JP Morgan Commodities Chief Blythe Masters Denies Firm Manipulates Precious Metals Markets
In recent years, bloggers, traders, and other market participants have made repeated accusations about manipulative trading practices by JP Morgan (NYSE: JPM) in the precious metals futures markets.The persistent rumors and allegations have resulted in an investigation by the Commodities Futures Trading Commission (CFTC) into the firm's practices. JP Morgan is one of the largest participants in the gold and silver futures markets in the world. In particular, its activity in the much smaller silver market has come under scrutiny.
On Thursday, Blythe Masters, the head of JP Morgan's commodities business, appeared on CNBC and refuted the allegations of manipulative trading. She also asserted that the firm does not make proprietary directional bets on precious metals prices. Rather, all of JP Morgan's activity is related to its client business, according to Masters.
Here are some of the highlights of her CNBC interview.
"JPM's commodities business is not about betting on commodity prices but about assisting clients... it's about assisting clients in executing, managing, their risks and ensuring access to capital so they can make the kind of large long-term investments that are needed in the long run to expand the supply of commodities"...
"There's been a tremendous amount of speculation particularly in the blogosphere on this topic. I think the challenge is it represents a misunderstanding as the nature of our business. As i mentioned earlier, our business is a client-driven business where we execute on behalf of clients to achieve their financial and risk management objectives. The challenge is that commentators don't see that. So to give you a specific example, we store significant amount of commodities, for example, silver, on behalf of customers we operate vaults in New York City, Singapore and in London. And often when customers have that metal stored in our facilities, they hedge it on a forward basis through JPMorgan who in turn hedges itself in the commodity markets. If you see only the hedges and our activity in the futures market, but you aren't aware of the underlying client position that we're hedging, that would suggest inaccurately that we're running a large directional position. In fact that's not the case at all."
"We have offsetting positions. We have no stake in whether prices rise or decline. Rather we're running a flat or relatively flat matched book."
"What is commonly out there is that JPMorgan is manipulating the metals market. It's not part of our business model. it would be wrong and we don't do it."
Financial blog ZeroHedge, which has been one of the loudest and most aggressive critics of JP Morgan's trading activity in precious metals, isn't buying her explanation.
Simply put, the numbers don't add up. In 2011, JP Morgan ranked first on Wall Street in commodities revenue. In fact, its trading revenues tripled to $2.8 billion. ZeroHedge argues that it is very difficult to comprehend how the group's revenues could have tripled without the firm making proprietary market bets with its own money.
From ZeroHedge: "Taken at face value, it would mean that all else being equal, JPMorgan transacted at least 3 times more in flow in 2011 than in 2010. Yet, everyone knows that trading volumes in 2011 slumped relative to 2010. So no, Blythe, we appreciate your explanation, but we would appreciate the truth even more."
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