JP Morgan Chase 2009 Annual Report Download - page 202

Notes to consolidated financial statements
JPMorgan Chase & Co./2009 Annual Report 200
Note 12 – Securities financing activities
JPMorgan Chase enters into resale agreements, repurchase agree-
ments, securities borrowed transactions and securities loaned
transactions, primarily to finance the Firm’s inventory positions,
acquire securities to cover short positions, accommodate custom-
ers’ financing needs, and settle other securities obligations.
Resale agreements and repurchase agreements are generally
treated as collateralized financing transactions carried on the
Consolidated Balance Sheets at the amounts at which the securities
will be subsequently sold or repurchased, plus accrued interest. On
January 1, 2007, pursuant to the adoption of the fair value option,
the Firm elected fair value measurement for certain resale and
repurchase agreements. In 2008, the Firm elected fair value meas-
urement for certain newly transacted securities borrowed and
securities lending agreements. For a further discussion of the fair
value option, see Notes 4 and 20 on pages 173–175 and 227,
respectively, of this Annual Report. The securities financing agree-
ments for which the fair value option was elected are reported
within securities purchased under resale agreements; securities
loaned or sold under repurchase agreements; securities borrowed;
and other borrowed funds on the Consolidated Balance Sheets.
Generally, for agreements carried at fair value, current-period
interest accruals are recorded within interest income and interest
expense, with changes in fair value reported in principal transac-
tions revenue. However, for financial instruments containing em-
bedded derivatives that would be separately accounted for in
accordance with FASB guidance for hybrid instruments, all changes
in fair value, including any interest elements, are reported in princi-
pal transactions revenue. Where appropriate, resale and repurchase
agreements with the same counterparty are reported on a net
basis. JPMorgan Chase takes possession of securities purchased
under resale agreements. On a daily basis, JPMorgan Chase moni-
tors the market value of the underlying collateral, primarily U.S. and
non-U.S. government and agency securities, that it has received
from its counterparties, and requests additional collateral when
necessary.
Transactions similar to financing activities that do not meet the
definition of a repurchase agreement are accounted for as “buys”
and “sells” rather than financing transactions. These transactions
are accounted for as a purchase/(sale) of the underlying securities
with a forward obligation to sell/(purchase) the securities. The
forward purchase/(sale) obligation is a derivative that is recorded
on the Consolidated Balance Sheets at fair value, with changes in
fair value recorded in principal transactions revenue.
Securities borrowed and securities lent are recorded at the amount
of cash collateral advanced or received. Securities borrowed consist
primarily of government and equity securities. JPMorgan Chase
monitors the market value of the securities borrowed and lent on a
daily basis and calls for additional collateral when appropriate. Fees
received or paid in connection with securities borrowed and lent are
recorded in interest income or interest expense.
The following table details the components of collateralized financings.
December 31, (in millions) 2009 2008
Securities purchased under resale agreements(a) $ 195,328 $ 200,265
Securities borrowed(b) 119,630 124,000
Securities sold under repurchase agreements(c) $ 245,692 $ 174,456
Securities loaned 7,835 6,077
(a) Includes resale agreements of $20.5 billion and $20.8 billion accounted for at fair
value at December 31, 2009 and 2008, respectively.
(b) Includes securities borrowed of $7.0 billion and $3.4 billion accounted for at fair
value at December 31, 2009 and 2008, respectively.
(c) Includes repurchase agreements of $3.4 billion and $3.0 billion accounted for at
fair value at December 31, 2009 and 2008, respectively.
JPMorgan Chase pledges certain financial instruments it owns to
collateralize repurchase agreements and other securities financings.
Pledged securities that can be sold or repledged by the secured
party are identified as financial instruments owned (pledged to
various parties) on the Consolidated Balance Sheets.
At December 31, 2009, the Firm received securities as collateral
that could be repledged, delivered or otherwise used with a fair
value of approximately $614.4 billion. This collateral was generally
obtained under resale agreements, securities borrowing agree-
ments and customer margin loans. Of these securities, approxi-
mately $392.9 billion were repledged, delivered or otherwise used,
generally as collateral under repurchase agreements, securities
lending agreements or to cover short sales.
Note 13 – Loans
The accounting for a loan may differ based on whether it is origi-
nated or purchased and whether the loan is used in an investing or
trading strategy. For purchased loans held-for-investment, the
accounting also differs depending on whether a loan is credit-
impaired at the date of acquisition. Purchased loans with evidence
of credit deterioration since the origination date and for which it is
probable, at acquisition, that all contractually required payments
receivable will not be collected are considered to be credit-
impaired. The measurement framework for loans in the Consoli-
dated Financial Statements is one of the following:
• At the principal amount outstanding, net of the allowance for
loan losses, unearned income, unamortized discounts and premi-
ums, and any net deferred loan fees or costs, for loans held for
investment (other than purchased credit-impaired loans);
• At the lower of cost or fair value, with valuation changes re-
corded in noninterest revenue, for loans that are classified as
held-for-sale;
• At fair value, with changes in fair value recorded in noninterest
revenue, for loans classified as trading assets or risk managed on
a fair value basis; or
• Purchased credit-impaired loans held-for-investment are initially
measured at fair value, which includes estimated future credit
losses. Accordingly, an allowance for loan losses related to these
loans is not recorded at the acquisition date.
See Note 4 on pages 173–175 of this Annual Report for further
information on the Firm’s elections of fair value accounting under