JP Morgan Chase 2015 Annual Report Download - page 302

Notes to consolidated financial statements
292 JPMorgan Chase & Co./2015 Annual Report
Other unfunded commitments to extend credit
Other unfunded commitments to extend credit generally
consist of commitments for working capital and general
corporate purposes, extensions of credit to support
commercial paper facilities and bond financings in the event
that those obligations cannot be remarketed to new
investors, as well as committed liquidity facilities to clearing
organizations. The Firm also issues commitments under
multipurpose facilities which could be drawn upon in
several forms, including the issuance of a standby letter of
credit.
Also included in other unfunded commitments to extend
credit are commitments to noninvestment-grade
counterparties in connection with leveraged finance
activities, which were $32.1 billion and $23.4 billion at
December 31, 2015 and 2014, respectively. For further
information, see Note 3 and Note 4.
The Firm acts as a settlement and custody bank in the U.S.
tri-party repurchase transaction market. In its role as
settlement and custody bank, the Firm is exposed to the
intra-day credit risk of its cash borrower clients, usually
broker-dealers. This exposure arises under secured
clearance advance facilities that the Firm extends to its
clients (i.e. cash borrowers); these facilities contractually
limit the Firm’s intra-day credit risk to the facility amount
and must be repaid by the end of the day. As of
December 31, 2015 and 2014, the secured clearance
advance facility maximum outstanding commitment amount
was $2.9 billion and $12.6 billion, respectively.
Guarantees
U.S. GAAP requires that a guarantor recognize, at the
inception of a guarantee, a liability in an amount equal to
the fair value of the obligation undertaken in issuing the
guarantee. U.S. GAAP defines a guarantee as a contract that
contingently requires the guarantor to pay a guaranteed
party based upon: (a) changes in an underlying asset,
liability or equity security of the guaranteed party; or (b) a
third party’s failure to perform under a specified
agreement. The Firm considers the following off–balance
sheet lending-related arrangements to be guarantees under
U.S. GAAP: standby letters of credit and financial
guarantees, securities lending indemnifications, certain
indemnification agreements included within third-party
contractual arrangements and certain derivative contracts.
As required by U.S. GAAP, the Firm initially records
guarantees at the inception date fair value of the obligation
assumed (e.g., the amount of consideration received or the
net present value of the premium receivable). For certain
types of guarantees, the Firm records this fair value amount
in other liabilities with an offsetting entry recorded in cash
(for premiums received), or other assets (for premiums
receivable). Any premium receivable recorded in other
assets is reduced as cash is received under the contract, and
the fair value of the liability recorded at inception is
amortized into income as lending and deposit-related fees
over the life of the guarantee contract. For indemnifications
provided in sales agreements, a portion of the sale
proceeds is allocated to the guarantee, which adjusts the
gain or loss that would otherwise result from the
transaction. For these indemnifications, the initial liability is
amortized to income as the Firm’s risk is reduced (i.e., over
time or when the indemnification expires). Any contingent
liability that exists as a result of issuing the guarantee or
indemnification is recognized when it becomes probable
and reasonably estimable. The contingent portion of the
liability is not recognized if the estimated amount is less
than the carrying amount of the liability recognized at
inception (adjusted for any amortization). The recorded
amounts of the liabilities related to guarantees and
indemnifications at December 31, 2015 and 2014,
excluding the allowance for credit losses on lending-related
commitments, are discussed below.
Standby letters of credit and other financial guarantees
Standby letters of credit (“SBLC”) and other financial
guarantees are conditional lending commitments issued by
the Firm to guarantee the performance of a customer to a
third party under certain arrangements, such as
commercial paper facilities, bond financings, acquisition
financings, trade and similar transactions. The carrying
values of standby and other letters of credit were $550
million and $672 million at December 31, 2015 and 2014,
respectively, which were classified in accounts payable and
other liabilities on the Consolidated balance sheets; these
carrying values included $123 million and $118 million,
respectively, for the allowance for lending-related
commitments, and $427 million and $554 million,
respectively, for the guarantee liability and corresponding
asset.
The following table summarizes the types of facilities under which standby letters of credit and other letters of credit
arrangements are outstanding by the ratings profiles of the Firm’s customers, as of December 31, 2015 and 2014.
Standby letters of credit, other financial guarantees and other letters of credit
2015 2014
December 31,
(in millions)
Standby letters of
credit and other
financial guarantees(b)
Other letters
of credit
Standby letters of
credit and other
financial guarantees(b)
Other letters
of credit
Investment-grade(a) $ 31,751 $ 3,290 $ 37,709 $ 3,476
Noninvestment-grade(a) 7,382 651 6,563 855
Total contractual amount $ 39,133 $ 3,941 $ 44,272 $ 4,331
Allowance for lending-related commitments $ 121 $ 2 $ 117 $ 1
Commitments with collateral 18,825 996 20,750 1,509
(a) The ratings scale is based on the Firm’s internal ratings, which generally correspond to ratings as defined by S&P and Moody’s.
(b) Effective in 2015, commitments to issue standby letters of credit, including those that could be issued under multipurpose facilities, are presented as other unfunded
commitments to extend credit. Previously, such commitments were presented as standby letters of credit and other financial guarantees. At December 31, 2014, these
commitments were $45.6 billion. Prior period amounts have been revised to conform with current period presentation.