B A S E L I I I P I L L A R I I I D I S C L O S U R E S

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1 B A S E L I I I P I L L A R I I I D I S C L O S U R E S JPMorgan Chase Bank, N.A., Mumbai Branch Year ended March 31, 2015

2 Basel III Pillar III disclosures for the year ended March 31, 2015 I. Scope of application The Pillar III disclosures under Basel III Capital Regulation included herein are made solely to meet the requirements in India, and relate solely to the activities of JPMorgan Chase Bank, N.A., Mumbai Branch ( The Branch ) and its two associate Non Banking Financial Companies which are J.P. Morgan Securities India Private Limited ( JPMSI ) and J.P. Morgan Advisors India Private Limited ( JPMAI ). The Branch, JPMSI and JPMAI are whollyowned subsidiaries of JPMorgan Chase & Co.,U.S.A ( the Firm ) and together constitute The Consolidated Bank in line with the Reserve Bank of India ( RBI ) guidelines on the preparation of consolidated prudential returns. For the purpose of financial reporting, the Branch is not required to consolidate any of its associates in accordance with Accounting Standard ( AS ) 21, Consolidated Financial Statements. For the purpose of consolidated prudential regulatory reporting, the consolidated Bank includes the above mentioned two associates as required by RBI in its circular on Financial Regulation of Systemically Important NBFC s and Bank s relationship with them vide circular ref. DBOD.No.FSD.BC.46/ / dated December 12, 2006 read with Guidelines for consolidated accounting and other quantitative methods to facilitate consolidated supervision vide circular ref. DBOD.No. BP.BC. 72 / / dated February 25, The Branch does not have any subsidiaries nor does it hold any stake in any company. For a comprehensive discussion of risk management of the Firm, including its consolidated subsidiaries, please refer to Firm's Annual Report for the year ended December 31, 2014, which is available in the Investor Relations section of Details of associates of the Branch along with the consolidation status for accounting and regulatory purposes are given below: a. Accounting and regulatory consolidation Name of the entity / Country of incorporation J.P. Morgan Securities India Private Limited (India) Included under accounting scope of consolidati on Method of consolidation Included under regulatory scope of consolidat ion Method of consolidation (yes / no) (yes / no) No Yes Line by line consolidati on method adopted as per AS21 Reasons if consolidated under only one of the scopes of consolidation As per the RBI circular number DBOD.No.FSD.BC.46/ / dated December 12, 2006 the Branch is not required to publish consolidated financial statements as per AS21 J.P. Morgan Advisors India Private Limited (India) No Yes Line by line consolidati on method adopted as per AS21 As per the RBI circular number DBOD.No.FSD.BC.46/ / dated December 12, 2006 the Branch is not required to publish consolidated financial statements as per AS21 2

3 b. List of group entities not considered for consolidation both under the accounting and regulatory scope of consolidation There are no group entities that are not considered for consolidation. c. List of group entities considered for consolidation Name of the entity / country of incorporation (as indicated in (i)a. above) J.P. Morgan Securities India Private Limited (India) J.P. Morgan Advisors India Private Limited (India) Principle activity of the entity Total balance sheet equity (as stated in the accounting balance sheet of the legal entity) (Rs. in million) Total balance sheet assets (as stated in the accounting balance sheet of the legal entity) NBFC 1,538 30,561 NBFC 2,050 5,378 d. The aggregate amount of capital deficiencies in all subsidiaries which are not included in the regulatory scope of consolidation i.e. that are deducted Not applicable as there are no subsidiaries of the Branch. e. The aggregate amounts (e.g. current book value) of the bank s total interests in insurance entities, which are riskweighted: As of March 31, 2015, the Branch does not have investment in any insurance entity. f. Restrictions or impediments on transfer of funds or regulatory capital within the banking group There are no restrictions or impediments on transfer of funds within the Group. 3

4 II. Capital Adequacy On a groupwide basis, Firm's capital management framework is intended to ensure that there is sufficient capital to support the underlying risks of the Firm's business activities and to maintain "wellcapitalized" status under US regulatory requirements. In addition, the Firm holds capital above these requirements as deemed appropriate to achieve management's regulatory and debt rating objectives. The Firm assesses its capital adequacy relative to the risks underlying the Firm's business activities, utilizing internal riskassessment methodologies. At local level, the Branch leverages as far as possible the groupwide capital management framework and risk assessment methodologies. These considerations are formalized as part of a local Internal Capital Adequacy Assessment Process (ICAAP), as required by local regulation. The Capital Management process at branch level is coordinated by the Finance organisation with inputs from appropriate local and firm wide risk specialists, and is reviewed by the Branch Management Committee. It is the responsibility of local management to determine the appropriate level of capitalisation for the Branch and to ensure the businesses are managed within those capital limits or to request for additional capital in accordance with the Firm s Major Capital Infusion policy. In the normal course of events, management reviews the adequacy of capital fortnightly or with increased frequency if circumstances demand. A summary of the Consolidated Bank capital requirement under Basel III guidelines for credit risk, market risk and operational risk and the capital adequacy ratio as on March 31, 2015 is presented below. Capital requirements for credit risk (Rs. in million) Particulars Amount 1 Portfolios subject to standardised approach 21,640 Securitisation exposure Total 21,640 Capital requirements for market risk Standardised duration method Amount 1 Interest rate risk 5,345 Foreign exchange risk (including gold) 1,890 Equity risk Total 7,235 Capital requirements for operational risk Particulars Amount 1 Basic indicator approach 2,606 Particulars Standalone 2 Consolidated 1 CRAR 17.07% 19.52% Tier I CRAR 16.68% 18.29% Tier II CRAR 0.39% 1.23% Notes : 1. Includes all entities considered under regulatory scope of consolidation. 2. Standalone represents JPMorgan Chase Bank, N.A., Mumbai Branch. 4

