JP Morgan Chase 2009 Annual Report Download - page 130

Management’s discussion and analysis
JPMorgan Chase & Co./2009 Annual Report
128
The 99% confidence level trading VaR includes substantially all
trading activities in IB. Beginning in the fourth quarter of 2008, the
credit spread sensitivities of certain mortgage products were in-
cluded in trading VaR. This change had an insignificant impact on
the average fourth quarter VaR. For certain other products included
in the trading VaR, particular risk parameters are not fully captured
– for example, correlation risk. Trading VaR does not include: held-
for-sale funded loan and unfunded commitments positions (how-
ever, it does include hedges of those positions); the DVA taken on
derivative and structured liabilities to reflect the credit quality of the
Firm; the MSR portfolio; and securities and instruments held by
other corporate functions, such as Private Equity. See the DVA
Sensitivity table on page 130 of this Annual Report for further
details. For a discussion of MSRs and the corporate functions, see
Note 3 on pages 156–173, Note 17 on pages 222–225 and Corpo-
rate/ Private Equity on pages 82–83 of this Annual Report.
2009 VaR results (99% confidence level VaR)
IB’s average total trading and credit portfolio VaR was $248 million
for 2009, compared with $202 million for 2008, primarily driven by
market volatility. Volatility began to significantly increase across all
asset classes from late 2008 and persisted through the first quarter of
2009. From the second quarter of 2009 onwards, volatility in the
markets gradually declined; however, the impact of the volatile
periods was still reflected in the 2009 VaR numbers.
Spot total trading and credit portfolio VaR as of December 31, 2009,
was $146 million, compared with $317 million as of December 31,
2008. The decrease in the spot VaR in 2009 reflects the reduction in
overall risk levels as well as the aforementioned decline in market
volatility by the end of 2009 when compared to the end of 2008.
For 2009, compared with the prior year, average trading VaR diversi-
fication increased to $131 million, or 37% of the sum of the compo-
nents, from $108 million, or 36% of the sum of the components in
the prior year. In general, over the course of the year, VaR exposures
can vary significantly as positions change, market volatility fluctuates
and diversification benefits change.
VaR backtesting (99% confidence level VaR)
To evaluate the soundness of its VaR model, the Firm conducts
daily back-testing of VaR against daily IB market risk–related
revenue, which is defined as the change in value of principal trans-
actions revenue (excluding private equity gains/(losses)) plus any
trading-related net interest income, brokerage commissions, un-
derwriting fees or other revenue. The daily IB market risk–related
revenue excludes gains and losses on held-for-sale funded loans
and unfunded commitments and from DVA. The following histo-
gram illustrates the daily market risk–related gains and losses for IB
trading businesses for the year ended 2009. The chart shows that
IB posted market risk–related gains on 219 out of 261 days in this
period, with 54 days exceeding $160 million. The inset graph looks
at those days on which IB experienced losses and depicts the
amount by which 99% confidence level VaR exceeded the actual
loss on each of those days. Losses were sustained on 42 days
during the year ended December 31, 2009, with no loss exceeding
the VaR measure. The Firm would expect to incur losses greater
than that predicted by VaR estimates once in every 100 trading
days, or about two to three times a year.