JP Morgan Chase 2009 Annual Report Download - page 184

Notes to consolidated financial statements
JPMorgan Chase & Co./2009 Annual Report 182
and the fair value of the defaulted reference obligation at the time of
settlement. Neither party to the CLN has recourse to the defaulting
reference entity. For a further discussion of CLNs, see Note 16 on
pages 214–222 of this Annual Report.
The following table presents a summary of the notional amounts of
credit derivatives and credit-linked notes the Firm sold and purchased
as of December 31, 2009 and 2008. Upon a credit event, the Firm as
seller of protection would typically pay out only a percentage of the
full notional amount of net protection sold, as the amount actually
required to be paid on the contracts takes into account the recovery
value of the reference obligation at the time of settlement. The Firm
manages the credit risk on contracts to sell protection by purchasing
protection with identical or similar underlying reference entities. As
such, other purchased protection referenced in the following table
includes credit derivatives bought on related, but not identical, refer-
ence positions; these include indices, and portfolio coverage. The Firm
does not use notional amounts as the primary measure of risk man-
agement for credit derivatives, because notional amounts do not take
into account the probability of the occurrence of a credit event,
recovery value of the reference obligation, or related cash instruments
and economic hedges.
Total credit derivatives and credit-linked notes
Maximum payout/Notional amount
December 31, 2009
(in millions) Protection sold
Protection purchased with
identical underlyings(b) Net protection (sold)/purchased(c)
Other protection
purchased(d)
Credit derivatives
Credit default swaps $ (2,937,442) $ 2,978,044 $ 40,602 $ 28,064
Other credit derivatives(a) (10,575) 9,290 (1,285) 30,473
Total credit derivatives (2,948,017) 2,987,334 39,317 58,537
Credit-linked notes (4,031) — (4,031) 1,728
Total $ (2,952,048) $ 2,987,334 $ 35,286 $ 60,265
Maximum payout/Notional amount
December 31, 2008
(in millions) Protection sold
Protection purchased with
identical underlyings(b) Net protection (sold)/purchased(c)
Other protection
purchased(d)
Credit derivatives
Credit default swaps $ (4,099,141) $ 3,973,616 $ (125,525) $ 288,751
Other credit derivatives(a) (4,026) — (4,026) 22,344
Total credit derivatives (4,103,167) 3,973,616 (129,551) 311,095
Credit-linked notes (4,080) — (4,080) 2,373
Total $ (4,107,247) $ 3,973,616 $ (133,631) $ 313,468
(a) Primarily consists of total return swaps and credit default swap options.
(b) Represents the total notional amount of protection purchased where the underlying reference instrument is identical to the reference instrument on protection sold; the
notional amount of protection purchased for each individual identical underlying reference instrument may be greater or lower than the notional amount of protection
sold.
(c) Does not take into account the fair value of the reference obligation at the time of settlement, which would generally reduce the amount the seller of protection pays to
the buyer of protection in determining settlement value.
(d) Represents single-name and index CDS protection the Firm purchased.
The following table summarizes the notional and fair value amounts of credit derivatives and credit-linked notes as of December 31, 2009, and
2008, where JPMorgan Chase is the seller of protection. The maturity profile is based on the remaining contractual maturity of the credit
derivative contracts. The ratings profile is based on the rating of the reference entity on which the credit derivative contract is based. The
ratings and maturity profile of protection purchased are comparable to the profile reflected below.
Protection sold – credit derivatives and credit-linked notes ratings(a) /maturity profile
December 31, 2009 (in millions) <1 year 1–5 years >5 years
Total
notional amount Fair value(b)
Risk rating of reference entity
Investment-grade (AAA/Aaa to BBB-/Baa3) $ (215,580) $ (1,140,133) $ (367,015) $ (1,722,728) $ (16,607)
Noninvestment-grade (BB+/Ba1 and below) (150,122) (806,139) (273,059) (1,229,320) (90,410)
Total $ (365,702) $ (1,946,272) $ (640,074) $ (2,952,048) $ (107,017)