Financial markets always seem to repeat some "stories", such as Nick of Bahrain Bank. Allison, Kuku in UBS Group AG? After Adoboli, "London Whale" Bruno? Michelle? Ixil was born, and caused huge losses in JPMorgan Chase, which is famous for its steadiness. 20 12 5 10, JPMorgan Chase announced a loss of $2 billion in credit derivatives trading. But the problem does not stop there. Before the huge losses were announced, in April, JPMorgan Chase was accused of illegally disposing of Lehman clients' funds in the bankruptcy case of Lehman Brothers, and was fined $20 million. On May 30th, JPMorgan Chase was investigated by the Japanese financial supervision department for alleged insider trading related to Japan's Banyanzi rights offering plan (Japan Banyanzi Co., Ltd. is a Japanese glass manufacturer-editor's note). These events show that even for financial institutions with a good history of internal control, speculative impulse is inevitable, especially in the complex derivatives market, financial institutions will inevitably greatly expand their business and risks.
Three key words of "London whale" incident
Details of the transaction that caused JPMorgan Chase's huge losses have not been disclosed. At present, we only know that JPMorgan Chase traders, known as "London whales", made huge transactions in the credit default swap market, which led to the continuous distortion of some credit default swap market prices and brought huge risk exposure to JPMorgan Chase. All other detailed discussions about the "London Whale" incident are still confined to speculation. However, in the analysis and debate of the "London Whale" incident, three key words have been repeatedly mentioned, which is also the core conflict of the "London Whale" incident.
volcker rule
The "London Whale" incident made people pay attention to the risk isolation of financial institutions again. With the passage of 1999 "Financial Services Modernization Act", the American financial industry officially returned to the era of mixed operation. However, the subprime mortgage crisis made people see the systemic risks brought by high-risk derivatives trading, and tried to isolate the high-risk business of financial institutions in the financial supervision system. As the embodiment of this idea, the Volcker rule was put forward.
The so-called Volcker rule refers to Article 6 19 of Dodd-Frank Act. This article stipulates that: unless otherwise stipulated, banking institutions shall not engage in self-operated business, acquire or hold any common stock, partnership or other forms of owner's rights and interests, or initiate the establishment of hedge funds or private equity funds. Non-bank institutions regulated by the Federal Reserve should also have additional capital requirements and scale restrictions when engaging in the above business. This rule attempts to separate high-risk proprietary business from low-risk traditional business, but it is opposed by most financial institutions. Because most financial institutions in the United States have proprietary business, proprietary business has become an important source of profits, and the Volcker rule has seriously affected the profitability of financial institutions. Under the lobbying of financial institutions, the implementation of Volcker rule was delayed. On April 12 and 19, the Federal Reserve, the Futures Trading Commission, the Federal Deposit Insurance Corporation, the Monetary Authority and the Securities and Exchange Commission jointly issued the Notice on the Adaptation Period of the Volcker Rule, announcing that financial institutions applying the Volcker Rule can postpone the time to fully meet the requirements of the Volcker Rule until July+04,212065438.
JPMorgan Chase's huge losses pushed the Volcker rule to the forefront again. The transaction in the "London Whale" incident is no longer a loss problem of financial institutions caused by financial derivatives trading, but a market manipulation problem caused by financial derivatives trading out of control. This is quite similar to the "327 national debt incident" in China. It is the almost infinite trading position of the short side that leads to the failure of the market price to return to the theoretical value, which in turn leads to the deterioration of the whole market.
There are still two views on the discussion of Volcker rule. Supporters believe that it is JPMorgan Chase's huge transactions in credit risk derivatives that have forced JPMorgan Chase or its counterparties to accumulate a large number of positions, thus bringing systemic risks to the market. If the Volcker rule is strictly implemented, huge transactions will be restricted, which will neither seriously distort the operation of the credit derivatives market nor bring huge losses to both parties. Opponents believe that the Volcker rule lacks enforceability. On the one hand, JPMorgan Chase's derivatives trading is characterized by hedging risks, while the existing version of the Volcker Rule provides some exemptions from the ban on proprietary trading, such as making markets for customers and hedging risks related to customer transactions, but it does not completely prohibit banks from hedging transactions; On the other hand, the Volcker rule will further restrict the liquidity of the assets of banking financial institutions that are in trouble due to the disintermediation of the banking industry and the financial crisis, making them at a disadvantage when competing with other companies. At present, the debate between the two sides on the Volcker rule continues.
Value at risk method
The "London Whale" incident also made people pay attention to the risk internal control of financial institutions. As the most important risk control tool in JPMorgan Chase, Value at Risk (VaR) has been repeatedly mentioned.
First of all, the question to be answered is whether the value at risk hinders the disclosure of risk information. As early as during the Southeast Asian financial crisis, the problem that the value at risk is not helpful to manage small probability and huge losses was widely recognized and gradually supplemented by risk analysis tools such as stress testing. However, the "London Whale" incident further shows that the value at risk will also bring about the selective disclosure of risk information. Risk analysis tools such as stress testing can be used as a supplement to the value at risk, but these tools cannot be calculated day by day and easily decomposed like the value at risk, thus providing an optional "blank area" for the disclosure of risk information of financial institutions, enabling managers of financial enterprises to conceal potential small probabilities and huge losses in a certain period of time, and providing space for insider trading. Therefore, the U.S. Department of Justice, the Federal Bureau of Investigation and the Securities and Exchange Commission conducted a survey of JPMorgan Chase executives to find out whether they concealed the real risks of the transaction.
Secondly, the calculation model of value at risk is also controversial. To calculate the value at risk, it is necessary to determine the value distribution characteristics of financial products in a specific period in the future. In the original value-at-risk model, the value of financial products obeys normal distribution or lognormal distribution. However, historical data show that the actual value distribution of financial products has higher peak and thicker tail than normal distribution, which is called "peak fat tail" feature. In order to be closer to the real risk value, the risk value can be calculated by historical simulation, Monte Carlo simulation, pressure test and fractal distribution. Considering that the risk value ignores the risk exceeding the confidence interval, this paper puts forward the conditional risk value on the basis of the risk value, that is, the average value of the losses exceeding VaR. All kinds of calculation methods of value at risk and derived risk indicators have their own advantages and disadvantages, which leads people to discuss whether the loss is caused by the wrong model. When 20 12 was released in the first quarter, JPMorgan Chase changed the calculation method of the risk value of the Chief Investment Office (CIO), but did not change the calculation model of the investment banking department, which made the risk faced by CIO have different assessments before and after the model change. Different price confirmation methods in the model are also considered as the main reason for JPMorgan Chase's huge losses, and the US Securities and Exchange Commission is also examining the accuracy and timing of these changes disclosed by JPMorgan Chase.