JP Morgan Chase 2010 Annual Report Download - page 143

JPMorgan Chase & Co./2010 Annual Report 143
The table below shows the results of the Firm’s VaR measure using a 95% confidence level.
95% Confidence-Level VaR
Total IB trading VaR by risk type, credit portfolio VaR and other VaR
As of or for the year ended
2010
2009 At December 31,
December 31,
(in millions) Average Minimum Maximum Average Minimum Maximum
20
1
0
2009
IB VaR by risk type
Fixed income
$
65
$
33
$
95
$ 160 $ 80 $ 216
$
52
$ 80
Foreign exchange
11
6
20
18 7 39
16
10
Equities
22
10
52
47 8 156
30
43
Commodities and other
16
1
1
32
20 11 35
13
14
Diversification benefit to
IB
trading VaR (43)(a) NM(b) NM(b) (91)(a) NM(b) NM(b) (34)(a) (54
)
(a)
IB trading VaR
$
71
$
40
$
107
$ 154 $ 77 $ 236
$
77
$ 93
Credit portfolio VaR
26
15
40
52 18 106
27
21
Diversification benefit to IB
trading and credit portfolio
VaR (10)(a) NM(b) NM(b) (42)(a) NM(b) NM(b) (5)(a)
(9
)
(a)
Total IB trading and credit
portfolio VaR $ 87 $ 50 $ 128 $ 164 $ 93 $ 256 $ 99 $ 105
Mortgage Banking VaR
$
23
$
8
$
47
$ 57 $ 19 $ 151
$
9
$ 28
Chief Investment Office
(“CIO”) VaR 61 44 80 103 71 126 56 76
Diversification benefit to
total
other VaR (13)(a) NM(b) NM(b) (36)(a) NM(b) NM(b) (10)(a) (13
)
(a)
Total o
ther VaR
$
71
$
48
$
100
$ 124 $ 79 $ 202
$
55
$ 91
Diversific
ation benefit to
total
IB and other VaR (59)(a) NM(b) NM(b) (82)(a) NM(b) NM(b) (65)(a) (73
)
(a)
Total IB and o
ther VaR
$
99
$
66
$
142
$ 206 $ 111 $ 328
$
89
$ 123
(a) Average VaR and period-end VaR were less than the sum of the VaR of the components described above, which is due to portfolio diversification. The diversification effect
reflects the fact that the risks were not perfectly correlated. The risk of a portfolio of positions is therefore usually less than the sum of the risks of the positions themselves.
(b) Designated as not meaningful (“NM”), because the minimum and maximum may occur on different days for different risk components, and hence it is not meaningful
to compute a portfolio-diversification effect.
VaR measurement
IB trading and credit portfolio VaR includes substantially all trading
activities in IB, including the credit spread sensitivities of certain
mortgage products and syndicated lending facilities that the Firm
intends to distribute. The Firm uses proxies to estimate the VaR for
these products since daily time series are largely not available. It is
likely that using an actual price-based time series for these products,
if available, would affect the VaR results presented. In addition, for
certain products included in IB trading and credit portfolio VaR,
particular risk parameters are not fully captured – for example, corre-
lation risk.
Total other VaR includes certain positions employed as part of the
Firm’s risk management function within CIO and in the Mortgage
Banking business. CIO VaR includes positions, primarily in debt
securities and credit products, used to manage structural and other
risks including interest rate, credit and mortgage risks arising from the
Firm’s ongoing business activities. The Mortgage Banking VaR in-
cludes the Firm’s mortgage pipeline and warehouse loans, MSRs and
all related hedges.
In the Firm’s view, including IB trading and credit portfolio VaR within
total other VaR produces a more complete and transparent perspec-
tive of the Firm’s market risk profile.
IB and other VaR does not include the retained credit portfolio, which
is not marked to market; however, it does include hedges of those
positions. It also does not include debit valuation adjustments
(“DVA”) taken on derivative and structured liabilities to reflect the
credit quality of the Firm, principal investments (mezzanine financing,
tax-oriented investments, etc.), and certain securities and investments
held by the Corporate/Private Equity line of business, including private
equity investments, capital management positions and longer-term
investments managed by CIO. These longer-term positions are man-
aged through the Firm’s earnings at risk and other cash flow monitor-
ing processes, rather than by using a VaR measure. Principal investing
activities and Private Equity positions are managed using stress and
scenario analyses. See the DVA Sensitivity table on page 144 of this
Annual Report for further details. For a discussion of Corpo-
rate/Private Equity, see pages 89–90 of this Annual Report.
2010 and 2009 VaR results
As presented in the table, average total IB and other VaR totaled
$99 million for 2010, compared with $206 million for 2009. The
decrease in average VaR in 2010 was driven by a decline in market
volatility in early 2009, as well as a reduction in exposures, primar-
ily in CIO and IB. Average total IB trading and credit portfolio VaR
for 2010 was $87 million, compared with $164 million for 2009.
The decrease in IB trading and credit portfolio VaR for 2010 was
also driven by the decline in market volatility, as well as a reduction
in exposure, primarily in the fixed income risk component. CIO VaR
averaged $61 million for 2010, compared with $103 million for
2009. Mortgage Banking VaR averaged $23 million for 2010,