JP Morgan Chase 2009 Annual Report Download - page 179

JPMorgan Chase & Co./2009 Annual Report 177
assessed and documented at least quarterly. Any hedge ineffective-
ness (i.e., the amount by which the gain or loss on the designated
derivative instrument does not exactly offset the gain or loss on the
hedged item attributable to the hedged risk) must be reported in
current-period earnings. If it is determined that a derivative is not
highly effective at hedging the designated exposure, hedge
accounting is discontinued.
There are three types of hedge accounting designations: fair
value hedges, cash flow hedges and net investment hedges.
JPMorgan Chase uses fair value hedges primarily to hedge fixed-
rate long-term debt, available-for-sale (“AFS”) securities and
gold and base metal inventory. For qualifying fair value hedges,
the changes in the fair value of the derivative, and in the value of
the hedged item, for the risk being hedged, are recognized in
earnings. If the hedge relationship is terminated, then the fair
value adjustment to the hedged item continues to be reported as
part of the basis of the hedged item and for interest-bearing
instruments is amortized to earnings as a yield adjust-
ment. Derivative amounts affecting earnings are recognized
consistent with the classification of the hedged item – primarily
net interest income and principal transactions revenue.
JPMorgan Chase uses cash flow hedges to hedge the exposure to
variability in cash flows from floating-rate financial instruments and
forecasted transactions, primarily the rollover of short-term assets
and liabilities, and foreign currency–denominated revenue and
expense. For qualifying cash flow hedges, the effective portion of
the change in the fair value of the derivative is recorded in other
comprehensive income/(loss) (“OCI”) and recognized in the Con-
solidated Statements of Income when the hedged cash flows affect
earnings. Derivative amounts affecting earnings are recognized
consistent with the classification of the hedged item – primarily
interest income, interest expense, noninterest revenue and com-
pensation expense. The ineffective portions of cash flow hedges are
immediately recognized in earnings. If the hedge relationship is
terminated, then the value of the derivative recorded in accumu-
lated other comprehensive income/(loss) (“AOCI”) is recognized in
earnings when the cash flows that were hedged affect earnings.
For hedge relationships that are discontinued because a forecasted
transaction is not expected to occur according to the original hedge
forecast, any related derivative values recorded in AOCI are imme-
diately recognized in earnings.
JPMorgan Chase uses foreign currency hedges to protect the value
of the Firm’s net investments in certain non-U.S. subsidiaries or
branches whose functional currencies are not the U.S. dollar. For
qualifying net investment hedges, changes in the fair value of the
derivatives are recorded in the translation adjustments account
within AOCI.
Impact of derivatives on the Consolidated Balance Sheets
The following table summarizes information on derivative fair
values that are reflected on the Firm’s Consolidated Balance Sheets
as of December 31, 2009, by accounting designation (e.g., whether
the derivatives were designated as hedges or not) and contract type.
Free-standing derivatives(a)
Derivative receivables Derivative payables
December 31, 2009
(in millions)
Not designated
as hedges
Designated
as hedges
Total derivative
receivables
Not
designated
as hedges
Designated
as hedges
Total derivative
payables
Trading assets and liabilities
Interest rate $ 1,148,901 $ 6,568 $ 1,155,469 $ 1,121,978 $ 427 $ 1,122,405
Credit 170,864 — 170,864 164,790 — 164,790
Foreign exchange 141,790 2,497 144,287 137,865 353 138,218
Equity 57,871 — 57,871 58,494 — 58,494
Commodity 36,988 39 37,027 35,082 194(c) 35,276
Gross fair value of trading
assets and liabilities $ 1,556,414 $ 9,104 $ 1,565,518 $ 1,518,209 $ 974 $ 1,519,183
Netting adjustment(b) (1,485,308) (1,459,058 )
Carrying value of derivative
trading assets and trading
liabilities on the Consolidated
Balance Sheets $ 80,210 $ 60,125
(a) Excludes structured notes for which the fair value option has been elected. See Note 4 on pages 173–175 of this Annual Report for further information.
(b) U.S. GAAP permits the netting of derivative receivables and payables, and the related cash collateral received and paid when a legally enforceable master netting
agreement exists between the Firm and a derivative counterparty.
(c) Excludes $1.3 billion related to separated commodity derivatives used as fair value hedging instruments that are recorded in the line item of the host contract (i.e.,
other borrowed funds).