Fair Value Option

6 Months Ended

Jun. 30, 2011

For a discussion of the primary financial instruments for which the fair value option was previously elected, including the basis for those elections and the determination of instrument-specific credit risk, where relevant, see Note 4 on pages 187–189 of JPMorgan Chase’s 2010 Annual Report.

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 three and six months ended June 30, 2011 and 2010, 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.



	Three months ended June 30,
	2011										2010
(in millions)	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	$	121		$	—			$	121		$	261		$	—			$	261
Securities borrowed	(8		)	—				(8		)	27			—				27
Trading assets:
Debt and equity instruments, excluding loans	107			(4		)	^(c)	103			40			(12		)	^(c)	28
Loans reported as trading assets:
Changes in instrument-specific credit risk	429			4			^(c)	433			389			28			^(c)	417
Other changes in fair value	13			1,371			^(c)	1,384			(299		)	1,217			^(c)	918
Loans:
Changes in instrument-specific credit risk	(7		)	—				(7		)	32			—				32
Other changes in fair value	139			—				139			(44		)	—				(44		)
Other assets	—			(42		)	^(d)	(42		)	—			(49		)	^(d)	(49		)
Deposits^(a)	(93		)	—				(93		)	(103		)	—				(103		)
Federal funds purchased and securities loaned or sold under repurchase agreements	(14		)	—				(14		)	(56		)	—				(56		)
Other borrowed funds^(a)	739			—				739			838			—				838
Trading liabilities	(3		)	—				(3		)	—			—				—
Beneficial interests issued by consolidated VIEs	(55		)	—				(55		)	(14		)	—				(14		)
Other liabilities	(1		)	(1		)	^(d)	(2		)	(19		)	14			^(d)	(5		)
Long-term debt:
Changes in instrument-specific credit risk^(a)	145			—				145			534			—				534
Other changes in fair value^(b)	(93		)	—				(93		)	1,332			—				1,332



	Six months ended June 30,
	2011										2010
(in millions)	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	$	3		$	—			$	3		$	280		$	—			$	280
Securities borrowed	1			—				1			39			—				39
Trading assets:
Debt and equity instruments, excluding loans	271			(1		)	^(c)	270			196			(11		)	^(c)	185
Loans reported as trading assets:
Changes in instrument-specific credit risk	909			4			^(c)	913			798			22			^(c)	820
Other changes in fair value	138			2,094			^(c)	2,232			(683		)	1,972			^(c)	1,289
Loans:
Changes in instrument-specific credit risk	(13		)	—				(13		)	79			—				79
Other changes in fair value	282			—				282			(71		)	—				(71		)
Other assets	—			(42		)	^(d)	(42		)	—			(102		)	^(d)	(102		)
Deposits^(a)	(110		)	—				(110		)	(292		)	—				(292		)
Federal funds purchased and securities loaned or sold under repurchase agreements	21			—				21			(65		)	—				(65		)
Other borrowed funds^(a)	956			—				956			912			—				912
Trading liabilities	(6		)	—				(6		)	(3		)	—				(3		)
Beneficial interests issued by consolidated VIEs	(89		)	—				(89		)	32			—				32
Other liabilities	(4		)	(3		)	^(d)	(7		)	4			14			^(d)	18
Long-term debt:
Changes in instrument-specific credit risk^(a)	199			—				199			585			—				585
Other changes in fair value^(b)	(117		)	—				(117		)	1,558			—				1,558

(a)

Total changes in instrument-specific credit risk related to structured notes were $142 million and $588 million for the three months ended June 30, 2011 and 2010, respectively, and $165 million and $696 million for the six months ended June 30, 2011 and 2010, respectively. Those totals include adjustments for structured notes classified within deposits and other borrowed funds, as well as long-term debt.


(b)	Structured notes are debt instruments with embedded derivatives that are tailored to meet a client’s need. The embedded derivative is the primary driver of risk. Although the risk associated with the structured notes is actively managed, the gains reported in this table do not include the income statement impact of such risk management instruments.


(c)	Reported in mortgage fees and related income.


(d)	Reported in other income.

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 June 30, 2011, and December 31, 2010, for loans, long-term debt and long-term beneficial interests for which the fair value option has been elected.



