JP Morgan Chase 2015 Annual Report Download - page 305

JPMorgan Chase & Co./2015 Annual Report 295
Clearing Services – Client Credit Risk
The Firm provides clearing services for clients by entering
into securities purchases and sales and derivative
transactions, with CCPs, including ETDs such as futures and
options, as well as OTC-cleared derivative contracts. As a
clearing member, the Firm stands behind the performance
of its clients, collects cash and securities collateral (margin)
as well as any settlement amounts due from or to clients,
and remits them to the relevant CCP or client in whole or
part. There are two types of margin. Variation margin is
posted on a daily basis based on the value of clients’
derivative contracts. Initial margin is posted at inception of
a derivative contract, generally on the basis of the potential
changes in the variation margin requirement for the
contract.
As clearing member, the Firm is exposed to the risk of
nonperformance by its clients, but is not liable to clients for
the performance of the CCPs. Where possible, the Firm
seeks to mitigate its risk to the client through the collection
of appropriate amounts of margin at inception and
throughout the life of the transactions. The Firm can also
cease providing clearing services if clients do not adhere to
their obligations under the clearing agreement. In the event
of non-performance by a client, the Firm would close out
the client’s positions and access available margin. The CCP
would utilize any margin it holds to make itself whole, with
any remaining shortfalls required to be paid by the Firm as
a clearing member.
The Firm reflects its exposure to nonperformance risk of the
client through the recognition of margin payables or
receivables to clients and CCPs, but does not reflect the
clients’ underlying securities or derivative contracts on its
Consolidated Financial Statements.
It is difficult to estimate the Firm’s maximum possible
exposure through its role as a clearing member, as this
would require an assessment of transactions that clients
may execute in the future. However, based upon historical
experience, and the credit risk mitigants available to the
Firm, management believes it is unlikely that the Firm will
have to make any material payments under these
arrangements and the risk of loss is expected to be remote.
For information on the derivatives that the Firm executes
for its own account and records in its Consolidated Financial
Statements, see Note 6.
Exchange & Clearing House Memberships
The Firm is a member of several securities and derivative
exchanges and clearing houses, both in the U.S. and other
countries, and it provides clearing services. Membership in
some of these organizations requires the Firm to pay a pro
rata share of the losses incurred by the organization as a
result of the default of another member. Such obligations
vary with different organizations. These obligations may be
limited to members who dealt with the defaulting member
or to the amount (or a multiple of the amount) of the Firm’s
contribution to the guarantee fund maintained by a clearing
house or exchange as part of the resources available to
cover any losses in the event of a member default.
Alternatively, these obligations may be a full pro-rata share
of the residual losses after applying the guarantee fund.
Additionally, certain clearing houses require the Firm as a
member to pay a pro rata share of losses resulting from the
clearing house’s investment of guarantee fund contributions
and initial margin, unrelated to and independent of the
default of another member. Generally a payment would only
be required should such losses exceed the resources of the
clearing house or exchange that are contractually required
to absorb the losses in the first instance. It is difficult to
estimate the Firm’s maximum possible exposure under
these membership agreements, since this would require an
assessment of future claims that may be made against the
Firm that have not yet occurred. However, based on
historical experience, management expects the risk of loss
to be remote.
Guarantees of subsidiaries
In the normal course of business, JPMorgan Chase & Co.
(“Parent Company”) may provide counterparties with
guarantees of certain of the trading and other obligations of
its subsidiaries on a contract-by-contract basis, as
negotiated with the Firm’s counterparties. The obligations
of the subsidiaries are included on the Firm’s Consolidated
balance sheets or are reflected as off-balance sheet
commitments; therefore, the Parent Company has not
recognized a separate liability for these guarantees. The
Firm believes that the occurrence of any event that would
trigger payments by the Parent Company under these
guarantees is remote.
The Parent Company has guaranteed certain debt of its
subsidiaries, including both long-term debt and structured
notes. These guarantees are not included in the table on
page 291 of this Note. For additional information, see Note
21.
JPMorgan Chase Financial Company LLC (“JPMFC”), a direct,
100%-owned finance subsidiary of the Parent Company,
was formed on September 30, 2015, for the purpose of
issuing debt and other securities in offerings to investors.
Any securities issued by JPMFC will be fully and
unconditionally guaranteed by the Parent Company, and
these guarantees will rank on a parity with the Firm’s
unsecured and unsubordinated indebtedness. As of
December 31, 2015, no securities had been issued by
JPMFC.