing value; towards the end of March Ina Drew (the CIO Head) ordered a trading stop
Ø JPM’s CEO Jamie Dimon admitted that the SCP grew into something which created new and potentially large risks rather than providing a “hedge”
2) Hiding Losses
Ø In the first four years since inception the CIO produced gains but in 2012 it opened the year with sustained losses
Ø To minimize the public impact of the losses the CIO began to employ different valuation and reporting practices, especially by assigning more favorable prices to its credit derivatives within the bid-ask spread (instead of “midpoint prices” as this was the case until the beginning of 2012)
Ø This lead to different P&L reports being published and to collateral valuation disputes with the CIO counterparties
Ø The bank’s Controller noticed this difference in valuation practices in an internal bank memorandum, but this document generally upheld CIO valuations
Ø The bank did not view the CIO as engaging in mismarking of assets until June 2013
Ø JPM told the Subcommittee that the key consideration leading to the restatement of the bank’s losses for the Q1 earnings was its determination that the London CIO personnel had not acted in “good faith” when marking the SCP book, which meant the SCP valuations had to be revised.
Ø [Direct quote from paper] “The ability of CIO personnel to hide hundreds of millions of dollars of additional losses over the span of three months, and yet survive internal valuation reviews, shows how imprecise, undisciplined, and open to manipulation the current process is for valuing credit derivatives.”
3) Disregarding Risk
Ø The CIO used five risk metrics associated with its trading activities: VaR, Credit Spread Widening (CS01), Credit Spread Widening 10% (CSW10%), stress lost limits and stop loss advisories. The limits on all five metrics were breached in Q1 2012
Ø In February 2012 a JPM key risk metric warned that the SCP risked posting a 6.3 bn USD loss, but this forecast was not taken seriously by the CIO
Ø The various breaches of the SCP were regularly reported up to JPM’s highest management level but didn’t lead to any reviews or immediate actions taken; more than this the CIO personnel frequently attacked the accuracy of risk metrics and attempted to downplay their significance
Ø [Direct quote from paper]: The bank’s actions not only exposed the many risk management deficiencies at JPMorgan Chase, but also raise systemic concerns about how many other financial institutions may be disregarding risk indicators and manipulating models to artificially lower risk results and capital requirements.
4) Avoiding and Conducting OCC Oversight
Ø Before 2012 the CIO disclosed very little information to the OCC, with the OCC admitting to the Subcommittee that the earliest reference of the SCP didn’t appear in any communication to them until Jan. 2012
Ø The OCC didn’t conduct any review of the CIO portfolios prior to 2012 and at some points failed to notice and follow up on red flags
Ø [Direct quote from paper]: “The JPMorgan Chase whale trades demonstrate how much more difficult effective regulatory oversight is when a bank fails to provide routine, transparent performance data about the operation of a large derivatives portfolio, its related trades, and its daily booked values. They also demonstrate the OCC’s failure to establish an effective regulatory relationship with JPMorgan Chase founded on the bank’s prompt cooperation with OCC oversight efforts. JPMorgan Chase’s ability to dodge effective OCC oversight of the multi-billion-dollar Synthetic Credit Portfolio until massive trades, mounting losses, and media reports exposed its activities, demonstrates that bank regulators need to conduct more aggressive oversight with their existing tools and develop more effective tools to detect and stop unsafe and unsound derivatives trading.”
5) Misinforming Investors, Regulators and the Public
Ø CIO Whale Trades not disclosed to the public prior to April ‘12
Ø “Mr. Dimon dismissed media reports about the SCP as a “complete tempest in a teapot.”
Ø JPMorgan’s CFO (Douglas Braunstein) stated that they informed risk management on a firm-wide level about their positions, however JPMorgan’s CRO (John Hogan) declared that “prior to the April press reports, he had been unaware of the size and nature of the SCP, much less its mounting losses
Ø Mr. Braunstein said that the SCP positions were “fully transparent to the regulators,” who “get information on those positions on a regular and recurring basis as part of our normalized reporting.” In fact, the SCP positions had never been disclosed to the OCC in any regular bank report.
Ø Mr. Braunstein also stated that with regard to “managing” the stress loss positions of the Synthetic Credit Portfolio, “[a]ll of the decisions are made on a very long-term basis.” In fact, the CIO credit traders engaged in daily derivatives trading, and the bank conceded the SCP was “actively traded.”
