Off–balance sheet lending-related financial instruments, guarantees, and other commitments

JPMorgan Chase provides lending-related financial instruments (e.g., commitments and guarantees) to meet the financing needs of its customers. The contractual amount of these financial instruments represents the maximum possible credit risk to the Firm should the counterparty draw upon the commitment or the Firm be required to fulfill its obligation under the guarantee, and should the counterparty subsequently fail to perform according to the terms of the contract. Most of these commitments and guarantees expire without being drawn or a default occurring. As a result, the total contractual amount of these instruments is not, in the Firm’s view, representative of its actual future credit exposure or funding requirements. For a discussion of off-balance sheet lending-related financial instruments and guarantees, and the Firm’s related accounting policies, see Note 29 on pages 283–289 of JPMorgan Chase’s 2011 Annual Report.

To provide for the risk of loss inherent in wholesale and consumer (excluding credit card) contracts, an allowance for credit losses on lending-related commitments is maintained. See Note 14 on page 136 of this Form 10-Q for further discussion regarding the allowance for credit losses on lending-related commitments.

The following table summarizes the contractual amounts and carrying values of off-balance sheet lending-related financial instruments, guarantees and other commitments at March 31, 2012, and December 31, 2011. The amounts in the table below for credit card and home equity lending-related commitments represent the total available credit for these products. The Firm has not experienced, and does not anticipate, that all available lines of credit for these products will be utilized at the same time. The Firm can reduce or cancel credit card lines of credit by providing the borrower notice or, in some cases, without notice as permitted by law. The Firm may reduce or close home equity lines of credit when there are significant decreases in the value of the underlying property, or when there has been a demonstrable decline in the creditworthiness of the borrower. Also, the Firm typically closes credit card lines when the borrower is 60 days or more past due.



Off–balance sheet lending-related financial instruments, guarantees and other commitments
	Contractual amount												Carrying value⁽ⁱ⁾
	March 31, 2012										December 31, 2011		March 31, 2012			December 31, 2011
By remaining maturity (in millions)	Expires in 1 year or less		Expires after 1 year through 3 years		Expires after 3 years through 5 years		Expires after 5 years		Total		Total
Lending-related
Consumer, excluding credit card:
Home equity – senior lien	$	1,103	$	4,921	$	4,742	$	5,482	$	16,248	$	16,542	$	—		$	—
Home equity – junior lien	2,361		8,981		7,630		6,444		25,416		26,408		—			—
Prime mortgage	2,594		—		—		—		2,594		1,500		—			—
Subprime mortgage	—		—		—		—		—		—		—			—
Auto	6,771		234		122		—		7,127		6,694		1			1
Business banking	10,024		513		76		328		10,941		10,299		6			6
Student and other	20		193		94		488		795		864		—			—
Total consumer, excluding credit card	22,873		14,842		12,664		12,742		63,121		62,307		7			7
Credit card	533,318		—		—		—		533,318		530,616		—			—
Total consumer	556,191		14,842		12,664		12,742		596,439		592,923		7			7
Wholesale:
Other unfunded commitments to extend credit^(a)(b)	61,030		63,684		92,950		5,544		223,208		215,251		426			347
Standby letters of credit and other financial guarantees^(a)(b)(c)(d)	28,383		32,434		39,039		2,158		102,014		101,899		693			696
Unused advised lines of credit	56,746		13,375		446		168		70,735		60,203		—			—
Other letters of credit^(a)(d)	4,210		778		119		—		5,107		5,386		2			2
Total wholesale	150,369		110,271		132,554		7,870		401,064		382,739		1,121			1,045
Total lending-related	$	706,560	$	125,113	$	145,218	$	20,612	$	997,503	$	975,662	$	1,128		$	1,052
Other guarantees and commitments
Securities lending indemnifications^(e)	$	194,641	$	—	$	—	$	—	$	194,641	$	186,077	NA			NA
Derivatives qualifying as guarantees	2,903		4,797		28,589		36,511		72,800		75,593		$	224		$	457
Unsettled reverse repurchase and securities borrowing agreements^(f)	61,013		—		—		—		61,013		39,939		—			—
Loan sale and securitization-related indemnifications:
Mortgage repurchase liability^(g)	NA		NA		NA		NA		NA		NA		3,516			3,557
Loans sold with recourse	NA		NA		NA		NA		10,183		10,397		142			148
Other guarantees and commitments^(h)	948		292		357		4,609		6,206		6,321		(80		)	(5		)

(a)

At March 31, 2012, and December 31, 2011, reflects the contractual amount net of risk participations totaling $603 million and $1.1 billion, respectively, for other unfunded commitments to extend credit; $18.7 billion and $19.8 billion, respectively, for standby letters of credit and other financial guarantees; and $934 million and $974 million, respectively, for other letters of credit. In regulatory filings with the Federal Reserve these commitments are shown gross of risk participations.

