JPMORGAN CHASE & CO | 2013 | FY | 3

Fair value option
The fair value option provides an option to elect fair value as an alternative measurement for selected financial assets, financial liabilities, unrecognized firm commitments, and written loan commitments not previously carried at fair value.
Elections
Elections were made by the Firm to:
•
Mitigate income statement volatility caused by the differences in the measurement basis of elected instruments (for example, certain instruments elected were previously accounted for on an accrual basis) while the associated risk management arrangements are accounted for on a fair value basis;
•
Eliminate the complexities of applying certain accounting models (e.g., hedge accounting or bifurcation accounting for hybrid instruments); and/or
•
Better reflect those instruments that are managed on a fair value basis.
Elections include the following:
•
Loans purchased or originated as part of securitization warehousing activity, subject to bifurcation accounting, or managed on a fair value basis.
•
Securities financing arrangements with an embedded derivative and/or a maturity of greater than one year.
•
Owned beneficial interests in securitized financial assets that contain embedded credit derivatives, which would otherwise be required to be separately accounted for as a derivative instrument.
•
Certain investments that receive tax credits and other equity investments acquired as part of the Washington Mutual transaction.
•
Structured notes issued as part of CIB’s client-driven activities. (Structured notes are predominantly financial instruments that contain embedded derivatives.)
•
Long-term beneficial interests issued by CIB’s consolidated securitization trusts where the underlying assets are carried at fair value.

Changes in fair value under the fair value option election
The following table presents the changes in fair value included in the Consolidated Statements of Income for the years ended December 31, 2013, 2012 and 2011, for items for which the fair value option was elected. The profit and loss information presented below only includes the financial instruments that were elected to be measured at fair value; related risk management instruments, which are required to be measured at fair value, are not included in the table.
 
2013
 
2012
 
2011
December 31, (in millions)
Principal transactions
Other income
Total changes in fair value recorded
 
Principal transactions
Other income
Total changes in fair value recorded
 
Principal transactions
Other income
Total changes in fair value recorded
Federal funds sold and securities purchased under resale agreements
$
(454
)
$
—

 
$
(454
)
 
$
161

$
—

 
$
161

 
$
270

$
—

 
$
270

Securities borrowed
10

—

 
10

 
10

—

 
10

 
(61
)
—

 
(61
)
Trading assets:
 
 
 
 
 
 
 
 
 
 
 

 

 
 
Debt and equity instruments, excluding loans
582

7

(c) 
589

 
513

7

(c) 
520

 
53

(6
)
(c) 
47

Loans reported as trading assets:
 
 
 
 
 
 
 
 
 
 
 

 

 
 
Changes in instrument-specific credit risk
1,161

23

(c) 
1,184

 
1,489

81

(c) 
1,570

 
934

(174
)
(c) 
760

Other changes in fair value
(133
)
1,833

(c) 
1,700

 
(183
)
7,670

(c) 
7,487

 
127

5,263

(c) 
5,390

Loans:
 
 
 
 
 
 
 
 
 
 
 

 

 
 
Changes in instrument-specific credit risk
36

—

 
36

 
(14
)
—

 
(14
)
 
2

—

 
2

Other changes in fair value
17

—

 
17

 
676

—

 
676

 
535

—

 
535

Other assets
32

(29
)
(d) 
3

 
—

(339
)
(d) 
(339
)
 
(49
)
(19
)
(d) 
(68
)
Deposits(a)
260

—

 
260

 
(188
)
—

 
(188
)
 
(237
)
—

 
(237
)
Federal funds purchased and securities loaned or sold under repurchase agreements
73

—

 
73

 
(25
)
—

 
(25
)
 
(4
)
—

 
(4
)
Other borrowed funds(a) 
(399
)
—

 
(399
)
 
494

—

 
494

 
2,986

—

 
2,986

Trading liabilities
(46
)
—

 
(46
)
 
(41
)
—

 
(41
)
 
(57
)
—

 
(57
)
Beneficial interests issued by consolidated VIEs
(278
)
—

 
(278
)
 
(166
)
—

 
(166
)
 
(83
)
—

 
(83
)
Other liabilities
—

2

(d) 
2

 
—

—


—

 
(3
)
(5
)
(d) 
(8
)
Long-term debt:
 
 
 
 
 
 
 
 
 
 
 

 

 
 
Changes in instrument-specific credit risk(a) 
(271
)
—

 
(271
)
 
(835
)
—

 
(835
)
 
927

—

 
927

Other changes in fair value(b)
1,280

—

 
1,280

 
(1,025
)
—

 
(1,025
)
 
