'London whale' drives market, say investors

Updated: 2012-04-09 08:06

(China Daily)

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'London whale' drives market, say investors

Traders at work on the floor of the New York Stock Exchange. Bruno Iksil, a London-based JPMorgan Chase & Co trader who specializes in credit-derivative indexes, has been nicknamed "the London whale" by some traders. Investors have complained that Iksil's trades may be distorting prices and are affecting bondholders who use the instruments to hedge hundreds of billions of dollars in fixed-income holdings. Jin Lee / Bloomberg

Iksil prompting price moves in derivatives trading of $10 trillion

A JPMorgan Chase & Co trader of derivatives linked to the financial health of corporations has amassed positions so large that he's driving price moves in the $10 trillion market, traders outside the company said.

The trader is London-based Bruno Iksil, according to five counterparts at hedge funds and rival banks who requested anonymity because they're not authorized to discuss the transactions. Iksil specializes in credit-derivative indexes, a market that has overtaken corporate bonds during the past decade to become the biggest forum for investors betting on the likelihood of company defaults.

Investors complain that Iksil's trades may be distorting prices, affecting bondholders who use the instruments to hedge hundreds of billions of dollars of fixed-income holdings. Analysts and economists also use the indexes to help gauge perceptions of risk in credit markets.

Though Iksil reveals little to other traders about his own positions, they say they've taken the opposite side of transactions and that his orders are the biggest they've encountered. Two hedge fund traders said they have seen unusually large price swings when told by dealers that Iksil was in the market. Some traders refer to Iksil as "the London whale," according to one person in the business.

Joe Evangelisti, a spokesman for New York-based JPMorgan, declined to comment on Iksil's specific transactions. Iksil didn't respond to phone messages and e-mails seeking comment.

The credit indexes are linked to the default risk on a group of at least 100 companies. A credit-default swap is a financial instrument used by investors to hedge against losses on corporate debt or to speculate on a company's creditworthiness.

Iksil may have "broken" some credit indexes - Wall Street lingo for creating a disparity between the price of the index and the average price of credit-default swaps on the individual companies, the people said. The persistence of the price differential has frustrated some hedge funds that had bet the gap would close, the people said.

'London whale' drives market, say investors

Some traders have added positions in a bet that Iksil will eventually liquidate some holdings, moving prices in their favor, the people said.

Unlike JPMorgan traders who buy and sell securities on behalf of customers, Iksil works in the chief investment office. The unit is affiliated with the bank's treasury, helping to control market risks and investing excess funds, according to the lender's annual report.

"The chief investment office is responsible for managing and hedging the firm's foreign-exchange, interest-rate and other structural risks," said Evangelisti. It is "focused on managing the long-term structural assets and liabilities of the firm and is not focused on short-term profits".

Iksil probably traded under close supervision at JPMorgan, said Paul Miller, an analyst at FBR Capital Markets in Arlington, Virginia.

"The issue is how much capital they're putting at risk," said Miller, a former examiner for the Federal Reserve Bank of Philadelphia.

A US curb on proprietary trading at banks, meant to reduce the odds they'll make risky investments with their own capital, is supposed to take effect in July. Regulators are still determining how the so-called Volcker rule will make exceptions for instances where companies are hedging to curtail risk in their lending and trading businesses.

Wall Street banks including JPMorgan, Goldman Sachs Group Inc and Morgan Stanley have submitted comment letters and met with regulators to discuss their complaints about the rule.

"Several agencies claiming jurisdiction over the Volcker rule have proposed regulations of mind-numbing complexity," said JPMorgan Chief Executive Officer Jamie Dimon in his annual letter to shareholders last week. "Even senior regulators now recognize that the current proposed rules are unworkable and will be impossible to implement."

JPMorgan had $4.14 billion of combined revenue last year from the chief investment office, treasury and private-equity investments, according to the annual report. The treasury and chief investment office held a combined $355.6 billion of investment securities as of December 2011, up 14 percent from a year earlier, according to a year-end earnings statement.

Chief Investment Officer Ina Drew, who runs the unit, was among JPMorgan's highest-paid executives in 2011, earning $14 million, a 6.8 percent pay cut from 2010, the bank said in a regulatory filing last week. Drew referred a request for comment to Evangelisti.

Iksil has earned about $100 million a year for the chief investment office in recent years, the Wall Street Journal said in an article, citing people familiar with the matter.

Iksil joined JPMorgan in 2005, according to his career- history record with the UK Financial Services Authority. He worked at the French investment bank Natixis SA between 1999 and 2003, according to data compiled by Bloomberg.

Bloomberg News in New York