annual report 2011 of j.p.

morgan ag

financial highlights j.p. morgan ag

million 2011 2010 2009 2008

Total net revenues Total Expenses Income before Tax Net Income Equity roe Overhead ratio Pretax margin ratio Tier 1 capital ratio Total capital ratio

99.0 84.7 14.3 14.3 275 5.18 % 85.54 % 14.42 % 17.18 % 32.17 %

99.7 77.6 22.1 22.1 305 7.24 % 77.83 % 22.17 % 18.01 % 33.56 %

96.8 80.8 24.6 16.0 291 5.50 % 83.46 % 25.41 % 16.34 % 31.13 %

120.0 94.0 25.9 25.9 149 17.41 % 78.38 % 21.63 % 12.90 % 20.54 %

high value payments

monthly number of high value in billion
750 700 1.000 transactions 650 600 550 500 450 400

> page 2: treasury services

2008

2009

2010

2011

assets under custody

bn
175 150 125 100 75 50 25

> page 3: worldwide securities services

monthly number in billion

2008

2009

2010

2011

content
Annual Report 2011
Management Report Assurance by the Board Balance sheet of J.P. Morgan AG, Frankfurt am Main Income statement of J.P. Morgan AG, Frankfurt am Main Notes to the nancial statements of J.P. Morgan AG, Frankfurt am Main Schedule of changes Cash Flow Statement Auditors Report Supervisory Board Report 22 40 41 42 44 21 2 18 20

management report

management report as of december 2011

Business and Regulatory Framework

organization and legal structure
J.P. Morgan AG, resident in Frankfurt am Main, is an indirectly owned 100 % subsidiary of JPMorgan Chase & Co. resident in Columbus, Ohio, usa. J.P. Morgan AG works closely together with various Group afliates, mainly in liquidity management and in the business segments, providing services to and receiving them from various Group afliates. J.P. Morgan Beteiligungs- und Verwaltungsgesellschaft mbH in Frankfurt am Main is the direct shareholder of J.P. Morgan AG with which a control and prot / loss transfer agreement exists.

and passing resolutions. Minutes of the Management Board meetings are taken down by a Legal Department staff member. For its meetings, the Supervisory Board receives an up-todate summary of the business division scorecards (that are used in the Management Board meetings), a presentation on nancial performance, the complete MaRisk risk reports, and a summary of the scorecards of the corporate functions for purposes of discussion, consideration, and passing resolutions. Supervisory Board meeting minutes are taken by the Director of the Legal Department or an external attorney. Normally, the Supervisory Boards Audit Committee meets

J.P. Morgan AG is managed by a Management Board Vorstand, consisting of three members and controlled by a Supervisory Board Aufsichtsrat with six members. The Management Board meets generally once a month, whereas the Supervisory Board meets at least twice a year. During the nancial year, the Supervisory Board held ve meetings while the Audit Committee held one meeting. For 2012, the Supervisory Board has decided to hold four full Supervisory Board meetings per year. The Supervisory Board receives a written risk report on a quarterly basis in compliance with the MaRisk (Minimum Requirements for Risk Management). The individual names of all Board Members are listed in the Notes. A detailed presentation is prepared monthly for the Management Board meetings by the two divisions Treasury Services and Worldwide Securities Services in the form of scorecards containing all of the transactions essential to the discussion of business performance in the past month, and which also show the development of the divisions kpis and kris. Similarly, the coo and cfo prepare corresponding presentations on nancial performance, all-inclusive risk, and scorecards of the corporate functions for purposes of discussion, consideration,

once a year with the auditor to discuss the annual nancial statements and the audit report. Minutes of the meeting of the Supervisory Boards Audit Committee are taken by a Legal Department staff member. The Bank has a full license according to section 1 para. 1 German Banking Act (kwg, nos. 1 to 5 and 7 to 9) and conducts banking business with institutional clients, banks, corporate clients and public-sector clients.

business segments and essential products & processes

J.P. Morgan AG is an integral part of the global J.P.Morgan Group and forms the backbone of J.P. Morgans operations in Germany. The full integration into J.P. Morgans global Treasury & Securities Services segment is of crucial importance, as it provides us with the necessary international network to deliver client services that do full justice to J.P. Morgans mission First class business in a rst class way. In 2011, the Bank further continued to concentrate on its core businesses to develop its Frankfurt base as J.P. Morgans agship European bank for clearing and as global custodian for the Ger-

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man investment market. At the same time, we invested decisively in human capital and technology in order to be able to meet the increased demands of global customer service, and provide the full spectrum of products available for transaction banking out of Frankfurt.

worldwide securities services

Within the Groups global Worldwide Securities Services segment, the Bank plays the role of a fully-licensed custody bank, and has been offering services as a global custodian to German institutional clients since as long as 1995. As a global custodian the Bank services 155 investment funds across 583 different segments on behalf of its clients. Alongside global custody services relating to securities safekeeping and trade transaction settlement, our extended service range includes diversied products and additional services, in particular client reporting. Providing a cutting-edge technological infrastructure and ensuring a strong client focus are essential elements of our strategy of generating future organic growth in additional client segments. Through the internet access portal J.P. Morgan access sm we offer clients and asset managers alike countless report compilation opportunities and reporting functions tailored to the needs and wishes of their respective customers while also supplying data and reports. Moreover, our transaction management module provides asset managers and investment companies, who do not have their own link to the s.w.i.f.t. network with direct and efcient access to J.P. Morgan AG when placing their business instructions and payment orders.

treasury services
J.P. Morgan AG is globally responsible for the Groups -clearing operations. In coming years, alongside political developments to generate a unied payment area in Europe and ongoing high investments into our technology, we expect to deliver our leading global technology and our client service to a growing number of corporate clients and nancial institutions in the mass payment market in Europe, centrally managed from J.P. Morgan AG and in close cooperation with our sister companies, and to achieve substantial business growth. We are continually expanding our top position as a -clearer in target2 and eba by offering improved features for our multinational corporate clients and nancial institutions both domestically and abroad. On the basis of these global infrastructure capabilities, our sales teams offer highly-advanced solutions in the areas of cash, treasury and trade nance management and, starting this year, also eca-covered nancing deals, for corporate clients, insurance companies, asset managers, and nancial institutions. Advanced technology and substantial enlargement of our international footprint within our Global Corporate Banking concept enable our sales teams to offer ever more far-reaching global cash management concepts with notable advantages in the management of liquidity, particularly for our international clients. We have moved forward with our rened service concept, and this has allowed us to see continued strong growth with selected target clients, above all in global cash management, in trade nance management, and in the commercial card business.

key sales markets and competitive situation

In Treasury Services we differentiate between relationship management and our function as global operating hub for Clearing Operations. In relationship management, J.P. Morgan AG is responsible for institutional clients, banks, corporate clients and public-sector clients domiciled in Germany or Austria, including subsidiary companies domiciled in these two countries whose parent companies have their registered ofces elsewhere.

