The UK Financial Services Authority, the regulator, has started a probe into JP Morgan to find out if traders in London breached rules connected to incorrect bets on derivatives that cost the US banking giant billions of dollars.

The FSA started a probe into the losses, revealed in the spring of 2012, at the bank’s chief investment office at the offices in London. Other organisations involved in the investigation are the US Justice Department and the Securities and Exchange Commission. Meanwhile, the New York Federal Reserve Bank and the Office of the Comptroller of the Currency have issued cease-and-desist orders against JP Morgan. 

“The Financial Services Authority's (FSA) regulatory response to this matter is ongoing and it is liaising with other regulators,” the watchdog said in an emailed statement late yesterday. “In addition to its extensive supervisory agenda, the FSA is continuing to conduct a formal enforcement investigation into the trading losses. Conclusions will be reached in the enforcement investigation in due course and any further appropriate action determined at that time,” it said.

While not strictly a wealth management issue, the losses at this large bank highlight the reputational damage that can be caused by such adverse news headlines. Firms such as UBS, for example, have also sustained large trading losses in recent years, leading to management resignations and restructuring of business units. (In the case of UBS, it lost $2.3 billion due to a London-based rogue trader who was subsequently convicted and jailed last year.)

JP Morgan, a bank that had been one of the few big financial firms to emerge with its status enhanced rather than diminished through the 2008 financial crisis, suffered an estimated $6.2 billion in losses caused by wrong-way bets on the credit derivatives market.

A UK trader known as the “Whale”, Bruno Iksil, made a credit derivatives bet that hit the bank; the move has led to the departures of several senior figures. JP Morgan’s chief executive, Jamie Dimon, has come under fire since details of the loss emerged last year.

Tightening controls
US regulators have ordered the bank to tighten risk and auditing controls.

The Federal Reserve and the Office of the Comptroller of the Currency have issued what are called cease-and-desist orders focusing on the CIO as well as broader anti-money-laundering controls.

The OCC said its cease-and-desist order followed “deficiencies in the banks’ overall program for Bank Secrecy Act/Anti-Money Laundering compliance”.

“The OCC found that the bank's BSA compliance program had critical deficiencies with respect to suspicious activity reporting, monitoring transactions, conducting customer due diligence and risk assessment, and implementing adequate systems of internal controls and independent testing. These findings resulted in violations by the bank of statutory and regulatory requirements to maintain an adequate BSA compliance program, file suspicious activity reports, and conduct appropriate due diligence on business and commercial banking customers. Concurrent with the OCC's enforcement action, the Board of Governors of the Federal Reserve System has issued a cease and desist order upon consent with the bank's parent company, JP Morgan Chase & Co.”