The wholesale credit environment remained favorable throughout 2013 driving an increase in commercial client activity. Discipline in underwriting across all areas of lending continues to remain a key point of focus, consistent with evolving market conditions and the Firm’s risk
management activities. The wholesale portfolio is actively managed, in part by conducting ongoing, in-depth reviews of credit quality and of industry, product and client concentrations. During the year, wholesalecriticized assets and nonperforming assets decreased from higher levels experienced in 2012, including a reduction in nonaccrual loans by 39%.
As of December 31, 2013, wholesale exposure (primarily CIB, CB and AM) increased by $13.7 billion from
December 31, 2012, primarily driven by increases of $11.4 billion in lending-related commitments and $8.4 billion in loans reflecting increased client activity primarily in CB and AM. These increases were partially offset by a $9.2 billion decrease in derivative receivables. Derivative receivables decreased predominantly due to reductions in interest rate derivatives driven by an increase in interest rates and reductions in commodity derivatives due to market movements. The decreases were partially offset by an increase in equity derivatives driven by a rise in equity markets.
Wholesale credit portfolio
December 31, Credit exposure Nonperforming(d)
(in millions) 2013 2012 2013 2012
Loans retained $308,263 $306,222 $ 821 $ 1,434
Loans held-for-sale 11,290 4,406 26 18
Loans at fair value(a) 2,011 2,555 197 265
Loans – reported 321,564 313,183 1,044 1,717
Derivative receivables 65,759 74,983 415 239
Receivables from
customers and other(b) 26,744 23,648 — —
Total wholesale
credit-related assets 414,067 411,814 1,459 1,956 Lending-related
commitments 446,232 434,814 206 355
Total wholesale credit
exposure $860,299 $846,628 $ 1,665 $ 2,311 Credit Portfolio
Management derivatives
notional, net(c) $ (27,996)$ (27,447) $ (5)$ (25) Liquid securities and
other cash collateral
held against derivatives (14,435) (15,201) NA NA (a) During 2013, certain loans that resulted from restructurings that
were previously classified as performing were reclassified as nonperforming loans. Prior periods were revised to conform with the current presentation.
(b) Receivables from customers and other primarily includes margin loans to prime and retail brokerage customers; these are classified in accrued interest and accounts receivable on the Consolidated Balance Sheets.
(c) Represents the net notional amount of protection purchased and sold through credit derivatives used to manage both performing and nonperforming wholesale credit exposures; these derivatives do not qualify for hedge accounting under U.S. GAAP. Excludes the synthetic credit portfolio. For additional information, see Credit derivatives on pages 137–138, and Note 6 on pages 220–233 of this Annual Report.
(d) Excludes assets acquired in loan satisfactions.
JPMorgan Chase & Co./2013 Annual Report 131
The following table presents summaries of the maturity and ratings profiles of the wholesale credit portfolio as of
December 31, 2013 and 2012. The ratings scale is based on the Firm’s internal risk ratings, which generally correspond to the ratings as defined by S&P and Moody’s.
Wholesale credit exposure – maturity and ratings profile
Maturity profile(e) Ratings profile
December 31, 2013 Due in 1
year or less
Due after 1 year through 5
years
Due after 5 years Total
Investment-grade Noninvestment-grade
Total
Total % of IG
(in millions, except ratios) AAA/Aaa to BBB-/Baa3 BB+/Ba1 & below
Loans retained $ 108,392 $ 124,111 $ 75,760 $ 308,263 $ 226,070 $ 82,193 $ 308,263 73%
Derivative receivables 65,759 65,759
Less: Liquid securities and other cash collateral
held against derivatives (14,435) (14,435)
Total derivative receivables, net of all collateral 13,550 15,935 21,839 51,324 44,677 6,647 51,324 87