management report

Based on our global worldwide responsibility in the Group for -Clearing Operations rests with the core team in Frankfurt am Main, and includes teams in sister companies of the Group in Mumbai (India) and in Manila (Philippines), J.P. Morgan AG services clients from the multitude of countries where the J.P.Morgan Group is active. Measured by payment values in target2 and eba, J.P. Morgan AG is among the largest -clearers in Germany in terms of the volume of daily payments settled daily.

key legal and business factors

In regards to its Treasury Services segment, the business of J.P. Morgan AG is primarily inuenced by global economic trends and the level of interest rates, whereas the Worldwide Securities Services segment business is primarily exposed to trends in the worlds capital markets. Both key segments depend essentially on regulatory developments for the banking industry. As we had predicted, throughout the 2011 nancial year the

In Worldwide Securities Services we offer our services as a custodian bank according to the German Investment Act foremost to special funds under German law and for direct investments by institutional clients, corporate clients and publicsector clients in Germany, including subsidiary companies domiciled in Germany whose parent companies are registered elsewhere. J.P. Morgan AG is one of the top custodian banks in Germany. J.P. Morgan AG benets from the product and technology leadership of the J.P.Morgan Group and its commitment and ability to continually make investments in the foundation it has established; from the strength of a global corporation that can use economies of scale and which pursues innovative product development; and it likewise benets from the fact that J.P. Morgan AG is in a position to provide the global solutions to its market locally and deliver these with an explicitly local client orientation. Conversely, J.P. Morgan AG sees itself as facing stiff competition in what is generally a hotly contested and attractive market (in Germany and Austria) that is still suffering from excessive fragmentation, which as a result often leads to undercutting on prices by competitors in a manner not in line with the market.

European Central Bank generally maintained its low interest rate policy, which had been spurred by the crisis. However, for the business activities of J.P. Morgan AG this allowed only for a temporary positive trend in margins. During the nancial year, the global capital markets saw neutral through positive development without exuberance setting in. On the regulatory front, J.P. Morgan AG implemented the new and supplemental requirements resulting from the MaRisk, the MaComp (Minimum Requirements for Compliance), and the BaFin circular regarding custodian banks.

internal control system and key indicators

In addition to regular meetings of the Management Board and the Supervisory Board, a Local Operating Committee with all key corporate functions represented on it manages corporate governance in everyday business on behalf of the Management Board. J.P. Morgan AGs corporate functions continue to support not only the Banks business segments but also all other Group units in Frankfurt am Main. The Treasury Services and Worldwide Securities Services segments are each managed by one Member of the Board (Markt) and are controlled by a Member of the Board (Marktfolge), respectively. In addition to the key controlling variables of interest income and commission income, a

management report

conservative risk policy that in particular narrowly limits credit and counterparty risk provides the basis for successful management of J.P. Morgan AG by the Management Board. All aspects of the business segments are transparently covered by a wide-ranging set of scorecards and controlled by the means of key risk and key performance indicators on a monthly basis in meetings of business control committees together with the inclusion of international risk managers of the Group. This enables the Management Board in a timely manner to identify changes and risks on an informed basis and to respond by taking corrective decisions. Over and above this, all data representing loan utilization, overdrafts, level of collateral and key ratios according to SolvV and LiqV are produced on a daily basis by the Finance and Credit teams for the Management Board. These reports have continuously been advanced to reect an increased focus on operational risk. All new governance regulations called for by the new large exposure regime (GroMiKV), as well as the new requirements for Compliance (MaComp) had already been implemented prior to the end of 2010. The expanded requirements under the MaRisk guidelines (minimum requirements for risk management) and the BaFin circular regarding the custodian banking function were implemented over the course of the year.

sions developed in opposite directions in 2011. Although the Treasury Services division was consistently able to expand its client and business base and record higher earnings, the Worldwide Securities Services division was forced to deal with a decline in earnings due to altered intra-Group charges. The key factors inuencing interest income were the investment of the companys funds in securities and the higher spreads that were able to be achieved with the investment of customer deposits, as well as an altered intra-Group charge. In comparison to the budget for the nancial year, interest income proved to be better and commission income weaker than expected. The individual gures are explained in more detail in the Notes. As of December 31, 2011, due in part to the reporting date total assets declined by just about a third owing to a decrease in reverse repos with our parent company. At 14.3 million, the Banks total operating prot results from normal business operations is about 35 % below the previous years gure. Components of this result have developed very differently. While interest income experienced a strong recovery thanks to higher margins, commission income fell 4 % below the previous years record level. We believe the year was a positive one overall since we were able to retain existing business as well as gain new clientele in both business areas as well as successfully expand business with our existing customer base. Even though the Bank once more was able to avoid any credit losses due to its conservative credit policy, the result is satisfactory only with some qualication, as interest income continues to remain below historic levels.

business development
In 2011, J.P. Morgan AGs business in general beneted from the macroeconomic developments, however, our results are still suffering from the zero interest rate policy introduced by the central banks, the displacement that occurred in the custodian bank segment from 2010, and from various one-time events. Earnings from business operations from the two divi-

personnel
Despite the business growth and our investments, the number of employees at J.P. Morgan AG increased only slightly from 248 to an average of 252 (+2 %) in 2011 due to further increases in efciency. Similar to 2010, the attrition rate in 2011 was

management report

10 % and thus continued to uctuate at a normal level. 14 % of all employees made use of exible work arrangements offered. In line with our business concept we continue to put the highest emphasis on the qualitative selection of hires and continued learning and training programs for our staff. The J.P. Morgan AG human resources policy focuses on the highest level of quality and diversity, and the Bank is simultaneously committing to adjusting to the needs of our employees as far as possible. The underlying features of J.P. Morgan AGs compensation system are presented in a separate compensation report, which can be found at the following website: http://www.jpmorgan.com/pages/international/german

Earnings, Financial and Assets Position

earnings
Despite continued business growth in 2011 J.P. Morgan AG did not manage the record level seen in 2010 commission income. To provide a more detailed report than in the past, we removed inter-company settlement items from the commission results and now only show the net value from commission income and expenses with customers as commission income: the remainder of the inter-company settlements is reported as other revenue. The values from the previous year were adjusted accordingly. As of December 31, 2011 the commission results were at 44.4 million, approximately 4 % less than the results from the previous year. By contrast, the net interest income nally showed positive development, as we had expected, and at 25.4 million is considerably higher than the comparable period, but still below its historic level. The main inuences on the net interest income were an investment of the Banks capital in interest bearing securities, the higher margins that were possible by investing customer deposits, as well as an amended Group settlement. Compared to the target gures for the nancial year, the net interest income turned out to be stronger, whereas the commission result turned out to be weaker than expected. The remaining operational revenues, which were mainly characterized by payments to other units within the Group and which now include, as described above, inter-company settlements and results from the pension assets and obligations, fell by about 31 % to 29.2 million for 2011. Under strict cost management and the further use of Group wide production platforms J.P. Morgan AG managed to limit the increase in personnel and administrative expenses to 6 % compared to the same time last year despite investments in human capital and technology. Despite the signicant increase

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in revenue, prot before tax fell 35 % to 14.3 million, mainly due to a negative swing in pension-related items, of 7.8 million, as well as the bank levy. The result is a return on equity of 5.18 % compared to 7.24 % the year before. The main reason for this decline can be seen in the development of the overhead ratio, which increased during the nancial year from 78 % to 86 %, mainly as a result of the above-mentioned increase in overall costs. Taxes on income are consolidated for the Bank and its sole shareholder J.P. Morgan Beteiligungs- und Verwaltungsgesellschaft mbH, Frankfurt am Main, with which a control and prot / loss transfer agreement exists.

