JP Morgan Chase 2014 Annual Report Download - page 291

JPMorgan Chase & Co./2014 Annual Report 289
Other unfunded commitments to extend credit
Other unfunded commitments to extend credit generally
comprise commitments for working capital and general
corporate purposes, extensions of credit to support
commercial paper facilities and bond financings in the event
that those obligations cannot be remarketed to new
investors, as well as committed liquidity facilities to clearing
organizations.
Also included in other unfunded commitments to extend
credit are commitments to noninvestment-grade
counterparties in connection with leveraged finance
activities, which were $23.7 billion and $18.3 billion at
December 31, 2014 and 2013, respectively. For further
information, see Note 3 and Note 4.
The Firm acts as a settlement and custody bank in the U.S.
tri-party repurchase transaction market. In its role as
settlement and custody bank, the Firm is exposed to the
intra-day credit risk of its cash borrower clients, usually
broker-dealers. This exposure is secured by collateral and
typically extinguished by the end of the day. During 2014,
the Firm extended secured clearance advance facilities to
its clients (i.e. cash borrowers); these facilities contractually
limit the Firm’s intra-day credit risk to the facility amount
and must be repaid by the end of the day. Through these
facilities, the Firm has reduced its intra-day credit risk
substantially; the average daily tri-party repo balance was
$253 billion during the year ended December 31, 2013,
and as of December 31, 2014, the secured clearance
advance facility maximum outstanding commitment amount
was $12.6 billion.
Guarantees
U.S. GAAP requires that a guarantor recognize, at the
inception of a guarantee, a liability in an amount equal to
the fair value of the obligation undertaken in issuing the
guarantee. U.S. GAAP defines a guarantee as a contract that
contingently requires the guarantor to pay a guaranteed
party based upon: (a) changes in an underlying asset,
liability or equity security of the guaranteed party; or (b) a
third party’s failure to perform under a specified
agreement. The Firm considers the following off–balance
sheet lending-related arrangements to be guarantees under
U.S. GAAP: standby letters of credit and financial
guarantees, securities lending indemnifications, certain
indemnification agreements included within third-party
contractual arrangements and certain derivative contracts.
As required by U.S. GAAP, the Firm initially records
guarantees at the inception date fair value of the obligation
assumed (e.g., the amount of consideration received or the
net present value of the premium receivable). For certain
types of guarantees, the Firm records this fair value amount
in other liabilities with an offsetting entry recorded in cash
(for premiums received), or other assets (for premiums
receivable). Any premium receivable recorded in other
assets is reduced as cash is received under the contract, and
the fair value of the liability recorded at inception is
amortized into income as lending and deposit-related fees
over the life of the guarantee contract. For indemnifications
provided in sales agreements, a portion of the sale
proceeds is allocated to the guarantee, which adjusts the
gain or loss that would otherwise result from the
transaction. For these indemnifications, the initial liability is
amortized to income as the Firm’s risk is reduced (i.e., over
time or when the indemnification expires). Any contingent
liability that exists as a result of issuing the guarantee or
indemnification is recognized when it becomes probable
and reasonably estimable. The contingent portion of the
liability is not recognized if the estimated amount is less
than the carrying amount of the liability recognized at
inception (adjusted for any amortization). The recorded
amounts of the liabilities related to guarantees and
indemnifications at December 31, 2014 and 2013,
excluding the allowance for credit losses on lending-related
commitments, are discussed below.
Standby letters of credit and other financial guarantees
Standby letters of credit (“SBLC”) and other financial
guarantees are conditional lending commitments issued by
the Firm to guarantee the performance of a customer to a
third party under certain arrangements, such as
commercial paper facilities, bond financings, acquisition
financings, trade and similar transactions. The carrying
values of standby and other letters of credit were
$789 million and $945 million at December 31, 2014 and
2013, respectively, which were classified in accounts
payable and other liabilities on the Consolidated balance
sheets; these carrying values included $235 million and
$265 million, respectively, for the allowance for lending-
related commitments, and $554 million and $680 million,
respectively, for the guarantee liability and corresponding
asset.