'Just The Facts' On The JPM 'Whale' Unwind Rumor

Tyler Durden's picture

Believing 'people familiar with the matter', extending rumors of large trades, and extrapolating DTCC (the CDS data repository) data has apparently caused a number of mainstream media reporters to believe that the JPMorgan 'Whale Trade' has been 60-75% unwound. The assertion appears to be based on two things: 1) a rumor from a Credit Suisse desk of heavy volumes in the last few days; and 2) DTCC data showing open trades falling. While we restate that no-one knows what the trade was, we offer three retorts to these assertions: 1) there is nothing in DTCC data that suggests any recent change in trend (or dramatic shift in net or gross notionals); 2) the aggregate nature of DTCC data offers little insight into the actual changes (whether they be unwinds or opposing positions); and 3) today is single-name CDS and index credit option expiration which means the few days leading up to this will ALWAYS have heavy volume - especially at the end of a very dramatic quarter such as the one we have just witnessed. The bottom-line is that the 'price' changes in IG9, HY9, and IG18 do not suggest any 'recent' change in the unwind scale and while we would expect that JPM has been unwinding (at least the hedge of the hedge), no-one knows how much and given the market's awareness of the position, IG9 would dramatically underperform its whale-driven rally move (which it has not yet). Anything else is speculation - though it is clear that IG9 tranche notionals suggest the original tail-risk position remains on the books.

 

IG9 Gross data shows nothing out of the ordinary in either tranched or untranched (index) exposure changes...

 

IG9 net data shows nothing exceptional - tranched is hardly moved at all and untranched (index) has leaked lower but remains considerably higher than the start of the year.

 

This suggests that the underlying tranche position (tail-risk-hedge) remains on their books and they are offsetting the index hedge of the hedge using other indices.

 

And IG18 (which is the most recent and liquid index in investment grade credit) has seen a dramatic swing in the last two weeks in terms of number of open trades - which could reflect a broad grab for cheap macro protection and then squeeze out on the QE hope trade into the Greek elections...

 

and finally, IG9 10Y has sold off rather dramatically since Dimon's call but we note that given the market's awareness of the position, the deterioration in credit over the period, and index arbitrageurs scaling out in their face, we would expect the widening to be much more than the tightening rally that led into this (and not just equivalent to it)...

 

 

The bottom line is that the JPM unwind call is speculation.

Nothing factually provides any evidence that they have done any actual unwinds and in fact the lack of movement in IG9 tranche net notionals means we assume they continue to hold the tail-risk hedge - though have likely taken on opposing positions in IG18 and HY18 to reduce exposure overall.

Not understanding that the huge underperformance in the last quarter would leave a lot of credit options traders dramatically in-the-money or out-of-the-money - and likely led to the pick up in volumes this week that is being used as evidence for the unwinds on JPM occurring is a mistake. The single-name CDS roll and index options expiry is a huge impact on volumes (as we may see next week when DTCC provides the delayed data - though note that the DTCC data is aggregate across maturuty and so a roll would not impact it specifically).

No-one knows - though we assume some efforts have been made to at least reduce exposure as we noted.

 

Data: DTCC and CMA