JP Morgan Chase 2014 Annual Report Download - page 139

JPMorgan Chase & Co./2014 Annual Report 137
COUNTRY RISK MANAGEMENT
Country risk is the risk that a sovereign event or action
alters the value or terms of contractual obligations of
obligors, counterparties and issuers or adversely affects
markets related to a particular country. The Firm has a
comprehensive country risk management framework for
assessing country risks, determining risk tolerance, and
measuring and monitoring direct country exposures in the
Firm. The Country Risk Management group is responsible
for developing guidelines and policies for managing country
risk in both emerging and developed countries. The Country
Risk Management group actively monitors the various
portfolios giving rise to country risk to ensure the Firm’s
country risk exposures are diversified and that exposure
levels are appropriate given the Firm’s strategy and risk
tolerance relative to a country.
Country risk organization
The Country Risk Management group is an independent risk
management function which works in close partnership with
other risk functions to identify and monitor country risk
within the Firm. The Firmwide Risk Executive for Country
Risk reports to the Firm’s CRO.
Country Risk Management is responsible for the following
functions:
• Developing guidelines and policies consistent with a
comprehensive country risk framework
• Assigning sovereign ratings and assessing country risks
• Measuring and monitoring country risk exposure and
stress across the Firm
• Managing country limits and reporting trends and limit
breaches to senior management
• Developing surveillance tools for early identification of
potential country risk concerns
• Providing country risk scenario analysis
Country risk identification and measurement
The Firm is exposed to country risk through its lending,
investing, and market-making activities, whether cross-
border or locally funded. Country exposure includes activity
with both government and private-sector entities in a
country. Under the Firm’s internal country risk management
approach, country exposure is reported based on the
country where the majority of the assets of the obligor,
counterparty, issuer or guarantor are located or where the
majority of its revenue is derived, which may be different
than the domicile (legal residence) or country of
incorporation of the obligor, counterparty, issuer or
guarantor. Country exposures are generally measured by
considering the Firm’s risk to an immediate default of the
counterparty or obligor, with zero recovery. Assumptions
are sometimes required in determining the measurement
and allocation of country exposure, particularly in the case
of certain tranched credit derivatives. Different
measurement approaches or assumptions would affect the
amount of reported country exposure.
Under the Firm’s internal country risk measurement
framework:
• Lending exposures are measured at the total committed
amount (funded and unfunded), net of the allowance for
credit losses and cash and marketable securities
collateral received.
• Securities financing exposures are measured at their
receivable balance, net of collateral received.
• Debt and equity securities are measured at the fair value
of all positions, including both long and short positions.
• Counterparty exposure on derivative receivables is
measured at the derivative’s fair value, net of the fair
value of the related collateral. Counterparty exposure on
derivatives can change significantly because of market
movements.
• Credit derivatives protection purchased and sold is
reported based on the underlying reference entity and is
measured at the notional amount of protection purchased
or sold, net of the fair value of the recognized derivative
receivable or payable. Credit derivatives protection
purchased and sold in the Firm’s market-making activities
is measured on a net basis, as such activities often result
in selling and purchasing protection related to the same
underlying reference entity; this reflects the manner in
which the Firm manages these exposures.