JPMorgan Chase & Co’s loss-making bets on European bonds and credit-default swaps have sparked queries from market participants disgruntled by what they saw as out-of-step prices and aggressive tactics and saw the bank scrutinise how its positions were valued.
The bank has reviewed the valuations of some positions overseen by Gianfranco Canepa, former co-head of high-yield trading for Europe, the Middle East and Africa, according to people familiar with the matter. Marking the value of those trades using prices closer to other banks’ bids helped to push that book into a loss of $70mn for the year from a profit.
Some market participants have discussed with JPMorgan contacts what they viewed as aggressive trading tactics, some of the people said, who asked not to be identified as the talks were private. No individual has been accused of wrongdoing.
A spokesperson for JPMorgan declined to comment. Canepa didn’t respond to multiple attempts to contact him.
The losses came as one of the market’s biggest banks looked to seize on what has been a turbulent year for European high-yield debt. At the heart of the issue were two trades, a short position on the debt of French grocer Casino Guichard-Perrachon SA and a long position issued by Metalcorp, a subsidiary of commodities firm Monaco Resources Group SAM, the people said.
Canepa’s trading desk was a large buyer of credit default swaps that insure Casino’s debt as part of a wager that amounted to €500mn ($530mn), Bloomberg has reported. It then offered clients higher-than-average prices on such swaps, indicating a greater chance of default, according to pricing information seen by Bloomberg News.
It was also the only bank to market so-called recovery swaps on Casino, a niche form of credit derivatives that lets traders speculate on where the price of bonds will recover to if the firm goes into bankruptcy, some of the people said. In the over-the-counter world of high-yield credit trading, a desk’s view will often influence the prices and products it offers. But some traders and investors saw the moves as JPMorgan using its heft to push the market, the people said.
The unit also bought Metalcorp bonds in recent months and valued them in the range of 70 cents on the euro in early October, well above the range of 40-50 cents offered by rivals including Goldman Sachs Group Inc for debt of the troubled commodities firm, Bloomberg reported at the time.
That may have limited the markdown that JPMorgan would have had to take on its bet at that time. In a note to clients late last year, the lender said it had a long position in those bonds.
A spokeswoman for Casino declined to comment. Metalcorp didn’t respond to an email seeking comment.
The US bank’s European high-yield trading desk has since written down the value of trades, the people said. Market moves were more consequential in the swing to a loss than any changes in the way the positions were marked, the people said.
The team also used thinly traded derivatives to make a broader wager that the continent’s credit markets would decline, one of the people said. Such a trade would have been lucrative when the cost to insure against high-yield bonds defaulting — a measure of investor confidence in the sector — peaked in late September, but it has fallen in the last few months.
Many of Canepa’s trades slumped in the weeks around his departure for a role at GoldenTree Asset Management, Bloomberg reported on December 7. His bosses were aware of the positions before they led to losses, the people said.
The continent’s high-yield debts lost value for most of 2022 as companies were slammed by everything from rampant inflation, war in Ukraine, government turmoil in the UK and climbing interest rates. The industry has recovered since October, however, tripping up investors who had predicted further declines.
The losses are unlikely to represent a major dent in Wall Street’s biggest trading operation. But it could be the difference in the unit breaking the annual revenue record of $29.5bn it set two years ago. Analysts currently project the trading division to fall just short.