5 III Credit Risk Credit Risk Management Policy Credit risk can be defined as the risk to earnings or capital arising from an obligor s failure to meet the terms of any contract with the lender or otherwise fail to perform as agreed. The Firm provides credit (for example, through loans, lendingrelated commitments and derivatives) to customers of all sizes, from large corporate clients to the individual consumer 1. The Firm manages the risk/reward relationship of each credit and discourages the retention of assets that do not generate a positive return above the cost of riskadjusted capital. Credit risk organization At a global level, the Chief Risk Officer (CRO) is responsible for the overall direction of the firm s risk management functions and is head of the Risk Management organization. The CRO reports to the CEO and the Directors Risk Policy Committee (DRPC). The CEO and CRO cochair the Firmwide Risk Committee (FRC), which is attended by each LOB CEO, the Chief Operating Officer (COO) of the firm, LOB CROs, Firmwide Risk Executives (FREs) and other senior managers from risk and control functions. The credit team/credit officers report to the CRO both at a local and a global level. The Firm s credit risk management governance consists of the following primary functions: Establishing a comprehensive credit risk policy framework Monitoring and managing credit risk across all portfolio segments, including transaction and line approval. Assigning and managing credit authorities in connection with the approval of all credit exposure Managing criticized exposures and delinquent loans Determining the allowance for credit losses and ensuring appropriate credit riskbased capital management Risk identification The Firm is exposed to credit risk through lending, trading and capital markets activities. Credit risk management works in partnership with the business segments in identifying and aggregating exposures across all lines of business. Risk measurement To measure credit risk, the Firm employs several methodologies for estimating the likelihood of obligor or counterparty default. Credit risk measurement is based upon the amount of exposure should the obligor or the counterparty default, the probability of default and the loss severity given a default event. These finally result in a facility grade for each facility sanctioned by the Firm to a customer. Based on these factors and related marketbased inputs, the Firm estimates both probable and unexpected losses for the wholesale and consumer portfolios. Probable losses are based primarily upon statistical estimates of credit losses as a result of obligor or counterparty default. Unexpected losses, reflected in the allocation of credit risk capital, represent the potential volatility of actual losses relative to the probable level of losses. Risk measurement for the wholesale portfolio is assessed primarily on a riskrated basis. Probable and unexpected loss calculations are based upon estimates of probability of default and loss given default. Probability of default is the expected default calculated on an obligor basis. Loss given default is an estimate of losses that are based upon collateral and structural support for each credit facility. Calculations and assumptions are based upon management information systems and methodologies which are under continual review. Risk ratings are assigned and reviewed on an ongoing basis by Credit Risk Team and revised, if needed, to reflect the borrowers' current risk profiles and the related collateral and structural positions. 1 In India, the client base primarily consists of large / medium sized corporate and financial entities. 5

