0. COUNTERPARTY RISK MANAGEMENT IN AN EVOLVING MARKETPLACE
Gerry Dorkin, Executive Director, J.P. Morgan
November 2009

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2. Agenda How does J.P. Morgan manage counterparty risk? Group sessions
How do you manage counterparty risk?
What are your priorities?
What are your biggest challenges?
What is the right model?
Review of findings
Run through the topics and questions at the end

3. 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

4. How does J.P. Morgan manage Counterparty Risk?
Analysis of the Fundamentals (Quantitative)
Capital
Assets
Management
Equity
Liabilities and Liquidity
So obviously we’ve discussed rate volatility through the crisis but the issue here is that it continues.
Interbank liquidity continues to be tight. Perception is everything.
Northern Rock example. Who would have considered a household name UK Bank would have to be nationalised in the 21st century?
Perception that the bank was in trouble drove investors to withdraw their cash in droves.
Flight to Quality….ie not everyone takes the same view. The consistent theme across our clients is that there is no consistency….
Flight to Transparency….exponential growth in liquidity funds as proactively addressed the need to provide transparency.

5. How does J.P. Morgan manage Counterparty Risk?
Overlay the Qualitative:
Diversity of earning streams
Track record
External Ratings
Market Perception

6. How does J.P. Morgan manage Counterparty Risk?
An evolving marketplace…
Temporary support programmes rolling off:
TARP
TAGP
Liquidity Fund Guarantees
Government Ownership
Increased regulatory oversight
FSA liquidity requirements for banks
Does your risk management strategy still make sense?

7. Sustaining liquidity management through the cycle
How does J.P. Morgan manage Counterparty Risk?
Sustaining liquidity management through the cycle

8. The layers of credit risk:
How does J.P. Morgan manage Counterparty Risk?
The layers of credit risk:
Counterparty concentration
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
Core financial services provider choice; credit profile; core provider risk etc.
Relationship strength; depth of understanding your business
Understand &
Manage Risk
Instrument choice and legal behaviour
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
Understand &
Manage Risk
Investment quality - support and service quality
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

9. How does J.P. Morgan manage Counterparty 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

10. How does J.P. Morgan manage Counterparty Risk?
In practice…
COUNTERPARTY X

11. Group Session
Market turmoil continues and the effect of Government intervention has yet to fully play out.
Markets are no longer waiting for return to “normal” but to a new paradigm.
Availability and cost of liquidity remains difficult.
Volatility has enforced behaviour change;
Investment guidelines.
Diversification.
Transparency and due diligence.
Operational risk, not just counterparty/instrument risk.
Increasing regulation brings extra requirements, but also opportunities.

12. Review of Findings