JP Morgan Chase 2014 Annual Report Download - page 268

Notes to consolidated financial statements
266 JPMorgan Chase & Co./2014 Annual Report
the sale of the underlying municipal bonds would first repay
any funded liquidity facility or outstanding floating-rate
certificates and the remaining amount, if any, would be paid
to the residual interests. If the proceeds from the sale of the
underlying municipal bonds are not sufficient to repay the
liquidity facility, in certain transactions the liquidity
provider has recourse to the residual interest holders for
reimbursement. Certain residual interest holders may be
required to post collateral with the Firm, as liquidity
provider, to support such reimbursement obligations should
the market value of the municipal bonds decline.
JPMorgan Chase Bank, N.A. often serves as the sole liquidity
provider, and J.P. Morgan Securities LLC serves as
remarketing agent, of the puttable floating-rate certificates.
The liquidity provider’s obligation to perform is conditional
and is limited by certain termination events, which include
bankruptcy or failure to pay by the municipal bond issuer or
credit enhancement provider, an event of taxability on the
municipal bonds or the immediate downgrade of the
municipal bond to below investment grade. In addition, the
Firm’s exposure as liquidity provider is further limited by
the high credit quality of the underlying municipal bonds,
the excess collateralization in the vehicle, or in certain
transactions, the reimbursement agreements with the
residual interest holders.
The long-term credit ratings of the puttable floating rate
certificates are directly related to the credit ratings of the
underlying municipal bonds, the credit rating of any insurer
of the underlying municipal bond, and the Firm’s short-term
credit rating as liquidity provider. A downgrade in any of
these ratings would affect the rating of the puttable
floating-rate certificates and could cause demand for these
certificates by investors to decline or disappear. However, a
downgrade of JPMorgan Chase Bank, N.A.’s short-term
rating does not affect the Firm’s obligation under the
liquidity facility.
As remarketing agent, the Firm may hold puttable floating-
rate certificates of the municipal bond vehicles. At
December 31, 2014 and 2013, the Firm held $55 million
and $262 million, respectively, of these certificates on its
Consolidated balance sheets. The largest amount held by
the Firm at any end of day during 2014 was $250 million,
or 3.0%, of the municipal bond vehicles’ aggregate
outstanding puttable floating-rate certificates. The Firm did
not have and continues not to have any intent to protect any
residual interest holder from potential losses on any of the
municipal bond holdings.
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 268 of this Note for
further information on consolidated municipal bond
vehicles.
The Firm’s exposure to nonconsolidated municipal bond VIEs at December 31, 2014 and 2013, 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
2014 $ 11.5 $ 6.3 $ 5.2 $ 6.3
2013 11.8 6.9 4.9 6.9
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
2014 $ 2.7 $ 8.4 $ 0.4 $ — $ — $ 11.5 4.9
2013 2.7 8.9 0.2 — — $ 11.8 7.2
(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.