6 Risk monitoring The Firm has developed policies and practices that are designed to preserve the independence and integrity of the approval and decisionmaking process of extending credit and to ensure credit risks are assessed accurately, approved properly, monitored regularly and managed actively, at both the transaction and portfolio levels. The policy framework establishes credit approval authorities, concentration limits, riskrating methodologies, portfolio review parameters and problem loan management protocols. Wholesale credit risk is monitored regularly on an aggregate portfolio, industry and individual customer basis with established concentration limits that are reviewed and revised, as deemed appropriate by management, on an annual basis. In order to meet credit risk management objectives, the Firm seeks to maintain a risk profile that is diverse in terms of borrower, product type, industry and geographic concentration. Management of the Firm's wholesale exposure is accomplished through loan syndication and participations, loan sales and securitisations, credit derivatives, use of master netting agreements and collateral and other riskreduction techniques. At a local level, the consolidated bank monitors large exposures in accordance with RBI regulations on single / group obligor limits. This ensures that large single obligor / group exposures are managed within appropriate limits set in relation to our capital resources. For the Branch, the large exposure limit for single borrowers is 15% of the capital funds and 40% in case of borrower group. In exceptional circumstances, with the approval of the Management Committee the single and group borrower limit can be enhanced up to a further 5% of capital funds. Similar limits are in place for JPMSI which are monitored inline with RBI applicable regulations. JPMAI has exemption from single obligor exposure norms. The exposure for each client is monitored on a daily basis by the local operations team. Any breaches in the limits are highlighted to senior management immediately along with the reasons for the breach. Management then takes a decision on the future course of action on exposures to that particular client. These breaches, if any are also reported to RBI. The exposure monitoring is reviewed and reported by the external concurrent auditors in their monthly reports. In addition, industry concentrations and risk mitigation through collateral are also addressed in the local credit policies for all credit exposures. The local policy for the Branch also specifically addresses exposure to sectors like Real Estate, and NBFC s, and policies governing purchase of distressed debt. Further, in line with RBI regulation on Exposure to Intra group entities, (ITEs), the bank has implemented daily exposure monitoring process for single entity and group intra entity exposure. Risk reporting At a firm level, to enable monitoring of credit risk and decisionmaking, aggregate credit exposure, credit quality forecasts, concentrations levels and risk profile changes are reported regularly to senior credit risk management. Detailed portfolio reporting of industry, customer and geographic concentrations occurs monthly, and the appropriateness of the allowance for credit losses is reviewed by senior management at least on a quarterly basis. Through the risk reporting and governance structure, credit risk trends and limit exceptions are provided regularly to, and discussed with, senior management. At a local level, the Credit Risk function is overseen in Mumbai by the Chief Risk Officer (CRO) for the Branch. The CRO works closely with the regional as well as Global Credit Risk Management (GCRM) teams to ensure that the credit exposure taken at the Mumbai branch is in line with the bank s risk management policy framework. There is a comprehensive credit authority framework in place which enables decision making to be escalated in response to the size and risk intensity of the request. There is adequate credit authority delegated to the CRO for smooth functioning of the overall portfolio and business needs. The India Credit Committee (ICC) approves the credit exposure that is to be booked in the Mumbai branch in accordance with the loan policy and the CRO is one of the members of this committee. The ICC meets on a periodic basis and accords its decision on credit requests from the various business units at the Branch. Minutes of the ICC meetings are prepared and signed off by the Chairman of the ICC subsequently. Similarly for JPMSI and JPMAI, the Board of Directors reviews and approves proposals to book any credit exposures in these entities. On a monthly basis, the India Risk Committee (IRC) reviews the JPMCB portfolio. Breakdown of the portfolio 6

7 by sector, security, products, rating etc is reviewed on a monthly basis and updates on the sensitive sectors, unhedged foreign currency exposure etc are reviewed on a quarterly basis by the IRC. Definition of past due and impaired In line with RBI directives, the "90 days' overdue" norm for identification of nonperforming assets (NPA) has been adopted for the Branch and 180 days for JPMSI and JPMAIPL. Any amount due to the consolidated bank under any credit facility is 'overdue' if it is not paid on the due date fixed (i.e. is not paid as per the date the obligor is obligated to pay). In case of The Branch an NPA shall be a loan or an advance or a derivative contract where any amount to be received (as per the contractual terms) remains overdue for a period of more than 90 days or in respect of an Overdraft/Cash Credit the account remains out of order for a period of more than 90 days. Likewise, in case of JPMSI and JPMAI an NPA shall be a loan or an advance where any amount to be received (as per the contractual terms) remains overdue for a period of more than 180 days. Quantitative Disclosure (Rs. in million) Gross credit exposures Amount 1 Fund based 123,127 Non fund based 290,187 Total 413,314 (Rs. in million) Geographic distribution of exposures Amount 1 Fund based domestic 123,127 Non fund based domestic 290,187 Fund based overseas Non fund based overseas Total 413,314 Note : 1. Includes all entities considered under regulatory scope of consolidation and excludes investments covered under specific market risk and other assets. 7

8 Industry type disclosure of exposures 1 (Rs. in million) Note : 1. Includes all entities considered under regulatory scope of consolidation and excludes investments covered under specific market risk and other assets. 8

9 Residual contractual maturity breakdown of assets 1 (Rs. In million) *Including Money at call and short notice. (Rs. In million) Amount of NPAs (Gross) Amount 1 Substandard 467 Doubtful 1 Doubtful 2 Doubtful 3 Loss Gross NPAs 467 Net NPAs NPA Ratios Gross NPAs to gross advances 0.00% Net NPAs to net advances Movement of NPAs (Gross) Opening balance Additions 467 Reductions 234 Closing balance 467 Movement of provisions for NPAs Opening balance 2 & Provision made during the year 47 Writeoff/ (Write back) of excess provisions (465) Closing balance 47 Amount of nonperforming investments Amount of provisions held for nonperforming investments Movement of provisions for depreciation on investments Opening balance 3 16 Provisions made during the year 12 Writeoff Writeback of excess provisions Closing balance 28 Note : 1. Includes all entities considered under regulatory scope of consolidation. 2. Includes excess provision amounting to Rs. 231 mio on sale of non performing assets to Securitisation Company (SC)/ Reconstruction Company (RC) in the past years and reversed in current year in accordance with the RBI guidelines. 3. Represents balance as of 1 st April

10 IV Credit Risk: Standardised approach The consolidated bank is using issue ratings which are assigned by the accredited rating agencies viz. CRISIL, ICRA, Fitch and CARE and published in the public domain to assign riskweights in terms of RBI guidelines for certain exposures. In respect of claims on nonresident corporate/ foreign banks, ratings assigned by international rating agencies i.e. Standard & Poor s, Moody s and Fitch are used. For all exposures, where multiple ratings are available, the second worst rating has been considered. Details of Credit Risk Exposure (fund based and nonfund based) based on Risk Weight: (Rs. in million) Particulars Amount 1 Below 100% risk weight 284, % risk weight 74,192 More than 100% risk weight 23,097 Deducted Total 381,944 Note: 1. Includes all entities considered under regulatory scope of consolidation. 10