(b)

At March 31, 2012, and December 31, 2011, included credit enhancements and bond and commercial paper liquidity commitments to U.S. states and municipalities, hospitals and other not-for-profit entities of $47.9 billion and $48.6 billion, respectively. These commitments also include liquidity facilities to nonconsolidated municipal bond VIEs; for further information, see Note 15 on pages 137–144 of this Form 10-Q.


(c)	At March 31, 2012, and December 31, 2011, included unissued standby letters of credit commitments of $43.5 billion and $44.1 billion, respectively.


(d)	At March 31, 2012, and December 31, 2011, JPMorgan Chase held collateral relating to $42.3 billion and $41.5 billion, respectively, of standby letters of credit; and $1.2 billion and $1.3 billion, respectively, of other letters of credit.


(e)	At March 31, 2012, and December 31, 2011, collateral held by the Firm in support of securities lending indemnification agreements was $195.9 billion and $186.3 billion, respectively. Securities lending collateral comprises primarily cash and securities issued by governments that are members of the Organisation for Economic Co-operation and Development (“OECD”) and U.S. government agencies.

(f)

At March 31, 2012, and December 31, 2011, the amount of commitments related to forward-starting reverse repurchase agreements and securities borrowing agreements were $9.2 billion and $14.4 billion, respectively. Commitments related to unsettled reverse repurchase agreements and securities borrowing agreements with regular-way settlement periods were $51.8 billion and $25.5 billion, at March 31, 2012, and December 31, 2011, respectively.


(g)	Represents the estimated mortgage repurchase liability related to indemnifications for breaches of representations and warranties in loan sale and securitization agreements. For additional information, see Loan sale and securitization-related indemnifications on page 153 of this Note.

(h)

At March 31, 2012, and December 31, 2011, included unfunded commitments of $571 million and $789 million, respectively, to third-party private equity funds; and $1.6 billion and $1.5 billion, respectively, to other equity investments. These commitments included $557 million and $820 million, respectively, related to investments that are generally fair valued at net asset value as discussed in Note 3 on pages 91–100 of this Form 10-Q. In addition, at March 31, 2012, and December 31, 2011, included letters of credit hedged by derivative transactions and managed on a market risk basis of $3.9 billion and $3.9 billion, respectively.


(i)	For lending-related products, the carrying value represents the allowance for lending-related commitments and the guarantee liability; for derivative-related products, the carrying value represents the fair value. For all other products the carrying value represents the valuation reserve.

Other unfunded commitments to extend credit

Other unfunded commitments to extend credit generally comprise commitments for working capital and general corporate purposes, as well as extensions of credit to support commercial paper facilities and bond financings in the event that those obligations cannot be remarketed to new investors.

Also included in other unfunded commitments to extend credit are commitments to noninvestment-grade counterparties in connection with leveraged and acquisition finance activities, which were $6.4 billion and $6.1 billion at March 31, 2012, and December 31, 2011, respectively. For further information, see Note 3 and Note 4 on pages 91–100 and 101–102 respectively, of this Form 10-Q.

Guarantees

The Firm considers the following off–balance sheet lending-related arrangements to be guarantees under U.S. GAAP: standby letters of credit and financial guarantees, securities lending indemnifications, certain indemnification agreements included within third-party contractual arrangements and certain derivative contracts. For a further discussion of the off–balance sheet lending-related arrangements the Firm considers to be guarantees, and the related accounting policies, see Note 29 on pages 283–289 of JPMorgan Chase’s 2011 Annual Report. The recorded amounts of the liabilities related to guarantees and indemnifications at March 31, 2012, and December 31, 2011, excluding the allowance for credit losses on lending-related commitments, are discussed below.

