In April and May 2012, large trading losses occurred at JPMorgan's Chief Investment Office, based on transactions booked through its London branch.
A series of derivative transactions involving credit default swaps (CDS) were entered, reportedly as part of the bank's "hedging" strategy.
[7][8] In February 2012, hedge fund insiders such as Boaz Weinstein of Saba Capital Management[9] became aware that the market in credit default swaps was possibly being affected by aggressive trading activities.
The price of the CDX IG index reflects the credit risk of an underlying basket of North American investment-grade companies.
[26][27] JPMorgan's bet was that credit markets would strengthen; the index is based on 121 investment grade bonds issued by North American corporations.
[32] A report issued in January 2013 made the following "key observations"[33] In July 2017, U.S. prosecutors dropped criminal charges against two derivative traders from France and Spain after unsuccessful efforts to extradite them from their countries.
[34] The trades occurred within the Chief Investment Office (CIO), where staff were reportedly "faithfully executing strategies demanded by the bank's risk management model".
The company had been without a treasurer for five months during the time of the trades and had a relatively inexperienced executive, Irvin Goldman, in charge of risk management in the CIO.
[37] The Volcker Rule, part of the Dodd–Frank Wall Street Reform and Consumer Protection Act, bans high-risk trading inside commercial banking and lending institutions.
The Volcker rule is sometimes referred to as "a modern Glass-Steagall firewall that separates core banking system from higher-risk, hedge fund-style proprietary trading".