Re-Engineering J.P. Morgan
Why High-Performance Computing Can Be A Bear
February 7, 2012
Another five systems were cut out in 2010 and 2011. The firm’s target is two platforms: one for fixed-income derivatives and one for equities derivatives.
For now, “we are comfortable with running five in the interim that are well coordinated and integrated,’’ Cherasia said.
Even with this rationalization, the company did not have a single, unified system for processing transactions.
“We had a collection of different clearance and settlement systems,’’ said Cherasia. “Some were owned by ‘back office technology.’ Some were owned by the businesses. Some were shared services.”
Complicating matters, J.P. Morgan’s investor services businesses were fairly independent. Every business had the ability to trade every product, any product.
Equity derivatives might be used in trades for swaps. Credit products might be used in customized ways to provide hedges for clients. That created tremendous complexity in the middle office. That, in effect, meant the company had to have an equity derivatives middle office, a credit derivatives middle office and a foreign exchange middle office – for each business.
So Dimon initiated a plan that created a single desk in each asset class that would act as the primary market maker. Any desk that wanted to trade that product had to face the primary market-making desk. That desk could take the other side of the trade. Or that desk could pass it on to the Street. By the time the new hierarchy was complete, trades between desks could be handled in an automated fashion. In limited cases, brokers could handle some trades on their own. But, by and large, everything went to the primary market makers.
And the middle offices got reorganized. General ledger entries and postings were handled by a single core processing platform for derivatives, a single platform for currencies, a single platform for credit instruments, a single platform for stocks.
Clearing and settlement activities, in addition, got consolidated onto one platform. That saved $30 million a year. And capacity went up ten-fold.
All in all, 24 streams of work got started at the end of 2009, covering changes in technology and operations that would affect not just trading, clearing and settlement, but human resources, legal affairs, compliance, risk management, finance, tax services, auditing, real estate, regional operations and the like.
Twelve streams of work are completed and 12 are still in progress.
The derivatives core processing platform overhaul, for instance, is midway through its program and is scheduled to be completed by the end of 2013.
2 MILLION POSITIONS, CUT IN HALF
It’s not that easy. Creating – or changing over – always-on, high-performance systems is hard, Cherasia notes.
Look at September 2008. J.P. Morgan was already in the midst of moving 600,000 derivatives positions over from Bear Stearns – when Lehman Brothers went out of business. “Lehman was interconnected through their derivatives contracts and collateral to everybody on the Street,’’ said Cherasia.
Lehman filed for bankruptcy on September 15 of that year. That was two days after the second most destructive hurricane to ever make landfall, Hurricane Ike, hit Houston, Texas.