Lending-related commitments 179,301 255,426 11,505 446,232 353,974 92,258 446,232 79
Subtotal 301,243 395,472 109,104 805,819 624,721 181,098 805,819 78
Loans held-for-sale and loans at fair value(a) 13,301 13,301
Receivables from customers and other 26,744 26,744
Total exposure – net of liquid securities and
other cash collateral held against derivatives $ 845,864 $ 845,864
Credit Portfolio Management derivatives net
notional by reference entity ratings profile(b)(c)(d) $ (1,149) $ (19,516) $ (7,331) $ (27,996) $ (24,649) $ (3,347) $ (27,996) 88%
Maturity profile(e) Ratings profile
December 31, 2012 Due in 1
year or less
Due after 1 year through 5
years
Due after 5 years Total
Investment-grade
Noninvestment-grade
Total Total % of IG
(in millions, except ratios) AAA/Aaa to BBB-/Baa3 BB+/Ba1 & below
Loans retained $ 115,227 $ 117,673 $ 73,322 $ 306,222 $ 214,446 $ 91,776 $ 306,222 70%
Derivative receivables 74,983 74,983
Less: Liquid securities and other cash collateral
held against derivatives (15,201) (15,201)
Total derivative receivables, net of all collateral 13,344 17,310 29,128 59,782 50,069 9,713 59,782 84
Lending-related commitments 164,327 261,261 9,226 434,814 347,316 87,498 434,814 80
Subtotal 292,898 396,244 111,676 800,818 611,831 188,987 800,818 76
Loans held-for-sale and loans at fair value(a) 6,961 6,961
Receivables from customers and other 23,648 23,648
Total exposure – net of liquid securities and
other cash collateral held against derivatives $ 831,427 $ 831,427
Credit Portfolio Management derivatives net
notional by reference entity ratings profile(b)(c)(d) $ (1,579) $ (16,475) $ (9,393) $ (27,447) $ (24,622) $ (2,825) $ (27,447) 90%
(a) Represents loans held-for-sale primarily related to syndicated loans and loans transferred from the retained portfolio, and loans at fair value.
(b) These derivatives do not quality for hedge accounting under U.S. GAAP. Excludes the synthetic credit portfolio.
(c) The notional amounts are presented on a net basis by underlying reference entity and the ratings profile shown is based on the ratings of the reference entity on which protection has been purchased.
(d) Predominantly all of the credit derivatives entered into by the Firm where it has purchased protection, including Credit Portfolio Management derivatives, are executed with investment grade counterparties.
(e) The maturity profile of retained loans, lending-related commitments and derivative receivables is based on remaining contractual maturity. Derivatives contracts that are in a receivable position at December 31, 2013, may become a payable prior to maturity based on their cash flow profile or changes in market conditions. Prior to this Annual Report, the maturity profile of derivative receivables was based on the maturity profile of average exposure (see pages 135–136 of this Annual Report for more detail); prior period amounts have been revised to conform to the current presentation.
Wholesale credit exposure – selected industry exposures The Firm focuses on the management and diversification of its industry exposures, paying particular attention to industries with actual or potential credit concerns.
Exposures deemed criticized align with the U.S. banking regulators’ definition of criticized exposures, which consist of the special mention, substandard and doubtful
categories. The total criticized component of the portfolio, excluding loans held-for-sale and loans at fair value, decreased by 22% to $12.2 billion at December 31, 2013, from $15.6 billion at December 31, 2012, primarily due to repayments and sales.
Management’s discussion and analysis
132 JPMorgan Chase & Co./2013 Annual Report
Below are summaries of the top 25 industry exposures as of December 31, 2013 and 2012. For additional information on industry concentrations, see Note 5 on page 219 of this Annual Report.