	June 30, 2011								December 31, 2010
(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
Performing loans 90 days or more past due
Loans reported as trading assets	$	—		$	—	$	—		$	—		$	—	$	—
Loans	—			—		—			—			—		—
Nonaccrual loans
Loans reported as trading assets	5,342			1,410		(3,932		)	5,246			1,239		(4,007		)
Loans	889			72		(817		)	927			132		(795		)
Subtotal	6,231			1,482		(4,749		)	6,173			1,371		(4,802		)
All other performing loans
Loans reported as trading assets	40,255			34,945		(5,310		)	39,490			33,641		(5,849		)
Loans	2,239			1,488		(751		)	2,496			1,434		(1,062		)
Total loans	$	48,725		$	37,915	$	(10,810	)	$	48,159		$	36,446	$	(11,713	)
Long-term debt
Principal-protected debt	$	20,620	^(b)	$	21,157	$	537		$	20,761	^(b)	$	21,315	$	554
Nonprincipal-protected debt^(a)	NA			17,359		NA			NA			17,524		NA
Total long-term debt	NA			$	38,516	NA			NA			$	38,839	NA
Long-term beneficial interests
Principal-protected debt	$	—		$	—	$	—		$	49		$	49	$	—
Nonprincipal-protected debt^(a)	NA			911		NA			NA			1,446		NA
Total long-term beneficial interests	NA			$	911	NA			NA			$	1,495	NA

(a)

Remaining contractual principal is not applicable to nonprincipal-protected notes. Unlike principal-protected notes, for which the Firm is obligated to return a stated amount of principal at the maturity of the note, nonprincipal-protected 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.


(b)	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.

At both June 30, 2011, and December 31, 2010, the contractual amount of letters of credit for which the fair value option was elected was $3.8 billion, with a corresponding fair value of $(6) million. For further information regarding off-balance sheet lending-related financial instruments, see Note 30 on pages 275–280 of JPMorgan Chase’s 2010 Annual Report.

- Definition

The entire disclosure for a company's election to apply the fair value option for measurement and reporting of eligible financial assets and liabilities (as defined), as well as certain other eligible items (as defined) included in the statement of financial position, whether such option is elected for a single eligible item or a group of similar eligible items and is in addition to other disclosures concerning fair value which the company may be required to provide. Such disclosure might be expected to include: (1) for items included in the statement of financial position: (a) the reasons for electing a fair value option for each eligible item or group of similar eligible items; (b) if the fair value option is elected for some but not all eligible items within a group of similar eligible items: (i) a description of those similar items and the reasons for partial election and (ii) information of how the group of similar items relates to individual balance sheet line items; (c) for each line item in the statement of financial position that includes an item or items for which the fair value option has been elected: (i) information of how each line item in the statement of financial position relates to major categories of assets and liabilities presented in accordance with other fair value disclosures and (ii) the aggregate carrying amount of ineligible items included in each line item in the balance sheet, if any; (d) the difference between the aggregate fair value and the aggregate unpaid principal balance (assuming contractual principal amounts and fair value option elected) of: (i) loans and long-term receivables (other than securities otherwise reported at fair value) and (ii) long-term debt instruments; (e) for loans held as assets for which the fair value option has been elected: (i) the aggregate fair value of loans that are 90 days or more past due, (ii) if the policy is to recognize interest income separately from other changes in fair value, the aggregate fair value of loans in nonaccrual status, and (iii) the difference between the aggregate fair value and the aggregate unpaid principal balance for loans that are 90 days or more past due, in nonaccrual status, or both; (f) for investments that would have been accounted for under the equity method if the entity had not chosen to apply the fair value option, the information required for such investments, if material either individually or in the aggregate; (2) for items included in the income statement: (a) the amounts of gains and losses from fair value changes included in earnings and in which line in the income statement those gains and losses are reported whether or not combined with gains and losses from items required to be accounted for at fair value; (b) a description of how interest and dividends are measured and where they are reported in the income statement; (c) for loans and other receivables held as assets: (i) the estimated amount of gains or losses included in earnings attributable to changes in instrument-specific credit risk and (ii) how the gains or losses attributable to changes in instrument-specific credit risk were determined; (d) for liabilities with fair values that have been significantly affected during the reporting period by changes in the instrument-specific credit risk: (i) the estimated amount of gains and losses from fair value changes included in earnings that are attributable to changes in the instrument-specific credit risk, (ii) qualitative information about the reasons for those changes, and (iii) how the gains and losses attributable to changes in instrument-specific credit risk were determined; and (3) certain other disclosures as required or determined to be provided.

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