FT Alphaville " These are the voyages of the JP Morgan CIO Bruno Iksil - a.k.a Voldermort - coverage at Bloomberg is getting a tad, should we say, compulsive. The latest follow up sees the news agency trawling through the LinkedIn profiles of JP Morgan's Chief Investment Office employees in an attempt to figure out exactly what the office does. Is it prop trading? Is it hedging? Or is it possibly funding? You can almost hear the collective Bloomberg brain chiming: "Cannot compute. Cannot compute. How can one guy hold a $100bn position? Why have we never heard of the Chief Investment Office before? Cue Bloomberg collective brain misfire. That's not to say that LinkedIn Profiles aren't useful for ascertaining how banks really work. We've trawled through many Delta One profiles ourselves for largely the same purpose. After all, ask the banks outright, and they tell you nothing. Look at someone's public LinkedIn profile, and it happily recounts the prop-like attributes of employee x's not-at-all prop sounding job title. We long ago established that one of the least reported phenomena of the post-crisis banking era has been the rise of internalisation, matching, the central execution desk and creative correlation hedging, all of which allow banks to draw on their own economies of scale. After all, if you can hedge x, with y - which also happens to be a helluva lot cheaper than x - why wouldn't you? And when it comes to x, what is x anyway? Is it a client position? Is it a bundled position made up of many smaller positions, with little relevance to x? Or is it your own prop view of how well x is now correlated with y? Or what x can be matched with internally before it creates a net position which has to be hedged externally. Or perhaps something else entirely? We just don't know. What we do know is that, while every bank structures itself differently, trading activities increasingly sit nearer or even within "Treasury" and/or financing departments outright. It is for this reason we believe that when it comes to Bruno Iksil and his $100bn trade... Bloomberg is still asking the wrong questions. Or, at the very least, obsessing over the wrong point. This isn't really about whether one man's $100bn position is speculative or not. Or, for that matter, whether it breaks the Volcker rule. It seems clear that JP Morgan considers the trade to be a legitimate hedge and/or risk-management measure. More to the point, the Volcker rule has always allowed for this sort of creative hedging. We're talking about hedges which are not fully correlated with the underlying risk, and which can, as a result, create huge savings (or even profits) for the banks involved. Indeed, this has been a known Volcker loophole for a long while. There's a bigger question than whether the trade is distorting the underlying market. We'd argue that it's better to ask and/or clarify the following: 1) To what degree does the Chief Investment Office act as a hub for processing of the bank's overall risk, funding and trading activity? 2) To what degree does the CIO act as a central execution desk - bundling all of JPM's exposures into one giant exposure, which it then decides to hedge as effectively as possible? 3) To what degree does the CIO depend on correlation modelling to decide its hedging practices, and how sure can we be that those correlation models are not having an impact on the underlying by diverting or supplementing flows from index constituents and or other asset classes entirely? 4) How sure can regulators be that the Volcker correlation loopholes are not abused? 5) Does bundling risk into one giant central position possibly create a far greater risk than the one posed by the multiple proprietary-desk trading model? 6) Have hedge funds got wise to what's going on? And are they unhappy because they can't replicate hedges as efficiently because they simply lack that sort of scale and/or access to flow. As for the mysterious chief investment office, are we wrong in assuming that the CIO is to JPM what the Captain Kirk's bridge is to the Starship Enterprise? Lisa provides the following illustration to us: Scotty, in the engine room: "we cannot do it Captain! There's no more liquidity in this market! It cannot take it. We'll end up distorting the space-time continuum skew! Or would we be better off calling it the Creative Hedging Office instead? Thoughts please. P.S. It was kinda hard to stop Lisa once she got started... "These are the voyages of the Starship JP Morgan. Its mission - to explore new hedges. To hedge, with what few others would call a hedge. To seek out, and explore new hedges. To boldly hedge with what no one has hedged with before. Related links: Volcker's "Delta one" loophole - FT Alphaville JPMorgan Trader Iksil Fuels Prop-Trading Debate With Bets - Bloomberg Hedge funds and the Whale, credit index edition - FT Alphaville This entry was posted by Izabella Kaminska on Tuesday, April 10th, 2012 at 15:32 and is filed under Capital markets, People. Tagged with central execution desk, Chief investment office, JP morgan.