NEW YORK ( TheStreet) --The Commodity Futures Trading Commission on Wednesday entered into a $100 million settlement agreement with JPMorgan Chase ( JPM) related to the bank's "London Whale" trading debacle. The regulator charged the bank with violation of a new Dodd-Frank prohibition against "manipulative conduct." "..
By selling a staggering volume of these swaps in a concentrated period, the Bank, acting through its traders, recklessly disregarded the fundamental precept on which market participants rely, that prices are established based on legitimate forces of supply and demand," the CFTC said in its order. As part of the settlement, JPMorgan admitted to reckless behavior on the part of its traders, the CFTC said. However, it did not go so far as to admit that it broke the law. According to a JPMorgan spokesperson Joseph Evangelisti, the bank admitted to "certain facts set out in the order." However, the bank "neither admitted nor denied the CFTC's legal conclusion that there was a violation." The violation charged in the CFTC's Order concerns the bank's trading of one particular credit default index -- IG9 10Y. As the end of February 2012, the bank's London traders had a net short position in the index of $65 billion. "On February 29, just ahead of the month-end testing of their marks, the traders believed the portfolio's situation was grave," the order said."That day, desperate to avoid further losses, the traders developed a resolve, as they put it, to 'defend the position.' Recognizing that the sheer size of their position in IG9 10Y had the potential to affect or influence the market, the traders recklessly sold massive amounts of protection on the IG9 10Y. They were short protection and they sold more protection. "Specifically, with the portfolio standing to benefit as the IG9 10Y market price dropped, on February 29 the CIO sold on net more than $7 billion of IG9 10Y, a staggering volume -- far and away the largest amount the CIO ever traded in one day -- $4.6 billion of which was sold during a three-hour period as the day drew to a close," the order said.
The decision to defend the position by selling huge volumes of the index in a single day "constituted a manipulative device employed by the traders in reckless disregard of the possible consequences of their conduct," the order charged. The case marks the first time the CFTC is using its enhanced powers under Dodd-Frank to charge players for reckless behavior. According to a Wall Street Journal report, Republican Commissioner Scott O'Malia dissented from the agency's settlement, saying the commission "should have taken more time to investigate whether the company is liable for a more serious violation, namely price manipulation." The CFTC however proceeded with the charges on the grounds that the new laws no longer require the regulator to prove that prices were distorted, only that behavior was reckless. "As this case demonstrates, the Commission is now better armed than ever to protect the market from traders, like those here, who try to 'defend' their position by dumping a gargantuan, record-setting, volume of swaps virtually all at once, recklessly ignoring the obvious dangers to legitimate pricing forces," David Meister, the CFTC director of enforcement said in a statement. JPMorgan is facing a mounting legal tab as it faces charges on multiple fronts. The bank set aside more than $9 billion toward legal reserves in the third quarter, causing it to post a loss for the first time since CEO Jamie Dimon took over as CEO in 2006. In its most recent earnings report last week, the bank disclosed for the first time that it had $23 billion in reserves to deal with litigation issues. -- Written by Shanthi Bharatwaj New York. >Contact by Email. Follow @shavenk