J.P. Morgan AG held sufcient liquidity at all times in 2011. The liquidity ratio is managed conservatively; it reached 2.66 on December 31, 2011 and averaged 1.50 for the year. Capital Structure The regulatory capital of J.P. Morgan AG decreased by 29 million to 632 million due to prot distribution. Considering the increased prot distribution completed with the drawing of the balance sheet, the core capital gure is now at 17.2 %, the total capital gure at 32.2 %. With this amount of capital available, J.P. Morgan AG remains in a comfortable position to support existing business, as well as the planned business growth with capital. J.P. Morgan AGs equity capital was composed of the following components on reporting key date December 31, 2011:

financing & liquidity

Principles and Objectives J.P. Morgan AGs balance sheet is driven by deposits provided by our institutional clients and banks through the -Clearing segment and the custodian bank business, which continued to show a positive nancial position in nancial year 2011. Clients are enabled to utilize credits solely in the form of intraday lines and short-term overnight overdrafts to cover technical shorts in cash positions in both business segments. Excess liquidity generated by these deposits-driven business policies in both business segments is placed in short-term deposits either within the Group, at the ecb, with rst-class banks and through gc Pooling at eurex. In principle, our general objectives indubitably include permanent liquidity and a risk-averse credit policy for the excess liquidity generated. It is our conscious business policy to waive potential opportunities to take higher interest income through increased counterparty risk or through term transformation. Off Balance Sheet Business Within the business of Trade Finance most credit risk exposure in the form of contingent liabilities taken on J.P. Morgan AGs own books continue to be directly collateralized through sister companies within the Group. Upper Tier 2: Lower Tier 2: Total Tier 2: Tier 1: 332 million share capital, reserves and reserves for general banking risks 150 million prot participation loan 150 million subordinated loan 300 million

management report

Cash Flow
in thousands Cash position at the end of previous year Cash flow from operating activities Cash flow from investment activities Cash flow from nancing activities Effects of exchange-rate changes Cash position at the end of the year 2011 330,493 328,985 1,525 16 0 0 2010 384 925,833 595,724 10 10 330,493

Risk Report
management and controlling
The management of the Back Ofce is responsible for risk management at J.P. Morgan AG, with regular reporting to the Management Board, as well as J.P. Morgan AGs Supervisory Board. J.P. Morgan AG classies a risk as a potential loss or a failure to realize a prot due to internal or external factors. Control functions which are independent of J.P. Morgan AGs

Assets & Liabilities Receivables from clients decreased by 98 million to 16 million owing to reduced utilization of short-term overdraft lines; whereas deposits by clients increased by 345 million to 4,470 million by year-end. Assets from banks declined by 4,139 million to 8,771 million, and liabilities by 4,849 million to 4,049 million by year-end. J.P. Morgan AGs balance sheet thus fell to 9,426 million at year-end. The solvability ratio was at 34.27 on December 31, 2011 and averaged 30.89 in 2011. Due to the short duration of the balance sheet, the Banks nancial standing remains extremely strong. Endorsement There are no reportable events at the end of 2011.

front-ofce departments are in charge of the operational implementation of the risk control and monitoring, taking into account the Group-wide infrastructure and policies. They report directly to the member of the board responsible for the Back Ofce the Chief Risk Ofcer. Control functions in J.P. Morgan AG comprise, in particular, the Chief Credit Ofcer (cco) for the controlling and monitoring of credit risks and the Treasury & Credit Control for market price and liquidity risk as well as the Local Operational Risk Manager for operational risks. At the same time, J.P. Morgan AG continues to develop the risk function. As part of that development, a separate Manager position for Risk Management was created at the end of 2011 and the position has now been lled; this will also allow the company to react to future regulatory developments. Risk Strategy and Risk Management The risk strategy is derived directly from J.P. Morgan AGs business strategy. It is dened by the Management Board of J.P. Morgan AG and is approved each year by the Supervisory Board. The risk strategy denes how J.P. Morgan AG will manage the risks it has taken as part of its business activities. By limiting

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and managing the risks, risk-bearing capability and liquidity are ensured at all times. The risk strategy covers all main risks and is if necessary further specied for individual risk types in the form of partial risk strategies and then substantiated and operationalized using policies, guidelines and working instructions. The integrity and suitability of the risk strategy is reviewed during the annual risk assessment. This ensures that the risk strategy takes all relevant risks faced by J.P. Morgan AG into consideration. The classication of individual risk types as a relevant risk is based on whether the occurrence of the risk could have a serious negative effect on J.P. Morgan AGs risk bearing capability. The analysis denes the risk appetite and allocates the available risk covering potential to the individual risk types. This facilitates compliance with the limits, and allows for the monitoring of that compliance throughout the nancial year. The following principles also apply for the risk management and monitoring:

Risk Bearing Ability and Stress Testing The risk bearing capability analysis is a core component of risk steering at J.P. Morgan AG. J.P. Morgan AG decided to transition to a going-concern approach during nancial year 2011. This is dened as allowing the Bank to continue the core business activities even if all items of the dened risk covering potential were consumed through exposure to risks. The risk covering potential is dened as the target prot for the subsequent 12 months, less a deduction of 10 % as a safety buffer for deviations from target. The quantication of the capital requirement for the occurring risks is done based on internal, institute-specic calculation approaches, where all risk types dened as signicant during the risk inventory are taken into consideration. Reputational risk is quantied as a stress event. The actual calculation of the risk bearing ability is currently performed on a quarterly basis with the goal of transitioning to a monthly basis in 2012. The usage as of December 31, 2011 was 32.8 %. In 2012, stress scenarios were dened for each risk type to

There are clearly dened organizational structures and documented processes for all risk categories, from these responsibilities and competencies of all functions involved are derived. The organizational and operational structure of J.P. Morgan AG follows the principle of a clear segregation of duties between Front Ofce (Markt) and Back Ofce (Marktfolge) in order to avoid conicts of interest. The Bank has dened and put in place the necessary processes for identifying, aggregating, managing, monitoring and communicating risks in light of the Group-wide infrastructure. Appropriate limits for all signicant risk categories have been adequately dened and are effectively controlled.

review the risk bearing ability. Some of the scenarios are analyzed on a monthly basis, others on a quarterly. The capital requirement quantied during this process is initially compared to the risk covering potential, and should that fail to sufce, to J.P. Morgan AGs equity capital less the regulatory capital requirements; this allows the evaluation of the risk bearing ability even in case of a stress. We will continue to work on developing our risk bearing ability and stress testing concept in 2012. The risk bearing ability concept and the stress tests are being validated on an annual basis. The regulatory capital requirement for the individual risk types must be monitored by the Chief Financial Ofcer (cfo) on a daily basis and is shown for the nancial year in the table below

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Regulatory in thousands Risk type Credit risk Operational risk Liquidity risk Market risk Capital requirement Risk covering potential 120,514 16,519 17,277 154,310 647,400 124,109 15,121 15,357 154,497 661,755 Dec. 31, 2010 Dec. 31, 2011

Economic Dec. 31, 2011

1,700 2,400 3,800 400 8,300 25,300

(all gures in thousands). The economic capital requirement pursuant to the going concern approach is being calculated by the Chief Risk Ofcer on a quarterly basis with the clear goal of increasing the frequency in 2012.

