JP Morgan Chase 2015 Annual Report Download - page 139

JPMorgan Chase & Co./2015 Annual Report 129
The following table summarizes the ratings profile by derivative counterparty of the Firm’s derivative receivables, including credit
derivatives, net of other liquid securities collateral, at the dates indicated. The ratings scale is based on the Firm’s internal ratings,
which generally correspond to the ratings as defined by S&P and Moody’s.
Ratings profile of derivative receivables
Rating equivalent 2015 2014(a)
December 31,
(in millions, except ratios)
Exposure net of
all collateral
% of exposure net
of all collateral
Exposure net of
all collateral
% of exposure net
of all collateral
AAA/Aaa to AA-/Aa3 $ 10,371 24% $ 18,713 32%
A+/A1 to A-/A3 10,595 25 13,508 23
BBB+/Baa1 to BBB-/Baa3 13,807 32 18,594 31
BB+/Ba1 to B-/B3 7,500 17 7,735 13
CCC+/Caa1 and below 824 2 821 1
Total $ 43,097 100% $ 59,371 100%
(a) Prior period amounts have been revised to conform with current period presentation.
As previously noted, the Firm uses collateral agreements to
mitigate counterparty credit risk. The percentage of the
Firm’s derivatives transactions subject to collateral
agreements — excluding foreign exchange spot trades,
which are not typically covered by collateral agreements
due to their short maturity — was 87% as of December 31,
2015, largely unchanged compared with 88% as of
December 31, 2014.
Credit derivatives
The Firm uses credit derivatives for two primary purposes:
first, in its capacity as a market-maker, and second, as an
end-user to manage the Firm’s own credit risk associated
with various exposures. For a detailed description of credit
derivatives, see Credit derivatives in Note 6.
Credit portfolio management activities
Included in the Firm’s end-user activities are credit
derivatives used to mitigate the credit risk associated with
traditional lending activities (loans and unfunded
commitments) and derivatives counterparty exposure in the
Firm’s wholesale businesses (collectively, “credit portfolio
management” activities). Information on credit portfolio
management activities is provided in the table below. For
further information on derivatives used in credit portfolio
management activities, see Credit derivatives in Note 6.
The Firm also uses credit derivatives as an end-user to
manage other exposures, including credit risk arising from
certain securities held in the Firm’s market-making
businesses. These credit derivatives are not included in
credit portfolio management activities; for further
information on these credit derivatives as well as credit
derivatives used in the Firm’s capacity as a market-maker in
credit derivatives, see Credit derivatives in Note 6.
Credit derivatives used in credit portfolio management
activities
Notional amount of
protection
purchased (a)
December 31, (in millions) 2015 2014
Credit derivatives used to manage:
Loans and lending-related commitments $ 2,289 $ 2,047
Derivative receivables 18,392 24,656
Credit derivatives used in credit portfolio
management activities $ 20,681 $ 26,703
(a) Amounts are presented net, considering the Firm’s net protection
purchased or sold with respect to each underlying reference entity or
index.
The credit derivatives used in credit portfolio management
activities do not qualify for hedge accounting under U.S.
GAAP; these derivatives are reported at fair value, with
gains and losses recognized in principal transactions
revenue. In contrast, the loans and lending-related
commitments being risk-managed are accounted for on an
accrual basis. This asymmetry in accounting treatment,
between loans and lending-related commitments and the
credit derivatives used in credit portfolio management
activities, causes earnings volatility that is not
representative, in the Firm’s view, of the true changes in
value of the Firm’s overall credit exposure.
The effectiveness of the Firm’s credit default swap (“CDS”)
protection as a hedge of the Firm’s exposures may vary
depending on a number of factors, including the named
reference entity (i.e., the Firm may experience losses on
specific exposures that are different than the named
reference entities in the purchased CDS); the contractual
terms of the CDS (which may have a defined credit event
that does not align with an actual loss realized by the Firm);
and the maturity of the Firm’s CDS protection (which in
some cases may be shorter than the Firm’s exposures).
However, the Firm generally seeks to purchase credit
protection with a maturity date that is the same or similar
to the maturity date of the exposure for which the
protection was purchased, and remaining differences in
maturity are actively monitored and managed by the Firm.