JP Morgan Chase 2003 Annual Report Download - page 119

J.P. Morgan Chase & Co. / 2003 Annual Report 117
JPM organ Chase uses forw ard foreign exchange contracts and
foreign currency–denominated debt instruments to protect the
value of its net investments in its non-U.S. subsidiaries in foreign
currencies. The portion of the hedging instruments excluded
from the assessment of hedge effectiveness (forw ard points) is
recorded in Net interest income.
The follow ing table presents derivative instrument- and hedg-
ing-related activities for the period indicated:
Year ended December 31, (in millions) 2003 2002
Fair value hedge ineffective net gains(a) $37 $441
Cash flow hedge ineffective net losses(a) (5) (1)
Cash flow hedging gains on forecasted
transactions that failed to occur ——
(a) Includes ineffectiveness and the components of hedging instruments that have been
excluded from the assessment of hedge effectiveness.
Over the next 12 months, it is expected that $124 million (after-
tax) of net losses recorded in Other comprehensive income at
December 31, 2003, w ill be recognized in earnings. The maximum
length of time over w hich forecasted transactions are hedged is
10 years, related to core lending and borrow ing activities.
In 2001, the adoption of SFAS 133 resulted in an after-tax
reduction to net income of $25 million and an after-tax reduc-
tion to Other comprehensive income of $36 million. Due to
SFAS 133, JPM organ Chase changed certain hedging strategies
and elected not to designate some derivatives utilized to man-
age economic exposure as accounting hedges. For example, to
moderate its use of derivatives, the mortgage business began
using AFS securities as economic hedges of mortgage servicing
rights. Changes in the fair value of credit derivatives used to
manage the Firm’s credit risk are recorded in Trading revenue
because of the difficulties in qualifying such contracts as hedges
of loans and commitments.
Off-balance sheet lending-related
financial instruments and guarantees
JPM organ Chase utilizes lending-related financial instruments
(e.g., commitments and guarantees) to meet the financing
needs of its customers. The contractual amount of these finan-
cial instruments represents the maximum possible credit risk
should the counterparty draw dow n the commitment or the
Firm fulfill its obligation under the guarantee, and the counter-
party w ere to subsequently fail to perform according to the
terms of the contract. M ost of these commitments and guaran-
tees expire w ithout a default occurring or w ithout being drawn.
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. Further, certain commit-
ments, primarily related to consumer financings, are cancelable,
upon notice, at the option of the Firm.
To provide for the risk of loss inherent in commercial-related
contracts, an allow ance for credit losses is maintained. See Note
12 on page 100 of this Annual Report for a further discussion of
the Allow ance for credit losses on lending-related commitments.
The follow ing table summarizes the contract amounts relating
to off–balance sheet lending-related financial instruments and
guarantees at December 31, 2003 and 2002:
Off-balance sheet lending-related financial instruments
December 31, (in millions) 2003 2002
Consumer-related $176,923 $151,138
Commercial-related:
Other unfunded commitments to extend credit (a)(b) $176,222 $196,654
Standby letters of credit and guarantees(a) 35,332 38,848
Other letters of credit (a) 4,204 2,618
Total commercial-related $215,758 $238,120
Customers’ securities lent $143,143 $101,503
(a) Net of risk participations totaling $16.5 billion and $15.6 billion at December 31, 2003
and 2002.
(b) Includes unused advised lines of credit totaling $19 billion at December 31, 2003 and
$22 billion at December 31, 2002, which are not legally binding. In regulatory filings with
the Federal Reserve Board, unused advised lines are not reportable.
FIN 45 establishes guarantor’s accounting and disclosure require-
ments for guarantees, requiring 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. FIN 45 defines a guarantee as a contract that contin-
gently requires the Firm to pay a guaranteed party, based on:
(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 follow ing
off-balance sheet lending arrangements to be guarantees under
FIN 45: certain asset purchase agreements, standby letters of
credit and financial guarantees, securities lending indemnifica-
tions, certain indemnification agreements included w ithin
third-party contractual arrangements and certain derivative con-
tracts. These guarantees are described in further detail below.
Note 29