Derivatives

Derivatives

2004 – J.P. Morgan Chase & Co.

Whereas:

Since the Federal Reserve Chairman Alan Greenspan and the world renown investor Warren Buffet have both expressed deep concerns about various aspects of derivatives trading and the extensive use of derivatives throughout the economy, there is a need to improve both the management of credit risk and market transparency in over-the-counter (OTC) derivatives markets;

J.P. Morgan Chase is one of the largest, if not the largest, participant in the overall derivatives markets. According to the U.S. Office of the Comptroller of the Currency, J.P. Morgan Chase had $34.7trillion in derivatives on their books (measured in notional value) as of September 30, 2003. The bank acts as a dealer in many derivatives markets and uses 99.5% of its derivatives for trading purpose with only 0.5% used for other purchases such as hedging its banking activity;

Derivatives transactions, especially in the amount needed to act as a dealer in OTC derivatives markets, can create large amounts of credit risk exposure. As a result of this activity, J.P. Morgan Chase Bank had $354.8 billion in total exposure – after bilateral netting – through its derivatives trading alone. This amount is equal to 783% of capital, and it is more than three times higher than that for other U.S. banks.

A study of the credit derivatives market conducted by Fitch in 2003 reported that J. P. Morgan Chase reported several critical concerns about the impact of credit derivatives on financial markets, and stated: "Without enhanced disclosure it is virtually impossible for the average investor or counterparty to assess the influence of credit derivatives on an institution's risk profile.”

For shareholders to properly assess the credit risk of the corporation, we believe this disclosure should include the following statements:

Collateral management policy of the corporation towards its OTC derivatives counterparties. This should include the threshold levels at which collateral is required of the corporation or its counterparties to mitigate its credit exposure, the types of assets that are accepted as collateral (and their haircuts), and the time limits for when required adjustments to collateral must be completed;
Credit ratings of the corporation’s OTC derivatives counter parties broken down according to the credit rating scale used by Standard & Poor's or Moody's, with the figures showing notional value, present value and future potential exposure of outstanding OTC contracts for each grade of credit rating,
The value at risk from changes in interest rates, exchange rates, equity prices and commodity prices,
The notional value of all derivatives holdings broken down by exchange traded and OTC, maturity, product (forward, future, swap, option, etc) and type (interest rate, exchange rate, equity, credit, commodity, etc.),
Credit derivatives exposure that augments current disclosure requirements by breaking down notional and gross fair value figures according to the credit rating scale used by Standard & Poor's or Moody's.

RESOLVED: That the Board of Directors develop policies to provide shareholders with adequate disclosure of the collateral for over-the-counter derivatives, via the corporate website and a report to shareholders.