JPMorgan Chase & Co. · NYSE:JPM

JPMorgan Chase & — Investor Presentation (May 2009)

36 slides from JPMorgan Chase &'s investor presentation, May 28, 2009

1. Slide 1: FASB Statement No. 161, Disclosures About Derivative Instruments and Hedging Activities

   MAY 28, 2009 FASB Statement No. 161, Disclosures About Derivative Instruments and Hedging Activities (FAS 161) Dial-in: 1-866-870-8212 International dial-in: 1-617-597-5026 Participant passcode: 67705679 © JPMorgan Chase & Co. All rights reserved. JPMorgan Chase Bank, N.A.

2. Slide 2: Today's Speakers

   Today’s Speakers ƒ Michael Mykytiw, Executive Director, J.P. Morgan Fund Accounting ƒ Christopher Roleke, Assistant Vice President, J.P. Morgan Financial Reporting © JPMorgan Chase & Co. All rights reserved. JPMorgan Chase Bank, N.A. 1

3. Slide 3: FAS 161 – Overview and Scope

   FAS 161 – Overview and Scope © JPMorgan Chase & Co. All rights reserved. JPMorgan Chase Bank, N.A.

4. Slide 4: FAS 161

   FAS 161 ƒ Issued in March 2008 ƒ Effective for interim and annual reporting periods beginning after November 15, 2008 (early adoption permitted) ƒ Amends disclosures required by FAS 133, (applicable to companies that report according to U.S. GAAP) ƒ Expands the disclosures required by FAS 133 to pro

5. Slide 5: FAS 161 Scope

   FAS 161 ƒ In scope (derivatives described in FAS 133); based on industry practice, these include: — Swaptions — Swaps — Futures contracts — Currency forward contract — Options (written and purchased) ƒ Out of scope are nonderivatives, such as: — Structured notes — Convertible preferred stocks and bo

6. Slide 6: FAS 161 – Disclosures

   FAS 161 – Disclosures © JPMorgan Chase & Co. All rights reserved. JPMorgan Chase Bank, N.A.

7. Slide 7: FAS 161 – New Disclosures

   FAS 161 – New Disclosures ƒ An entity’s objectives for holding or using derivative instruments and its strategies for achieving those objectives. ƒ These must be discussed in the context of each instrument’s primary underlying risk exposure: — Interest rate risk — Credit risk — Foreign exchange risk

8. Slide 8: FAS 161 – New Disclosures

   FAS 161 – New Disclosures ƒ The level of an entity’s derivative activity ƒ New tables showing derivative instruments’ — Location in the balance sheet and fair value at the end of the period — Location in the Statement of Operations the realized and unrealized gain/loss over the period ƒ The existenc

9. Slide 9: FAS 161 – Tabular Disclosure: Balance Sheet

   FAS 161 – Tabular Disclosure: Balance Sheet ƒ Entities must disclose, in a table, the balance sheet location and period end market value for derivatives by primary risk exposure category ƒ Derivatives in asset positions should be presented separately from derivatives in a liability position ƒ Deriva

10. Slide 10: FAS 161 – Tabular Disclosure: Income Statement

    FAS 161 – Tabular Disclosure: Income Statement ƒ Entities must disclose the amount of gains and losses for derivatives where those amounts are reported in the income statement. The disclosure requires this to be presented by primary risk exposure. ƒ The statement does not require the disclosure of g

11. Slide 11: FAS 161 – Implementation

    FAS 161 – Implementation © JPMorgan Chase & Co. All rights reserved. JPMorgan Chase Bank, N.A.

