JP Morgan Chase 2013 Annual Report Download - page 16

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and will be devoted to this eort. In total,
it is hard to measure the overall scope and
investment since nearly all employees and
systems are engaged in some way or another.
We will be applying the new rules all the
way to the client level, the product level and
the trading desk
We will be applying the new rules, particu-
larly around capital, liquidity and the SLR
(and the factors that increase our capital
surcharge as a global systemically impor-
tant bank), all the way down to each client
we serve, each product we oer and each
trading desk we operate. Doing so will allow
our client executives as well as product and
trading managers to understand how the
new rules aect us at a very granular level
and allow our professionals to begin making
proper and compensating adjustments. At
the most basic level, some of these rules
conict with one another; for example, the
client may be profitable on Basel III capital
but not on SLR capital or vice versa. The
binding constraint at the client level may be
very dierent from the binding constraint at
the firmwide level. To be successful, we will
need to actively manage all these constraints
so we get a fair return on our capital and
properly manage our risks.
At the firmwide level, once we satisfy Basel
III capital, SLR capital and the Liquidity
Coverage Ratio, the binding constraints on
the firm may very well become the CCAR
test, the annual stress test from the Federal
Reserve Board. By its nature, the CCAR test is
less predictable because it will change every
year. And while you can’t eectively manage
stress testing at the client or product level, we
will manage it at the business level so that it
has more predictable outcomes, allowing for
more predictable capital planning.
We are big believers in stress testing, and
you should know that we do it all the time
and successfully conduct a large number of
dierent kinds of stress tests every week.
This enables us to eectively manage risk to
protect your company.
The new rules will have a major eect on
certain clients and products
All the new rules will not aect all clients
and all products equally. I obviously can’t
cover all client types and products, but I
would like to give some examples of those
that may be aected more than most – and
what that impact means for both JPMorgan
Chase and our clients.
Derivatives. Non-corporate users of deriva-
tives (asset managers, hedge funds, finan-
cial companies, governments, etc.) will have
to move all their standardized derivatives
(mostly interest rate and credit derivatives)
to exchanges, as opposed to handling them
directly with a bank. Corporate end users
of derivatives will be allowed to continue
to trade bilaterally with a bank. However,
for both of these segments, the cost to oer
derivatives to our various client groups will
increase due to capital, liquidity and margin
requirements imposed on us. It still remains
to be seen how all this will sort out.
Non-operational deposits. Essentially, these
are deposits that wholesale clients hold with
us that typically are short term and trans-
actional in nature. We take these deposits
more as a service to the client – not because
they are profitable for us. The new rules
require us to hold 100% of HQLA against
financial institution deposits and 40%
against non-financial corporate deposits. In
addition, based on current proposals, we
would have to hold 6% equity against the
assets we maintain for financial institutions
even if those assets consist of cash or other
low-risk assets such as government bonds.
This makes non-operational deposits hugely