Officers arrested Spanish national Javier Martin-Artajo Rueda on an international warrant by the United States for alleged fraud and tax crimes, police said in a statement.
He is accused of being the senior figure in the 2012 trading scandal involving $6.2 billion (4.6 billion euros) in trading losses at the US banking giant.
“The detainee is suspected of being responsible for manipulating and inflating the value of positions on his firm’s credit portfolio,” the statement said.
The suspect went before a judge at the National Court in Madrid, who granted him bail pending a ruling on extradition after Martin-Artajo did not consent to be extradited voluntarily, a judicial source said.
He was released on condition that he check in with the court every two weeks and was banned from leaving Spain, said the source, who asked not to be named.
US federal prosecutors filed criminal charges on August 14 against Martin-Artajo and Frenchman Julien Grout, alleging they kept false records on trades, committed wire fraud and submitted false US securities filings.
The Securities and Exchange Commission, the US stock trading authority, also filed civil charges against the two men alleging securities fraud.
A third ex-JPMorgan banker, French national Bruno Iksil — originally identified as the “London Whale” responsible for the trades — was cleared of criminal responsibility after cooperating with prosecutors.
Martin-Artajo, 49, is a Spaniard who usually resides in London, while Grout, 35, resides in his native France.
Grout’s lawyer Edward Little said his team was “negotiating with the US to decide how to proceed”.
“The US cannot have him arrested as long as he is in France,” Little told AFP by telephone. “The only way he would return to the US is if we can reach a reasonable agreement on bail.”
According to US prosecutors, Martin-Artajo was the most senior of the three employees implicated in the scandal.
The Spaniard’s law firm earlier said he would be “cleared of any wrongdoing.”
The US complaint documents how the London team allegedly falsified financial records after Martin-Artajo was pressured from higher-ups about losses in early 2012.
Martin-Artajo directed underlings to calculate trades and price assets in such a way as to discount the losses, according to the complaint, which cites phone calls and emails.
Iksil is depicted in the complaints as a generally unwilling participant in the cover-up, urging Martin-Artajo to revise pricing practices to more accurately reflect the losses.
At one point, Martin-Artajo allegedly quarrelled with Iksil after he reported in an email a single-day trading loss of $40 million.
As a result of the false records, JPMorgan in July 2012 understated losses from its corporate private equity division, which included the London trading operation, by $459 million.
The defendants each face a maximum sentence of 65 years in prison when all the criminal charges are combined, and a fine of at least $5 million.
The debacle led to senior bank resignations, slashed pay for JPMorgan chief executive Jamie Dimon and sparked various government probes.
The case is one of several regulatory headaches still facing JPMorgan. The bank also faces probes on its sale of mortgage-backed securities, among other issues.