By means of its credit risk strategy, which is derived from the general business and risk strategy, the Management Board denes the risk prole in regards to its clients and credit products. Moreover, credit organization and processes for risk steering, potential measures to minimize risk and risk reporting are dened more closely in the Group-wide policies and in the J.P. Morgan AG MaRisk Guidelines. The Management Board takes credit decisions on the basis of the clearly dened separate responsibilities for Markt and Marktfolge. J.P. Morgan AG uses a basic scenario to calculate the economic capital in which a customers rating and exposure are considered. A series of scenarios with varying gravity are considered during the credit risk stress tests. These scenarios assume that the customer ratings will worsen considerably over time. The effects of the default of a portion of the portfolio are also examined. Stress tests and their results are validated on a regular basis. J.P. Morgan AG uses the credit risk standard approach (ksa) for the regulatory quantication of the credit risk. Daily monitoring of counterparty default risk at the individual client level is done by Treasury & Credit Control, using the Group-wide credit limit control system, which records individual limits and utilization at the account level and / or at the

risk categories
Credit Risk Credit or counterparty default risk is the most signicant risk category in J.P. Morgan AG due to its core activities, as a result of the potential drawdown of overdraft facilities by clients who hold their transactional cash account for -Clearing or Global Custody activities with J.P. Morgan AG. Depending on the credit rating of the client, the allocation of overdraft facilities is accompanied by the implementation of dened risk mitigation steps, such as the provision of collateral. Due to the business model, the main credit risk concentrations are intercompany transactions. We do not expect to see any changes in the creditworthiness here. Since J.P. Morgan AG does not run an active trading book, other credit risk categories, such as issuer risk, replacement risk and settlement risk, play a minor role for the rms risk prole.

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level of single borrower units (Kreditnehmereinheit). The system does not allow unauthorised intra-day limit breaches. Daily activities mainly focus on the monitoring of intra-day lines of credit and overdraft facility usage. A daily report of exposures, utilizations, all new accounts and facilities, and all changes of existing facilities is being daily presented for approval to the coo as well as the Management Board. Moreover, compliance with the approved limit structure, the moni-

toring of J.P. Morgan AGs risk capacity as well as the analysis of the Banks portfolio (e. g., maturities, credit products, segments and countries) including concentration risk is summarized in monthly or quarterly reports to the Management Board. The following charts show the industry and country risk concentrations as of 12 / 31 / 2011:

Industry risk concentrations ( million)

6,000 4,996 5,000 75 % 4,000 3,000 2,000 1,000 470 329 250 25 % 224 0% 2,211 50 % 100 %

Bank

Broker

Telekom

Auto

Machinery

Other

Country risk concentrations ( million)

3,500 3,000 2,500 2,000 1,500 1,000 500 1,742 1,555 1,139 968 881 881 25 % 2,869 75 % 100 %

50 %

usa

Spain

Japan

France

Germany

Russia

Other

0%

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J.P. Morgan AG has procedures for intensied loan management as well as the treatment of problematic loans, but did not require the application of these procedures during 2011. Operational Risk Operational Risk is dened under supervisory regulations as the risk of loss resulting from inadequate or failed processes, people and systems, or from external events. This denition also covers legal risks and compliance risks. The legal department is generally involved in case of legal risks. The legal department decides whether an external law rm needs to be mandated. The necessary processes for identifying, measuring, aggregating, managing, monitoring and communicating risks are stipulated in Group-wide risk policies and guidelines and stated in the J.P. Morgan AG OpsRisk Manual, for which the Chief Operating Ofcer and the Local Operational Risk Manager are responsible. During 2011 J.P. Morgan AG transitioned the calculation of capital requirements for operational risks from the basic indicator approach to an institute-specic approach as part of the risk bearing capability considerations. Under the new approach, the operational risks are assessed on the product level based on a regular assessment and analysis of the end-toend processing by all of the control functions at J.P. Morgan AG. The residual risk assessment is then used to derive a loss probability on the product level, which is required for the nal calculation of the loss potential or the economic capital requirement for J.P. Morgan AGs operational risks. Information from the institutionalized loss event database, the qualitative results from the regular Control Self Assessments, the denition of the risk-based Outsourcing Controlling, the results from the Internal Audit, as well as the Control Testing by the

Compliance Department and the Local Operational Risk Manager are then used to calculate the amount of the loss event. The assumptions made using this approach are scrutinized during the scenario analysis (stress test) on the product level and their effectiveness on the economic risk capital reviewed. A summary of the results is presented to the Management Board as part of the quarterly MaRisk reports. Operational risks are only essentially limited in the framework of business continuity, destined to enable due operation of critical processes, such as to give J.P. Morgan AG the resiliency to recover from an incident which may impact the business. The resiliency risk scenarios include loss of people, unavailability of IT systems as well as the closure of its ofce building. Corresponding recovery plans have been developed incorporating the Group-wide infrastructure and are tested on a regular basis. Liquidity Risk J.P. Morgan AG denes liquidity risk as the risk of loss arising from the rms inability to meet its current or future commitments in total or when they come due. At J.P. Morgan AG a liquidity risk exists in an original sense. However, renancing risks and market liquidity risks do not exist due to the business model. In the business and risk strategy, the J.P. Morgan AG Management Board denes the management of liquidity risks, which are specied in detail in the new Liquidity Risk Policy. This includes warning thresholds and escalation mechanisms for escalation to the Management Board for the risk-mitigating instruments. The policy denes a number of stress scenarios which analyze the effects of sudden withdrawals of liquidity on the liquidity situation and thus J.P. Morgan AGs capacity to act. Stress scenarios include both the sudden outow of

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liquidity as well as a sudden increase in utilization of credit lines. Scenarios are then calculated assuming the day of lowest excess liquidity in the given quarter. In both scenarios, J.P. Morgan AGs liquidity needs are covered. Moreover, J.P. Morgan AG performs a series of simulations to analyze the intra-day liquidity situation, in which a changed payment pattern by market participants and customers is assumed.