Selected metrics
30 days or more past due and accruing loans
Net charge-offs/
(recoveries)
Credit derivative
hedges(f)
Liquid securities and other cash collateral held against
derivative receivables Noninvestment-grade(e)
Credit
exposure(d) Investment-
grade Noncriticized Criticized
performing Criticized nonperforming As of or for the year ended
December 31, 2013 (in millions) Top 25 industries(a)
Real Estate $ 87,102 $ 62,964 $ 21,505 $ 2,286 $ 347 $ 178 $ 6 $ (66) $ (125)
Banks & Finance Cos 66,881 56,675 9,707 431 68 14 (22) (2,692) (6,227)
Oil & Gas 46,934 34,708 11,779 436 11 34 13 (227) (67)
Healthcare 45,910 37,635 7,952 317 6 49 3 (198) (195)
State & Municipal Govt(b) 35,666 34,563 826 157 120 40 1 (161) (144)
Consumer Products 34,145 21,100 12,505 537 3 4 11 (149) (1)
Asset Managers 33,506 26,991 6,477 38 — 217 (7) (5) (3,191)
Utilities 28,983 25,521 3,045 411 6 2 28 (445) (306)
Retail & Consumer Services 25,068 16,101 8,453 492 22 6 — (91) —
Technology 21,403 13,787 6,771 825 20 — — (512) —
Central Govt 21,049 20,633 345 71 — — — (10,088) (1,541)
Machinery & Equipment Mfg 19,078 11,154 7,549 368 7 20 (18) (257) (8)
Metals/Mining 17,434 9,266 7,508 594 66 1 16 (621) (36)
Business Services 14,601 7,838 6,447 286 30 9 10 (10) (2)
Transportation 13,975 9,683 4,165 100 27 10 8 (68) —
Telecom Services 13,906 9,130 4,284 482 10 — 7 (272) (8)
Media 13,858 7,783 5,658 315 102 6 36 (26) (5)
Insurance 13,761 10,681 2,757 84 239 — (2) (98) (1,935)
Building Materials/Construction 12,901 5,701 6,354 839 7 15 3 (132) —
Automotive 12,532 7,881 4,490 159 2 3 (3) (472) —
Chemicals/Plastics 10,637 7,189 3,211 222 15 — — (13) (83)
Securities Firms & Exchanges 10,035 7,781 2,233 14 7 1 (68) (4,169) (175)
Agriculture/Paper Mfg 7,387 4,238 3,064 82 3 31 — (4) (4)
Aerospace/Defense 6,873 5,447 1,426 — — — — (142) (1)
Leisure 5,331 2,950 1,797 495 89 5 — (10) (14)
All other(c) 201,298 180,460 19,911 692 235 1,249 (6) (7,068) (367)
Subtotal $ 820,254 $ 637,860 $ 170,219 $ 10,733 $ 1,442 $ 1,894 $ 16 $ (27,996) $ (14,435)
Loans held-for-sale and loans at fair
value 13,301
Receivables from customers and
other 26,744
Total $ 860,299
JPMorgan Chase & Co./2013 Annual Report 133 Selected metrics
30 days or more past due and accruing loans
Net charge-offs/
(recoveries)
Credit derivative
hedges(f)
Liquid securities and other cash collateral held against
derivative receivables Noninvestment-grade(e)
Credit
exposure(d) Investment-
grade Noncriticized Criticized
performing Criticized nonperforming As of or for the year ended
December 31, 2012 (in millions) Top 25 industries(a)
Real Estate $ 76,198 $ 50,103 $ 21,503 $ 4,067 $ 525 $ 391 $ 54 $ (41) $ (509)
Banks & Finance Cos 73,318 55,805 16,928 578 7 20 (34) (3,524) (6,027)
Oil & Gas 42,563 31,258 11,012 270 23 9 — (155) (101)
Healthcare 48,487 41,146 6,761 569 11 38 9 (238) (459)
State & Municipal Govt(b) 41,821 40,562 1,093 52 114 28 2 (186) (221)
Consumer Products 32,778 21,428 10,473 868 9 2 (16) (275) (12)
Asset Managers 31,474 26,283 4,987 204 — 46 — — (2,714)
Utilities 29,533 24,917 4,257 175 184 2 15 (315) (368)
Retail & Consumer Services 25,597 16,100 8,763 700 34 20 (11) (37) (1)
Technology 18,488 12,089 5,683 696 20 — 1 (226) —
Central Govt 21,223 20,678 484 61 — — — (11,620) (1,154)
Machinery & Equipment Mfg 18,504 10,228 7,827 444 5 — 2 (23) —
Metals/Mining 20,958 12,912 7,608 406 32 8 (1) (409) (126)
Business Services 13,577 7,172 6,132 232 41 9 23 (10) —
Transportation 19,827 15,128 4,353 283 63 5 2 (82) (1)
Telecom Services 12,239 7,792 3,244 1,200 3 5 1 (229) —
Media 16,007 7,473 7,754 517 263 2 (218) (93) (8)
Insurance 14,446 12,156 2,119 171 — 2 (2) (143) (1,729)
Building Materials/Construction 12,377 5,690 4,172 791 4 8 1 (114) (11)
Automotive 11,511 6,447 5,892 101 — — — (530) —
Chemicals/Plastics 11,591 7,234 4,172 169 16 18 2 (55) (74)
Securities Firms & Exchanges 5,756 4,096 1,612 46 2 — — (171) (183)
Agriculture/Paper Mfg 7,729 5,029 2,657 42 1 5 — — —
Aerospace/Defense 6,702 5,518 1,150 33 1 — — (141) —
Leisure 7,748 3,160 3,724 551 313 — (13) (63) (24)
All other(c) 195,567 174,264 21,353 384 357 1,478 5 (8,767) (1,479)
Subtotal $ 816,019 $ 624,668 $ 175,713 $ 13,610 $ 2,028 $ 2,096 $ (178) $ (27,447) $ (15,201)
Loans held-for-sale and loans at fair
value 6,961
Receivables from customers and
other 23,648
Total $ 846,628
(a) The industry rankings presented in the table as of December 31, 2012, are based on the industry rankings of the corresponding exposures at December 31, 2013, not actual rankings of such exposures at December 31, 2012.