11 V Credit Risk Mitigation The Branch has in place a Credit Risk Mitigation policy, which underlines the eligibility requirements for credit risk mitigants for capital computation as per Basel III guidelines. The Branch reduces its credit exposure to counterparty with the value of eligible financial collateral to take account of the risk mitigating effect of the collateral. To account for the volatility in the value of collateral, haircut is applied based on the type, issuer, maturity, rating and remargining / revaluation frequency of the collateral. During the year ended March , the Branch has accepted fixed deposits / Standby Letters of Credit (SBLC)/ Guarantees / BARD Bonds as collateral and has considered them for capital benefits in capital adequacy calculations as per the RBI guidelines. These are considered at net realisable value. The Branch has also accepted current assets / movables fixed assets as collateral during the current year but the same is not considered for capital benefits as per the RBI guidelines. The Branch does not perceive any market, liquidity or concentration risk arising out of such collaterals. Details of Credit Exposure (after balance sheet netting) (Rs. in million) Covered by: Amount 1 Eligible Financial collaterals after application of haircuts 30,694 Guarantees 3,406 Note : 1. Includes all entities considered under regulatory scope of consolidation. 34,100 11

12 VI Securitisation Globally, the Firm securitises and sells a variety of consumer and wholesale loans to make optimum use of capital. Locally, the Branch originates or purchases loans and securitizes the same in compliance with the guidelines issued by RBI. The Branch provides different roles in a securitization process as allowed by RBI. The securitisation transactions are accounted for in accordance with RBI guidelines. The securitised assets are derecognised upon sale if the criteria for True sale prescribed by RBI are met. Any profit/ premium arising on account of sale is amortised over the life of the securities issued or to be issued by the Special Purpose Vehicle and losses, if any, is recognised immediately in the profit and loss account. Locally, the credit policy of the bank, which has been approved by the Management Committee permits securitisation of existing loan portfolio. As per the policy, the bank can sell its existing loans for freeing capital and overall portfolio management, in accordance with the RBI guidelines on Securitisation of Standard Assets. Currently all the sell down of loans have met the true sale criteria and hence there is no residual exposure left in the books of the bank. As on March 31, 2015, the Branch does not have any loans that it has securitized and sold down to investors. This is not an activity that is regularly undertaken by the Bank. The Branch does participate in securitization of portfolios by NBFCs on a selective basis. All decisions to participate in a securitization under go the same level of credit and other risk due diligence as any other funded or nonfunded exposure would be subject to. The securitization portfolio is regularly monitored for the performance of the pool of underlying assets and if there is any identification of deterioration in the pool then suitable action is taken to mitigate risks of default. As an originator, the Branch has no offbalance sheet securitisation exposures and has no exposures from credit lines or liquidity facilities to special purpose vehicles or exposures from guarantees provided to monolines and third parties. The Branch recognizes that if the Bank does provide any implicit support, the same may most likely be construed by the investors and the market that all of the risks inherent in the securitised assets are still being held by the Bank and, in effect, had not been transferred. Hence the Branch does not provide any implicit support that could mislead participants. There are no securitization exposures in JPMSI and JPMAI. Details of securitisation exposures in the Banking and Trading Book: Banking Book Trading Book Nil Nil Securitisation exposures retained/purchased* (Rs. in million) Nature Exposure Type Exposure On Balance Sheet Off Balance Sheet Risk weight bands breakup of securitisation exposures retained or purchased and the related capital charge Risk Bands Exposure 1 Capital Charge 1 RWA 1 <100% risk weight =100% risk weight >100% risk weight Total Note : 1. Includes all entities considered under regulatory scope of consolidation. 12

