JP Morgan Chase 2013 Annual Report Download - page 192

Notes to consolidated financial statements
198 JPMorgan Chase & Co./2013 Annual Report
The following table describes the valuation methodologies used by the Firm to measure its more significant products/
instruments at fair value, including the general classification of such instruments pursuant to the valuation hierarchy.
Product/instrument Valuation methodology Classifications in the valuation hierarchy
Securities financing agreements Valuations are based on discounted cash flows, which consider: Level 2
• Derivative features. For further information refer to the
discussion of derivatives below.
• Market rates for the respective maturity
• Collateral
Loans and lending-related commitments - wholesale
Trading portfolio Where observable market data is available, valuations are based on: Level 2 or 3
• Observed market prices (circumstances are limited)
• Relevant broker quotes
• Observed market prices for similar instruments
Where observable market data is unavailable or limited, valuations
are based on discounted cash flows, which consider the following:
• Yield
• Lifetime credit losses
• Loss severity
• Prepayment speed
• Servicing costs
Loans held for investment and
associated lending related
commitments
Valuations are based on discounted cash flows, which consider: Predominantly level 3
• Credit spreads, derived from the cost of CDS; or benchmark credit
curves developed by the Firm, by industry and credit rating, and
which take into account the difference in loss severity rates
between bonds and loans
• Prepayment speed
Lending related commitments are valued similar to loans and reflect
the portion of an unused commitment expected, based on the Firm’s
average portfolio historical experience, to become funded prior to an
obligor default
For information regarding the valuation of loans measured at
collateral value, see Note 14 on pages 258-283 of this Annual Report.
Loans - consumer
Held for investment consumer
loans, excluding credit card Valuations are based on discounted cash flows, which consider: Predominantly level 3
• Discount rates (derived from primary origination rates and market
activity)
• Expected lifetime credit losses (considering expected and current
default rates for existing portfolios, collateral prices, and
economic environment expectations (i.e., unemployment rates))
• Estimated prepayments
• Servicing costs
• Market liquidity
For information regarding the valuation of loans measured at
collateral value, see Note 14 on pages 258-283 of this Annual Report.
Held for investment credit card
receivables Valuations are based on discounted cash flows, which consider: Level 3
• Projected interest income and late fee revenue, funding, servicing
and credit costs, and loan repayment rates
• Estimated life of receivables (based on projected loan payment
rates)
• Discount rate - based on expected return on receivables
• Credit costs - allowance for loan losses is considered a reasonable
proxy for the credit cost based on the short-term nature of credit
card receivables
Trading loans - Conforming
residential mortgage loans
expected to be sold
Fair value is based upon observable prices for mortgage-backed
securities with similar collateral and incorporates adjustments to
these prices to account for differences between the securities and the
value of the underlying loans, which include credit characteristics,
portfolio composition, and liquidity.
Predominantly level 2