(b) In addition to the credit risk exposure to states and municipal governments (both U.S. and non-U.S.) at December 31, 2013 and 2012, noted above, the Firm held $7.9 billion and $18.2 billion, respectively, of trading securities and $30.4 billion and $21.7 billion, respectively, of AFS and HTM securities issued by U.S. state and municipal governments. For further information, see Note 3 and Note 12 on pages 195–215 and 249–254, respectively, of this Annual Report.
(c) All other includes: individuals, private education and civic organizations; SPEs; and holding companies, representing approximately 64%, 22% and 5%, respectively, at December 31, 2013, and 57%, 28% and 7%, respectively, at December 31, 2012.
(d) Credit exposure is net of risk participations and excludes the benefit of “Credit Portfolio Management derivatives net notional” held against derivative receivables or loans and “Liquid securities and other cash collateral held against derivative receivables”.
(e) Exposures deemed criticized correspond to special mention, substandard and doubtful categories as defined by US bank regulatory agencies.
(f) Represents the net notional amounts of protection purchased and sold through credit derivatives used to manage the credit exposures; these derivatives do not qualify for hedge accounting under U.S. GAAP. The all other category includes purchased credit protection on certain credit indices. Credit Portfolio Management derivatives excludes the synthetic credit portfolio.
Management’s discussion and analysis
134 JPMorgan Chase & Co./2013 Annual Report
Presented below is a discussion of several industries to which the Firm has significant exposure and continues to monitor because of actual or potential credit concerns.
For additional information, refer to the tables on the previous pages.
• Real estate: Exposure to this industry increased by
$10.9 billion or 14%, in 2013 to $87.1 billion. The increase was largely driven by growth in multifamily exposure in the CB. The credit quality of this industry improved as the investment-grade portion of the exposures to this industry increased by 26% from 2012.
The ratio of nonaccrual retained loans to total retained loans decreased to 0.50% at December 31, 2013 from 0.86% at December 31, 2012. For further information on commercial real estate loans, see Note 14 on pages 258–283 of this Annual Report.
• State and municipal governments: Exposure to this sector decreased by $6.2 billion in 2013 to $35.7 billion. Lending-related commitments comprise approximately 66% of the exposure to this sector, generally in the form of liquidity and standby letter of credit facilities backing bonds and commercial paper.
The credit quality of the portfolio remains high as 97%
of the portfolio was rated investment-grade, unchanged from 2012. The Firm continues to actively monitor this exposure in light of the challenging environment faced by certain state and municipal governments. For further discussion of commitments for bond liquidity and standby letters of credit, see Note 29 on pages 318–324 of this Annual Report.
Loans
In the normal course of its wholesale business, the Firm provides loans to a variety of customers, ranging from large corporate and institutional clients to high-net-worth individuals. For further discussion on loans, including information on credit quality indicators, see Note 14 on pages 258–283 of this Annual Report.
The Firm actively manages its wholesale credit exposure.
One way of managing credit risk is through secondary market sales of loans and lending-related commitments.
During 2013 and 2012, the Firm sold $16.3 billion and
$8.4 billion, respectively, of loans and lending-related commitments.
The following table presents the change in the nonaccrual loan portfolio for the years ended December 31, 2013 and 2012. Nonaccrual wholesale loans decreased by $673 million from December 31, 2012, largely reflecting paydowns.
