JP Morgan Chase 2009 Annual Report Download - page 182

Notes to consolidated financial statements
JPMorgan Chase & Co./2009 Annual Report 180
Net investment hedge gains and losses
The following table presents hedging instruments, by contract type, that were used in net investment hedge accounting relationships, and the
pretax gains/(losses) recorded on such derivatives for the year ended December 31, 2009.
Gains/(losses) recorded in income and other comprehensive income/(loss)
Year ended
December 31, 2009 (in millions)
Derivatives – excluded components
recorded directly in income(a)
Derivatives – effective portion
recorded in OCI
Contract type
Foreign exchange $ (112) $ (259)
Total $ (112) $ (259)
(a) Certain components of derivatives used as hedging instruments are permitted to be excluded from the assessment of hedge effectiveness, such as forward points on a
futures or forwards contract. Amounts related to excluded components are recorded in current-period income. There was no ineffectiveness for net investment hedge
accounting relationships during 2009.
Risk management derivatives gains and losses (not designated as
hedging instruments)
The following table presents nontrading derivatives, by contract
type, that were not designated in hedge relationships, and the
pretax gains/(losses) recorded on such derivatives for the year
ended December 31, 2009. These derivatives are risk management
instruments used to mitigate or transform the risk of market expo-
sures arising from banking activities other than trading activities,
which are discussed separately below.
Year ended December 31, 2009
(in millions)
Derivatives gains/(losses)
recorded in income
Contract type
Interest rate(a) $ (3,113 )
Credit(b) (3,222 )
Foreign exchange(c) (197 )
Equity(b) (8 )
Commodity(b) (50 )
Total $ (6,590
)
(a) Gains and losses were recorded in principal transactions revenue, mortgage
fees and related income, and net interest income.
(b) Gains and losses were recorded in principal transactions revenue.
(c) Gains and losses were recorded in principal transactions revenue and net
interest income.
Trading derivative gains and losses
The Firm has elected to present derivative gains and losses related
to its trading activities together with the cash instruments with
which they are risk managed. All amounts are recorded in principal
transactions revenue in the Consolidated Statements of Income for
the year ended December 31, 2009.
Year ended December 31, 2009
(in millions)
Gains/(losses) recorded in
principal transactions revenue
Type of instrument
Interest rate $ 4,375
Credit 5,022
Foreign exchange 4,053
Equity 1,475
Commodity 1,329
Total $ 16,254
Credit risk, liquidity risk and credit-related contingent features
In addition to the specific market risks introduced by each deriva-
tive contract type, derivatives expose JPMorgan Chase to credit risk
– the risk that derivative counterparties may fail to meet their
payment obligations under the derivative contracts and the collat-
eral, if any, held by the Firm proves to be of insufficient value to
cover the payment obligation. It is the policy of JPMorgan Chase to
enter into legally enforceable master netting agreements as well as
to actively pursue the use of collateral agreements to mitigate
derivative counterparty credit risk. The amount of derivative receiv-
ables reported on the Consolidated Balance Sheets is the fair value
of the derivative contracts after giving effect to legally enforceable
master netting agreements and cash collateral held by the Firm.
These amounts represent the cost to the Firm to replace the con-
tracts at then-current market rates should the counterparty default.
While derivative receivables expose the Firm to credit risk, deriva-
tive payables expose the Firm to liquidity risk, as the derivative
contracts typically require the Firm to post cash or securities collat-
eral with counterparties as the mark-to-market (“MTM”) moves in
the counterparties’ favor, or upon specified downgrades in the
Firm’s and its subsidiaries’ respective credit ratings. At December
31, 2009, the impact of a single-notch and six-notch ratings down-
grade to JPMorgan Chase & Co. and its subsidiaries, primarily
JPMorgan Chase Bank, N.A., would have required $1.2 billion and
$3.6 billion, respectively, of additional collateral to be posted by
the Firm. Certain derivative contracts also provide for termination of
the contract, generally upon a downgrade of either the Firm or the
counterparty, at the fair value of the derivative contracts. At De-
cember 31, 2009, the impact of single-notch and six-notch ratings
downgrades to JPMorgan Chase & Co. and its subsidiaries, primar-
ily JPMorgan Chase Bank, N.A., related to contracts with termina-
tion triggers would have required the Firm to settle trades with a
fair value of $260 million and $4.7 billion, respectively. The aggre-
gate fair value of net derivative payables that contain contingent
collateral or termination features triggered upon a downgrade was
$22.6 billion at December 31, 2009, for which the Firm has posted
collateral of $22.3 billion in the normal course of business.