Even as JPMorgan seems set to put its London Whale troubles behind it with a nearly $1 billion imminent settlement, while at the same time throwing two mid-level traders at NY prosecutors and washing its hands of the whole tempest in a teapot affair, a curious snag has appeared. The CFTC, which in the past has never had a problem with promptly settling any market manipulation abuse with any bank in exchange for a small cash-greased slap on the hand, is suddenly a sticking point in JPM's ability to just walk away from the biggest prop trading Snafu in history. As WSJ reports, "the CFTC is focusing on the bank's increasingly aggressive trades made over several months early last year, when it added tens of billions of dollars to its derivatives positions—contracts tied to investment-grade corporate bonds, these people say. The CFTC is likely to use new powers granted by the Dodd-Frank law that allow it to charge firms for recklessly manipulating markets, say people familiar with the agency's thinking."

One of the sticking points in the CFTC discussions is over whether the bank or its traders manipulated the trades, according to a person familiar with the talks. J.P. Morgan is balking at any CFTC settlement that would require it to admit to manipulation, this person said.



One can see where this is headed: if JPM were to admit market manipulation in the first case of CIO prop trading, it would fully expose itself to current and future such instances whereby its London office uses some $500 billion in excess reserves to corner some new, previously unknown market. Recall that all the London CIO did was use billions in deposits to serve as ever greater "dry powder" to fund its attempt to corner the IG9 market, until one day it couldn't control the hedge fund (and media leaked) onslaught against it and had to fold recording over $6 billion in losses to date.

Furthermore, it would also raise question about JPM's integrity (heaven forbid) in other parallel instances of market manipulation.

Finally, it would put into question such stern promises as those ushered by Blythe Masters (currently in hot water with regulators over JPM's other manipulation, namely that of energy markets and of physical commodities) over a year ago in which she solemnly lied promised the CNBC camera the following:

" 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"...

"... "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.

. 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."

We dare anyone to reread tha above bullet points with a straight face.