JP Morgan Chase Bank has been fined a total of £572m by UK and US regulators over the “London Whale” $6.2bn trading losses incurred by the bank.
The FCA has fined the firm £137.6m, the US Securities and Exchange Commission has imposed a fine of $200m (£124.4m), the Office of the Comptroller of the Currency fined the firm $300m, and the Federal Reserve levied a fine of $200m.
The FCA says the trading losses, which occurred in 2012, were caused by JP Morgan’s “high risk trading strategy, weak management of that trading and an inadequate response” to information which flagged the risks.
The UK regulator says JP Morgan’s trading strategy for its synthetic credit portfolio caused the size of its positions to grow so large it was at risk of substantial losses from small adverse market movements.
JP Morgan assumed the amounts which indicated rules on risk limits had been breached were unreliable and doubted whether risk measurements were accurate.
When significant losses began to emerge last year, JP Morgan traders sought to hide the scale of the losses by mismarking positions, which went undetected due to flaws in valuation controls.
Ahead of publishing an earnings statement in the US in May 2012, senior mangement commissioned a review of synthetic credit portfolio valuations. The FCA says the review failed to uncover the extent of the valuation problems, and that senior management failed to act on the inconsistencies raised in light of the extent of the portfolio’s losses.
As a result JP Morgan’s earnings statement in May overvalued the portfolio’s positions, and the company had to restate its earnings in July.
The FCA says during the first half of last year, JP Morgan failed to co-operate with the UK regulator and hid the extent of the losses as well as “numerous serious and significant issues” relating to to the synthetic credit portfolio.
FCA director of enforcement and financial crime Tracey McDermott says: ”When the scale of the problems at JPMorgan became apparent, it sent a shock-wave through the markets. We consider JPMorgan’s failings to be extremely serious such as to undermine the trust and confidence in UK financial markets.
“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 and as things began to go wrong, the firm didn’t wake up quickly enough to the size and the scale of the problems. What is worse, they compounded this by failing to be open and co-operative with us as their regulator.”