13 VII Market risk Market risk management The Firm takes on exposure to market risks, which is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market parameters. Market risks arise from open positions in interest rate, currency and equity products, all of which are exposed to general and specific market movements and changes in the level of volatility of market rates or prices such as interest rates, foreign exchange rates, credit spreads, commodity prices and equity prices. The Firm separates exposures to market risk into either trading or nontrading portfolios. Trading portfolios include those positions arising from marketmaking transactions where the Firm acts as principal with clients or with the market. The Firm manages market risk mainly along lines of business. Nontrading portfolios primarily arise from the interest rate management of the Firm s banking assets and liabilities and foreign exchange risks arising from the Firm's investments. Market risk management framework At Firm level, market risk is identified, analysed, and controlled by an independent corporate risk governance function. Market risk group seeks to facilitate efficient risk/return decisions, reduce volatility in operating performance and make the Firm's market risk profile transparent to senior management, Board of Directors and regulators. Market risk management is overseen by the Chief Risk Officer and performs primary functions of (i) establishment of a comprehensive market risk policy framework; (ii) independent measurement, monitoring and control of line of business market risk; (iii) definition, approval and monitoring of limits; and (iv) performance of stress testing and qualitative risk assessments. The Firm's business segments also have valuation teams whose function is to provide independent oversight for the accuracy of valuations of the positions that expose the Firm to market risk. Market risk identification and classification The market risk management group works in partnership with the business segments to identify market risks throughout the Firm to refine and monitor market risk policies and procedures. All business segments are responsible for comprehensive identification and verification of market risks within their units. Market risk management group is also responsible for identifying exposures which may not be large within individual business segments, but which may be large for the Firm in aggregate. Regular meetings are held between market risk management and the head of risktaking businesses to discuss and decide on risk exposure in the context of the market environment and client flows. Market risk measurement The Firm uses various metrics, both statistical and nonstatistical, to measure and reflect all aspects of market risk. (i) Nonstatistical measures Nonstatistical risk measures include net open positions, basis point values, option sensitivities, market values, position concentrations and position turnover. These measures provide granular information on the Firm's market risk exposure. (ii) Statistical measures The Firm's primary statistical risk measure, ValueAtRisk ("VAR"), estimates the potential loss from adverse market moves in an ordinary market environment and provides a consistent crossbusiness measure of risk profiles and levels of diversification. VAR is used for comparing risk across businesses, monitoring limits, oneoff approvals, and as an input to economic capital calculations. To calculate VAR, the Firm uses historical simulation, which measures risk across instruments and portfolios in a consistent and comparable way. This approach assumes that historical changes in market values are representative of future changes. The simulation is based upon data for the previous twelve months. The Firm calculates VAR using a oneday time horizon and an expected tailloss methodology, which approximates a 99% confidence level. 13

14 While VAR reflects the risk of loss due to adverse changes in normal markets, stress testing captures the Firm's exposure to unlikely but plausible events in abnormal markets. Along with VAR, stress testing is important in measuring and controlling risk. Stress testing enhances the understanding of the Firm's risk profile and loss potential, and stress losses are monitored against limits. Stresstest results, trends and explanations are provided each month to the Firm's senior management and to the lines of business to help them better measure and manage risk and to understand event risksensitive positions. Periodically scenarios are reviewed and updated to reflect changes in the Firm's risk profile and economic events. To evaluate the soundness of the VAR model, the Firm conducts daily backtesting of VAR against daily market riskrelated revenue. Loss advisories are tools used to highlight to senior management trading losses above certain levels and are used to initiate discussion of remedies. The Firm conducts economic value stress tests using multiple scenarios that assume significant changes in credit spreads, equity prices and interest rates. Stress testing enhances the understanding of the Firm s risk profile and loss potential, and stress losses are monitored against limits. Market risk monitoring Market risk is controlled primarily through a series of limits. Limits reflect the Firm's risk appetite in the context of the market environment and business strategy. In setting limits, the Firm takes into consideration factors such as senior management risk appetite, market volatility, product liquidity, accommodation of client business and management experience. Market risk executive regularly reviews and updates risk limits. Senior management, including the Group's Chief Executive Officer and Chief Risk Officer, is responsible for reviewing and approving risk limits on an ongoing basis. All nonstatistical measures, statistical measures, loss advisories and limit excesses are reported daily to each lines of business at a Regional level. Limit breaches are reported in a timely manner to senior management, and the affected business segment is required to reduce trading positions or consult with senior management on the appropriate action. At the local level, the India Risk Committee (IRC) is responsible for the overall management of risk limits and review of the risk reports at the Branch. The IRC ensures that the market risks are effectively identified, measured, monitored and controlled, consistent with the Bank s business strategy and appetite for risk. For the Branch Stress tests are done on a weekly/monthly basis and monitored against stress limits. (Rs. in million) Quantitative Disclosure Amount 1 Capital requirements for Interest rate risk 5,345 Equity position risk Foreign exchange risk 1,890 Total 7,235 Notes : 1. Includes all entities considered under regulatory scope of consolidation. 14

15 VIII. Operational risk Operational risk is the risk of loss resulting from inadequate or failed processes or systems, human factors or due to external events that are neither market nor creditrelated. To monitor and control operational risk, the Firm maintains an overall Operational Risk Management Framework ( ORMF ) which comprises Governance oversight, risk assessment, capital measurement, and reporting and monitoring. The ORMF is intended to enable the Firm to function with a sound and wellcontrolled operational environment. Risk Management is responsible for prescribing the ORMF to the lines of business and corporate functions and to provide independent oversight of its implementation. In 2014, Operational Risk Officers ( OROs ) were appointed across each line of business and corporate function to provide this independent oversight. The lines of business and corporate functions are responsible for implementing the ORMF. The Firmwide Oversight and Control Group, comprised of dedicated control officers within each of the lines of business and corporate functional areas, as well as a central oversight team, is responsible for day to day review and monitoring of ORMF execution. The India Location Operating Committee (LOC) is chaired by the CAO of the Branch and is responsible for the oversight and control of operational risk within the location. LOC meetings are held monthly and include a review of all operational risk, relevant changes in regulatory framework and general ledger controls. Similarly JPMSI has a Risk Management Committee and the JPMAI has the Board of Directors which is responsible for management of operational risks. The Bank has standard operating procedures to control and reduce risk arising from operational error and continues to revise plans to suit the current operating environment. Automation of platforms has further reduced the risk of potential losses resulting from manual processing. The Branch closely monitors capacity limit for handling transaction in each Operations unit. The respective unit s Operation Managers are responsible for escalating to their line regional managers and CAO if there is any capacity constraint. Material changes in the Operational Risk profile are assessed through a due diligence review and/or are subject to the New Business Initiative Approval process. Staff knowledge of internal policies, systems and procedures, and the regulations is maintained through regular trainings or prior to implementation of changes in the operating environment. Business Continuity Plans are documented to reflect the current production environment and tested annually. Further the Local Management Committee consisting of senior management has been established to enable the management of the Branch to discharge their responsibilities effectively. The Management Committee reviews business, operational and financial matters, as well as risk management. Operation Risk Capital Assessment As required by Reserve Bank of India, the Branch follows the Basic Indicator Approach to compute capital requirements for operational risk. 15

