JP Morgan Chase 2012 Annual Report Download - page 193

JPMorgan Chase & Co./2012 Annual Report 203
Therefore, market approximates fair value for the Firm’s physical commodities inventories. When fair value hedging has been applied (or when market is below cost), the
carrying value of physical commodities approximates fair value, because under fair value hedge accounting, the cost basis is adjusted for changes in fair value. For a further
discussion of the Firm’s hedge accounting relationships, see Note 6 on pages 218–227 of this Annual Report. To provide consistent fair value disclosure information, all physical
commodities inventories have been included in each period presented.
(d) 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 Committee on Uniform Security Identification Procedures numbers (“CUSIPs”).
(e) As permitted under U.S. GAAP, the Firm has elected to net derivative receivables and derivative payables and the related cash collateral received and paid when a legally
enforceable master netting agreement exists. For purposes of the tables above, the Firm does not reduce derivative receivables and derivative payables balances for this netting
adjustment, either within or across the levels of the fair value hierarchy, as such netting is not relevant to a presentation based on the transparency of inputs to the valuation of
an asset or liability. Therefore, the balances reported in the fair value hierarchy table are gross of any counterparty netting adjustments. However, if the Firm were to net such
balances within level 3, the reduction in the level 3 derivative receivable and payable balances would be $8.4 billion and $11.7 billion at December 31, 2012 and 2011,
respectively; this is exclusive of the netting benefit associated with cash collateral, which would further reduce the level 3 balances.
(f) Private equity instruments represent investments within the Corporate/Private Equity segment. The cost basis of the private equity investment portfolio totaled $8.4 billion and
$9.5 billion at December 31, 2012 and 2011, respectively.
(g) Includes investments in hedge funds, private equity funds, real estate and other funds that do not have readily determinable fair values. The Firm uses net asset value per share
when measuring the fair value of these investments. At December 31, 2012 and 2011, the fair value of these investments were $4.9 billion and $5.5 billion, respectively, of
which $1.1 billion and $1.2 billion, respectively, in level 2, and $3.8 billion and $4.3 billion, respectively, in level 3.
Transfers between levels for instruments carried at fair
value on a recurring basis
For the year ended December 31, 2012, $113.9 billion of
settled U.S. government agency mortgage-backed securities
were transferred from level 1 to level 2. While the U.S.
government agency mortgage-backed securities market
remains highly liquid and transparent, the transfer reflects
greater market price differentiation between settled
securities based on certain underlying loan specific factors.
There were no significant transfers from level 2 to level 1
for the year ended December 31, 2012, and no significant
transfers between level 1 and level 2 for the year ended
December 31, 2011.
For the years ended December 31, 2012 and 2011, there
were no significant transfers from level 2 into level 3. For
the year ended December 31, 2012, transfers from level 3
into level 2 included $1.2 billion of derivative payables
based on increased observability of certain structured
equity derivatives; and $1.8 billion of long-term debt due to
a decrease in valuation uncertainty of certain equity
structured notes. For the year ended December 31, 2011,
transfers from level 3 into level 2 included $2.6 billion of
long-term debt due to a decrease in valuation uncertainty of
certain structured notes.
All transfers are assumed to occur at the beginning of the
reporting period.
During 2012 the liquidity for certain collateralized loan
obligations increased and price transparency improved.
Accordingly, the Firm incorporated a revised valuation
model into its valuation process for CLOs to better calibrate
to market data where available. The Firm began to verify
fair value estimates from this model to independent sources
during the fourth quarter of 2012. Although market
liquidity and price transparency have improved, CLO market
prices were not yet considered materially observable and
therefore CLOs remained in level 3 as of December 31,
2012. The change in the valuation process did not have a
significant impact on the fair value of the Firm’s CLO
positions.