JP Morgan Chase 2003 Annual Report Download - page 51

J.P. Morgan Chase & Co. / 2003 Annual Report 49
Off–balance sheet arrangements and
contractual cash obligations
Special-purpose ent ities
Special-purpose entities (“ SPEs” ), special-purpose vehicles
(“ SPVs” ), or variable-interest entities (“ VIEs” ), are an important
part of the financial markets, providing market liquidity by facili-
tating investors’ access to specific portfolios of assets and risks.
SPEs are not operating entities; typically they are established for
a single, discrete purpose, have a limited life and have no
employees. The basic SPE structure involves a company selling
assets to the SPE. The SPE funds the asset purchase by selling
securities to investors. To insulate investors from creditors of
other entities, including the seller of the assets, SPEs are often
structured to be bankruptcy-remote. SPEs are critical to the
functioning of many investor markets, including, for example,
the market for mortgage-backed securities, other asset-backed
securities and commercial paper. JPM organ Chase is involved
w ith SPEs in three broad categories of transactions: loan securi-
tizations (through “ qualifying” SPEs), multi-seller conduits, and
client intermediation. Capital is held, as appropriate, against all
SPE-related transactions and related exposures such as deriva-
tive transactions and lending-related commitments.
The Firm has no commitments to issue its ow n stock to support
any SPE transaction, and its policies require that transactions
w ith SPEs be conducted at arm’s length and reflect market pric-
ing. Consistent w ith this policy, no JPM organ Chase employee is
permitted to invest in SPEs w ith w hich the Firm is involved
w here such investment w ould violate the Firm’s Worldw ide
Rules of Conduct. These rules prohibit employees from self-
dealing and prohibit employees from acting on behalf of the
Firm in transactions w ith w hich they or their family have any
significant financial interest.
For certain liquidity commitments to SPEs, the Firm could be
required to provide funding if the credit rating of JPM organ
Chase Bank w ere dow ngraded below specific levels, primarily
P-1, A-1 and F1 for M oody’s, Standard & Poor’s and Fitch,
respectively. The amount of these liquidity commitments w as
$34.0 billion at December 31, 2003. If JPM organ Chase Bank
w ere required to provide funding under these commitments, the
Firm could be replaced as liquidity provider. Additionally, w ith
respect to the multi-seller conduits and structured commercial
loan vehicles for w hich JPM organ Chase Bank has extended liq-
uidity commitments, the Bank could facilitate the sale or refi-
nancing of the assets in the SPE in order to provide liquidity.
Of these liquidity commitments to SPEs, $27.7 billion is included
in the Firm’s total Other unfunded commitments to extend
credit included in the table on the follow ing page. As a result
of the consolidation of multi-seller conduits in accordance with
FIN 46, $6.3 billion of these commitments are excluded from
the table, as the underlying assets of the SPE have been included
on the Firm’s Consolidated balance sheet.
The follow ing table summarizes certain revenue information
related to VIEs w ith w hich the Firm has significant involvement,
and qualifying SPEs:
Year ended December 31, 2003 “Qualif ying”
(in millions) VIEs(a) SPEs Tot al
Revenue $79$979 $ 1,058
(a) Includes consolidated and nonconsolidated asset-backed commercial paper conduits for a
consistent presentation of 2003 results.
The revenue reported in the table above represents primarily
servicing fee income. The Firm also has exposure to certain VIE
vehicles arising from derivative transactions w ith VIEs; these
transactions are recorded at fair value on the Firm’s Consolidated
balance sheet w ith changes in fair value (i.e., mark-to-market
gains and losses) recorded in Trading revenue. Such M TM gains
and losses are not included in the revenue amounts reported in
the table above.
For a further discussion of SPEs and the Firm’s accounting for
SPEs, see Note 1 on pages 86–87, Note 13 on pages 100–103,
and Note 14 on pages 103–106 of this Annual Report.
Cont ractual cash obligations
In the normal course of business, the Firm enters into various con-
tractual obligations that may require future cash payments.
Contractual obligations at December 31, 2003, include Long-term
debt, trust preferred capital securities, operating leases, contractual
purchases and capital expenditures and certain Other liabilities. For
a further discussion regarding Long-term debt and trust preferred
capital securities, see Note 18 on pages 109–111 of this Annual
Report. For a further discussion regarding operating leases, see
Note 27 on page 115 of this Annual Report.
The accompanying table summarizes JPM organ Chase’s off–
balance sheet lending-related financial instruments and signifi-
cant contractual cash obligations, by remaining maturity, at
December 31, 2003. Contractual purchases include commit-
ments for future cash expenditures, primarily for services and
contracts involving certain forward purchases of securities and
commodities. Capital expenditures primarily represent future
cash payments for real estate–related obligations and equip-
ment. Contractual purchases and capital expenditures at
December 31, 2003, reflect the minimum contractual obligation
under legally enforceable contracts w ith contract terms that are
both fixed and determinable. Excluded from the follow ing table
are a number of obligations to be settled in cash, primarily in
under one year. These obligations are reflected on the Firm’s
Consolidated balance sheet and include Deposits; Federal funds
purchased and securities sold under repurchase agreements; Other
borrowed funds; purchases of Debt and equity instruments that
settle w ithin standard market timeframes (e.g. regular-w ay);
Derivative payables that do not require physical delivery of the
underlying instrument; and certain purchases of instruments that
resulted in settlement failures.