JP Morgan Chase 2014 Annual Report Download - page 133

JPMorgan Chase & Co./2014 Annual Report 131
MARKET RISK MANAGEMENT
Market risk is the potential for adverse changes in the value
of the Firm’s assets and liabilities resulting from changes in
market variables such as interest rates, foreign exchange
rates, equity prices, commodity prices, implied volatilities
or credit spreads.
Market risk management
Market Risk is an independent risk management function
that identifies and monitors market risks throughout the
Firm and defines market risk policies and procedures. The
Market Risk function reports to the Firm’s CRO.
Market Risk seeks to control risk, facilitate efficient risk/
return decisions, reduce volatility in operating performance
and provide transparency into the Firm’s market risk profile
for senior management, the Board of Directors and
regulators. Market Risk is responsible for the following
functions:
• Establishment of a market risk policy framework
• Independent measurement, monitoring and control of
line of business and firmwide market risk
• Definition, approval and monitoring of limits
• Performance of stress testing and qualitative risk
assessments
Risk identification and classification
Each line of business is responsible for the management of
the market risks within its units. The independent risk
management group responsible for overseeing each line of
business is charged with ensuring that all material market
risks are appropriately identified, measured, monitored and
managed in accordance with the risk policy framework set
out by Market Risk.
Risk measurement
Tools used to measure risk
Because no single measure can reflect all aspects of market
risk, the Firm uses various metrics, both statistical and
nonstatistical, including:
• VaR
• Economic-value stress testing
• Nonstatistical risk measures
• Loss advisories
• Profit and loss drawdowns
• Earnings-at-risk
Risk monitoring and control
Market risk is controlled primarily through a series of limits
set in the context of the market environment and business
strategy. In setting limits, the Firm takes into consideration
factors such as market volatility, product liquidity and
accommodation of client business and management
experience. The Firm maintains different levels of limits.
Corporate level limits include VaR and stress limits.
Similarly, line of business limits include VaR and stress
limits and may be supplemented by loss advisories,
nonstatistical measurements and profit and loss
drawdowns. Limits may also be set within the lines of
business, as well at the portfolio or legal entity level.
Limits are set by Market Risk and are regularly reviewed
and updated as appropriate, with any changes approved by
lines of business management and Market Risk. Senior
management, including the Firm’s CEO and CRO, are
responsible for reviewing and approving certain of these
risk limits on an ongoing basis. All limits that have not been
reviewed within specified time periods by Market Risk are
escalated to senior management. The lines of business are
responsible for adhering to established limits against which
exposures are monitored and reported.
Limit breaches are required to be reported in a timely
manner by Risk Management to limit approvers, Market
Risk and senior management. In the event of a breach,
Market Risk consults with Firm senior management and
lines of business senior management to determine the
appropriate course of action required to return to
compliance, which may include a reduction in risk in order
to remedy the breach. Certain Firm or line of business-level
limits that have been breached for three business days or
longer, or by more than 30%, are escalated to senior
management and the Firmwide Risk Committee.