JP Morgan Chase 2013 Annual Report Download - page 288

Notes to consolidated financial statements
294 JPMorgan Chase & Co./2013 Annual Report
The Firm consolidates municipal bond vehicles if it owns the
residual interest. The residual interest generally allows the
owner to make decisions that significantly impact the
economic performance of the municipal bond vehicle,
primarily by directing the sale of the municipal bonds
owned by the vehicle. In addition, the residual interest
owners have the right to receive benefits and bear losses
that could potentially be significant to the municipal bond
vehicle. The Firm does not consolidate municipal bond
vehicles if it does not own the residual interests, since the
Firm does not have the power to make decisions that
significantly impact the economic performance of the
municipal bond vehicle. See page 296 of this Note for
further information on consolidated municipal bond
vehicles.
The Firm’s exposure to nonconsolidated municipal bond VIEs at December 31, 2013 and 2012, including the ratings profile of
the VIEs’ assets, was as follows.
December 31,
(in billions) Fair value of assets held by VIEs Liquidity facilities Excess/(deficit)(a) Maximum exposure
Nonconsolidated municipal bond vehicles
2013 $ 11.8 $ 6.9 $ 4.9 $ 6.9
2012 14.2 8.0 6.2 8.0
Ratings profile of VIE assets(b)
Fair value of
assets held
by VIEs
Wt. avg.
expected life
of assets
(years)
Investment-grade Noninvestment- grade
December 31,
(in billions, except where otherwise noted) AAA to AAA- AA+ to AA- A+ to A- BBB+ to BBB- BB+ and below
2013 $ 2.7 $ 8.9 $ 0.2 $ — $ — $ 11.8 7.2
2012 3.1 11.0 0.1 — — 14.2 5.9
(a) Represents the excess/(deficit) of the fair values of municipal bond assets available to repay the liquidity facilities, if drawn.
(b) The ratings scale is presented on an S&P-equivalent basis. The prior period has been reclassified to conform with the current presentation.
Credit-related note and asset swap vehicles
Credit-related note vehicles
The Firm structures transactions with credit-related note
vehicles in which the VIE purchases highly rated assets,
such as asset-backed securities, and enters into a credit
derivative contract with the Firm to obtain exposure to a
referenced credit which the VIE otherwise does not hold.
The VIE then issues credit-linked notes (“CLNs”) with
maturities predominantly ranging from one to ten years in
order to transfer the risk of the referenced credit to the
VIE’s investors. Clients and investors often prefer using a
CLN vehicle since the CLNs issued by the VIE generally carry
a higher credit rating than such notes would if issued
directly by JPMorgan Chase. As a derivative counterparty in
a credit-related note structure, the Firm has a senior claim
on the collateral of the VIE and reports such derivatives on
its Consolidated Balance Sheets at fair value. The collateral
purchased by such VIEs is predominantly investment grade.
The Firm divides its credit-related note structures broadly
into two types: static and managed.
In a static credit-related note structure, the CLNs and
associated credit derivative contract either reference a
single credit (e.g., a multi-national corporation), or all or
part of a fixed portfolio of credits. In a managed credit-
related note structure, the CLNs and associated credit
derivative generally reference all or part of an actively
managed portfolio of credits. An agreement exists between
a portfolio manager and the VIE that gives the portfolio
manager the ability to substitute each referenced credit in
the portfolio for an alternative credit. The Firm does not act
as portfolio manager; its involvement with the VIE is
generally limited to being a derivative counterparty. As a
net buyer of credit protection, in both static and managed
credit-related note structures, the Firm pays a premium to
the VIE in return for the receipt of a payment (up to the
notional of the derivative) if one or more of the credits
within the portfolio defaults, or if the losses resulting from
the default of reference credits exceed specified levels. The
Firm does not provide any additional contractual financial
support to the VIE. In addition, the Firm has not historically
provided any financial support to the CLN vehicles over and
above its contractual obligations. Since each CLN is
established to the specifications of the investors, the
investors have the power over the activities of that VIE that
most significantly affect the performance of the CLN.
Furthermore, the Firm does not generally have a variable
interest that could potentially be significant. Accordingly,
the Firm does not generally consolidate these credit-related
note entities. As a derivative counterparty, the Firm has a
senior claim on the collateral of the VIE and reports such
derivatives on its Consolidated Balance Sheets at fair value.
Substantially all of the assets purchased by such VIEs are
investment-grade.