JP Morgan Chase 2003 Annual Report Download - page 121

J.P. Morgan Chase & Co. / 2003 Annual Report 119
w ith the requirements set forth in the representations and w ar-
ranties. Historically, losses incurred on such repurchases and/or
indemnifications have been insignificant, and therefore manage-
ment expects the risk of material loss to be remote.
In connection with Chase Cardmember Services, the Firm is a
50% partner with one of the leading companies in electronic
payment services in a joint venture, know n as Chase M erchant
Services (the “ joint venture” ) that provides merchant processing
services in the United States. The joint venture is contingently
liable for processed credit card sales transactions in the event of
a dispute betw een the cardmember and a merchant. If a dispute
is resolved in the cardmember’s favor, the joint venture w ill cred-
it or refund the amount to the cardmember and charge back
the transaction to the merchant. If the joint venture is unable
to collect the amount from the merchant, the joint venture w ill
bear the loss for the amount credited or refunded to the card-
member. The joint venture mitigates this risk by w ithholding
settlement or obtaining escrow deposits from certain merchants.
How ever, in the unlikely event that: 1) a merchant ceases
operations and is unable to deliver products, services or a
refund; 2) the joint venture does not have sufficient w ithhold-
ings or escrow deposits to provide customer refunds; and
3) the joint venture does not have sufficient financial resources
to provide customer refunds, the Firm w ould be liable to refund
the cardholder in proportion to its equity interest in the joint
venture. For the year ended December 31, 2003, the joint
venture incurred aggregate credit losses of $2.0 million on
$260 billion of aggregate volume processed. At December 31,
2003, the joint venture held $242 million of collateral. The Firm
believes that, based on historical experience and the collateral
held by the joint venture, the fair value of the guarantee w ould
not be materially different from the credit loss allow ance recorded
by the joint venture; therefore, the Firm has not recorded any
allow ance for losses in excess of the allow ance recorded by the
joint venture.
The Firm is a member of several securities and futures
exchanges and clearinghouses both in the United States and
overseas. M embership in some of these organizations requires
the Firm to pay a pro rata share of the losses incurred by the
organization as a result of the default of another member. Such
obligation varies w ith different organizations. It may be limited
to members w ho dealt with the defaulting member or to the
amount (or a multiple of the amount) of the Firm’s contribution
to a members’ guaranty fund, or, in a few cases, it may be
unlimited. It is difficult to estimate the Firm’s maximum exposure
under these membership agreements, since this w ould require
an assessment of future claims that may be made against the
Firm that have not yet occurred. How ever, based on historical
experience, management expects the risk of loss to be remote.
In addition to the contracts described above, there are certain
derivative contracts to w hich the Firm is a counterparty that
meet the characteristics of a guarantee under FIN 45. These
derivatives are recorded on the Consolidated balance sheet at
fair value. These contracts include w ritten put options that
require the Firm to purchase assets from the option holder at
a specified price by a specified date in the future, as w ell as
derivatives that effectively guarantee the return on a counter-
party’s reference portfolio of assets. The total notional value
of the derivatives that the Firm deems to be guarantees w as
$50 billion at December 31, 2003. The Firm reduces its expo-
sures to these contracts by entering into offsetting transactions
or by entering into contracts that hedge the market risk related
to these contracts. The fair value related to these contracts w as
a derivative receivable of $163 million and a derivative payable
of $333 million at December 31, 2003.
Finally, certain w ritten put options and credit derivatives permit
cash settlement and do not require the option holder or the
buyer of credit protection to ow n the reference asset. The Firm
does not consider these contracts to be guarantees as described
in FIN 45.
Credit risk concentrations
Concentrations of credit risk arise w hen a number of customers
are engaged in similar business activities or activities in the same
geographic region, or w hen they have similar economic features
that w ould cause their ability to meet contractual obligations to
be similarly affected by changes in economic conditions.
JPM organ Chase regularly monitors various segments of its
credit risk portfolio to assess potential concentration risks and
to obtain collateral w hen deemed necessary. In the Firm’s com-
mercial portfolio, risk concentrations are primarily evaluated by
industry, and also by geographic region. In the consumer portfo-
lio, concentrations are primarily evaluated by product, and by
U.S. geographic region.
For further information regarding on–balance sheet credit con-
centrations by major product and geography, see Note 11 on
page 99 of this Annual Report. For information regarding
concentrations of off–balance sheet lending-related financial
instruments by major product, see Note 29 on page 117 of this
Annual Report. M ore information about concentrations can be
found in the follow ing tables in the M D&A:
Commercial exposure Page 55
Commercial selected industry concentrations Page 56
Selected country exposure Page 58
Geographic region:
1– 4 Family residential mortgage loans Page 62
Managed credit card loans Page 62
Automobile financings Page 62
Note 30