* JPMorgan's commodities risk down 38 pct from Q1
* Bank's apparent caution follows volatility in commodities
(Updates with JPM VaR details, commodity market moves in Q2,
background of bank's push into commodities and peer risk
By Barani Krishnan
July 13 JPMorgan Chase & Co's
commodities trading risk fell to its lowest level in two years
during the second quarter as tumbling prices sidelined many
investors in oil, metals and agricultural markets, company
results showed on Friday.
The largest U.S. bank by assets said its value-at-Risk (VaR)
in commodities fell by 38 percent to average $13 million per day
in the three months to June, versus $21 million in the first
VaR is an industry term for the maximum money a financial
institution is willing to lose a day for trading a particular
asset class. It is an important consideration when firms make
trading or hedging decisions.
In the case of Wall Street banks, such as JPMorgan, that
typically do not break down their commodity earnings, VaR is
often the only guide of their exposure in that area.
Of the four asset classes that define JPMorgan's VaR,
commodities was the only group that showed such a decline. The
VaR for equities jumped 18 percent from the first quarter; the
reading for fixed income rose 10 percent, while the risk for
foreign exchange was barely changed.
The last time JPMorgan's commodities VaR averaged $13
million was in the first quarter of 2010.
Compared to the first quarter of this year, its commodities
risk was lower too by an average of $3 million.
A relative late comer to commodities trading compared to
established peers such as Goldman Sachs and Morgan
Stanley, JPMorgan achieved record revenues above $2.8
billion in the business last year, propelling it above its
It made its push towards the sector in 2010 as Wall Street
banks started winding down risky proprietary trading desks to
comply with new U.S. financial laws. Many have stayed on in the
business by servicing client orders.
JPMorgan's apparent caution towards commodities came after
unexpected twists and turns in oil, metals and agricultural
markets over the past three months.
After a relatively mild April, commodity prices tumbled
their most in nine months in May and continued a broad downtrend
until a violent snap back on the last trading day of June.
The 1 percent drop on the benchmark Thomson
Reuters-Jefferies commodities index in April -- followed
by an 11 percent slump and 4 percent gain in subsequent months
-- tripped up some of the biggest speculators in the sector,
including hedge funds which posted sharp losses.
The whipsaw volatility also sent many investors scurrying to
the relative safety of U.S. Treasuries and the
"The volatility in commodities has obviously taken a toll
across the board on banks involved in those markets," said Peter
Cardillo, chief market economist at Rockwell Global Capital in
JPMorgan's trading division faced a particularly difficult
second quarter for another reason: wrong credit bets that caused
it to lose nearly $6 billion and brought unwanted regulatory
scrutiny to the bank.
Usually the first major U.S. bank to report earnings in a
quarter, JPMorgan said it managed to earn a net income of $4.96
billion in the second quarter versus $5.43 billion a year ago,
in spite of its disastrous credit positions.
Commodities VaR at leading Wall Street banks over the past
two years(in $ millions):
Average commodities VaR by quarter
2Q12 1Q12 4Q11 3Q11 2Q11 1Q10 4Q10 3Q10 2Q10
JPMorgan Chase 13 21 20 15 16 13 14 13 20
Morgan Stanley n/a 31 28 32 29 33 26 30 29
Goldman Sachs n/a 26 26 25 39 37 23 29 32
Citigroup n/a 14 18 22 25 23 27 26 21
Bank of America n/a 13.1 12.1 15.7 23.7 23.9 17.7 19.4 23.2
(Reporting By Barani Krishnan; Editing by Andrew Hay and Sofina