JP Morgan Chase 2014 Annual Report Download - page 137

JPMorgan Chase & Co./2014 Annual Report 135
The following chart compares the daily market risk-related
gains and losses on the Firm’s Risk Management positions
for the year ended December 31, 2014. As the chart
presents market risk-related gains and losses related to
those positions included in the Firm’s Risk Management
VaR, the results in the table below differ from the results of
backtesting disclosed in the Market Risk section of the
Firm’s Basel III Pillar 3 Regulatory Capital Disclosures
reports, which are based on Regulatory VaR applied to
covered positions. The chart shows that for the year ended
December 31, 2014, the Firm observed five VaR band
breaks and posted gains on 157 of the 260 days in this
period.
Other risk measures
Economic-value stress testing
Along with VaR, stress testing is an important tool in
measuring and controlling risk. While VaR reflects the risk
of loss due to adverse changes in markets using recent
historical market behavior as an indicator of losses, stress
testing is intended to capture the Firm’s exposure to
unlikely but plausible events in abnormal markets. The Firm
runs weekly stress tests on market-related risks across the
lines of business using multiple scenarios that assume
significant changes in risk factors such as credit spreads,
equity prices, interest rates, currency rates or commodity
prices. The framework uses a grid-based approach, which
calculates multiple magnitudes of stress for both market
rallies and market sell-offs for each risk factor. Stress-test
results, trends and explanations based on current market
risk positions are reported to the Firm’s senior management
and to the lines of business to allow them to better
understand the sensitivity of positions to certain defined
events and to enable them to manage their risks with more
transparency.
Stress scenarios are defined and reviewed by Market Risk,
and significant changes are reviewed by the relevant Risk
Committees. While most of the scenarios estimate losses
based on significant market moves, such as an equity
market collapse or credit crisis, the Firm also develops
scenarios to quantify risk arising from specific portfolios or
concentrations of risks, which attempt to capture certain
idiosyncratic market movements. Scenarios may be
redefined on an ongoing basis to reflect current market
conditions. Ad hoc scenarios are run in response to specific
market events or concerns. The Firm’s stress testing
framework is utilized in calculating results under scenarios
mandated by the Federal Reserve’s CCAR and ICAAP
(“Internal Capital Adequacy Assessment Process”)
processes.