JP Morgan Chase 2010 Annual Report Download - page 277

JPMorgan Chase & Co./2010 Annual Report
277
The following table presents standby letters of credit and other letters of credit arrangements by the ratings profiles of the Firm’s customers as
of December 31, 2010 and 2009.
Standby letters of credit and other financial guarantees and other letters of credit
2010
2009
December 31, (in millions)
Standby letters
of credit and other
financial guarantees
Other letters
of credit
Standby letters
of credit and other
financial guarantees
Other letters
of credit
Investment-grade
(a)
$ 70,236 $ 5,289 $ 66,786 $ 3,861
Noninvestment-grade
(a)
24,601 1,374 24,699 1,306
Total contractual amount
(b)
94,837
(c)
6,663 91,485
(c)
5,167
Allowance for lending-related commitments
345
2
552 1
Commitments with collateral
37,815
2,127
31,454 1,315
(a) The ratings scale is based on the Firm’s internal ratings which generally correspond to ratings as defined by S&P and Moody’s.
(b) At December 31, 2010 and 2009, represents the contractual amount net of risk participations totaling $22.4 billion and $24.6 billion, respectively, for standby letters of
credit and other financial guarantees; and $1.1 billion and $690 million, respectively, for other letters of credit. In regulatory filings with the Federal Reserve these
commitments are shown gross of risk participations.
(c) At December 31, 2010 and 2009, includes unissued standby letters of credit commitments of $41.6 billion and $38.4 billion, respectively.
Indemnification agreements – general
In connection with issuing securities to investors, the Firm may enter
into contractual arrangements with third parties that require the Firm
to make a payment to them in the event of a change in tax law or an
adverse interpretation of tax law. In certain cases, the contract also
may include a termination clause, which would allow the Firm to
settle the contract at its fair value in lieu of making a payment under
the indemnification clause. The Firm may also enter into indemnifica-
tion clauses in connection with the licensing of software to clients
(“software licensees”) or when it sells a business or assets to a third
party (“third-party purchasers”), pursuant to which it indemnifies
software licensees for claims of liability or damages that may occur
subsequent to the licensing of the software, or third-party purchasers
for losses they may incur due to actions taken by the Firm prior to the
sale of the business or assets. It is difficult to estimate the Firm’s
maximum exposure under these indemnification arrangements, since
this would require an assessment of future changes in tax law and
future claims that may be made against the Firm that have not yet
occurred. However, based on historical experience, management
expects the risk of loss to be remote.
Securities lending indemnification
Through the Firm’s securities lending program, customers’ securi-
ties, via custodial and non-custodial arrangements, may be lent to
third parties. As part of this program, the Firm provides an indemni-
fication in the lending agreements which protects the lender
against the failure of the third-party borrower to return the lent
securities in the event the Firm did not obtain sufficient collateral.
To minimize its liability under these indemnification agreements,
the Firm obtains cash or other highly liquid collateral with a market
value exceeding 100% of the value of the securities on loan from
the borrower. Collateral is marked to market daily to help assure
that collateralization is adequate. Additional collateral is called
from the borrower if a shortfall exists, or collateral may be released
to the borrower in the event of overcollateralization. If a borrower
defaults, the Firm would use the collateral held to purchase re-
placement securities in the market or to credit the lending customer
with the cash equivalent thereof. Also, as part of this program, the
Firm invests cash collateral received from the borrower in accor-
dance with approved guidelines.
Derivatives qualifying as guarantees
In addition to the contracts described above, the Firm transacts
certain derivative contracts that meet the characteristics of a guar-
antee under U.S. GAAP. These contracts include written put options
that require the Firm to purchase assets upon exercise by the option
holder at a specified price by a specified date in the future. The
Firm may enter into written put option contracts in order to meet
client needs, or for trading purposes. The terms of written put
options are typically five years or less. Derivative guarantees also
include contracts such as stable value derivatives that require the
Firm to make a payment of the difference between the market
value and the book value of a counterparty’s reference portfolio of
assets in the event that market value is less than book value and
certain other conditions have been met. Stable value derivatives,
commonly referred to as “stable value wraps”, are transacted in
order to allow investors to realize investment returns with less
volatility than an unprotected portfolio and are typically longer-term
or may have no stated maturity, but allow the Firm to terminate the
contract under certain conditions.
Derivative guarantees are recorded on the Consolidated Balance
Sheets at fair value in trading assets and trading liabilities. The
total notional amount of the derivatives that the Firm deems to be
guarantees was $87.8 billion and $98.1 billion at December 31,
2010 and 2009, respectively. The notional amount generally repre-
sents the Firm’s maximum exposure to derivatives qualifying as
guarantees. However, exposure to certain stable value derivatives is
contractually limited to a substantially lower percentage of the
notional amount; the notional amount on these stable value con-
tracts was $25.9 billion and $24.9 billion and the maximum expo-
sure to loss was $2.7 billion and $2.5 billion, at December 31,
2010 and 2009, respectively. The fair values of the contracts re-
flects the probability of whether the Firm will be required to per-
form under the contract. The fair value related to derivative
guarantees were derivative payables of $390 million and $974 mil-
lion and derivative receivables of $96 million and $78 million at