Is J.P. Morgan In The Process Of Unwinding Its Massive IG9 Trade?

Bloomberg Businessweek – Trading Surge in Index Behind JPMorgan Loss Signaling Unwind
Trading in the credit derivatives index that contributed to JPMorgan Chase & Co. (JPM) (JPM)’s losses in its London chief investment office soared to a record yesterday in a sign that the biggest U.S. bank may be unwinding its position, according to data cited by Credit Suisse Group AG. Volume in Series 9 of the Markit CDX North America Investment Grade Index surged the past two days, with a record $31 billion of the contracts, which expire December 2017, traded yesterday, Credit Suisse traders said today in an e-mail to market participants, citing data from Markit Group Ltd. That compares with an average of $2 billion to $3 billion, the traders said…The bank has sold 65 percent to 70 percent of its losing position and is still selling the rest, CNBC reported earlier today…Trading in the Markit CDX Series 9 the past three weeks is signaling that JPMorgan may have exited much of the position Iksil built this year. Dealers reduced the net amount of protection they sold on Series 9 of the index by 35 percent to $29.6 billion in the three weeks ended June 15, according to the Depository Trust & Clearing Corp. That amount had climbed 53 percent to $45.8 billion in the 20 weeks ended June 1. The surge in trading in the index this week suggests more unwinds have occurred, the Credit Suisse traders wrote in the note they sent to market participants.

FT Alphaville (FT Blog) – Approaching the beach
CNBC is reporting on Wednesday that JPMorgan has sold a substantial amount of its loss-making synthetic credit portfolio…To which we raise an eyebrow and say, “really?” On Tuesday, FT Alphaville ranted about discussed how it baffles us that the regulators didn’t spot the Whale’s positions earlier. We presented this graph using DTCC data, to give a sense of just how much the risk taking activity in the Markit CDX.NA.IG.9 index grew since the beginning of the year. This is the one credit index that we know for certain that JPMorgan is in, i.e. even the regulator is on record about it. The last data point in the above was for $138bn of net notional. The next data point, released late Tuesday, is $136bn and that’s the total outstanding on the untranched index as of June 15th. That’s not a lot of movement at all. But then we looked at the MarkitSERV activity data to check if something has been going on more recently, i.e. this week. This dataset is daily to DTCC’s weekly, and is activity (new and terminated trades on a given day) rather than total outstanding positions (whenever traded).

That Tuesday spike of $31bn is pretty incredible, isn’t it? Like — biggest amount of trading on a day since MarkitSERV started measuring the data. Also, if someone had sold a lot of protection in the first few months of 2012, and exited recently (likely by just taking the other side of the trade and buying), that would have crystalised a fair amount of loss. Interesting. This is definitely a milestone in the saga then…The other thing that’s being mentioned, and quite rightly, is that Wednesday happens to be an “IMM date”. Options on CDS expire, as do some CDS contracts themselves. Hence it’s completely normal to have a spike in activity. It’s the magnitude of the above that leads us to believe that something big did indeed happen on Tuesday. Not 65-70 per cent of the Whale’s position worth of “big”, but at least the first convincing (public) sign we’ve seen that the positions are being managed down.


The volume data shown in the chart above is current as of Tuesday’s close.  Unfortunately the DTCC only offers weekly data on notional amounts outstanding.  As of June 15, the net notional amount of CDX.NA.IG.9 outstanding had not fallen appreciably.  If J.P. Morgan has truly exited the majority of its IG9 position in the past couple days, the chart below should show a considerable drop when the June 22 data is released next Tuesday.

Source: Bianco Research

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