JP Morgan Chase 2010 Annual Report Download - page 253

JPMorgan Chase & Co./2010 Annual Report 253
interest rate risk that is tailored to their specific needs. The derivative
transaction between the Firm and the VIE may include currency swaps
to hedge assets held by the VIE denominated in foreign currency into
the investors’ local currency or interest rate swaps to hedge the
interest rate risk of assets held by the VIE; to add additional interest
rate exposure into the VIE in order to increase the return on the
issued notes; or to convert an interest-bearing asset into a zero-
coupon bond.
The Firm’s exposure to asset swap vehicles is generally limited to its
rights and obligations under the interest rate and/or foreign ex-
change derivative contracts. The Firm historically has not provided
any financial support to the asset swap vehicles over and above its
contractual obligations. The Firm does not generally consolidate
these asset swap vehicles, since the Firm does not have the power
to direct the significant activities of these entities and does not
have a variable interest that could potentially be significant. As a
derivative counterparty, the Firm has a senior claim on the collat-
eral of the VIE and reports such derivatives on its balance sheet at
fair value. Substantially all of the assets purchased by such VIEs are
investment-grade.
Exposure to nonconsolidated asset swap VIEs at December 31, 2010 and 2009, was as follows.
Net derivative
Trading
Total
Par value of
December 31, (in billions) receivables assets
(b)
exposure
(c)
collateral held by VIEs
(d)
2010
(a)
$ 0.3 $ — $ 0.3 $
7.6
2009
(a)
0.1
—
0.1
10.2
(a) Excluded the fair value of collateral of zero and $623 million at December 31, 2010 and 2009, respectively, which was consolidated as the Firm, in its role as secondary
market-maker, held a majority of the issued notes of certain vehicles.
(b) Trading assets principally comprise notes issued by VIEs, which from time to time are held as part of the termination of a deal or to support limited market-making.
(c) On–balance sheet exposure that includes net derivative receivables and trading assets – debt and equity instruments.
(d) The Firm’s maximum exposure arises through the derivatives executed with the VIEs; the exposure varies over time with changes in the fair value of the derivatives. The
Firm relies upon the collateral held by the VIEs to pay any amounts due under the derivatives; the vehicles are structured at inception so that the par value of the collat-
eral is expected to be sufficient to pay amounts due under the derivative contracts.
VIEs sponsored by third parties
Investment in a third-party credit card securitization trust
The Firm holds two interests in a third-party-sponsored VIE, which
is a credit card securitization trust that owns credit card receivables
issued by a national retailer. The Firm is not the primary beneficiary
of the trust, as the Firm does not have the power to direct the
activities of the VIE that most significantly impact the VIE’s eco-
nomic performance. The first note is structured so that the principal
amount can float up to 47% of the principal amount of the receiv-
ables held by the trust, not to exceed $4.2 billion. The Firm ac-
counts for its investment at fair value within AFS securities. At
December 31, 2010 and 2009, the amortized cost of the note was
$3.0 billion and $3.5 billion, respectively, and the fair value was
$3.1 billion and $3.5 billion, respectively. The Firm accounts for its
other interest with the trust, which is not subject to the limits noted
above, as a loan at amortized cost. This senior loan had an amor-
tized cost and fair value of approximately $1.0 billion at both
December 31, 2010 and 2009. For more information on AFS securi-
ties and loans, see Notes 12 and 14 on pages 214–218 and 220–
238, respectively, of this Annual Report.
VIE used in FRBNY transaction
In conjunction with the Bear Stearns merger, in June 2008, the
Federal Reserve Bank of New York (“FRBNY”) took control,
through an LLC formed for this purpose, of a portfolio of $30.0
billion in assets, based on the value of the portfolio as of March 14,
2008. The assets of the LLC were funded by a $28.85 billion term
loan from the FRBNY and a $1.15 billion subordinated loan from
JPMorgan Chase. The JPMorgan Chase loan is subordinated to the
FRBNY loan and will bear the first $1.15 billion of any losses of the
portfolio. Any remaining assets in the portfolio after repayment of
the FRBNY loan, repayment of the JPMorgan Chase loan and the
expense of the LLC will be for the account of the FRBNY. The extent
to which the FRBNY and JPMorgan Chase loans will be repaid will
depend on the value of the assets in the portfolio and the liquida-
tion strategy directed by the FRBNY. The Firm does not consolidate
the LLC, as it does not have the power to direct the activities of the
VIE that most significantly impact the VIE’s economic performance.
Prior to January 1, 2010, the Firm did not consolidate the LLC in
accordance with the accounting treatment under prior consolida-
tion accounting guidance since it did not have the obligation to
absorb the majority of the vehicle’s expected losses, receive a
majority of the vehicle’s residual returns, or both.
Other VIEs sponsored by third parties
The Firm enters into transactions with VIEs structured by other
parties. These include, for example, acting as a derivative counter-
party, liquidity provider, investor, underwriter, placement agent,
trustee or custodian. These transactions are conducted at arm’s
length, and individual credit decisions are based on the analysis of
the specific VIE, taking into consideration the quality of the underly-
ing assets. Where the Firm does not have the power to direct the
activities of the VIE that most significantly impact the VIE’s eco-
nomic performance, or a variable interest that could potentially be
significant, the Firm records and reports these positions on its
Consolidated Balance Sheets similarly to the way it would record
and report positions in respect of any other third-party transaction.