Wholesale nonaccrual loan activity
Year ended December 31, (in millions) 2013 2012
Beginning balance $ 1,717 $ 2,581
Additions(a) 1,293 1,920
Reductions:
Paydowns and other 1,075 1,784
Gross charge-offs 241 335
Returned to performing status 279 240
Sales 371 425
Total reductions 1,966 2,784
Net reductions (673) (864)
Ending balance $ 1,044 $ 1,717
(a) During 2013, certain loans that resulted from restructurings that were previously classified as performing were reclassified as nonperforming loans. Prior periods were revised to conform with the current presentation.
The following table presents net charge-offs/recoveries, which are defined as gross charge-offs less recoveries, for the years ended December 31, 2013 and 2012. The amounts in the table below do not include gains or losses from sales of nonaccrual loans.
Wholesale net charge-offs/(recoveries)
Year ended December 31,
(in millions, except ratios) 2013 2012
Loans – reported
Average loans retained $ 307,340 $ 291,980
Gross charge-offs 241 346
Gross recoveries (225) (524)
Net charge-offs/(recoveries) 16 (178)
Net charge-off/(recovery) rate 0.01% (0.06)%
JPMorgan Chase & Co./2013 Annual Report 135
Receivables from customers
Receivables from customers primarily represent margin loans to prime and retail brokerage clients that are collateralized through a pledge of assets maintained in clients’ brokerage accounts that are subject to daily minimum collateral requirements. In the event that the collateral value decreases, a maintenance margin call is made to the client to provide additional collateral into the account. If additional collateral is not provided by the client, the client’s position may be liquidated by the Firm to meet the minimum collateral requirements.
Lending-related commitments
JPMorgan Chase uses lending-related financial instruments, such as commitments (including revolving credit facilities) and guarantees, to meet the financing needs of its customers. The contractual amounts of these financial instruments represent the maximum possible credit risk should the counterparties draw down on these
commitments or the Firm fulfills its obligations under these guarantees, and the counterparties subsequently fails to perform according to the terms of these contracts.
In the Firm’s view, the total contractual amount of these wholesale lending-related commitments is not
representative of the Firm’s actual future credit exposure or funding requirements. In determining the amount of credit risk exposure the Firm has to wholesale lending-related commitments, which is used as the basis for allocating credit risk capital to these commitments, the Firm has established a “loan-equivalent” amount for each commitment; this amount represents the portion of the unused commitment or other contingent exposure that is expected, based on average portfolio historical experience, to become drawn upon in an event of a default by an obligor. The loan-equivalent amount of the Firm’s lending-related commitments was $218.9 billion and $223.7 billion as of December 31, 2013 and 2012, respectively.
Clearing services
The Firm provides clearing services for clients entering into securities and derivative transactions. Through the
provision of these services the Firm is exposed to the risk of non-performance by its clients and may be required to share in losses incurred by central counterparties (“CCPs”).
Where possible, the Firm seeks to mitigate its credit risk to its clients through the collection of adequate margin at inception and throughout the life of the transactions and can also cease provision of clearing services if clients do not adhere to their obligations under the clearing agreement.
For further discussion of Clearing services, see Note 29 on 318–324, of this Annual Report.
Derivative contracts
In the normal course of business, the Firm uses derivative instruments predominantly for market-making activities.
Derivatives enable customers to manage exposures to fluctuations in interest rates, currencies and other markets.
The Firm also uses derivative instruments to manage its own credit exposure. The nature of the counterparty and the settlement mechanism of the derivative affect the credit risk to which the Firm is exposed. For over-the-counter (“OTC”) derivatives the Firm is exposed to the credit risk of the derivative counterparty. For exchange traded
derivatives (“ETD”) such as futures and options, and
“cleared” over-the-counter (“OTC-cleared”) derivatives, the firm is generally exposed to the credit risk of the relevant CCP. Where possible, the Firm seeks to mitigate its credit risk exposures arising on derivatives transactions through the use of legally enforceable master netting arrangements and collateral agreements. For further discussion of derivative contracts, counterparties and settlement types, see Note 6 on pages 220–233 of this Annual Report.
The following table summarizes the net derivative receivables for the periods presented.
