JPMorgan Chase & Co. (JPM) has offloaded majority of its derivative positions that were the culprit behind its trading loss, CNBC first reported on Wednesday. The derivatives led to about $2 billion marked-to-market loss for JPMorgan in the first six weeks of the current quarter.
JPMorgan has sold approximately 65-70% of its holdings in Series 9 of the CDX North America Investment Grade Index (CDX.NA.IG 9). In May, the company had announced the loss in its Chief Investment Office (CIO) with respect to the synthetic credit portfolio.
The portfolio was meant to protect JPMorgan against potential losses in its large holdings of loans, deposits and bonds. However, the hedging strategy backfired as the repositioning of the credit portfolio was poorly monitored and executed.
As per the data available with London-based Markit Group Ltd., the trading volume in CDX.NA.IG 9 has surged significantly over the last couple of days. On Tuesday, trades worth $31 billion took place in this particular index where normal daily trading contracts are in the range of $1-$5 billion.
Though JPMorgan has not come up with any official statement regarding this, the traders stated that offloading of derivative holdings is most likely coming from the company. Further, the CEO has been concealing the details of the trades in the hope that the company can unwind the position of its derivatives easily.
As a result of the trading loss, JPMorgan had to face the wrath of the investors, employees and regulators alike. Further, Fitch Ratings and Standard & Poor’s (S&P) revised their assessments on the company.
Additionally, the company temporarily suspended its $15 billion share repurchase program and decided to remove the private equity-like operations – the special investments group – from its CIO. We believe these restructuring efforts are part of the overall audit of JPMorgan’s risk management abilities. The company is scheduled to reveal the full status of its derivative position and updated loss forecast while announcing its second quarter results on July 13.
Currently, JPMorgan retains a Zacks #4 Rank, which translates into a short-term Sell rating. One of its peers, Bank of America Corporation (BAC) retains a Zacks #3 Rank (a short-term Hold rating).
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