JPMorgan Chase & Co. has agreed to pay a $100 million penalty, and admitted that its traders acted “recklessly” during a series of London trades that ultimately cost the bank $6 billion.
The settlement, announced Wednesday by the Commodity Futures Trading Commission, comes less than a month after JPMorgan, the nation’s largest bank, agreed to pay $920 million and admit fault in a deal with the Securities and Exchange Commission and other U.S. and British regulators.
The stunning trading losses that surfaced in April 2012 shook the financial world and damaged JPMorgan’s reputation. The CFTC deal differs from the previous agreement in that JPMorgan is formally acknowledging that its traders recklessly distorted prices to reduce the banks’ losses at the expense of other market participants. In the SEC agreement, JPMorgan admitted only that it failed to supervise those traders.
The bank “recklessly disregarded the fundamental precept on which market participants rely: that prices are established based on legitimate forces of supply and demand,” the CFTC said in a news release.
According to the agency, JPMorgan traders in London sold off $7 billion in derivatives tied to a price index of corporate bonds in one day — including $4.6 billion worth in a three-hour span.
Derivatives are investments whose value is based on some other investment, such as oil and currencies. JPMorgan was betting that the price of the index would drop. When the traders sold their derivatives, the price of the index plunged.
That was a “staggering volume” and the most ever traded by the bank in one day, according to the CFTC. The traders realized that the huge volume of the derivatives they had amassed could affect the market, and they decided to do so, the agency said.
New York-based JPMorgan, in a statement, said, “We are pleased to be able to put behind us another aspect of the … trading matter by the resolution of the CFTC investigation.”
The agreement marks the first time the CFTC used a new legal authority from the 2010 financial overhaul law that is designed to prohibit reckless market conduct.
Under this new authority, the CFTC can sanction companies or individuals for manipulating the market without proving they had a specific intent to do so. It defines manipulation as a trading strategy employed “in reckless disregard” of its potential effect and harm to the market. Selling a large volume of derivatives in a compressed time period to protect against losses constituted a “manipulative device,” the CFTC said.
Enforcement Director David Meister said the agency now is “better armed than ever to protect the market.”
The CFTC action could be seen as a warning to other financial institutions to refrain from similar conduct.
Sen. Maria Cantwell, D-Wash., who wrote the anti-manipulation provision of the law, said the new authority provides “a bright line of what activities won’t be tolerated on Wall Street.”
“The best policeman is a rule that basically everyone understands and lives by,” she said.
In addition to paying the $100 million, JPMorgan agreed in the settlement to continue to take steps to tighten its oversight of derivatives trading with an eye to reducing risk.
The Justice Department has been investigating JPMorgan for possible criminal violations in connection with the London trades. One of the traders involved, Bruno Iksil, was known as the “London Whale” for the outsize bets he made that could roil markets.
JPMorgan was one of the few financial institutions to come through the 2008 financial crisis without suffering major losses. The trading loss raised concern about continued risk-taking by Wall Street banks five years after the financial crisis plunged the country into the worst recession since the Great Depression of the 1930s.
The fallout ensnared JPMorgan CEO Jamie Dimon, who initially dismissed news reports of the huge bets by the London operation as a “tempest in a teapot.” He later acknowledged the magnitude of the losses, admitted to Congress that the bank failed in its oversight and took a multi-million-dollar pay cut.
Federal prosecutors in New York filed criminal charges in August against JPMorgan traders Javier Martin-Artajo and Julien Grout. Martin-Artajo supervised the bank’s trading strategy in London, and Grout, his subordinate, was in charge of recording the value of the investments each day. They were charged with conspiracy to falsify books and records, commit wire fraud and falsify filings to the SEC.
Both traders, through their lawyers, have denied any wrongdoing. No charges have been brought against Iksil. Prosecutors say he tried to raise questions about how his colleagues were recording the trades.
The settlement with the CFTC comes at a time when JPMorgan is in talks with the Justice Department to resolve unrelated claims dating back to the 2008 financial crisis. The payout could be as much as $11 billion, to resolve claims over its sales of mortgage-backed securities in the run-up to the crisis.