JP Morgan Chase 2015 Annual Report Download - page 196

Notes to consolidated financial statements
186 JPMorgan Chase & Co./2015 Annual Report
The following table describes the valuation methodologies generally used by the Firm to measure its significant products/
instruments at fair value, including the general classification of such instruments pursuant to the valuation hierarchy.
Product/instrument Valuation methodology
Classifications in the valuation
hierarchy
Securities financing agreements Valuations are based on discounted cash flows, which consider: Level 2
• Derivative features: for further information refer to the discussion
of derivatives below.
• Market rates for the respective maturity
• Collateral
Loans and lending-related commitments — wholesale
Trading portfolio Where observable market data is available, valuations are based on: Level 2 or 3
• Observed market prices (circumstances are infrequent)
• Relevant broker quotes
• Observed market prices for similar instruments
Where observable market data is unavailable or limited, valuations
are based on discounted cash flows, which consider the following:
• Credit spreads derived from the cost of credit default swaps
(“CDS”); or benchmark credit curves developed by the Firm, by
industry and credit rating
• Prepayment speed
Loans held for investment and
associated lending-related
commitments
Valuations are based on discounted cash flows, which consider: Predominantly level 3
• Credit spreads, derived from the cost of CDS; or benchmark credit
curves developed by the Firm, by industry and credit rating
• Prepayment speed
Lending-related commitments are valued similar to loans and reflect
the portion of an unused commitment expected, based on the Firm’s
average portfolio historical experience, to become funded prior to an
obligor default
For information regarding the valuation of loans measured at
collateral value, see Note 14.
Loans — consumer
Held for investment consumer
loans, excluding credit card
Valuations are based on discounted cash flows, which consider: Predominantly level 3
• Expected lifetime credit losses -considering expected and current
default rates, and loss severity
• Prepayment speed
• Discount rates
• Servicing costs
For information regarding the valuation of loans measured at
collateral value, see Note 14.
Held for investment credit card
receivables
Valuations are based on discounted cash flows, which consider: Level 3
• Credit costs — allowance for loan losses is considered a
reasonable proxy for the credit cost
• Projected interest income, late-fee revenue and loan repayment
rates
• Discount rates
• Servicing costs
Trading loans — conforming
residential mortgage loans
expected to be sold
Fair value is based upon observable prices for mortgage-backed
securities with similar collateral and incorporates adjustments to
these prices to account for differences between the securities and the
value of the underlying loans, which include credit characteristics,
portfolio composition, and liquidity.
Predominantly level 2