JP Morgan Chase 2014 Annual Report Download - page 76

Management’s discussion and analysis
74 JPMorgan Chase & Co./2014 Annual Report
OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL CASH OBLIGATIONS
In the normal course of business, the Firm enters into
various contractual obligations that may require future cash
payments. Certain obligations are recognized on-balance
sheet, while others are off-balance sheet under U.S. GAAP.
The Firm is involved with several types of off–balance sheet
arrangements, including through nonconsolidated special-
purpose entities (“SPEs”), which are a type of VIE, and
through lending-related financial instruments (e.g.,
commitments and guarantees).
Special-purpose entities
The most common type of VIE is an SPE. SPEs are commonly
used in securitization transactions in order to isolate certain
assets and distribute the cash flows from those assets to
investors. SPEs are an important part of the financial
markets, including the mortgage- and asset-backed
securities and commercial paper markets, as they provide
market liquidity by facilitating investors’ access to specific
portfolios of assets and risks. SPEs may be organized as
trusts, partnerships or corporations and are typically
established for a single, discrete purpose. SPEs are not
typically operating entities and usually have a limited life
and no employees. The basic SPE structure involves a
company selling assets to the SPE; the SPE funds the
purchase of those assets by issuing securities to investors.
JPMorgan Chase uses SPEs as a source of liquidity for itself
and its clients by securitizing financial assets, and by
creating investment products for clients. The Firm is
involved with SPEs through multi-seller conduits, investor
intermediation activities, and loan securitizations. See Note
16 for further information on these types of SPEs.
The Firm holds capital, as deemed appropriate, against all
SPE-related transactions and related exposures, such as
derivative transactions and lending-related commitments
and guarantees.
The Firm has no commitments to issue its own stock to
support any SPE transaction, and its policies require that
transactions with SPEs be conducted at arm’s length and
reflect market pricing. Consistent with this policy, no
JPMorgan Chase employee is permitted to invest in SPEs
with which the Firm is involved where such investment
would violate the Firm’s Code of Conduct. These rules
prohibit employees from self-dealing and acting on behalf
of the Firm in transactions with which they or their family
have any significant financial interest.
Implications of a credit rating downgrade to JPMorgan Chase
Bank, N.A.
For certain liquidity commitments to SPEs, JPMorgan Chase
Bank, N.A. could be required to provide funding if its short-
term credit rating were downgraded below specific levels,
primarily “P-1”, “A-1” and “F1” for Moody’s, Standard &
Poor’s and Fitch, respectively. These liquidity commitments
support the issuance of asset-backed commercial paper by
Firm-administered consolidated SPEs. In the event of a
short-term credit rating downgrade, JPMorgan Chase Bank,
N.A., absent other solutions, would be required to provide
funding to the SPE, if the commercial paper could not be
reissued as it matured. The aggregate amounts of
commercial paper outstanding held by third parties as of
December 31, 2014 and 2013, was $12.1 billion and
$15.5 billion, respectively. The aggregate amounts of
commercial paper outstanding could increase in future
periods should clients of the Firm-administered
consolidated SPEs draw down on certain unfunded lending-
related commitments. These unfunded lending-related
commitments were $9.9 billion and $9.2 billion at
December 31, 2014 and 2013, respectively. The Firm could
facilitate the refinancing of some of the clients’ assets in
order to reduce the funding obligation. For further
information, see the discussion of Firm-administered multi-
seller conduits in Note 16.
The Firm also acts as liquidity provider for certain municipal
bond vehicles. The Firm’s obligation to perform as liquidity
provider is conditional and is limited by certain termination
events, which include bankruptcy or failure to pay by the
municipal bond issuer or credit enhancement provider, an
event of taxability on the municipal bonds or the immediate
downgrade of the municipal bond to below investment
grade. See Note 16 for additional information.
Off–balance sheet lending-related financial
instruments, guarantees, and other commitments
JPMorgan Chase provides lending-related financial
instruments (e.g., commitments and guarantees) to meet
the financing needs of its customers. The contractual
amount of these financial instruments represents the
maximum possible credit risk to the Firm should the
counterparty draw upon the commitment or the Firm be
required to fulfill its obligation under the guarantee, and
should the counterparty subsequently fail to perform
according to the terms of the contract. Most of these
commitments and guarantees expire without being drawn
or a default occurring. As a result, the total contractual
amount of these instruments is not, in the Firm’s view,
representative of its actual future credit exposure or
funding requirements. For further discussion of lending-
related financial instruments, guarantees and other
commitments, and the Firm’s accounting for them, see
Lending-related commitments on page 125 and Note 29.
For a discussion of liabilities associated with loan sales-and
securitization-related indemnifications, see Note 29.