To calculate interest rate risk for its investment book, J.P. Morgan AG uses the price value of a basis point (pvbp) approach. Exceeded limits are generally escalated to the management. In addition to the year end value, the table below also shows the maximum, minimum and average pvbp in absolute terms in 2011.
Price Value of a Basis Point Approach 2,615 0 34,174 8,619

Liquidity management is handled by the J.P. Morgan AG Treasury function in compliance with Group-wide policies and J.P. Morgan AGs Treasury Policy. Compliance with these policies as well as dened warning thresholds are monitored daily by Treasury & Credit Control, which reports to the coo. Market Price Risk J.P. Morgan AG denes market price risk as the risk of loss due to changed market prices. Given J.P. Morgan AGs business activities, only interest rate risks as well as exchange-rate risks have an impact, if a limited one, while share price and commodity price risks have no importance whatsoever for the Banks risk prole. We refer to J.P. Morgans published analyses in regard to assessing interest and currency developments. Treasury & Credit Control is responsible for the daily moniSince J.P. Morgan AG has no active trading book, interest rate risks arise solely in treasury management of -liquidity. Exchange-rate risks are solely generated through the settlement of fx payments on behalf of clients who hold a payments transaction or deposit account with J.P. Morgan AG and from intra-Group settlements in us dollar. The management of market risks is dened by the Management Board in the business and risk strategy and dened more closely by the treasury policy, which is setting approved limits for the Banks risk. These positions are valued and accordingly monitored on an ongoing basis. Risks from nancial instruments, at the Bank mainly from the acquisition of debentures from public issuers and from issued products that are hedged by the total return swaps, as presented in paragraphs 2.5 and 2.10 of the attachment. toring of the market price risks. Daily adherence to limits and the impact on the Banks risk capacity is reported to the Management Board of J.P. Morgan AG on a monthly and quarterly basis. To monitor risk in regards to risk capacity, J.P. Morgan AG determines the market risk using a VaR approach with a condence level of 95 %, 1 day retention duration and 264 day data basis. In addition, the impact of a shift of 200 basis points is reviewed as a stress scenario for the interest rate risk. Given the low exposure exchange-rate risks only limits for spot positions exist.
Dec. 31, 2011 Minimum 2011 Maximum 2011 Average 2011

14 management report

Reputation Risk The outstanding reputation of jpmc is an invaluable, but fragile asset in the interaction with its client base, but also in its interaction with other market participants as well as governmental regulators and authorities. In this context, J.P. Morgan AG stresses the importance of Compliance, Operational Risk Management, Legal, Financial Control and Internal Audit, and the necessity of their active representation in various governance meetings (i. e. loc, bcc etc) in order to ensure compliance with internal JPMC procedures and / or regulatory requirements and to be involved in any client escalation as early as possible. Risk Control and Monitoring Timely, independent and risk-based reporting on credit risks, market price risks, liquidity risk and operational risk is being provided to the management on a daily, weekly and monthly basis; the coo summarizes said reports as part of the quarterly MaRisk reports. The various control functions at J.P. Morgan AG mainly the Internal Audit, Compliance and Local Operational Risk Management departments will create an annual review and audit plan based on the results of the assessment of the operational risks, particularly in order to ensure the effectiveness of the dened controlling measures.

Bank, n.a., London is generally involved when this type of audit is performed. Denition of Limits In addition to regulatory limits of LiqV and SolvV the Management Board at J.P. Morgan AG dened a series of limits, that are monitored daily and in a timely manner. These limits are dened in various policies and include aspects such as, credit limits, deposit guidance limits, bidding limits, position limits as well as J.P. Morgan AG minimum liquidity warning thresholds. All risk-based policies of J.P. Morgan AG are approved by the Management Board and updated on a regular basis. They dene roles and responsibilities as well as escalation procedures in the event of threshold excesses or even limit breaches. Approval of New Products & Markets The introduction of new products and the expansion of business into new markets occurs in line with the Group-wide New Business Initiative Policy. The coo is responsible for an analysis of the potential risks, the design of the operative processes, their regulatory impact, and their impact on J.P. Morgan AGs risk capacity. If the product involves an expansion of trading activities, the coo shall also ensure there is a sufcient test phase prior to introduction in real production. Integrating various functions such as Financial Control, Tax,

The Internal Audit department reports directly to the Chairman of the Management Board and is responsible for review of the business operations at J.P. Morgan AG based on a riskoriented audit approach, which cover all activities and processes at J.P. Morgan AG and thus, the outsourced activities as well. The Group auditing department of JPMorgan Chase

Legal, Compliance and Risk Management as co-ordinated by the coo guarantees a review of the planned product launch independent of the trading function. This committee documents its ndings along with a recommendation, which are then submitted for discussion and approval by the Management Board as a whole. Only after approval, is the initiative integrated into real production at J.P. Morgan AG.

management report 15

internal control system

General remarks Please refer to the explanations provided in the risk report for a presentation of the risks and the measures for limiting risks. The internal control system (ics) and the risk management system, that cover the J.P. Morgan AG accounting processes, focus on the guidelines, procedures and measures taken to ensure the efcacy, economic viability and orderliness of the accounting as well as to guarantee adherence to the key statutory regulations. The internal control system consists of two areas, Control and Monitoring. In organizational terms, the Financial Control section is responsible for ics management. The monitoring measures consist of elements integrated into the process and external, independent elements. Among other things, the integrated measures include a monthly control process covering all the Banks activities, during which the balance sheet as at that date and the p&l account are examined to assess their correct presentation and the risks, and the validity then conrmed. Moreover, in all instances the foureye principle is applied, along with technical controls, mainly by software-controlled audit mechanisms. Furthermore, qualied staff members with the due expertise (Head of Finance) and specialist functions such as Financial Control and Internal Audit take part in the process-integrated monitoring and control functions. The Management and Supervisory Boards (in particular the Audit Committee) as well as an auditing company are involved in the internal monitoring system in the form of process-independent audit measures. The audit of the annual nancial statements constitutes a key element of the process-independent monitoring.

With a view to the accounting the risk management system is geared to identify, evaluate and communicate risks from faulty bookkeeping, accounting, and reporting in a timely manner. Use of it The software used in the Bank to input accounting processes is made up of the it systems used throughout the Group. The orderly functioning of the programs and interfaces utilized is regularly assessed and conrmed. As part of the examination of our it, the auditors check the due operation of the accounting-relating applications at all computer center locations. The complete it system, including that for accounting, is secured against unauthorized access. Key regulations and control activities to ensure due, orderly and reliable accounting The internal control systems structure and measures ensure that business transactions are entered swiftly and completely in line with the statutory and the internal regulations and, that assets and liabilities are accurately calculated, valued and carried in the annual nancial statements. The booking documentation provides a reliable information base and a clear paper trail. The regulations of the Financial Accounting Standard Boards are applied within the J.P.Morgan Group as uniform valuation and accounting principles according to us-gaap, supplemented and commented on by the Groups Accounting Policies section. Here, again, stipulations are made with regards to the intra-Group settlement policies. In the framework of preparing the individual nancial statements of J.P. Morgan AG, a reconciliation statement is prepared from us-gaap to the annual nancial statements under hgb, compiled since 2009 in concurrence with the new regulations of BilMoG. Here, local work directives cover the details of the formal requirements for the individual nancial statements.

