JP Morgan Chase 2015 Annual Report Download - page 201

JPMorgan Chase & Co./2015 Annual Report 191
(a) At December 31, 2015 and 2014, included total U.S. government-sponsored enterprise obligations of $67.0 billion and $84.1 billion, respectively, which were predominantly
mortgage-related.
(b) At December 31, 2015 and 2014, included within trading loans were $11.8 billion and $17.0 billion, respectively, of residential first-lien mortgages, and $4.3 billion and $5.8
billion, respectively, of commercial first-lien mortgages. Residential mortgage loans include conforming mortgage loans originated with the intent to sell to U.S. government
agencies of $5.3 billion and $7.7 billion, respectively, and reverse mortgages of $2.5 billion and $3.4 billion, respectively.
(c) Physical commodities inventories are generally accounted for at the lower of cost or market. “Market” is a term defined in U.S. GAAP as not exceeding fair value less costs to sell
(“transaction costs”). Transaction costs for the Firm’s physical commodities inventories are either not applicable or immaterial to the value of the inventory. Therefore, market
approximates fair value for the Firm’s physical commodities inventories. When fair value hedging has been applied (or when market is below cost), the carrying value of physical
commodities approximates fair value, because under fair value hedge accounting, the cost basis is adjusted for changes in fair value. For a further discussion of the Firm’s hedge
accounting relationships, see Note 6. To provide consistent fair value disclosure information, all physical commodities inventories have been included in each period presented.
(d) Balances reflect the reduction of securities owned (long positions) by the amount of identical securities sold but not yet purchased (short positions).
(e) As permitted under U.S. GAAP, the Firm has elected to net derivative receivables and derivative payables and the related cash collateral received and paid when a legally
enforceable master netting agreement exists. For purposes of the tables above, the Firm does not reduce derivative receivables and derivative payables balances for this netting
adjustment, either within or across the levels of the fair value hierarchy, as such netting is not relevant to a presentation based on the transparency of inputs to the valuation of
an asset or liability. However, if the Firm were to net such balances within level 3, the reduction in the level 3 derivative receivables and payables balances would be $546
million and $2.5 billion at December 31, 2015 and 2014, respectively; this is exclusive of the netting benefit associated with cash collateral, which would further reduce the
level 3 balances.
(f) Private equity instruments represent investments within the Corporate line of business. The cost basis of the private equity investment portfolio totaled $3.5 billion and $6.0
billion at December 31, 2015 and 2014, respectively.
(g) Certain prior period amounts (including the corresponding fair value parenthetical disclosure for accounts payable and other liabilities on the Consolidated balance sheets) were
revised to conform with the current period presentation.
Transfers between levels for instruments carried at fair
value on a recurring basis
For the years ended December 31, 2015 and 2014, there
were no significant transfers between levels 1 and 2.
During the year ended December 31, 2015, transfers from
level 3 to level 2 and from level 2 to level 3 included the
following:
• $3.1 billion of long-term debt and $1.0 billion of
deposits driven by an increase in observability on
certain structured notes with embedded interest rate
and FX derivatives and a reduction of the significance in
the unobservable inputs for certain structured notes
with embedded equity derivatives
• $2.1 billion of gross equity derivatives for both
receivables and payables as a result of an increase in
observability and a decrease in the significance in
unobservable inputs; partially offset by transfers into
level 3 resulting in net transfers of approximately $1.2
billion for both receivables and payables
• $2.8 billion of trading loans driven by an increase in
observability of certain collateralized financing
transactions; and $2.4 billion of corporate debt driven
by a decrease in the significance in the unobservable
inputs and an increase in observability for certain
structured products
During the year ended December 31, 2014, transfers from
level 3 to level 2 included the following:
• $4.3 billion and $4.4 billion of gross equity derivative
receivables and payables, respectively, due to increased
observability of certain equity option valuation inputs
• $2.7 billion of trading loans, $2.6 billion of margin
loans, $2.3 billion of private equity investments, $2.0
billion of corporate debt, and $1.3 billion of long-term
debt, based on increased liquidity and price
transparency
Transfers from level 2 into level 3 included $1.1 billion of
other borrowed funds, $1.1 billion of trading loans and
$1.0 billion of long-term debt, based on a decrease in
observability of valuation inputs and price transparency.
During the year ended December 31, 2013, transfers from
level 3 to level 2 included the following:
• Certain highly rated CLOs, including $27.4 billion held in
the Firm’s available-for-sale (“AFS”) securities portfolio
and $1.4 billion held in the trading portfolio, based on
increased liquidity and price transparency;
• $1.3 billion of long-term debt, largely driven by an
increase in observability of certain equity structured
notes.
Transfers from level 2 to level 3 included $1.4 billion of
corporate debt securities in the trading portfolio largely
driven by a decrease in observability for certain credit
instruments.
All transfers are assumed to occur at the beginning of the
quarterly reporting period in which they occur.
Level 3 valuations
The Firm has established well-documented processes for
determining fair value, including for instruments where fair
value is estimated using significant unobservable inputs
(level 3). For further information on the Firm’s valuation
process and a detailed discussion of the determination of
fair value for individual financial instruments, see pages
185–188 of this Note.
Estimating fair value requires the application of judgment.
The type and level of judgment required is largely
dependent on the amount of observable market information
available to the Firm. For instruments valued using
internally developed models that use significant
unobservable inputs and are therefore classified within
level 3 of the fair value hierarchy, judgments used to
estimate fair value are more significant than those required
when estimating the fair value of instruments classified
within levels 1 and 2.
In arriving at an estimate of fair value for an instrument
within level 3, management must first determine the
appropriate model to use. Second, due to the lack of
observability of significant inputs, management must assess
all relevant empirical data in deriving valuation inputs
including, but not limited to, transaction details, yield