JP Morgan Chase 2013 Annual Report Download - page 317

JPMorgan Chase & Co./2013 Annual Report 323
obligations related to these loans remain with the FDIC
receivership.
For additional information regarding litigation, see Note 31
on pages 326–332 of this Annual Report.
Loans sold with recourse
The Firm provides servicing for mortgages and certain
commercial lending products on both a recourse and
nonrecourse basis. In nonrecourse servicing, the principal
credit risk to the Firm is the cost of temporary servicing
advances of funds (i.e., normal servicing advances). In
recourse servicing, the servicer agrees to share credit risk
with the owner of the mortgage loans, such as Fannie Mae
or Freddie Mac or a private investor, insurer or guarantor.
Losses on recourse servicing predominantly occur when
foreclosure sales proceeds of the property underlying a
defaulted loan are less than the sum of the outstanding
principal balance, plus accrued interest on the loan and the
cost of holding and disposing of the underlying property.
The Firm’s securitizations are predominantly nonrecourse,
thereby effectively transferring the risk of future credit
losses to the purchaser of the mortgage-backed securities
issued by the trust. At December 31, 2013 and 2012, the
unpaid principal balance of loans sold with recourse totaled
$7.7 billion and $9.3 billion, respectively. The carrying
value of the related liability that the Firm has recorded,
which is representative of the Firm’s view of the likelihood it
will have to perform under its recourse obligations, was
$131 million and $141 million at December 31, 2013 and
2012, respectively.
Other off-balance sheet arrangements
Indemnification agreements – general
In connection with issuing securities to investors, the Firm
may enter into contractual arrangements with third parties
that require the Firm to make a payment to them in the
event of a change in tax law or an adverse interpretation of
tax law. In certain cases, the contract also may include a
termination clause, which would allow the Firm to settle the
contract at its fair value in lieu of making a payment under
the indemnification clause. The Firm may also enter into
indemnification clauses in connection with the licensing of
software to clients (“software licensees”) or when it sells a
business or assets to a third party (“third-party
purchasers”), pursuant to which it indemnifies software
licensees for claims of liability or damages that may occur
subsequent to the licensing of the software, or third-party
purchasers for losses they may incur due to actions taken
by the Firm prior to the sale of the business or assets. It is
difficult to estimate the Firm’s maximum exposure under
these indemnification arrangements, since this would
require an assessment of future changes in tax law and
future claims that may be made against the Firm that have
not yet occurred. However, based on historical experience,
management expects the risk of loss to be remote.
Credit card charge-backs
Chase Paymentech Solutions, Card’s merchant services
business and a subsidiary of JPMorgan Chase Bank,
N.A., is a global leader in payment processing and
merchant acquiring.
Under the rules of Visa USA, Inc., and MasterCard
International, JPMorgan Chase Bank, N.A., is primarily liable
for the amount of each processed credit card sales
transaction that is the subject of a dispute between a
cardmember and a merchant. If a dispute is resolved in the
cardmember’s favor, Chase Paymentech will (through the
cardmember’s issuing bank) credit or refund the amount to
the cardmember and will charge back the transaction to the
merchant. If Chase Paymentech is unable to collect the
amount from the merchant, Chase Paymentech will bear the
loss for the amount credited or refunded to the
cardmember. Chase Paymentech mitigates this risk by
withholding future settlements, retaining cash reserve
accounts or by obtaining other security. However, in the
unlikely event that: (1) a merchant ceases operations and is
unable to deliver products, services or a refund; (2) Chase
Paymentech does not have sufficient collateral from the
merchant to provide customer refunds; and (3) Chase
Paymentech does not have sufficient financial resources to
provide customer refunds, JPMorgan Chase Bank, N.A.,
would recognize the loss.
Chase Paymentech incurred aggregate losses of $14
million, $16 million, and $13 million on $750.1 billion,
$655.2 billion, and $553.7 billion of aggregate volume
processed for the years ended December 31, 2013, 2012
and 2011, respectively. Incurred losses from merchant
charge-backs are charged to Other expense, with the offset
recorded in a valuation allowance against Accrued interest
and accounts receivable on the Consolidated Balance
Sheets. The carrying value of the valuation allowance was
$5 million and $6 million at December 31, 2013 and 2012,
respectively, which the Firm believes, based on historical
experience and the collateral held by Chase Paymentech of
$208 million and $203 million at December 31, 2013 and
2012, respectively, is representative of the payment or
performance risk to the Firm related to charge-backs.
Clearing Services - Client Credit Risk
The Firm provides clearing services for clients entering into
securities purchases and sales and derivative transactions,
with central counterparties (“CCPs”), including exchange
traded derivatives (“ETDs”) such as futures and options, as
well as cleared over-the-counter (“OTC-cleared”) derivative
contracts. As a clearing member, the Firm stands behind the
performance of its clients, collects cash and securities
collateral (margin) as well as any settlement amounts due
from or to clients, and remits them to the relevant CCP or
client in whole or part. There are two types of margin.
Variation margin is posted on a daily basis based on the
value of clients’ derivative contracts. Initial margin is posted
at inception of a derivative contract, generally on the basis
of the potential changes in the variation margin
requirement for the contract.