JP Morgan Chase 2015 Annual Report Download - page 143

JPMorgan Chase & Co./2015 Annual Report 133
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 management, part of the independent risk
management function, is responsible for identifying and
monitoring 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
line 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 to limit approvers, Market Risk and senior
management. In the event of a breach, Market Risk consults
with Firm senior management and the line 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.