16 management report

Outlook
significant opportunities and risks for the coming years
J.P. Morgan AG is very well positioned to benet enduringly and over-proportionally in coming years from various prolesharpening initiatives that have been carried out in recent years, and from the initiatives in the spheres of corporate governance and risk management, which the Bank constantly adapts to reect new market and regulatory requirements. Over the next years we expect to see a continued acceleration of the trend toward professionalizing cash management in companies, pension funds and insurers. This is a result of the need, on the one hand, to accommodate increasingly complex production and supply chains through optimal nancial structures; and on the other hand, to meet the increasingly complex demands of liquidity management (including risk management and revenue enhancement). At the same time, we see the trend toward the growth of increasingly large institutional investors, who will be forced to adapt their investment strategies for an economy which is becoming more and more global resulting in increased demand for Global Custodian services. This outlook is supported by the leading global position of J.P. Morgan, and the Groups continued investment in the technology used in our business, and not least our constant local effort to provide the highest-quality services, the best people management and a prime customer focus. Thus, the Bank continues to work toward acquiring new customers, as well as to expand its business with existing customers. We see huge opportunity in the global expansion of our Global Corporate Banking franchise, which will provide us with a strong, expanded presence in the core markets around

the world for years to come and an expansion of our product spectrum (particularly in rapidly developing markets such as Asia, the Middle East and Latin America). Risks to our business are, in our view, limited to a potential overreaction of regulators after the experience of the nancial crisis. However, we assume that regulators world-wide will develop and introduce a coordinated and measured concept for the regulation of nancial markets in such a way as to avoid negative consequences for economic and capital market activity. We also consider the fragmentation of the transaction bank market, within which individual companies are trying to hold on to the market using sub market pricing, to be a further risk factor. Considering the Banks business model and its ongoing strategic planning, we consider the risks from a possible worsening of the sovereign debt crisis to be manageable and with only limited effect on the Banks target results. Expectations for Banks future performance Staying with our on-going and consistent conservative credit policy, we do not expect credit losses from a slowdown of the economy as a result of the European sovereign debt crisis and / or declining economic dynamics in China. We expect our commission income to increase even with the dynamics of slowing economic and capital market activity. With regard to interest income, at the beginning of 2012, margins in the short-term money market are once again in decline as a result of continuously low nominal interest rates and our conservative investment policy without term transformation. We expect no more than a slight improvement compared to last year. The budget foresees an increase of 6 % in interest income for 2012 and a further increase of 2 % for 2013. We foresee an

management report 17

increase of 21 % in commission income for the current nancial year, as well as a further increase of 7 % for 2012. All in all, we still expect to see positive income growth of 52 % for the coming year despite increasing pressure from the competition and the resulting price pressure in our fragmented markets, as well as a further growth of 19 % the following year. Assumptions These expectations are based on our assumption of a temporary slowing of the economy, followed by a renewed increase in growth rates even in 2012 yet and in coming years as well as a nally successful management of the various risks and crises by politicians. We also continue to believe that the ecb will only be able to start a slow exit strategy in 2012, so that we do not expect to see a signicant increase in interest rate levels, which would allow for correspondingly higher margins on our customer deposits. Development of Segments Based on the scenario described above we will continue to implement rigorous cost discipline in both segments, which will include additional efciency optimization achieved by outsourcing individual functions. This will give us the space we need for additional investments in technology in order to continuously improve our global offering. We have already begun enhancing efciencies over the past few years without sacricing the quality of our services or the investments into technology. We will maintain our efforts to acquire new customers and we are committed to successfully grow our customer business in both segments. Our budget assumes a 34 % increase in revenue for the World Securities Services division for the current year and 5 % for 2013; the planned growth rates for the Treasure Services division is 5 % for 2012 and 6 % for 2013.

Liquidity & Solvency J.P. Morgan AG is solvent at all times owing to the businessmodel-driven structure of our balance sheet. In addition, the Bank will continue to manage a high liquidity ratio, which came to 1.47 (as at 03 / 22 / 2011), and will continue to stay away from term transformation to achieve additional interest rate margin.

18 assurance by the board

Assurance by the Board

We herby assure that to the best of our knowledge and in line with the applicable accounting principles for nancial reporting, this report offers a fair picture of the Banks assets, nancial / liquidity and earnings that corresponds to the facts and that the course of business, the business results and the Banks positions are presented in such a way as to convey a true and fair picture, and that the material opportunities and risks of the Banks presumable future performance in the remainder of the current business year are described. Frankfurt am Main, April 18, 2012 J.P. Morgan AG Frankfurt am Main Management Board

thomas meyer

oliver berger

burkhard kbel-sorger

financial statements 19

Financial statements for 2011 J.P. Morgan AG

20 balance sheet

balance sheet as at december 31, 2011 of j.p. morgan ag, frankfurt am main

assets
in thousands Cash Receivables from banks Receivables from clients Bonds and other xed income securities Shares and other non xed income securities Participations Fixed Assets Other Assets Prepaid and deferred expenses Capitalized differences from netting assets Total 2.4. 2.6. 2.7. 2.8. 2.9. Note 2.1. 2.2. 2.3. 2.5. 2011 0 8,770,942 15,529 601,792 0 244 7,463 4,871 1,678 23,741 9,426,261 2010 330,493 12,910,414 113,816 601,570 0 244 9,316 7,155 92 23,463 13,996,563

liabilities and stockholders equity

in thousands Liabilities due to banks Liabilities due to clients Securitized liabilities Other liabilities Deferred income Reserves Subordinated debt Prot participation rights Fund for general banking risks Paid-in capital Total Contingent liabilities Other commitments 2.22. 2.15. 2.16. 2.17. 2.18. 2.19. Note 2.11. 2.12. 2.13. 2.14. 2011 4,048,874 4,469,834 183,507 80,814 30 11,403 150,059 150,000 56,300 275,441 9,426,261 127,687 0 2010 8,897,890 4,125,175 256,596 44,566 20 10,922 150,043 150,000 56,300 305,049 13,996,561 139,773 0

income statement 21

income statement of j.p. morgan ag, frankfurt am main

for the period january 1, 2011 through december 31, 2011

in thousands Interest income Interest expense Interest Subtotal Income from shares and other variable rate securities Income from investments Investment Subtotal Commission income Commission expenses Commission Subtotal Net income from nancial transaction Other operating income General administrative expenses Amortization and depreciation of xed and intangible assets Other operating expenses Amortization and value impairments on receivables and specic securities as well as allocation to loans-business accruals Income from allocations to receivables and specic securities as well as allocations to loans-business accruals Other Subtotal Net operating income Extraordinary income Extraordinary expenses Extraordinary result Income tax expense (benet) Other taxes Prots transferred as a result of a prot transfer of partial prot transfer agreement Net income for the year Retained earnings Unappropriated prot 3.6. 3.5. 3.3. 3.4. 29,179 74,880 2,587 7,218 0 33 55,472 14,303 0 0 0 0 14 44,248 29,960 29,960 0 42,235 70,648 2,630 4,326 0 2,624 32,746 22,025 0 0 0 0 12 8,142 13,949 16,011 29,960 3.2. 3.1. Note 2011 125,669 100,290 25,379 0 9 9 49,176 4,789 44,387 2010 58,006 49,672 8,334 2 4 6 51,222 4,791 46,431

22 notes

j.p. morgan ag, frankfurt am main, appendix to the financial statements 2011

1. General Remarks
1.1. general principles
J.P. Morgan AG, Frankfurt am Main, is a registered stock corporation under German law active in Germany in the main segments of transaction banking, securities custody and deposit and loans business. The J.P. Morgan AG balance sheet and the p&l account have been prepared according to the regulations of the German Commercial Code (hgb) and the Decree on Accounting for Banks and Financial Service Providers. Given our classication as a corporation focused on the capital market as per section 264d hgb, we are obliged to prepare a cash ow statement and a schedule of movements in equity. The structure of the balance sheet and the p&l accounts are unchanged over the prior year.

