gerry dorkin, executive director, j.p. morgan november 2009 counterparty risk management in an...

Gerry Dorkin, Executive Director, J.P. Morgan

November 2009

COUNTERPARTY RISK MANAGEMENT IN AN EVOLVING MARKETPLACE

This presentation was prepared exclusively for the benefit and internal use of the J.P. Morgan client to whom it is directly addressed and delivered including such client’s subsidiaries, (the “Company”) in order to assist the Company in evaluating, on a preliminary basis, certain products or services that may be provided by J.P. Morgan. This presentation is for discussion purposes only and is incomplete without reference to, and should be viewed solely in conjunction with, the oral briefing provided by J.P. Morgan. It may not be copied, published or used, in whole or in part, for any purpose other than as expressly authorised by J.P. Morgan.

The statements in this presentation are confidential and proprietary to J.P. Morgan and are not intended to be legally binding. Neither J.P. Morgan nor any of its directors, officers, employees or agents shall incur any responsibility or liability to the Company or any other party with respect to the contents of this presentation or any matters referred to in, or discussed as a result of, this document. J.P. Morgan makes no representations as to the legal, regulatory, tax or accounting implications of the matters referred to in this presentation.

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Agenda

How does J.P. Morgan manage counterparty risk?

Group sessionsHow do you manage counterparty risk?What are your priorities?What are your biggest challenges?What is the right model?

Review of findings

How does J.P. Morgan manage Counterparty Risk?

Understanding the financial strength of banks…

Two-pronged approach:Analysis of the Fundamentals (Quantitative)Overlay the Qualitative


Analysis of the Fundamentals (Quantitative)

CapitalAssetsManagement EquityLiabilities and Liquidity


Overlay the Qualitative:

Diversity of earning streamsTrack recordExternal RatingsMarket Perception


An evolving marketplace…

Temporary support programmes rolling off:TARPTAGPLiquidity Fund Guarantees

Government Ownership

Increased regulatory oversightFSA liquidity requirements for banks

Does your risk management strategy still make sense?

Sustaining liquidity management through the cycle


The layers of credit risk:

Counterparty concentration

Core financial services provider choice; credit profile; core provider risk etc.

Relationship strength; depth of understanding your business

Regular assessment of counterparty risk profiles and comparison against risk preferences

Opportunities to optimise cash held, classify appropriately, or invest and diversify to mitigate concentration risk

Instrument type; fit to liquidity needs

Changes to structure, risk profile or return profile

Transparency of holdings

Review assets against risk criteria:

― Cash accounts and time deposits

― money market mutual funds

― reverse repos

― direct securities investments

Review other criteria e.g. jurisdiction

Holdings and collateral; next level analysis

Support, experience, track record and access

Clear and complete investment policy

― ongoing inspection

― type, level and frequency of disclosure

― triggers for escalation or review

Understand &

Manage Risk

Instrument choice and legal behaviour

Investment quality - support and service quality

Understand &

Manage Risk

Understand &

Manage Risk



Operating model:

Effective and sustainable liquidity management requires a balance between: Capital Preservation Liquidity / Availability of Funds Convenience & Cost Return / Performance

In addition, the balance must be achieved in compliance with the investment risk and currency risk management policies

Management oversight and reporting are additional over-heads which must be organised to be efficient if practice is to be maintained long term

Liquidity Management is not a ‘fair-weather activity’ or a ‘knee-jerk reaction’. It is a fundamental part of business

Date February 7, 2002 April 30, 2008 May 28, 2008 November 26, 2008 February 26, 2009 March 11, 2009

JPM Max. Tenor 397 days 735 days 190 days 35 days Run-off period started 0 days¹

JPM Internal Rating

AA- AA- AA- AA- AA- AA-

S&P A/A-1 A+/A-1 A+/A-1 A+/A-1 A+/A-1 A/A-1

Moody’s Aa3/P-1 Aa2/P-1 Aa2/P-1 Aa2/P-1 review negative

Aa2/P-1 Aa3/P-1

Fitch AA-/F1+ AA-/F1+ AA-/F1+ AA-/F1+ watch negative

A/F1+ A/F1+

Market Commentary

Counterparty X is added as an

approved issuer to the CTE

counterparty list.

As a reflection of stable outlook from

all three credit rating agencies

Counterparty X had a max tenor limit of 735 days on April

30, 2008.

Counterparty X began to meet

financial headwinds as a result their tenor limits were reduced to 190

days.

Counterparty X’s financial condition

further eroded. Increasing asset

quality and liquidity concerns resulted in further reduction in

their maximum tenor limit.

The magnitude of the Irish government’s

potential liability is a multiple of its GDP.

The ability of the Irish Government to

accumulate sufficient liquid reserves to

meet potential claims is questionable.

Despite the blanket guarantee of the

Irish government we believe it is prudent

to stop placing further time deposits with Counterparty X.


In practice…

COUNTERPARTY X

Group Session

Review of Findings

gerry dorkin, executive director, j.p. morgan november 2009 counterparty risk management in an...

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