16 IX. Interest rate risk in the banking book (IRRBB) The Firm s banking book may be subject to interest rate risk primarily resulting from exposures of banking book products to changes in the level, slope and curvature of the yield curve and the volatility of interest rates. Interest rate risk is one of the categories of market risk. Interest rate risk management for the banking book is governed by the relevant Market Risk Management policies and framework as well as Interest rate risk management policy at the Firm level CIO and Treasury manage the firm s interest rate risk exposures within parameters defined by senior management and work with the lineofbusinesses in defining methodologies for the transfer of interest rate risk. At the Branch, India Treasury / Chief Investment Office (CIO) manages the funding activities of JPMCB Mumbai Branch. In this role, it serves as a funds clearing house for the various line of business; businesses with excess cash from deposit raising activities sell those funds to Treasury / CIO, while businesses with funding requirements purchase those funds from Treasury / CIO. The funds are transacted using market based rates established in accordance with funds transfer pricing procedures employed by the firm and with the following objectives: Insulate the business from interest rate risk and transfer any such risk arising from the business activities to Treasury / CIO. Convey the appropriate economic value and/or cost of the business activities to the firm. At the Branch, while it is a core operating principle that businesses transfer all interest rate risk to Treasury / CIO, business requests to retain some or all specific interest rate risk to a transaction require discussion and approval from Treasury / CIO. Such exceptions may be granted by Treasury / CIO on a case by case basis with appropriate business justification and the proposals need to be placed in the local ALCO for consideration. As line of businesses (LOBs) transfers all interest rate risk arising from business activities to Treasury / CIO, Treasury / CIO subsequently manages the banking book interest rate risk for the bank in conjunction with its investment activities, subject to the limits governing Treasury / CIO activities/positions at the bank. BPV as a measure is used to calculate Interest Rate Risk in the Banking book. BPV is used to quantify the change in value of the balance sheet across all accrual positions to a one basis point change in the interest rates. The greater the BPV, the greater the sensitivity of the balance sheet and therefore earnings to changes in Interest Rates. Interest rate risk in the banking book could arise from lending and deposit taking activities of the bank, an as well from interbank money market takings and placings and repos positions managed by Treasury / CIO. There is a local Banking Book Interest Rate Risk Management Policy which articulates banking book interest rate risk management approach and delineates roles and responsibilities with respect to interest rate risk management. Banking book interest rate risk is transferred from the operating businesses to Treasury / CIO. Interest rate risk limits (in terms of bpv) for the entity including trading and banking book are set and monitored on a daily basis. On a monthly basis a summary of the interest rate risk in the banking book in terms of bpv is placed in ALCO. Currently, there is no option risk in this entity as the bank does not offer products such as mortgage loans that have embedded optionality. Currently the Interest Rate Risk in the Banking Book of the consolidated bank as of March 31, 2015 is BPV USD 101. A 200 bps stress will result in economic loss of Rs crores. This is not considered to be material given the size of the balance sheet and the capital position of the consolidated bank. 16

17 X. General Disclosures for Exposures Related to Counterparty Credit Risk Counterparty Credit Risk (CCR) Limits for the banking counterparties are assessed based on an internal model that considers the parameters viz. credit rating and net worth of counterparties, net worth of the Bank and business requirements. In all other cases, CCR limit is approved based on credit assessment process followed by the Bank as per the Credit Policy and procedural Manual. CCR limits are set on the amount and tenor while fixing the limits to respective counterparties with distinct limits for each type of exposure. Capital for CCR exposure is assessed based on Standardised Approach. The Branch uses Credit Support Agreement (CSA) as a credit risk mitigant while dealing with select counterparties. CSA defines the terms or rules under which collateral is posted or transferred between derivative counterparties to mitigate the credit risk arising from "in the money" derivative positions on OTC Derivative contracts. The bank does not recognise bilateral netting. The derivative exposure is calculated using Current Exposure Method (CEM) and the balance outstanding as on March 31, 2015 is given below. Quantitative Disclosures Particulars Notionals (Rs. in million) Amount 1 Current Exposure Forward Contracts 2,540, ,489 Currency Options 162,793 7,032 Interest Rate Swaps 2,719,654 36,524 Currency Swaps 275,833 41,163 Total 5,699, ,208 Notes : 1. Includes all entities considered under regulatory scope of consolidation. 17

