JPMorgan trader Iksils heft said to distort indexes in $10-trn credit derivatives market

Written by Bloomberg | Updated: Apr 7 2012, 09:33am hrs
A JPMorgan Chase trader of derivatives linked to the financial health of corporations has amassed positions so large that hes driving price moves in the $10-trillion market, traders outside the firm said.

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

Investors complain that Iksils 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 theyve taken the opposite side of transactions and that his orders are the biggest theyve encountered. Two hedge fund traders said they have seen unusually large price swings when they were told by dealers that Iksil was in the market.

Joe Evangelisti, a spokesman for New York-based JPMorgan, declined to comment on Iksils specific transactions. Iksil didnt respond to phone messages and emails seeking comment.

The credit indexes are linked to the default risk on a group of at least 100 companies. The newest and most active index of investment-grade credit rose the most in almost four months on Thursday.

The Markit CDX North America Investment Grade Index of credit-default swaps Series 18 climbed 4.4 basis points to a mid-price of 97 basis points at 5:13 pm in New York. The price of the index is quoted in yield spreads, which rise along with the perceived likelihood of increased corporate defaults.

A credit-default swap is a financial instrument that investors use to hedge against losses on corporate debt or to speculate on a companys 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 the 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.

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

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

The chief investment office is responsible for managing and hedging the firms foreign-exchange, interest-rate and other structural risks, Evangelisti said. Its 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 theyre 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 theyll 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 firms 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, JPMorgan Chief Executive Officer Jamie Dimon said in his annual letter to shareholders released this week. Even senior regulators now recognise 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 JPMorgans highest-paid executives in 2011, earning $14 million, a 6.8 percent pay cut from 2010, the bank said in a regulatory filing this week. Drew referred a request for comment to Evangelisti.

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

The trader may have built a $100 billion position in contracts on Series 9 of the Markit CDX North America Investment Grade Index, according to the people, who said they based their estimates on the trades and price movements they witnessed as well as their understanding of the size and structure of the markets.

The positions, by the banks calculations, amount to tens of billions of dollars and were built with the knowledge of Iksils superiors, a person familiar with the firms view said.