12. Slide 12: Implementation of FAS 161

    Implementation of FAS 161 Steps ƒ Established derivative population and verified security categories — Determined population of derivatives held during reporting period — Reviewed and corrected derivative security categories; accounting system technology was enhanced to store risk exposure categorie

13. Slide 13: Implementation of FAS 161

    Implementation of FAS 161 ƒ FAS 161 risk exposure initial upload — FAS 161 Risk Exposure Categories assigned to derivative population using mapping table ƒ Established security setup procedure — Process to set up and verify derivative security categories ƒ Created a process to maintain and reconcile

14. Slide 14: Implementation of FAS 161 - Risk Exposure Assignment

    Implementation of FAS 161 - Risk Exposure Assignment ƒ All ‘in scope’ derivatives were identified within client portfolios ƒ Accounting system asset classifications were reviewed and enhanced ƒ Risk exposure categories were assigned based on suggested tables in ICI Guidance memorandum © JPMorgan Cha

15. Slide 15: Implementation of FAS 161 – Technology

    Implementation of FAS 161 – Technology Accounting Functionality and development for FAS 161 includes: Platform 1. New screen to setup two digit Risk Exposure Categories 2. Security level assignment of Risk Exposure Category 3. Account-level override of Risk Exposure Category 4. Three new fields asso

16. Slide 16: FAS 161 – Sample Report

    FAS 161 – Sample Report © JPMorgan Chase & Co. All rights reserved. JPMorgan Chase Bank, N.A. 15

17. Slide 17: FAS 161: Financial Reporting Considerations

    FAS 161: Financial Reporting Considerations Portfolio Reconciliations ƒ Items to reconcile in the portfolio disclosure include ƒ Gross presentation of all numbers (unrealized gains verses losses), separately stated ƒ Total unrealized gain/loss is reported for forwards, futures and swaps; therefore,

18. Slide 18: FAS 161: Financial Reporting Considerations

    FAS 161: Financial Reporting Considerations The Income Statement ƒ Realized gain/loss reconciliation — Swap payments, which are reclassified from income to gain will now need to be analyzed and tracked by risk exposure — Foreign currency: How will mark to market and spot contracts be presented on th

19. Slide 19: FAS 161: Financial Reporting Considerations

    FAS 161: Financial Reporting Considerations Financial Statement Notes ƒ Notes to financial statements will require more scrutiny than in the past. New standard details about how derivatives are used and why should be immediately be reviewed for compliance ƒ It will no longer suffice to add a generic

20. Slide 20: FAS 161: Financial Reporting Considerations – Open Questions

    FAS 161: Financial Reporting Considerations Open Questions ƒ Where should the new disclosure be placed? Clients should consider presentation of the tables alongside the statements or in the notes to financial statements. ƒ If an entity has only one risk exposure category, how can this be presented?

21. Slide 21: FSP FAS 157-4

    FSP FAS 157-4 Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions that Are Not Orderly © JPMorgan Chase & Co. All rights reserved. JPMorgan Chase Bank, N.A.

22. Slide 22: FSP FAS 157-4: Overview

    FSP FAS 157 – 4: Overview ƒ Issued: April 9, 2009 ƒ Effective: Annual reporting periods ending after June 15, 2009 ƒ Retains the existing ‘exit price’ concept under FAS 157 ƒ States that FAS 157 does not preclude the use of quoted prices provided by third parties, such as pricing services or brokers

23. Slide 23: FSP FAS 157-4: Overview

    FSP FAS 157 – 4: Overview ƒ States that revisions resulting from a change in valuation technique or its application shall be accounted for as a change in accounting estimate ƒ Requires new financial statement disclosure ƒ New guidance outlines a two-step process to: ƒ Assess the volume and level of

24. Slide 24: FSP FAS 157-4: Overview

    FSP FAS 157 – 4: Overview Step 1 ƒ Factors to consider in determining whether there has been a significant decrease in the volume of level of activity ƒ Few recent transactions ƒ Price quotations are not based on current information ƒ Price quotations vary substantially either over time or among mar

25. Slide 25: FSP FAS 157-4: Overview

    FSP FAS 157 – 4: Overview ƒ Indices that previously were highly correlated with the fair values…are demonstrably uncorrelated ƒ Significant increase in implied liquidity risk premiums, yields, or performance indicators ƒ Wide bid-ask spread or significant increases in the bid-ask spread ƒ Significan