Standby letters of credit and other financial guarantees

Standby letters of credit (“SBLC”) and other financial guarantees are conditional lending commitments issued by the Firm to guarantee the performance of a customer to a third party under certain arrangements, such as commercial paper facilities, bond financings, acquisition financings, trade and similar transactions. The carrying values of standby and other letters of credit were $695 million and $698 million at March 31, 2012, and December 31, 2011, respectively, which were classified in accounts payable and other liabilities on the Consolidated Balance Sheets; these carrying values included $317 million and $319 million, respectively, for the allowance for lending-related commitments, and $378 million and $379 million, respectively, for the guarantee liability and corresponding asset.

The following table summarizes the types of facilities under which standby letters of credit and other letters of credit arrangements are outstanding by the ratings profiles of the Firm’s customers, as of March 31, 2012, and December 31, 2011.

Standby letters of credit, other financial guarantees and other letters of credit



	March 31, 2012						December 31, 2011
(in millions)	Standby letters of credit and other financial guarantees				Other letters of credit		Standby letters of credit and other financial guarantees				Other letters of credit
Investment-grade^(a)		$	79,149		$	3,558		$	78,884		$	4,105
Noninvestment-grade^(a)		22,865			1,549			23,015			1,281
Total contractual amount^(b)		$	102,014	^(c)	$	5,107		$	101,899	^(c)	$	5,386
Allowance for lending-related commitments		$	315		$	2		$	317		$	2
Commitments with collateral		42,263			1,201			41,529			1,264


(a)	The ratings scale is based on the Firm’s internal ratings which generally correspond to ratings as defined by S&P and Moody’s.

(b)

At March 31, 2012, and December 31, 2011, reflects the contractual amount net of risk participations totaling $18.7 billion and $19.8 billion, respectively, for standby letters of credit and other financial guarantees; and $934 million and $974 million, respectively, for other letters of credit. In regulatory filings with the Federal Reserve these commitments are shown gross of risk participations.


(c)	At March 31, 2012, and December 31, 2011, included unissued standby letters of credit commitments of $43.5 billion and $44.1 billion, respectively.

Derivatives qualifying as guarantees

In addition to the contracts described above, the Firm transacts certain derivative contracts that have the characteristics of a guarantee under U.S. GAAP. For further information on these derivatives, see Note 29 on pages 283–289 of JPMorgan Chase’s 2011 Annual Report. The total notional value of the derivatives that the Firm deems to be guarantees was $72.8 billion and $75.6 billion at March 31, 2012, and December 31, 2011, respectively. The notional amount generally represents the Firm’s maximum exposure to derivatives qualifying as guarantees. However, exposure to certain stable value contracts is contractually limited to a substantially lower percentage of the notional amount; the notional amount on these stable value

contracts was $26.1 billion and $26.1 billion and the maximum exposure to loss was $2.8 billion and $2.8 billion, at March 31, 2012, and December 31, 2011, respectively. The fair values of the contracts reflect the probability of whether the Firm will be required to perform under the contract. The fair value related to derivatives that the Firm deems to be guarantees were derivative payables of $315 million and $555 million and derivative receivables of $91 million and $98 million at March 31, 2012, and December 31, 2011, respectively. The Firm reduces exposures to these contracts by entering into offsetting transactions, or by entering into contracts that hedge the market risk related to the derivative guarantees.

In addition to derivative contracts that meet the characteristics of a guarantee, the Firm is both a purchaser and seller of credit protection in the credit derivatives market. For a further discussion of credit derivatives, see Note 5 on pages 103–109 of this Form 10-Q.

Loan sales- and securitization-related indemnifications

Mortgage repurchase liability

In connection with the Firm’s loan sale and securitization activities with the GSEs and other loan sale and private-label securitization transactions, as described in Note 15 on pages 137–144 of this Form 10-Q, and Note 16 on pages 256–267 of JPMorgan Chase’s 2011 Annual Report, the Firm has made representations and warranties that the loans sold meet certain requirements. The Firm may be, and has been, required to repurchase loans and/or indemnify the GSEs and other investors for losses due to material breaches of these representations and warranties. Generally, the maximum amount of future payments the Firm would be required to make for breaches of these representations and warranties would be equal to the unpaid principal balance of such loans that are deemed to have defects that were sold to purchasers (including securitization-related SPEs) plus, in certain circumstances, accrued and unpaid interest on such loans and certain expense.

