Fair Value Option

3 Months Ended

Mar. 31, 2012

Fair value option

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 198–200 of JPMorgan Chase’s 2011 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 months ended March 31, 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.



	Three months ended March 31,
	2012										2011
(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	$	(48	)	$	—			$	(48	)	$	(118	)	$	—			$	(118	)
Securities borrowed	14			—				14			9			—				9
Trading assets:
Debt and equity instruments, excluding loans	364			3			^(c)	367			164			3			^(c)	167
Loans reported as trading assets:
Changes in instrument-specific credit risk	476			18			^(c)	494			480			—				480
Other changes in fair value	(252		)	1,577			^(c)	1,325			125			723			^(c)	848
Loans:
Changes in instrument-specific credit risk	—			—				—			(6		)	—				(6		)
Other changes in fair value	25			—				25			143			—				143
Other assets	—			(194		)	^(d)	(194		)	—			—				—
Deposits^(a)	(160		)	—				(160		)	(17		)	—				(17		)
Federal funds purchased and securities loaned or sold under repurchase agreements	2			—				2			35			—				35
Other borrowed funds^(a)	(475		)	—				(475		)	217			—				217
Trading liabilities	9			—				9			(3		)	—				(3		)
Beneficial interests issued by consolidated VIEs	(6		)	—				(6		)	(34		)	—				(34		)
Other liabilities	—			—				—			(3		)	(2		)	^(d)	(5		)
Long-term debt:
Changes in instrument-specific credit risk^(a)	(419		)	—				(419		)	54			—				54
Other changes in fair value^(b)	(705		)	—				(705		)	(24		)	—				(24		)


(a)	Total changes in instrument-specific credit risk related to structured notes were $(468) million and $23 million for the three months ended March 31, 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 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 losses 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 March 31, 2012, and December 31, 2011, for loans, long-term debt and long-term beneficial interests for which the fair value option has been elected.



	March 31, 2012								December 31, 2011
(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	$	4,691		$	1,008	$	(3,683	)	$	4,875		$	1,141	$	(3,734	)
Loans	775			55		(720		)	820			56		(764		)
Subtotal	5,466			1,063		(4,403		)	5,695			1,197		(4,498		)
All other performing loans
Loans reported as trading assets	36,303			31,497		(4,806		)	37,481			32,657		(4,824		)
Loans	2,316			1,813		(503		)	2,136			1,601		(535		)
Total loans	$	44,085		$	34,373	$	(9,712	)	$	45,312		$	35,455	$	(9,857	)
Long-term debt
Principal-protected debt	$	19,127	^(c)	$	19,131	$	4		$	19,417	^(c)	$	19,890	$	473
Nonprincipal-protected debt^(b)	NA			16,342		NA			NA			14,830		NA
Total long-term debt	NA			$	35,473	NA			NA			$	34,720	NA
Long-term beneficial interests
Principal-protected debt	$	—		$	—	$	—		$	—		$	—	$	—
Nonprincipal-protected debt^(b)	NA			1,001		NA			NA			1,250		NA
Total long-term beneficial interests	NA			$	1,001	NA			NA			$	1,250	NA


(a)	There were no performing loans which were ninety days or more past due as of March 31, 2012, and December 31, 2011, 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.

At March 31, 2012, and December 31, 2011 the contractual amount of letters of credit for which the fair value option was elected was $3.9 billion and $3.9 billion, respectively, with a corresponding fair value of $(80) million and $(5) million, respectively. For further information regarding off-balance sheet lending-related financial instruments, see Note 29 on pages 283–289 of JPMorgan Chase’s 2011 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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