By Christopher Whittall
LONDON, April 10 (IFR) – Senior credit traders believe hedge
funds are trying to squeeze positions held by renowned JP Morgan
trader Bruno Iksil by leaking details of his purported positions
to the press.
Stories broke late last week that Iksil’s positions were
creating distortions in credit markets, with a range of hedge
funds and banks cited as sources.
One buy-sider said that the tale was nothing more than
rampant speculation and dismissed the idea that the trader may
have broken some of the indices, given the many factors
affecting synthetic and broader markets such as troubled
sovereigns, banks, and low liquidity.
Some traders attributed the press leaks to an attempt to
squeeze and profit from a move in the market by firms that had
taken the other side of his trades, which were causing them a
lot of pain.
“The market is very illiquid in general and people have very
much reduced risk limits – this creates weird price actions.
This sounds like a bunch of disgruntled hedge funds trying to
take advantage of the poor liquidity in the market and force him
to cut his positions,” said a senior trader at a major bank.
Iksil, who works in JP Morgan’s London office, was reported
to be long the Series 9 of the Markit CDX North America
Investment Grade index (CDX.IG.NA.9), with a Bloomberg report
suggesting he had built up a $100bn position in the index.
Iksil is well-known and respected in the market in his role
in JP Morgan’s Chief Investment Office, which manages macro
risks across the whole of the bank’s operations. The CIO often
uses credit instruments to hedge tail-risk scenarios across the
bank’s books.
If the CIO’s position is a hedge, it seems unlikely that it
will be forced to exit.
Meanwhile, hedge funds could have been badly burnt if they
took a short position on the Series 9 contract that Iksil is
reportedly long.
The five-year contract more than halved from its high of
166.85bp last October to a low of 63.49bp in March, and is due
to expire in December this year. The index has since rallied
slightly to 78.97bp at close yesterday.
The Series 9 stands apart from other “off-the-run” indices
not least because it was used to hedge synthetic CDOs and
tranches, but also it had four names – Fannie, Freddie, CIT
Group and Washington Mutual – that all eventually defaulted.
It was the last index which had an active tranche market and
commenced trading as the “on-the-run” on September 21, 2007
rolling six months later.
CIO’S DEEP POCKETS
JP Morgan’s CIO is focused “on hedging aggregate structural
risks and investing to bring our assets and liabilities into
better risk alignment. They are not focused on short-term
profits,” JP Morgan spokesperson Joe Evagenlisti wrote in an
email.
JP Morgan’s Treasury and CIO has a combined investment
portfolio of $356bn as of end of 2011 (around 16% of the firm’s
total assets) to hedge the bank’s company-wide risk such as
changes in interest rates, foreign exchange and credit risk.
Some observers have cast doubt on the likelihood of one
trader amassing a net CDS position in Series 9 which is greater
than the combined derivative holdings of all except six banks.
They also point out a $100bn gross notional would be quite
appropriate to hedge JP Morgan’s credit risk exposure or its
liquid asset portfolio for risk management purposes.
“We have a lot of high grade credit as we lend to
blue-chip companies, so we buy credit derivatives in the case
those credits deteriorate. [In this case] we had a big hedge
against credit deteriorations and then had to take some off that
off,” said one source at the bank.
JP Morgan’s CIO- and Iksil in particular – is renowned in
the market for taking large positions. Many attribute this to
the size of JP Morgan’s banking franchise and the consequent
size of risks it has to hedge, with a balance sheet of around
$2.3trn.
Even without factoring in offsetting losses elsewhere in the
bank, profits in the CIO business division where traders
including Iskil work, delivered in 2011 only $411 million of JP
Morgan’s $19 billion of net income, or about two percent,
according to the company’s financial disclosures.
In 2010, the business showed profit of $670 million, or
about 4 percent, of $17.4 billion of net income. In 2009, a year
of exceptional turbulence in financial assets, the unit showed
profits of $3.1 billion, one-fourth of reported net income.
JP MORGAN’S BLACK BOX?
There remains an air of mystery around Iksil and the CIO due
to its sprawling nature and the size of positions it takes.
Dealers are reluctant to discuss Iksil’s activity openly as he
is a client, but they reject the notion that he is running large
outright positions.
“The CIO is a massive black box and he’s is a very big
trader, but that’s because JP Morgan is massive house and he’s
managing the overall risk,” said the senior trader at a major
bank.
“It can easily be misconstrued what the JPM CIO actually
does and spun much worse than it actually is,” added one head of
European credit trading at a major bank.
The remuneration policy of the CIO also undermines the
theory that it takes outright punts on the market. Traders are
understood to be evaluated and paid on how closely they deliver
the assigned offsets to positions elsewhere in the bank.
In other words, as long as trades hedge as intended, the
trader would get paid the same amount if the positions lost $100
million as if they made $100 million.
Many other banks are also understood to have comparable
functions to JPM’s CIO. The French banks, Citigroup, Deutsche
Bank and UBS were all cited as examples of large treasury
functions that hedge credit exposures across their institutions
in similar ways.
“JP Morgan is a big company and therefore through their CIO
they would have to take significant positions, but nothing that
would be qualified as abnormal,” said one global head of credit
trading at a major bank.
