JP Morgan Chase 2013 Annual Report Download - page 148

Management’s discussion and analysis
154 JPMorgan Chase & Co./2013 Annual Report
PRINCIPAL RISK MANAGEMENT
Principal investments are predominantly privately-held
financial assets and instruments, typically representing an
ownership or junior capital position, that have unique risks
due to their illiquidity or for which there is less observable
market or valuation data. Such investing activities, including
private equity investments, mezzanine financing, and tax-
oriented investments are typically intended to be held over
extended investment periods and, accordingly, the Firm has
no expectation for short-term gain with respect to these
investments.
The Firm’s approach to managing principal risk is consistent
with the Firm’s general risk governance structure. A firm-
wide risk policy framework exists for all principal investing
activities. All investments are approved by investment
committees that include executives who are independent
from the investing businesses. An independent valuation
function is responsible for reviewing the appropriateness of
the carrying values of principal investments, in accordance
with relevant accounting, valuation and risk policies.
Targeted levels for total and annual investments are
established in order to manage the overall size of the
portfolios. Industry, geographic, and position level
concentration limits are in place and intended to ensure
diversification of the portfolios. The Firm also conducts
stress testing on these portfolios using specific scenarios
that estimate losses based on significant market moves
and/or other risk events.
The Firm’s principal investments are managed under
various lines of business and are captured within the
respective LOB’s financial results. Principal investments
cover multiple asset classes and occur either as a
standalone investing businesses or as part of a broader
business platform. Asset classes include private equity, tax
equity investments including affordable housing, and
mezzanine/junior debt investments. The majority of the
Firm’s private equity is reported separately under
Corporate/Private Equity (for detailed information, see
Private Equity portfolio on page 111 of this Annual Report).