18 XI. Composition of Capital Part II : Template to be used before March 31, 2017 (i.e. during the transition period of Basel III regulatory adjustments) Common Equity Tier 1 capital: instruments and reserves Amounts Subject to PreBasel III Treatment (Rs. in million) Ref No. 1 Directly issued qualifying common share capital plus 37,003 a1+a2+b2 related stock surplus (share premium) 2 Retained earnings 14,406 c1 3 Accumulated other comprehensive income (and other 12,668 b4+c3 reserves) 4 Directly issued capital subject to phase out from CET1 (only applicable to nonjoint stock companies) Public sector capital injections grandfathered until January 1, Common share capital issued by subsidiaries and held by third parties (amount allowed in group CET1) 6 Common Equity Tier 1 capital before regulatory adjustments Common Equity Tier 1 capital : regulatory adjustments 64,077 7 Prudential valuation adjustments 8 Goodwill (net of related tax liability) 9 Intangibles other than mortgageservicing rights (net of related tax liability) 10 Deferred tax assets 87 d1 11 Cashflow hedge reserve 12 Shortfall of provisions to expected losses 13 Securitisation gain on sale 14 Gains and losses due to changes in own credit risk on fair valued liabilities 15 Definedbenefit pension fund net assets 16 Investments in own shares (if not already netted off paidup capital on reported balance sheet) 17 Reciprocal crossholdings in common equity 18 Investments in the capital of banking, financial and insurance entities that are outside the scope of regulatory consolidation, net of eligible short positions, where the bank does not own more than 10% of the issued share capital (amount above 10% threshold) 19 Significant investments in the common stock of banking, financial and insurance entities that are outside the scope of regulatory consolidation, net of eligible short positions (amount above 10% threshold) 20 Mortgage servicing rights (amount above 10% threshold) 21 Deferred tax assets arising from temporary differences (amount above 10% threshold, net of related tax liability) 22 Amount exceeding the 15% threshold 18

19 23 of which : significant investments in the common stock of financial entities 24 of which : mortgage servicing rights 25 of which : deferred tax assets arising from temporary differences 26 National specific regulatory adjustments (26a+26b+26c+26d) 26a of which : Investments in the equity capital of unconsolidated insurance subsidiaries 26b of which : Investments in the equity capital of unconsolidated nonfinancial subsidiaries 26c of which : Shortfall in the equity capital of majority owned financial entities which have not been consolidated with the bank 26d of which : Unamortised pension funds expenditures Regulatory Adjustments Applied to Common Equity Tier 1 in respect of Amounts Subject to PreBasel III Treatment 27 Regulatory adjustments applied to Common Equity Tier 1 due to insufficient Additional Tier 1 and Tier 2 to cover deductions 28 Total regulatory adjustments to Common equity Tier Common Equity Tier 1 capital (CET1) 63,990 Additional Tier 1 capital : instruments 30 Directly issued qualifying Additional Tier 1 instruments plus related stock surplus (share premium) (31+32) 31 of which : classified as equity under applicable accounting standards (Perpetual NonCumulative Preference Shares) 32 of which : classified as liabilities under applicable accounting standards (Perpetual debt Instruments) 33 Directly issued capital instruments subject to phase out from Additional Tier 1 34 Additional Tier 1 instruments (and CET1 instruments not included in row 5) issued by subsidiaries and held by third parties (amount allowed in group AT1) 35 of which : instruments issued by subsidiaries subject to phase out 36 Additional Tier 1 capital before regulatory adjustments Additional Tier 1 capital: regulatory adjustments 37 Investments in own Additional Tier 1 instruments 38 Reciprocal crossholdings in Additional Tier 1 instruments 39 Investments in the capital of banking, financial and insurance entities that are outside the scope of regulatory consolidation, net of eligible short positions, where the bank does not own more than 10% of the issued common share capital of the entity (amount above 10% threshold) 40 Significant investments in the capital of banking, financial and insurance entities that are outside the scope of regulatory consolidation (net of eligible short positions) 41 National specific regulatory adjustments (41a+41b) 41a Investments in the Additional Tier 1 capital of unconsolidated insurance subsidiaries 41b Shortfall in the Additional Tier 1 capital of majority owned financial entities which have not been consolidated with the bank 19