The Firm has recognized a mortgage repurchase liability of $3.5 billion and $3.6 billion, as March 31, 2012, and December 31, 2011, respectively, which is reported in accounts payable and other liabilities net of probable recoveries from third-party originators of $561 million and $577 million at March 31, 2012, and December 31, 2011, respectively.

Substantially all of the estimates and assumptions underlying the Firm’s established methodology for computing its recorded mortgage repurchase liability — including factors such as the amount of probable future demands from purchasers, trustees or investors, the ability of the Firm to cure identified defects, the severity of loss upon repurchase or foreclosure, and recoveries from third parties — require application of a significant level of management judgment. Estimating the mortgage repurchase liability is further complicated by historical data and uncertainty surrounding numerous external factors, including: (i) macro-economic factors and (ii) the level of future demands, which is dependent, in part, on actions taken by third parties such as the GSEs, mortgage insurers, trustees and investors.

While the Firm uses the best information available to it in estimating its mortgage repurchase liability, the estimation process is inherently uncertain and imprecise and, accordingly, losses in excess of the amounts accrued as of March 31, 2012, are reasonably possible. The Firm believes the estimate of the range of reasonably possible losses, in excess of its established repurchase liability, is from $0 to approximately $2 billion at March 31, 2012. This estimated range of reasonably possible loss considers the Firm's GSE-related exposure based on an assumed peak to trough decline in home prices of 43%, which is an additional 8 percentage point decline in home prices beyond the Firm’s current assumptions which were derived from a nationally recognized home price index. Although the Firm does not consider a further decline in home prices of this magnitude likely to occur, such a decline could increase the level of loan delinquencies, thereby potentially increasing the repurchase demand rate from the GSEs and increasing loss severity on repurchased loans, each of which could affect the Firm’s mortgage repurchase liability. Claims related to private-label securitizations have, thus far, generally manifested themselves through threatened or pending litigation, which the Firm has considered with other litigation matters as discussed in Note 23 on pages 154–163 of this Form 10-Q. Actual repurchase losses could vary significantly from the Firm’s recorded mortgage repurchase liability or this estimate of reasonably possible additional losses, depending on the outcome of various factors, including those considered above.

The following table summarizes the change in the mortgage repurchase liability for each of the periods presented.



Summary of changes in mortgage repurchase liability^(a)
Three months ended March 31, (in millions)	2012				2011
Repurchase liability at beginning of period	$	3,557			$	3,285
Realized losses^(b)	(364		)		(231		)
Provision^(c)	323				420
Repurchase liability at end of period	$	3,516		^(d)	$	3,474


(a)	Mortgage repurchase demands associated with private-label securitizations are separately evaluated by the Firm in establishing its litigation reserves.


(b)	Includes principal losses and accrued interest on repurchased loans, “make-whole” settlements, settlements with claimants, and certain related expense. For the three months ended March 31, 2012 and 2011, make-whole settlements were and $186 million and $115 million, respectively.


(c)	Primarily relates to increases in estimated probable future repurchase demands. Also includes $27 million and $13 million of provision related to new loan sales for the three months ended March 31, 2012 and 2011, respectively.


(d)	Includes $32 million at March 31, 2012, related to future repurchase demands on loans sold by Washington Mutual to the GSEs.

Loans sold with recourse

The Firm provides servicing for mortgages and certain commercial lending products on both a recourse and nonrecourse basis. In nonrecourse servicing, the principal credit risk to the Firm is the cost of temporary servicing advances of funds (i.e., normal servicing advances). In recourse servicing, the servicer agrees to share credit risk with the owner of the mortgage loans, such as Fannie Mae or Freddie Mac or a private investor, insurer or guarantor. Losses on recourse servicing predominantly occur when foreclosure sales proceeds of the property underlying a defaulted loan are less than the sum of the outstanding principal balance, plus accrued interest on the loan and the cost of holding and disposing of the underlying property. The Firm’s securitizations are predominantly nonrecourse, thereby effectively transferring the risk of future credit losses to the purchaser of the mortgage-backed securities issued by the trust. At March 31, 2012, and December 31, 2011, the unpaid principal balance of loans sold with recourse totaled $10.2 billion and $10.4 billion, respectively. The carrying value of the related liability that the Firm has recorded, which is representative of the Firm’s view of the likelihood it will have to perform under its recourse obligations, was $142 million and $148 million at March 31, 2012, and December 31, 2011, respective