1.2. changed accounting and valuation methods

The balance sheet and income statement formats are consistent with those in the previous year with the exception of the below mentioned changes. For consistency reasons all transfer pricing agreements for sales services which are based on a cost-plus approach are reported under other revenues or other expenses from 2011 onwards. The Bank elected to use the idw rs hfa 30 Accounting for retirement benets option to report p&l from changes in discount rates, mark-to-market of plan assets, and current revenues from plain assets as income from nancial assets. Following 246 para 2 sentence 2 hgb, revenues and expenses from the accumulation and discounting of liabilities and netted plain assets have to be netted. Following 28 and 29 RechKredV, interest income which does not belong to normal bank activities shall be reported under other income

notes 23

in thousands

2010

Allocation idw rs hfa 30

Allocation Commission

2010 Comparative gure

2011

Commission income Commission expenses Net commission income Other operating income General administrative expenses Other expenses

70,870 8,853 62,017 17,913 65,894 264 4,754 4,754

19,648 4,062 15,586 19,648 4,062

51,222 4,791 46,431 42,315 70,648 4,326

49,176 4,789 44,387 29,179 74,880 7,218

1.3. foreign currency translation

Foreign-currency receivables and liabilities have been converted using the European Central Bank reference rates applicable at year-end. Transactions denominated in foreign currency were translated at the end-of-month rate for the month in which the business was transacted. Currency gains / losses are booked to the p&l item for Other operating income.

2. Key accounting and valuation principles and explanations

2.1. cash reserve
in thousands Cash reserve Cash balances Credit with Central Bank of which: with Deutsche Bundesbank Dec. 31, 2011 0 0 0 Dec. 31, 2010 330,493 330,493 330,493

Liquid funds are carried at nominal values. In the prior year, the liquidity was deposited with Deutsche Bundesbank.

24 notes

2.2. receivables from banks

in thousands Receivables from banks of which: Receivables from afliates Structure of maturity Due daily Other maturity 1. up to three months, 2. three months up to one year, 3. one year up to ve years, 4. more than ve years 8,384,514 386,429 386,429 9,824,797 3,085,616 3,085,616 Dec. 31, 2011 8,770,943 8,752,529 Dec. 31, 2010 12,910,414 10,184,942

Receivables from banks are carried at the lower of nominal value or at the cost of acquisition plus accrued interest.

2.3. receivables from clients

in thousands Receivables from clients of which: Receivables from afliates Structure of maturity Due daily undened maturity Other maturity 1. up to three months, 2. three months up to one year, 3. one year up to ve years, 4. more than ve years 14,190 1,339 1,339 113,816 Dec. 31, 2011 15,529 1,261 Dec. 31, 2010 113,816 92,456

Receivables from clients are carried at the lower of nominal value or at the cost of acquisition plus accrued interest.

2.4. participations
in thousands Participations of which: in banks Dec. 31, 2011 244 89 Dec. 31, 2010 244 89

The participations are carried at acquisition cost. There is a contingent obligation to make an additional contribution of 600,000 under the participation.

notes 25

2.5. bonds and other fixed income securities

in thousands Bonds and other xed income securities maturing in 2011 bonds public sector bonds of which: eligable as collateral with Deutsche Bundesbank of which are marketable on a stock exchange Listed Not listed Dec. 31, 2011 601,792 601,792 601,792 601,792 601,792 Dec. 31, 2010 601,570 601,570 601,570 601,570 601,570

All Bonds and other xed income securities are classied as held-to-maturity. The Bonds are carried at amortized cost. The premium was capitalized and amortized using the straight line basis. Bonds and other fixed income securities are valued at cost. The premium paid on acquisition is capitalized at cost and amortized over the term linear. The Bonds are listed on the Luxembourg and German Stock Exchanges in Frankfurt and Berlin. As at reporting date mark-to-market gains of 243 thousand have not been recognized.

2.6. change in fixed assets

Other Plant and Business Equipment Technical Plant and Equipment

in thousands Cumulative purchase cost as at January 1, 2011 Addition Disposals Cumulative purchase cost as at December 31, 2011 Scheduled depreciation in the current year Cumulative depreciation as at December 31, 2010 Status at December 31, 2011 Net book value as at December 31, 2010

Securities

Total

20,305 86 10 20,380 2,060 14,275 6,106

7,135 649 32 7,752 527 6,395 1,357

600,772

628,212 735 42

600,772 195 211 600,561

628,905 2,782 20,881 608,023

8,080

1,236

600,756

610,072

26 notes

Tangible assets are posted at purchase cost less scheduled straight-line depreciation. The addition of minor-value assets is valued and written back in line with section 6 para. 2a German Income Tax Act (EStG).

2.7. other assets

in thousands Other assets Dec. 31, 2011 4,871 Dec. 31, 2010 7,155

Other assets include 2.6 million of pension liability insurance and 1.7 million of withholding taxes.

2.8. prepaid and deferred expenses

in thousands Accrued items Dec. 31, 2011 1,678 Dec. 31, 2010 92

Accruals include monthly pension pre-payments of 1,573 thousand which were already paid in December 2011 in order to achieve timely settlement.

2.9. capitalized difference from netting assets

In line with the valuation method stated in section 246 para. 2 sentence 2 BilMoG assets that serve to cover debts from pension obligations and similar non-current obligations must be netted against the liabilities. The excess carrying value of the balance is then entered under the item for Capitalized differences from netting assets. No use was made of the transitional option as per section 67 para. 1 eghgb. The calculation for the actuarial expert report was based on the Prof. Dr. Klaus Heubeck 2005 G actuarial death tables. The evaluation follows the accepted principles of the actuarial mathematics, using the so called Projected-Unit-Credit-Method (puc-Method).

notes 27

Pension and pre-pension part-time obligations Allocation Allocation from (deferred compensation) Use (pension disbursements) Pension obligations Assets Additions Disposals Revaluation for risen partial assets Market value above purchase costs Assets Capitalized difference from netting assets Capitalized difference from netting assets Purchase costs assets Purchase costs assets Trend for allocations to pension obligations Allocation Allocation based on interest expense (reported in other expenses) Allocation early retirement (under personnel expenses) Direct pension payment / Insurance reimbursement Allocation to pension obligations Jan. 1 Dec. 31, 2011 Dec. 31, 2011 Jan. 1, 2010 Dec. 31, 2010 Jan. 1, 2010 Dec. 31, 2010 Dec. 31, 2011 Jan. 1, 2011 Jan. 1, 2011

