The Financial Conduct Authority has fined JPMorgan Chase Bank £137m for serious failings related to its Chief Investment Office (CIO). Without a discount for early settlement the fine would have been £196m.
The fine is part of a £570m set of fines from four regulators - including the FCA - over the so-called "London Whale" trader failings.
The FCA said JPMorgan's conduct demonstrated flaws permeating all levels of the firm: from portfolio level to senior management, resulting in breaches of Principles 2, 3, 5 and 11 of the FCA's Principles for Businesses - the fundamental obligations firms have under the regulatory system.
The FCA says that the breaches occurred in connection with the US$6.2 billion trading losses sustained by CIO in 2012. These losses arose as a result of what became known as the "London Whale" trades, and were caused by a high risk trading strategy, weak management of that trading and an inadequate response to important information which should have notified the firm of the huge risks present in the CIO's Synthetic Credit Portfolio (SCP).
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Tracey McDermott, the FCA's director of enforcement and financial crime, said: "When the scale of the problems at JPMorgan became apparent, it sent a shock-wave through the markets. Maintaining the integrity of markets is a key part of our wholesale conduct agenda. We consider JPMorgan's failings to be extremely serious such as to undermine the trust and confidence in UK financial markets."
"This is yet another example of a firm failing to get a proper grip on the risks its business poses to the market. There were basic failings in the operation of fundamental controls over a high risk part of the business. Senior management failed to respond properly to warning signals that there were problems in the CIO. Firms must learn the lessons from this incident and ensure that they have business practices, values and culture to control the risks in their businesses."
FCA summary of key facts:
• The trading strategy for the SCP in 2012 caused the size of its positions to grow so large that it was at risk of substantial losses from even a small adverse market move.
• However the firm's response to breaches of relevant risk limits was to assume the numbers indicating a breach were unreliable or to doubt the accuracy of the methodology for risk measurement and to approve temporary limit increases without adequate analysis of the root cause of the breaches.
• When significant losses began to mount during 2012, JPMorgan's traders sought to conceal them by mismarking positions and through misconduct in the market in which the losses were occurring. Mismarking went undetected in 2012 owing to flaws in valuation controls, some of which had existed since 2007.
During the first half of 2012, JPMorgan failed to be open and co-operative with the FCA in that it concealed the extent of the losses as well as numerous serious and significant issues regarding the situation in the SCP. JPMorgan's failings were extremely serious and undermined trust and confidence in UK financial markets.
JPMorgan agreed to settle at an early stage of the FCA's investigation. JPMorgan therefore qualified for a 30 per cent discount under the FCA's settlement discount scheme. Without the discount the fine would have been £196m.
This was a significant cross-border investigation, and the FCA has thanked the US Securities and Exchange Commission, US Attorney's Office for the Southern District of New York, Federal Bureau of Investigation, Office of the Comptroller of the Currency, New York Federal Reserve Bank and the US Commodity Futures Trading Commission for their co-operation.