Blog News Events Publications Directory Community Industry Voices Media

Path To CFTC’s Whale Case Seen in U.K. Settlement

The U.S. Commodity Futures Trading Commission is still chasing J.P. Morgan’s “London whale,” even after U.K. regulators settled over the same conduct.

The CFTC didn’t join the $920 million settlement with J.P. Morgan Thursday because it’s still investigating whether the bank manipulated derivatives markets in early 2012 with the large positions that earned trader Bruno Iksil the nickname “London whale.” The bank disclosed Thursday it was notified by the CFTC that “staff intends to recommend enforcement action” against the bank and that it had received a so-called “Wells” notice.

Of concern to the CFTC is whether traders increased their positions in complex derivatives–contracts tied to investment-grade corporate bonds—in order to drive down prices in the market to improve the accounting of their portfolio’s overall profit. The agency is expected to use its new, expanded powers to go after manipulation at the bank. Under new powers it gained through the 2010 Dodd-Frank law, the CFTC must only prove traders were reckless, not intentionally manipulating prices.

AdvertisingION Commodities

The U.K.’s Financial Conduct Authority, which settled its charges last week, stopped short of saying J.P. Morgan manipulated the market, but said the firm “failed to observe proper standards of market conduct.”

The FCA settlement details how the trades had the potential to move prices and benefit traders, especially at the end of the month when they marked their positions. The FCA said traders were trying to “limit the damage,” as one of the traders said in an e-mail quoted in the settlement.

“The size and manner of the trading had the potential to affect the price” of derivatives at a time when the traders “stood to benefit from a lower price,” the FCA said in the settlement.

The FCA said that traders sold derivatives even though prices were falling at a time when a downward movement of one basis point would improve the traders “mark to market profit and loss” by approximately $34.7 million.

J.P. Morgan’s trades could have “contributed to the month end price” of the derivative index “being at a lower level than it would otherwise have been,” the FCA said.

The Justice Department has indicted two of the former J.P. Morgan employees involved in the trades, Javier Martin-Artajo and Julien Grout, for allegedly faking books and hiding hundreds of millions of dollars in losses. Mr. Grout’s lawyer said last week his client was a junior employee and had been “unjustly played as a pawn” in the case. A lawyer for Mr. Martin-Artajo hasn’t commented.

Javier Martin-Artajo allegedly put pressure on other traders to “defend their positions” at the end of the month when the traders’ positions would come under greater scrutiny, according to the federal grand jury indictment against him.

Prosecutors didn’t charge the two former traders with manipulation, but allege they increased their positions “as part of a strategy designed in part to stem the losses.”

Representatives for J.P. Morgan and for the CFTC both declined to comment.