JP Morgan Chase 2010 Annual Report Download - page 187

JPMorgan Chase & Co./2010 Annual Report 187
Trading assets and liabilities
Trading assets include debt and equity instruments held for trading
purposes that JPMorgan Chase owns (“long” positions), certain
loans managed on a fair value basis and for which the Firm has
elected the fair value option, and physical commodities inventories
that are generally accounted for at the lower of cost or fair value.
Trading liabilities include debt and equity instruments that the Firm
has sold to other parties but does not own (“short” positions). The
Firm is obligated to purchase instruments at a future date to cover
the short positions. Included in trading assets and trading liabilities
are the reported receivables (unrealized gains) and payables (unre-
alized losses) related to derivatives. Trading assets and liabilities
are carried at fair value on the Consolidated Balance Sheets. Bal-
ances reflect the reduction of securities owned (long positions) by
the amount of securities sold but not yet purchased (short posi-
tions) when the long and short positions have identical Committee
on Uniform Security Identification Procedures (“CUSIPs”).
Trading assets and liabilities–average balances
Average trading assets and liabilities were as follows for the periods indicated.
Year ended December 31, (in millions)
20
10
2009 2008
Trading assets – debt and equity instruments
(a)
$ 354,441 $ 318,063 $ 384,102
Trading assets – derivative receivables
84
,676
110,457 121,417
Trading liabilities – debt and equity instruments
(a) (b)
78,159 60,224 78,841
Trading liabilities – derivative payables
65,714
77,901 93,200
(a) Balances reflect the reduction of securities owned (long positions) by the amount of securities sold, but not yet purchased (short positions) when the long and short
positions have identical CUSIPs.
(b) Primarily represent securities sold, not yet purchased.
Note 4 – Fair value option
The fair value option provides an option to elect fair value as an
alternative measurement for selected financial assets, financial
liabilities, unrecognized firm commitments, and written loan com-
mitments not previously carried at fair value.
Elections
Elections were made by the Firm to:
• Mitigate income statement volatility caused by the differences in
the measurement basis of elected instruments (for example, cer-
tain instruments elected were previously accounted for on an
accrual basis) while the associated risk management arrange-
ments are accounted for on a fair value basis;
• Eliminate the complexities of applying certain accounting models
(e.g., hedge accounting or bifurcation accounting for hybrid in-
struments); and
• Better reflect those instruments that are managed on a fair value
basis.
Elections include the following:
• Loans purchased or originated as part of securitization ware-
housing activity, subject to bifurcation accounting, or man-
aged on a fair value basis.
• Securities financing arrangements with an embedded deriva-
tive and/or a maturity of greater than one year.
• Owned beneficial interests in securitized financial assets that
contain embedded credit derivatives, which would otherwise
be required to be separately accounted for as a derivative in-
strument.
• Certain tax credits and other equity investments acquired as
part of the Washington Mutual transaction.
• Structured notes issued as part of IB’s client-driven activities.
(Structured notes are financial instruments that contain em-
bedded derivatives.)
• Long-term beneficial interests issued by IB’s consolidated
securitization trusts where the underlying assets are carried at
fair value.