20 Regulatory Adjustments Applied to Additional Tier 1 in respect of Amounts Subject to PreBasel III Treatment 42 Regulatory adjustments applied to Additional Tier 1 due to insufficient Tier 2 to cover deductions 43 Total regulatory adjustments to Additional Tier 1 capital 44 Additional Tier 1 capital (AT1) 44a Additional Tier 1 capital reckoned for capital adequacy 45 Tier 1 capital (T1 = CET1 + Admissible AT1) ( a) 63,990 Tier 2 capital : instruments and provisions 46 Directly issued qualifying Tier 2 instruments plus related stock surplus 2,955 a3+b3 47 Directly issued capital instruments subject to phase out from Tier 2 48 Tier 2 instruments (and CET1 and AT1 instruments not included in rows 5 or 34) issued by subsidiaries and held by third parties (amount allowed in group Tier 2) 49 of which : instruments issued by subsidiaries subject to phase out 50 Provisions 1,350 c2+c4 51 Tier 2 capital before regulatory adjustments 4,305 Tier 2 capital: regulatory adjustments 52 Investments in own Tier 2 instruments 53 Reciprocal crossholdings in Tier 2 instruments 54 Investments in the capital of banking, financial and insurance entities that are outside the scope of regulatory consolidation, net of eligible short positions, where the bank does not own more than 10% of the issued common share capital of the entity (amount above the 10% threshold) 55 Significant investments in the capital banking, financial and insurance entities that are outside the scope of regulatory consolidation (net of eligible short positions) 56 National specific regulatory adjustments (56a+56b) 56a of which : Investments in the Tier 2 capital of unconsolidated insurance subsidiaries 56b of which : Shortfall in the Tier 2 capital of majority owned financial entities which have not been consolidated with the bank Regulatory Adjustments Applied To Tier 2 in respect of Amounts Subject to PreBasel III Treatment 57 Total regulatory adjustments to Tier 2 capital 58 58a 58b 58c Tier 2 capital (T2) 4,305 Tier 2 capital reckoned for capital adequacy 4,305 Excess Additional Tier 1 capital reckoned as Tier 2 capital Total Tier 2 capital admissible for capital adequacy (58a + 58b) 4,305 20

21 59 Total capital (TC = T1 + Admissible T2) ( c) 68,295 Risk Weighted Assets in respect of Amounts Subject to PreBasel III Treatment 60 Total risk weighted assets (60a + 60b + 60c) 349,795 60a of which : total credit risk weighted assets 240,449 60b of which : total market risk weighted assets 80,393 60c of which : total operational risk weighted assets 28,953 Capital ratios 61 Common Equity Tier 1 (as a percentage of risk 18.29% weighted assets) 62 Tier 1 (as a percentage of risk weighted assets) 18.29% 63 Total capital (as a percentage of risk weighted assets) 19.52% 64 Institution specific buffer requirement (minimum CET1 5.50% requirement plus capital conservation and countercyclical buffer requirements, expressed as a percentage of risk weighted assets) 65 of which : capital conservation buffer requirement 0.00% 66 of which : bank specific countercyclical buffer requirement 67 of which : GSIB buffer requirement 68 Common Equity Tier 1 available to meet buffers (as a percentage of risk weighted assets) National minima (if different from Basel III) 69 National Common Equity Tier 1 minimum ratio (if different from Basel III minimum) 5.50% 70 National Tier 1 minimum ratio (if different from Basel III minimum) 7.00% 71 National total capital minimum ratio (if different from Basel III minimum) 9.00% Amounts below the thresholds for deduction (before risk weighting) 72 Nonsignificant investments in the capital of other financial entities Nil 73 Significant investments in the common stock of financial entities Nil 74 Mortgage servicing rights (net of related tax liability) Nil 75 Deferred tax assets arising from temporary differences (net of related tax liability) Nil Applicable caps on the inclusion of provisions in Tier 2 76 Provisions eligible for inclusion in Tier 2 in respect of exposures subject to standardised approach (prior to application of cap) 1,350 c2+c4 77 Cap on inclusion of provisions in Tier 2 under standardised approach 3,006 60a*1.25% 78 Provisions eligible for inclusion in Tier 2 in respect of exposures subject to internal ratingsbased approach Nil (prior to application of cap) 79 Cap for inclusion of provisions in Tier 2 under internal ratingsbased approach Nil Capital instruments subject to phaseout arrangements (only applicable between March 31, 2017 and March 31, 2022) 80 Current cap on CET1 instruments subject to phase out arrangements Nil 81 Amount excluded from CET1 due to cap (excess over cap after redemptions and maturities) Nil 82 Current cap on AT1 instruments subject to phase out arrangements Nil 83 Amount excluded from AT1 due to cap (excess over cap after redemptions and maturities) Nil 21

22 84 Current cap on T2 instruments subject to phase out arrangements 85 Amount excluded from T2 due to cap (excess over cap after redemptions and maturities) Nil Nil Notes to the template Row No. of the template Particular 10 Deferred tax assets associated with accumulated losses (Rs. in million) Amount Deferred tax assets (excluding those associated with 87 accumulated losses) net of Deferred tax liability Total as indicated in row If investments in insurance subsidiaries are not deducted fully from capital and instead considered under 10% threshold for deduction, the resultant increase in the capital of bank 26b of which : Increase in Common Equity Tier 1 capital of which : Increase in Additional Tier 1 capital of which : Increase in Tier 2 capital If investments in the equity capital of unconsolidated nonfinancial subsidiaries are not deducted and hence, risk weighted then : (i) Increase in Common Equity Tier 1 capital (ii) Increase in risk weighted assets 44a Excess Additional Tier 1 capital not reckoned for capital adequacy (difference between Additional Tier 1 capital as reported in row 44 and admissible Additional Tier 1 capital as reported in 44a) of which : Excess Additional Tier 1 capital which is considered as Tier 2 capital under row 58b 50 Eligible Provisions included in Tier 2 capital Eligible Revaluation Reserves included in Tier 2 capital Total of row 50 58a Excess Tier 2 capital not reckoned for capital adequacy (difference between Tier 2 capital as reported in row 58 and T2 as reported in 58a) 22