Ø Mr. Braunstein indicated that the SCP was intended to provide “stress loss protection” to the bank in the event of a credit crisis, essentially presenting the SCP as a portfolio designed to lower rather than increase bank risk. But in early April, days before the earnings call, Ms. Drew told the bank’s executive committee that, overall, the SCP was “long” credit, a posture that multiple senior executives told the Subcommittee was inconsistent with providing protection against a credit crisis.
Ø Mr. Braunstein declared in an investors call: “[W]e believe all of this is consistent with what we believe the ultimate outcome will be related to Volcker.” The Volcker Rule is intended to reduce bank risk by prohibiting high risk proprietary trading activities by federally insured banks, their affiliates, and subsidiaries. However, the Volcker Rule also allows certain trading activities to continue, including “risk-mitigating hedging activities.” Mr. Braunstein’s statement gave the misimpression that the SCP was “hedging” risk (which, as the investigation proved, it was not)
Ø Near the end of January, the bank approved use of a new CIO Value-at-Risk (VaR) model that cut in half the SCP’s purported risk profile, but failed to disclose that VaR model change in its April 8-K filing, and omitted the reason for returning to the old model in its May 10-Q filing.
C. Whale Trade Case History
The investigation brought various deficiencies to light:
· Systemic problems with regard to the way synthetic derivatives are traded and recorded
· Systemic problems with regard to the way synthetic derivatives are managed for risk
· Evidence that the “whale trades” were not acts of rogue traders but involved some of bank’s most senior managers
D. Findings of Fact
1) Increased Risk Without Notice to Regulators:
In Q1 2012 JPM CIO used bank deposits, including some that were federally insured, to construct a 157bn USD portfolio of synthetic credit derivatives, engaging in high-risk, short-term trading strategies
2) Mischaracterized High Risk Trading as Hedging: JPM claims the SCP functioned as a hedge but failed to provide more details with regard to this “hedge”
3) Hid Massive Losses: the CIO hid more than 660mn USD in losses during 2012 by a) overstating the value of its credit derivatives b) ignoring red flags that the values were inaccurate c) supporting reviews which exposed SCP’s questionable pricing practices
4) Disregarded Risk: JPM disregarded the breach of 5 of the major risk limits on the SCP and allowed the CIO to raise the limits and continue trading
5) Dodged OCC Oversight: JPM did not alert the OCC to the nature and extent of its portfolio (by omitting SCP’s growing size, complexity, risk profile & losses)
6) Failed Regulatory Oversight: OCC failed to investigate CIO trading activity, tolerated bank reports which omitted CIO-specific performance data, failed to question a new VaR model that dramatically lowered the SCP’s risk profile etc.
7) Mischaracterized the Portfolio: JPM downplayed the SCP size, risk profile and losses describing it as the product of long-term investment decision-making to reduce risk and produce stress loss protection
E. Recommendations
(1) Require Derivatives Performance Data:
Regulators to require banks to identify all portfolios containing derivatives over a specified notional size and require periodic reports with detailed performance data for those portfolios; to conduct annual reviews in order to detect undisclosed
(2) Require Contemporaneous Hedge Documentation: Regulators to require the establishment of hedging policies which demand a detailed documentation when setting up a hedge, together with information on assets being hedged, risk associated with these assets, how and when the hedge will be tested for effectiveness and how (any by whom) the hedge will be unwound. Additionally periodic test results with regard to hedge effectiveness should be set up by the banks
(3) Strengthen Credit Derivative Valuations: Banks should be encouraged to use independent pricing services or prices reflecting actual, executed trades etc.
(4) Investigate Risk Limit Breaches: Regulators should track and investigate trading activities that cause large or sustained breaches of VaR, CS01, CSW10%, stop loss limits, or other specified risk or stress limits or risk metrics.
(5) Investigate Models That Substantially Lower Risk: Disclosure and investigation of any risk or capital evaluation model which materially lowers the purported risk or regulatory capital requirements for a trading activity/portfolio
(6) Implement Merkley-Levin Provisions: (a.k.a. the Volcker rule) this regulation should put an end to high-risk proprietary trading activities and to the build-up of high risk assets at federally insured banks (respectively at their affiliates)
(7) Enhance Derivative Capital Charges: Additional capital charges for derivatives trading characterized as “permitted activities under Merkley-Levin should be imposed.
