JP Morgan Chase 2008 Annual Report Download - page 101

JPMorgan Chase & Co. / 2008 Annual Report 99
bonds on a bankruptcy-remote, nonrecourse or limited-recourse
basis) originated by a diverse group of companies in industries
that are not highly correlated. For further discussion of SPEs, see
Note 17 on pages 189–198 of this Annual Report. The remaining
all other exposure is well-diversified across industries and none
comprise more than 2% of total exposure.
Derivative contracts
In the normal course of business, the Firm uses derivative instruments
to meet the needs of customers; generate revenue through trading
activities; manage exposure to fluctuations in interest rates, currencies
and other markets; and manage the Firm’s credit exposure.The
notional amount of the Firm’s derivative contracts outstanding signifi-
cantly exceeded, in the Firm’s view, the possible credit losses that
could arise from such transactions. For most derivative transactions,
the notional amount does not change hands; it is used simply as a
reference to calculate payments. For further discussion of these con-
tracts, see Note 32 and Note 34 on pages 214–217 and 222–223 of
this Annual Report.
The following tables summarize the aggregate notional amounts and
the net derivative receivables MTM for the periods presented.
Notional amounts of derivative contracts
December 31, Notional amounts(a)
(in billions) 2008 2007
Interest rate contracts
Interest rate and currency swaps(b) $ 56,206 $ 53,458
Future and forwards 6,277 4,548
Written options(c) 4,803 5,742
Purchased options 4,656 5,349
Total interest rate contracts 71,942 69,097
Credit derivatives 8,388 7,967
Foreign exchange contracts
Future and forwards 3,354 3,424
Foreign exchange spot contracts 389 40
Written options(c) 972 909
Purchased options 959 906
Total foreign exchange contracts 5,674 5,279
Commodity contracts
Swaps 234 275
Future and forwards 115 91
Written options(c) 206 228
Purchased options 198 233
Total commodity contracts 753 827
Equity contracts
Swaps 77 105
Future and forwards 56 72
Written options(c) 628 739
Purchased options 652 821
Total equity contracts 1,413 1,737
Total derivative notional amounts $ 88,170 $ 84,907
(a) Represents the sum of gross long and gross short third-party notional derivative
contracts.
(b) Includes cross currency swap contract notional amounts of $1.7 trillion and
$1.4 trillion at December 31, 2008 and 2007, respectively.
(c) Written options do not result in counterparty credit risk.
Derivative receivables marked to market (“MTM”)
December 31, Derivative receivables MTM
(in millions) 2008 2007
Interest rate contracts $ 64,101 $ 36,020
Credit derivatives 44,695 22,083
Foreign exchange contracts 24,715 5,616
Commodity contracts 14,830 9,419
Equity contracts 14,285 3,998
Total, net of cash collateral 162,626 77,136
Liquid securities collateral held against
derivative receivables (19,816) (9,824)
Total, net of all collateral $ 142,810 $ 67,312
The amount of derivative receivables reported on the Consolidated
Balance Sheets of $162.6 billion and $77.1 billion at December 31,
2008 and 2007, respectively, is the amount of the mark-to-market
value (“MTM”) or fair value of the derivative contracts after giving
effect to legally enforceable master netting agreements and cash col-
lateral held by the Firm. These amounts represent the cost to the
Firm to replace the contracts at current market rates should the
counterparty default. However, in management’s view, the appropri-
ate measure of current credit risk should also reflect additional liquid
securities held as collateral by the Firm of $19.8 billion and $9.8 bil-
lion at December 31, 2008 and 2007, respectively, resulting in total
exposure, net of all collateral, of $142.8 billion and $67.3 billion at
December 31, 2008 and 2007, respectively. Derivative receivables,
net of collateral, increased $75.5 billion from December 31, 2007,
primarily related to the decline in interest rates, widening credit
spreads and volatile foreign exchange rates reflected in interest rate,
credit and foreign exchange derivatives, respectively. The increase in
2008 also included positions acquired in the Bear Stearns merger.
The Firm also holds additional collateral delivered by clients at the initi-
ation of transactions, and although this collateral does not reduce the
balances noted in the table above, it is available as security against
potential exposure that could arise should the MTM of the client’s
transactions move in the Firm’s favor. As of December 31, 2008 and
2007, the Firm held $22.2 billion and $17.4 billion of this additional
collateral, respectively. The derivative receivables MTM also do not
include other credit enhancements in the form of letters of credit.
While useful as a current view of credit exposure, the net MTM value
of the derivative receivables does not capture the potential future
variability of that credit exposure. To capture the potential future
variability of credit exposure, the Firm calculates, on a client-by-client
basis, three measures of potential derivatives-related credit loss:
Peak, Derivative Risk Equivalent (“DRE”), and Average exposure
(“AVG”). These measures all incorporate netting and collateral bene-
fits, where applicable.
Peak exposure to a counterparty is a measure of exposure calculated
at a 97.5% confidence level. Derivative Risk Equivalent exposure is a
measure that expresses the risk of derivative exposure on a basis
intended to be equivalent to the risk of loan exposures. The measure-
ment is done by equating the unexpected loss in a derivative coun-
terparty exposure (which takes into consideration both the loss