322

—

 
322

(a)
Total changes in instrument-specific credit risk related to structured notes were $(337) million, $(340) million, and $899 million for the years ended December 31, 2013, 2012 and 2011, respectively. These totals include adjustments for structured notes classified within deposits and other borrowed funds, as well as long-term debt.
(b)
Structured notes are predominantly financial instruments containing embedded derivatives. Where present, the embedded derivative is the primary driver of risk. Although the risk associated with the structured notes is actively managed, the gains/(losses) reported in this table do not include the income statement impact of the risk management instruments used to manage such risk.
(c)
Reported in mortgage fees and related income.
(d)
Reported in other income.
Determination of instrument-specific credit risk for items for which a fair value election was made
The following describes how the gains and losses included in earnings during December 31, 2013, 2012 and 2011, which were attributable to changes in instrument-specific credit risk, were determined.
•
Loans and lending-related commitments: For floating-rate instruments, all changes in value are attributed to instrument-specific credit risk. For fixed-rate instruments, an allocation of the changes in value for the period is made between those changes in value that are interest rate-related and changes in value that are credit-related. Allocations are generally based on an analysis of borrower-specific credit spread and recovery information, where available, or benchmarking to similar entities or industries.
•
Long-term debt: Changes in value attributable to instrument-specific credit risk were derived principally from observable changes in the Firm’s credit spread.
•
Resale and repurchase agreements, securities borrowed agreements and securities lending agreements: Generally, for these types of agreements, there is a requirement that collateral be maintained with a market value equal to or in excess of the principal amount loaned; as a result, there would be no adjustment or an immaterial adjustment for instrument-specific credit risk related to these agreements.

Difference between aggregate fair value and aggregate remaining contractual principal balance outstanding
The following table reflects the difference between the aggregate fair value and the aggregate remaining contractual principal balance outstanding as of December 31, 2013 and 2012, for loans, long-term debt and long-term beneficial interests for which the fair value option has been elected.
 
2013
 
2012
December 31, (in millions)
Contractual principal outstanding
 
Fair value
Fair value over/(under) contractual principal outstanding
 
Contractual principal outstanding
 
Fair value
Fair value over/(under) contractual principal outstanding
Loans(a)
 
 
 
 
 
 
 
 
 
Nonaccrual loans
 
 
 
 
 
 
 
 
 
Loans reported as trading assets
$
5,156

 
$
1,491

$
(3,665
)
 
$
4,217

 
$
960

$
(3,257
)
Loans(d)
209

 
154

(55
)
 
293

 
236

(57
)
Subtotal
5,365

 
1,645

(3,720
)
 
4,510

 
1,196

(3,314
)
All other performing loans
 
 
 
 
 
 
 
 
 
Loans reported as trading assets
33,069

 
29,295

(3,774
)
 
44,084

 
40,581

(3,503
)
Loans(d)
1,618

 
1,563

(55
)
 
2,034

 
1,927

(107
)
Total loans
$
40,052

 
$
32,503

$
(7,549
)
 
$
50,628

 
$
43,704

$
(6,924
)
Long-term debt
 
 
 
 
 
 
 
 
 
Principal-protected debt
$
15,797

(c) 
$
15,909

$
112

 
$
16,541

(c) 
$
16,391

$
(150
)
Nonprincipal-protected debt(b)
NA

 
12,969

NA

 
NA

 
14,397

NA

Total long-term debt
NA

 
$
28,878

NA

 
NA

 
$
30,788

NA

Long-term beneficial interests
 
 
 
 
 
 
 
 
 
Nonprincipal-protected debt(b)
NA

 
$
1,996

NA

 
NA

 
$
1,170

NA

Total long-term beneficial interests
NA

 
$
1,996

NA

 
NA

 
$
1,170

NA

(a)
There were no performing loans that were ninety days or more past due as of December 31, 2013 and 2012, respectively.
(b)
Remaining contractual principal is not applicable to nonprincipal-protected notes. Unlike principal-protected structured notes, for which the Firm is obligated to return a stated amount of principal at the maturity of the note, nonprincipal-protected structured notes do not obligate the Firm to return a stated amount of principal at maturity, but to return an amount based on the performance of an underlying variable or derivative feature embedded in the note.
(c)
Where the Firm issues principal-protected zero-coupon or discount notes, the balance reflected as the remaining contractual principal is the final principal payment at maturity.
(d)
During 2013, certain loans that resulted from restructurings that were previously classified as performing were reclassified as nonperforming loans. Prior periods were revised to conform with the current presentation.
At December 31, 2013 and 2012, the contractual amount of letters of credit for which the fair value option was elected was $4.5 billion and $4.5 billion, respectively, with a corresponding fair value of $(99) million and $(75) million, respectively. For further information regarding off-balance sheet lending-related financial instruments, see Note 29 on pages 318–324 of this Annual Report.

Structured note products by balance sheet classification and risk component
The table below presents the fair value of the structured notes issued by the Firm, by balance sheet classification and the primary risk to which the structured notes’ embedded derivative relates.
 
December 31, 2013
 
December 31, 2012
(in millions)
Long-term debt
Other borrowed funds
Deposits
Total
 
Long-term debt
Other borrowed funds
Deposits
Total
Risk exposure
 
 
 
 
 
 
 
 
 
Interest rate
$
9,516

$
615

$
1,270

$
11,401

 
$
8,669

$
1,143

$
559

$
10,371

Credit
4,248

13

—

4,261

 
6,166

—

—

6,166

Foreign exchange
2,321

194

27

2,542

 
2,819

—

29

2,848

Equity
11,082

11,936

3,736

26,754

 
11,580

9,809

2,972

24,361

Commodity
1,260

310

1,133

2,703

 
1,379

332

1,555

3,266

Total structured notes
$
28,427

$
13,068

$
6,166

$
47,661

 
$
30,613

$
11,284

$
5,115

$
47,012

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