Issues of concern involve primarily the April 2012 public disclosures which included: (1) mischaracterizing the involvement of the bank’s risk managers in SCP positions; (2) mischaracterizing the SCP as “fully transparent to the regulators;” (3) mischaracterizing SCP decisions as “made on a very long-term basis;” (4) mischaracterizing the SCP as a hedge; (5) asserting the SCP whale trades would be allowed under the Volcker Rule; and (6) omitting disclosure of a key VaR model change at the CIO. The mischaracterization of the SCP as a hedge was repeated again publicly in May 2012.


Active Member

Towards better reference rate practices – a central bank perspective
•Describe the risk components of market interest rates and explain their implications in choosing a proper reference rate.
•Describe recent market trends which have encouraged market participants to consider changing reference interest rates.
•Explain the implications of reference rates on the transmission of monetary policy, including potential challenges.
•Explain how the use of reference interest rates can impact the financial stability in a banking system.
•Describe characteristics of effective reference rates.
•Explain the role of the public sector in the setting and oversight of reference rates, and in encouraging change and supporting transition to new reference rates when necessary.

Good reference rate practices, including reliable and robust reference rates that embody sound governance procedures and the adequate use of such reference rates, bring substantial economic benefits. As discussed above, it is therefore essential that market participants use robust and reliable reference rates that are adequately governed and administered and free from market abuse, and are able to choose rates that are most consistent with their business needs. In their responsibility for monetary policy and financial stability objectives, central banks have a genuine interest in the use of reference rates in a way that supports the efficient and stable functioning of the financial system and in reference rates which are robust even during times of stress.
Central banks should continue to support the development of well-functioning money markets, in line with their primary policy objectives. This includes close monitoring of developments and structural changes in the relevant markets, and constructive interaction with market participants on an ongoing basis. While initiatives to improve reference rate practices should be led by the private sector, due to their public-good nature, private sector investment in the production of the reference rates tends to be low. Thus, central banks see two other areas where they can contribute. The actual form of involvement will depend on the extent of market failure and country-specific, respectively currency-area specific, circumstances, including market structure and institutional arrangements.
(i) Enhancing the reliability and robustness of reference interest rates
Resilient reference rates, especially during times of stress, will contribute to maintaining the proper functioning of the monetary transmission mechanism and the stability of the financial system. Recognizing that much work has already been conducted or is underway in various forums, there are a range of actions central banks or other parts of the public sector should take in this area. They include:
· promoting better governance and oversight of rate setting processes and possible ways to deal with stigma issues surrounding the publication of individual quotes;
· promoting sound rate setting processes based on the enhanced use of transaction data combined with the transparent and appropriate use of expert judgment and, where appropriate, promoting the introduction of robust fallback procedures;
· continuing to work with market participants to improve the availability of information and statistics on the pricing and activity in underlying markets as well as related markets; and
· engaging in a dialogue with the private sector on how financial contracts can deal with situations where reference rates may become unavailable for prolonged periods.
(ii) Enhancing reference rate choices
Having the choice among a number of reliable reference rates would (i) enable market participants to select those which are most consistent with their needs, and thus (ii) enhance the resilience of the financial system by better aligning reference rate uses.
The combination of strong network economics, coordination problems and transaction costs may hamper the transition to alternative reference rates that better fit users’ business needs. There are a range of possible measures central banks could take to promote additional choices and to alleviate constraints to transition from verbal encouragement to more active involvement. They include:
· Considering (where appropriate) whether there is a case for a more active role in guiding and facilitating a transition by, for example, working with market participants and other public authorities to review and possibly reduce possible practical, legal and accounting constraints to transition. Aiding the transition to new reference rates would be particularly crucial if central banks believe that there is a growing discrepancy between the economic rationale and the actual use of existing reference rates or if the quality of governance and administration of existing rates is unsatisfactory;
· Facilitating informed reference rate choices by improving transparency of markets from which reference rates are derived, e.g. by encouraging the provision of information on market activity and other relevant data;
· Where appropriate, promoting the development of (near) credit risk free policy-related reference rates such as overnight rates, OIS fixed rates and GC repo rates. Specifically, central banks could further assess what obstacles currently prevent greater use of such rates and encourage the private sector, where necessary, to take steps to standardize reference OIS rates and promote the development of related basis swap markets. In certain cases, central banks or supervisory authorities could become more actively involved in producing reference rates. The decisions to do so would depend on the mandate of the individual central bank and the evolution of money markets in each jurisdiction.