JP Morgan Chase 2015 Annual Report Download - page 303

JPMorgan Chase & Co./2015 Annual Report 293
Securities lending indemnifications
Through the Firm’s securities lending program, customers’
securities, via custodial and non-custodial arrangements,
may be lent to third parties. As part of this program, the
Firm provides an indemnification in the lending agreements
which protects the lender against the failure of the
borrower to return the lent securities. To minimize its
liability under these indemnification agreements, the Firm
obtains cash or other highly liquid collateral with a market
value exceeding 100% of the value of the securities on loan
from the borrower. Collateral is marked to market daily to
help assure that collateralization is adequate. Additional
collateral is called from the borrower if a shortfall exists, or
collateral may be released to the borrower in the event of
overcollateralization. If a borrower defaults, the Firm would
use the collateral held to purchase replacement securities in
the market or to credit the lending customer with the cash
equivalent thereof.
Derivatives qualifying as guarantees
In addition to the contracts described above, the Firm
transacts certain derivative contracts that have the
characteristics of a guarantee under U.S. GAAP. These
contracts include written put options that require the Firm
to purchase assets upon exercise by the option holder at a
specified price by a specified date in the future. The Firm
may enter into written put option contracts in order to meet
client needs, or for other trading purposes. The terms of
written put options are typically five years or less.
Derivatives deemed to be guarantees also include contracts
such as stable value derivatives that require the Firm to
make a payment of the difference between the market
value and the book value of a counterparty’s reference
portfolio of assets in the event that market value is less
than book value and certain other conditions have been
met. Stable value derivatives, commonly referred to as
“stable value wraps”, are transacted in order to allow
investors to realize investment returns with less volatility
than an unprotected portfolio and are typically longer-term
or may have no stated maturity, but allow the Firm to
terminate the contract under certain conditions.
Derivatives deemed to be guarantees are recorded on the
Consolidated balance sheets at fair value in trading assets
and trading liabilities. The total notional value of the
derivatives that the Firm deems to be guarantees was
$53.8 billion and $53.6 billion at December 31, 2015 and
2014, respectively. The notional amount generally
represents the Firm’s maximum exposure to derivatives
qualifying as guarantees. However, exposure to certain
stable value contracts is contractually limited to a
substantially lower percentage of the notional amount; the
notional amount on these stable value contracts was $28.4
billion and $27.5 billion at December 31, 2015 and 2014,
respectively, and the maximum exposure to loss was $3.0
billion and $2.9 billion at December 31, 2015 and 2014,
respectively. The fair values of the contracts reflect the
probability of whether the Firm will be required to perform
under the contract. The fair value of derivatives that the
Firm deems to be guarantees were derivative payables of
$236 million and $102 million and derivative receivables of
$14 million and $22 million at December 31, 2015 and
2014, respectively. The Firm reduces exposures to these
contracts by entering into offsetting transactions, or by
entering into contracts that hedge the market risk related to
the derivative guarantees.
In addition to derivative contracts that meet the
characteristics of a guarantee, the Firm is both a purchaser
and seller of credit protection in the credit derivatives
market. For a further discussion of credit derivatives, see
Note 6.
Unsettled reverse repurchase and securities borrowing
agreements, and unsettled repurchase and securities
lending agreements
In the normal course of business, the Firm enters into
reverse repurchase agreements and securities borrowing
agreements, which are secured financing agreements. Such
agreements settle at a future date. At settlement, these
commitments result in the Firm advancing cash to and
receiving securities collateral from the counterparty. The
Firm also enters into repurchase agreements and securities
lending agreements. At settlement, these commitments
result in the Firm receiving cash from and providing
securities collateral to the counterparty. These agreements
generally do not meet the definition of a derivative, and
therefore, are not recorded on the Consolidated balance
sheets until settlement date. These agreements
predominantly consist of agreements with regular-way
settlement periods. For a further discussion of securities
purchased under resale agreements and securities
borrowed, and securities sold under repurchase agreements
and securities loaned, see Note 13.
Loan sales- and securitization-related indemnifications
Mortgage repurchase liability
In connection with the Firm’s mortgage loan sale and
securitization activities with U.S. GSEs, as described in Note
16, the Firm has made representations and warranties that
the loans sold meet certain requirements. The Firm has
been, and may be, required to repurchase loans and/or
indemnify U.S. GSEs (e.g., with “make-whole” payments to
reimburse U.S. GSEs for their realized losses on liquidated
loans). To the extent that repurchase demands that are
received relate to loans that the Firm purchased from third
parties that remain viable, the Firm typically will have the
right to seek a recovery of related repurchase losses from
the third party. Generally, the maximum amount of future
payments the Firm would be required to make for breaches
of these representations and warranties would be equal to
the unpaid principal balance of such loans that are deemed
to have defects that were sold to purchasers (including
securitization-related SPEs) plus, in certain circumstances,
accrued interest on such loans and certain expense. The
carrying values of the repurchase liabilities were $148
million and $275 million at December 31, 2015 and 2014,
respectively.
Private label securitizations
The liability related to repurchase demands associated with
private label securitizations is separately evaluated by the
Firm in establishing its litigation reserves.