JP Morgan Chase 2014 Annual Report Download - page 292

Notes to consolidated financial statements
290 JPMorgan Chase & Co./2014 Annual Report
The following table summarizes the types of facilities under which standby letters of credit and other letters of credit
arrangements are outstanding by the ratings profiles of the Firm’s customers, as of December 31, 2014 and 2013.
Standby letters of credit, other financial guarantees and other letters of credit
2014 2013
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) $ 66,856 $ 3,476 $ 69,109 $ 3,939
Noninvestment-grade(a) 23,018 855 23,614 1,081
Total contractual amount $ 89,874 $ 4,331 $ 92,723 $ 5,020
Allowance for lending-related commitments $ 234 $ 1 $ 263 $ 2
Commitments with collateral 39,726 1,509 40,410 1,473
(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.
Advised lines of credit
An advised line of credit is a revolving credit line which
specifies the maximum amount the Firm may make
available to an obligor, on a nonbinding basis. The borrower
receives written or oral advice of this facility. The Firm may
cancel this facility at any time by providing the borrower
notice or, in some cases, without notice as permitted by law.
Securities lending indemnifications
Through the Firm’s securities lending program, customers’
securities, via custodial and non-custodial arrangements,
may be lent to third parties. As part of this program, the
Firm provides an indemnification in the lending agreements
which protects the lender against the failure of the
borrower to return the lent securities. 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 replacement securities in
the market or to credit the lending customer with the cash
equivalent thereof.
Derivatives qualifying as guarantees
In addition to the contracts described above, the Firm
transacts certain derivative contracts that have the
characteristics of a guarantee 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 other trading purposes. The terms of
written put options are typically five years or less.
Derivatives deemed to be 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.
Derivatives deemed to be guarantees are recorded on the
Consolidated balance sheets at fair value in trading assets
and trading liabilities. The total notional value of the
derivatives that the Firm deems to be guarantees was
$53.6 billion and $56.3 billion at December 31, 2014 and
2013, respectively. The notional amount generally
represents the Firm’s maximum exposure to derivatives
qualifying as guarantees. However, exposure to certain
stable value contracts is contractually limited to a
substantially lower percentage of the notional amount; the
notional amount on these stable value contracts was
$27.5 billion and $27.0 billion at December 31, 2014 and
2013, respectively, and the maximum exposure to loss was
$2.9 billion and $2.8 billion at both December 31, 2014
and 2013. The fair values of the contracts reflect the
probability of whether the Firm will be required to perform
under the contract. The fair value of derivatives that the
Firm deems to be guarantees were derivative payables of
$102 million and $109 million and derivative receivables of
$22 million and $37 million at December 31, 2014 and
2013, respectively. The Firm reduces exposures to these
contracts by entering into offsetting transactions, or by
entering into contracts that hedge the market risk related to
the derivative guarantees.
In addition to derivative contracts that meet the
characteristics of a guarantee, the Firm is both a purchaser
and seller of credit protection in the credit derivatives
market. For a further discussion of credit derivatives, see
Note 6.
Unsettled reverse repurchase and securities borrowing
agreements
In the normal course of business, the Firm enters into
reverse repurchase agreements and securities borrowing
agreements that settle at a future date. At settlement, these
commitments require that the Firm advance cash to and
accept securities from the counterparty. These agreements
generally do not meet the definition of a derivative, and