Derivative receivables
December 31, (in millions)
Derivative receivables
2013 2012
Interest rate $ 25,782 $ 39,205
Credit derivatives 1,516 1,735
Foreign exchange 16,790 14,142
Equity 12,227 9,266
Commodity 9,444 10,635
Total, net of cash collateral 65,759 74,983 Liquid securities and other cash collateral
held against derivative receivables (14,435) (15,201) Total, net of all collateral $ 51,324 $ 59,782
Management’s discussion and analysis
136 JPMorgan Chase & Co./2013 Annual Report
Derivative receivables reported on the Consolidated Balance Sheets were $65.8 billion and $75.0 billion at
December 31, 2013 and 2012, respectively. These amounts represent the fair value of the derivative contracts, after giving effect to legally enforceable master netting
agreements and cash collateral held by the Firm. However, in management’s view, the appropriate measure of current credit risk should also take into consideration additional liquid securities (primarily U.S. government and agency securities and other G7 government bonds) and other cash collateral held by the Firm aggregating $14.4 billion and
$15.2 billion at December 31, 2013 and 2012, respectively, that may be used as security when the fair value of the client’s exposure is in the Firm’s favor.
In addition to the collateral described in the preceding paragraph, the Firm also holds additional collateral (primarily: cash; G7 government securities; other liquid government-agency and guaranteed securities; and corporate debt and equity securities) delivered by clients at the initiation of transactions, as well as collateral related to contracts that have a non-daily call frequency and collateral that the Firm has agreed to return but has not yet settled as of the reporting date. Though this collateral does not reduce the balances and is not included in the table above, it is available as security against potential exposure that could arise should the fair value of the client’s derivative transactions move in the Firm’s favor. As of December 31, 2013 and 2012, the Firm held $29.0 billion, of this additional collateral. The derivative receivables fair value, net of all collateral, also does not include other credit enhancements, such as letters of credit. For additional information on the Firm’s use of collateral agreements, see Note 6 on pages 220–233 of this Annual Report.
While useful as a current view of credit exposure, the net fair value of the derivative receivables does not capture the potential future variability of that credit exposure. To capture the potential future variability of credit exposure, the Firm calculates, on a client-by-client basis, three measures of potential derivatives-related credit loss: Peak, Derivative Risk Equivalent (“DRE”), and Average exposure (“AVG”). These measures all incorporate netting and collateral benefits, where applicable.
Peak exposure to a counterparty is an extreme measure of exposure calculated at a 97.5% confidence level. DRE exposure is a measure that expresses the risk of derivative exposure on a basis intended to be equivalent to the risk of loan exposures. The measurement is done by equating the unexpected loss in a derivative counterparty exposure (which takes into consideration both the loss volatility and the credit rating of the counterparty) with the unexpected loss in a loan exposure (which takes into consideration only the credit rating of the counterparty). DRE is a less extreme measure of potential credit loss than Peak and is the primary measure used by the Firm for credit approval of derivative transactions.
Finally, AVG is a measure of the expected fair value of the Firm’s derivative receivables at future time periods, including the benefit of collateral. AVG exposure over the total life of the derivative contract is used as the primary metric for pricing purposes and is used to calculate credit capital and the CVA, as further described below. The three year AVG exposure was $35.4 billion and $42.3 billion at December 31, 2013 and 2012, respectively, compared with derivative receivables, net of all collateral, of $51.3 billion and $59.8 billion at December 31, 2013 and 2012, respectively.
The fair value of the Firm’s derivative receivables incorporates an adjustment, the CVA, to reflect the credit quality of counterparties. The CVA is based on the Firm’s AVG to a counterparty and the counterparty’s credit spread in the credit derivatives market. The primary components of changes in CVA are credit spreads, new deal activity or unwinds, and changes in the underlying market environment. The Firm believes that active risk
management is essential to controlling the dynamic credit risk in the derivatives portfolio. In addition, the Firm’s risk management process takes into consideration the potential impact of wrong-way risk, which is broadly defined as the potential for increased correlation between the Firm’s exposure to a counterparty (AVG) and the counterparty’s credit quality. Many factors may influence the nature and magnitude of these correlations over time. To the extent that these correlations are identified, the Firm may adjust the CVA associated with that counterparty’s AVG. The Firm risk manages exposure to changes in CVA by entering into credit derivative transactions, as well as interest rate, foreign exchange, equity and commodity derivative transactions.
The accompanying graph shows exposure profiles to derivatives over the next 10 years as calculated by the DRE and AVG metrics. The two measures generally show that exposure will decline after the first year, if no new trades are added to the portfolio.