26. Slide 26: FSP FAS 157-4: Overview

    FSP FAS 157 – 4: Overview Step 2 ƒ Identifying transactions that are not orderly ƒ There was not adequate market exposure prior to measurement date ƒ The seller marketed the asset to a single market participant ƒ The seller is in or near bankruptcy or the sale was otherwise ‘forced’ ƒ The transactio

27. Slide 27: FSP FAS 157-4: Overview

    FSP FAS 157 – 4: Overview Weigh the evidence and decide: ƒ Transaction is not orderly – entity should place little or no weight on that observed transaction price ƒ Transaction is orderly – entity must consider the observed transaction price, but may determine the weight given ƒ Insufficient evidenc

28. Slide 28: FSP FAS 157-4: New Disclosures

    FSP FAS 157 – 4: New Disclosures ƒ Entities are required to disclose in interim and annual periods the inputs and valuation techniques used to measure fair value, together with any changes in valuation techniques ƒ Entities are required to make disclosures for debt and equity securities based on maj

29. Slide 29: FAS 157: Financial Reporting Considerations

    FAS 157: Financial Reporting Considerations J.P. Morgan solutions for enhanced 3 Level Hierarchy reporting: ƒ Option 1 – Systematically summarize the Asset Type 1 value (stocks / corporate bonds / U.S. Treasuries) and long/short designations (employed in current SOI) applied to a table with Levels 1

30. Slide 30: FSP FAS 157-4: Pricing Vendor Response

    FSP FAS 157 – 4: Pricing Vendor Response ƒ IDC ƒ Launched FAS 157-related section on their 360 View Web site to act as online hub for FAS 157-related information and client communication — Includes: Position Paper, Summary of Inputs, Pricing Methodology Binder ƒ Hosted two Webinars in the last three

31. Slide 31: FSP FAS 157-4: Pricing Vendor Response

    FSP FAS 157 – 4: Pricing Vendor Response ƒ New product development: — Monthly Market Data Summary Report (in test) — Intrinsic Fair Value Model (future release) — Client-Driven Scenario Modeling (future release) — Access to Assumptive Data: Comparable Bonds and Incorporation of Trades and Bids Infor

32. Slide 32: FSP FAS 157-4: Pricing Vendor Response

    FSP FAS 157 – 4: Pricing Vendor Response ƒ Pricing Direct ƒ Issued a Pricing Methodology Book ƒ New product development: Mark-to-Model ƒ Willing to hold Webcasts and other working sessions with clients © JPMorgan Chase & Co. All rights reserved. JPMorgan Chase Bank, N.A. 31

33. Slide 33: FSP FAS 157-4: Pricing Vendor Response

    FSP FAS 157 – 4: Pricing Vendor Response ƒ S&P ƒ Utilizes a ‘market approach’ – evaluators are assigned to specific asset subgroups, utilizing all available market data to determine indicative price ƒ Updated pricing methodology documentation to be released soon ƒ New Web site planned to launch by e

34. Slide 34: FSP FAS 157-4: Pricing Vendor Response

    FSP FAS 157 – 4: Pricing Vendor Response ƒ Reuters ƒ Planning improved transparency by increasing information surrounding evaluations and make it available to clients through Datascope; no current ETA for implementation — Market depth information to help identify where security price lies relative t

35. Slide 35: FSP FAS 157-4: Pricing Vendor Response

    FSP FAS 157 – 4: Pricing Vendor Response ƒ Reuters ƒ Prior to Datascope implementation, some information will be available through individual commentary requests submitted through Datascope ƒ Basic pricing methodology document obtained; revised FAS157-4 document to be sent when completed ƒ Willing t

36. Slide 36: Questions?

    Questions? © JPMorgan Chase & Co. All rights reserved. JPMorgan Chase Bank, N.A.

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