So Much For the 'Epic' JPM 'Whale-Trade' Unwind
Last night's release of DTCC CDS data came and went with little furor. Despite the protestations of various mainstream media reporters last week that they had been 'told' that JPM had unwound 65-75% of their IG9 disaster last week, their is nothing in the actual reported data from the CDS repository to suggest any 'epic' unwind or change in actual risk transfer occurred. We hate to say we told you so but the spike in activity was very likely associated with the CDS roll as all those Weinstein-wannabes unwound their index-arb positions (sold back their index protection and bought back their single-name protection) as opposed to face the illiquidity cliff of holding through the roll. The last few weeks have seen index net notionals drop for IG9 - which fits with the index-arbitrage unwind - but little to no change in the tranched risk (which is the more appropriate to track JPM's exposure) suggesting that JPM remains the 'diligent shareholder-friendly' holder of its tail-risk hedge just as Dimon said they would.
IG9 10Y Index skew (orange) reverted to zero (green oval) which is what you are trying to achieve if you are an index arbitrageur (primer - you are trying to arbitrage the difference between the index value and the value that the underlying portfolio of names is implying the index should have) - so of course there was dramatic activity last week in the IG9 10Y index (and single-names I am sure) as profits were taken.
Weinstein said this week that SABA has exited the index-arb position - which is entirely not surprising as the roll is the perfect time to exit this kind of position especially given the convergence of the 'richness' of the index.
No 'epic' signs of unwinds in tranched risk and the slide in net index notionals fits perfectly with an unwind of the hedge-fund-based index-arbitrage unwinds into the CDS roll (and fits with the chart above - the green oval - as the skew was around zero and hedgies exited with their nice profit).
Bottom line - There is no evidence in the actual risk transfer market data that JPM has unwound any sizable exposure in the whale trade. If one believes they have unwound some index exposure then given the lack of movements in the tranched data, they are now considerably more 'naked' exposed in their tail-risk hedge tranche position - which means - if Bernanke or Draghi fire the tail-risk-smashing bazooka anytime soon, then a hideously under-hedged compression in correlation will mean dramatic losses for this position.
So which is it?
- JPM has not unwound 'much' of their hedge position (which actually made sense given the global macro environment we face - but was managed very poorly); or
- JPM has unwound some of the index hedge 'delta' used to manage the position but remains in the tail-risk hedge and therefore far more exposed to a central bank liquidity injection
Heads they lose, Tails - well they lose?