JP Morgan Chase 2014 Annual Report Download - page 215

JPMorgan Chase & Co./2014 Annual Report 213
Net investment hedge gains and losses
The following table presents hedging instruments, by contract type, that were used in net investment hedge accounting
relationships, and the pretax gains/(losses) recorded on such instruments for the years ended December 31, 2014, 2013 and
2012.
Gains/(losses) recorded in income and other comprehensive income/(loss)
2014 2013 2012
Year ended December 31,
(in millions)
Excluded
components
recorded
directly in
income(a)
Effective
portion
recorded in OCI
Excluded
components
recorded
directly in
income(a)
Effective
portion
recorded in OCI
Excluded
components
recorded
directly in
income(a)
Effective
portion
recorded in OCI
Foreign exchange derivatives $(448) $1,698 $(383) $773 $(306) $(82)
(a) Certain components of hedging derivatives are permitted to be excluded from the assessment of hedge effectiveness, such as forward points on foreign
exchange forward contracts. Amounts related to excluded components are recorded in current-period income. The Firm measures the ineffectiveness of
net investment hedge accounting relationships based on changes in spot foreign currency rates, and therefore there was no significant ineffectiveness for
net investment hedge accounting relationships during 2014, 2013 and 2012.
Gains and losses on derivatives used for specified risk
management purposes
The following table presents pretax gains/(losses) recorded
on a limited number of derivatives, not designated in hedge
accounting relationships, that are used to manage risks
associated with certain specified assets and liabilities,
including certain risks arising from the mortgage pipeline,
warehouse loans, MSRs, wholesale lending exposures, AFS
securities, foreign currency-denominated liabilities, and
commodities-related contracts and investments.
Derivatives gains/(losses)
recorded in income
Year ended December 31,
(in millions) 2014 2013 2012
Contract type
Interest rate(a) $ 2,308 $ 617 $ 5,353
Credit(b) (58) (142) (175)
Foreign exchange(c) (7) 1 47
Commodity(d) 156 178 94
Total $ 2,399 $ 654 $ 5,319
(a) Primarily represents interest rate derivatives used to hedge the
interest rate risk inherent in the mortgage pipeline, warehouse loans
and MSRs, as well as written commitments to originate warehouse
loans. Gains and losses were recorded predominantly in mortgage fees
and related income.
(b) Relates to credit derivatives used to mitigate credit risk associated
with lending exposures in the Firm’s wholesale businesses. These
derivatives do not include credit derivatives used to mitigate
counterparty credit risk arising from derivative receivables, which is
included in gains and losses on derivatives related to market-making
activities and other derivatives. Gains and losses were recorded in
principal transactions revenue.
(c) Primarily relates to hedges of the foreign exchange risk of specified
foreign currency-denominated assets and liabilities. Gains and losses
were recorded in principal transactions revenue.
(d) Primarily relates to commodity derivatives used to mitigate energy
price risk associated with energy-related contracts and investments.
Gains and losses were recorded in principal transactions revenue.
Gains and losses on derivatives related to market-making
activities and other derivatives
The Firm makes markets in derivatives in order to meet the
needs of customers and uses derivatives to manage certain
risks associated with net open risk positions from the Firm’s
market-making activities, including the counterparty credit
risk arising from derivative receivables. All derivatives not
included in the hedge accounting or specified risk
management categories above are included in this category.
Gains and losses on these derivatives are primarily recorded
in principal transactions revenue. See Note 7 for
information on principal transactions revenue.
Credit derivatives
Credit derivatives are financial instruments whose value is
derived from the credit risk associated with the debt of a
third-party issuer (the reference entity) and which allow
one party (the protection purchaser) to transfer that risk to
another party (the protection seller). Credit derivatives
expose the protection purchaser to the creditworthiness of
the protection seller, as the protection seller is required to
make payments under the contract when the reference
entity experiences a credit event, such as a bankruptcy, a
failure to pay its obligation or a restructuring. The seller of
credit protection receives a premium for providing
protection but has the risk that the underlying instrument
referenced in the contract will be subject to a credit event.
The Firm is both a purchaser and seller of protection in the
credit derivatives market and uses these derivatives for two
primary purposes. First, in its capacity as a market-maker,
the Firm actively manages a portfolio of credit derivatives
by purchasing and selling credit protection, predominantly
on corporate debt obligations, to meet the needs of
customers. Second, as an end-user, the Firm uses credit
derivatives to manage credit risk associated with lending
exposures (loans and unfunded commitments) and
derivatives counterparty exposures in the Firm’s wholesale
businesses, and to manage the credit risk arising from
certain financial instruments in the Firm’s market-making
businesses. Following is a summary of various types of
credit derivatives.