Risk Management

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Post-Knight, A Newly Risk-Averse JP Morgan Reviews Dealings With Brokerages

JP Morgan's move could spark other firms to do the same, an article in the Wall Street Journal suggests.

JP Morgan is reviewing its dealings with dozens of brokerages that use the bank to settle trades in an attempt to reduce its risk following a series of recent financial scandals that have damaged market confidence.

The bank’s review, which started more than six months ago is attempting to assess the profits clients generate for the bank versus risks they pose, according to an a href="http://online.wsj.com/article/SB10000872396390443618604577621561683343518.html?mod=WSJ_hp_LEFTWhatsNewsCollection#articleTabs%3Darticle" target="_blank">article in the Wall Street Journal..

JP Morgan's move could spark other firms to do the same, the WSJ suggests.

JP Morgan’s new risk assessment comes on the heels of a number of major financial scandals, including the collapse of MF Global and Peregrine Financial, and the Knight Capital technology glitch that almost led to its demise.

JP Morgan itself has of course been at the center of its very own scandal, when a bad trade cost the bank $7 billion earlier this year.

Details have emerged showing that the newly risk-averse bank actually refused to accept thousands of Knight-owned securities as the brokerage desperately attempted to put new financing in place, the WSJ reports.

From the Wall Street Journal:

J.P. Morgan's plans, which haven't been made public, involve dialing back services to some clients and severing ties with others. J.P. Morgan already has stopped serving some clients, according to people familiar with the bank, but their names couldn't be obtained.

Knight isn't on the list of clients J.P. Morgan is contemplating dumping, people familiar with the bank said. A Knight spokesman said the bank "is an important partner to Knight, and we look forward to continuing the strategic relationship." The review is designed to identify the sort of funding problems that bedeviled Knight during its frantic efforts to stay alive, these people said.

Knight might still have a good relationship with JP Morgan, but according to the Wall Street Journal, tensions between both firms were sky high when Knight was scrambling to find a lifeline that would allow the brokerage to continue to operate.

From WSJ:

On Aug. 2, at about 4:20 p.m., Knight told J.P. Morgan it wanted the bank to help arrange financing from Royal Bank of Canada, using J.P. Morgan as what is known as a "tri-party" agent, say people familiar with the day's events. Such a move would put J.P. Morgan in the middle of an RBC loan to Knight, with J.P. Morgan handling the collateral Knight intended to pledge for the loan.

A little before 5 p.m., Knight transferred about 1,000 securities to a collateral account overseen by J.P. Morgan at the Depository Trust & Clearing Corp., an industry clearinghouse that closely monitored Knight's finances that day and through the weekend, while keeping securities regulators updated. More on Knight Capital

But J.P. Morgan told Knight some securities were unreadable through databases used to reach valuations, and the bank instructed Knight not to send more.

At around 5:15 p.m., Knight transferred 6,000 more securities. J.P. Morgan said some of these also were unreadable and said it lacked formal instructions required for tri-party financing.

In total, J.P. Morgan rejected more than 4,000 of the roughly 7,000 securities Knight had sent.

Tensions between J.P. Morgan and Knight executives erupted in a series of phone calls late into the night, with Knight accusing J.P. Morgan of dragging its feet and the bank shooting back that Knight had jumped the gun in transferring the securities.

At 8 a.m. the next morning, Friday, the transfer of securities out of Knight's J.P. Morgan-controlled account was complete, giving Knight full control of the securities it had sought to use in the financing. Knight informed RBC that the deal wasn't going to happen, according to a person familiar with those discussions. Knight arranged other financing and opened for business.

Melanie Rodier has worked as a print and broadcast journalist for over 10 years, covering business and finance, general news, and film trade news. Prior to joining Wall Street & Technology in April 2007, Melanie lived in Paris, where she worked for the International Herald ... View Full Bio

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