[ by Melanie Gretchen and Howard Haykin ]

JPMorgan, having lost $6.2 billion on London Whale derivative trades, has adopted yet another model for judging the risk of its credit derivatives positions.  The new VaR model aims to "achieve consistency with like products" within the corporate and investment banks. 

"This change had an insignificant impact" to average VaR for fixed income and the investment bank’s trading and credit portfolio, the NY-based bank said.

4th Time's the Charm? The new VaR model is the 4th employed by the bank since the Chief Investment Office adopted a risk formula in January 2012 that unduly understated the risk of the London Whale's portfolio at the time.  The switch in VaR models - underyling reasons and circumstances for the move - currently is under Federal investigation.  It's interesting to note that the VaR model adopted by the CIO was not being used in any other area of the bank at the time.

The VaR model estimates the most amount of money a trading position can lose on 95% of the trading days.

Prior to the 2013 switch in risk models, the last switch in models took place in Q3 of 2012, and reduced the bank's estimated risk by 24%, to $115 million.

SEC Scrutiny.  The controversial switch in VaR models also is under investigation by the SEC.  One particular aspect that interests the SEC is the timing of the firm’s disclosures and the point in time when bank executives knew about the CIO’s swelling bets and losses.  In June, Mr. Dimon defended the firm, which uses data going back 1 year, in which case the VaR figure might fall just because a volatile week was no longer included in the calculation.

The models "never are totally accurate in capturing changes in business, concentration, liquidity or geopolitics."

For further details, go to [Bloomberg, 4/12/13].

To contact Melanie Gretchen: melanie@compliance-insights.com; Howard Haykin: howard@compliance-insights.com.