2011 122,148,610 6,761,711 113,743 4,894,776 124,129,288 145,611,117 920,860 0 0 1,337,910 147,869,887 23,462,507 23,740,599 116,025,621 116,942,778

6,761,711 6,084,020 769,516 208,223 300,048

28 notes

Valuation parameters (BilMoG) for pension obligations: Discount rate Growth in commitments Growth in pension Fluctuation for staff turnover, age and gender based probabilities are considered Pre-retirement employment: Discount rate Growth in commitments Growth in pension Accruals for jubilee: Discount rate Growth in commitments Growth in pension Fluctuation for staff turnover, age and gender based probabilities are considered

2011

2010

5.14 % 3.00 % 2.00 % Mercer Standard

5.15 % 3.00 % 2.00 % Mercer Standard

5.14 % 3.00 % 0.00 %

5.15 % 3.00 % 0.00 %

5.14 % 3.00 % 0.00 % Mercer Standard

5.15 % 3.00 % 0.00 % Mercer Standard

Investment Measure pursuant to section 285 para. 26 for Special Assets I Legal basis Risk management method Calculation based on Reinvestment Section 253 para. 3 sen. 4 Term Valuation as per section 36 InvG at year end Invested capital

2011

jpmc i-Universal-Fund German Investment Act Qualied method Market value (nav) of the assets Compounded investments No write-downs as valued per section 246 (2) hgb No limit in daily redemption 131,976 thousand; shares 1,078,462 not eligible for exchange listing / not listed

Mutual fund Legal basis Risk management method Calculation based on Reinvestment Section 253 para. 3 sen. 4 Term Valuation as per section 36 InvG at year end Invested capital

jpm global bond fund (eur) c (acc) eur German Investment Act Qualied method Market value (nav) of the assets Compounded investments No write-downs as valued per section 246 (2) hgb No limit in daily redemption 71,840 thousand; shares 323,399 listed on the stock exchange

notes 29

All pension assets are held to hedge pension benets granted to employees. The primary investment target of the funds is to cover long term the nancial obligations. The fund unit prices are calculated as follows: A net asset value (nav) is allocated to each share class this is the value of the assets minus the liabilities for that class. The nav is then divided by the total number of current shares belonging to that share class to arrive at the unit price.

2.10. other accounting and valuation methods

Other assets are strictly valued at the lower of cost and market. Expenses and income deferrals have been formed and allocated to the respective balance-sheet item. Liabilities are carried at the sums repayable and securitized liabilities are held at their nominal value. Appropriate provisions have been made for uncertain liabilities. However, the provision methodology does not anticipate losses from future business. Interest driven business, in the banking book, is valued using the periodical approach (p&l based method). In accordance with this method, no write off is required. Accruals are valued at the settlement amount, factoring in expected increases in prices and costs. Accruals with a remaining term of more than one year have been discounted / revalued at the average market interest rates as calculated and announced by Deutsche Bundesbank (section 253 para. 2 hgb). Income and expenses from discounting and revaluing are entered without netting under the respective interest income / interest expense item (section 277 para. 5 hgb). Valuation units were set up for bearer debentures and notes issued that are hedged by total return swaps against market price risk. The trs are concluded in a clear relationship to the respective liability and their effectiveness tested. Owing to the clear hedge relationship, the transactions involved are micro-hedges that represent an efcient and perfect hedge relationship for the entire term. The fair values covered by the total return swaps in relation to the underlying liabilities are calculated using customary valuation models. Efciency is measured by juxtaposing the market valuation for the liability to that of the respective total return swap.

30 notes

The term of the individual trs matches that of the liabilities hedged and was as follows at December 31, 2011: The fair value of all Total Return Swaps at December 31, 2011 was 62,946 thousand. The valuation was done using internal models. J.P. Morgan uses valuation techniques to establish the fair value of instruments where prices quoted in active markets are not available. Therefore, where possible, parameter inputs to the valuation techniques are based on observable data derived from prices of relevant instruments traded in an active market. These valuation techniques involve some level of management estimation and judgment, the degree of which will depend on the price transparency for the instrument or market and the instruments complexity.
Total Return Swap

in thousands Overview Total Return Swaps Term 2012 2013 2014 2015 2016 2017 2018 2020 2022

Liability

28,893 41,877 62,948 81,764 45,655 72,718 90,000 150,000 110,000

28,893 41,877 62,948 81,764 45,092 72,718 90,000 150,000 110,000

In total, 27 valuation units were formed, and 30 total return swaps established to cover 36 liability items.

notes 31

2.11. liabilities due to banks

in thousands Liabilities due to banks of which: Liabilities to afliates Structure of maturites: Due daily Other maturity 1. up to three months, 2. three months up to one year, 3. one year up to ve years, 4. more than ve years 2,872,459 1,176,415 886,433 39,982 250,000 2,696,597 6,201,293 6,201,293 Dec. 31, 2011 4,048,874 1,969,421 Dec. 31, 2010 8,897,890 7,650,899

2.12. liabilities due to clients

in thousands Liabilities due to clients of which: Liabilities to afliates Structure of maturity: Due daily Other maturity 1. up to three months, 2. three months up to one year, 3. one year up to ve years, 4. more than ve years 3,960,290 509,544 57,673 319,994 41,877 90,000 3,202,218 922,957 441,044 245,403 41,510 195,000 Dec. 31, 2011 4,469,834 175,737 Dec. 31, 2010 4,125,175 205,982

2.13. securitized liabilities

in thousands Securitized liabilities of which: Own bills accepted and bills in circulation Structure of maturity: Debentures issued of which due the following year Other Securitized Liabilities 1. up to three months, 2. three months up to one year, 3. more than ve years 183,507 183,507 256,596 256,596 Dec. 31, 2011 183,507 Dec. 31, 2010 256,596

32 notes

Securitized liabilities result from bearer debentures issued. The possibility of their termination before maturity was taken into consideration when grouping them by remaining term. In the nancial year 2011 no further debentures were issued.

2.14. other liabilities

in thousands Other liabilities consisting of: Prot transfer Interest for prot participation rights (J.P. Morgan Beteiligungs- und Verwaltungsgesellschaft mbH) Turnover tax Other liabilities 44,248 5,020 5,147 26,398 8,142 4,128 2,194 30,102 Dec. 31, 2011 80,814 Dec. 31, 2010 44,566

The interest for the prot participation rights was paid to J.P. Morgan Beteiligungs- und Verwaltungsgesellschaft mbH, Frankfurt am Main. According to 268 para. 8 sentence 3 hgb 44,248 thousand will be remitted to J.P. Morgan Beteiligungs- und Verwaltungsgesellschaft mbH. This includes the correction of the prot transfer for previous years, which corresponds to the retained earnings. That results in a net loss.

2.15. reserves
in thousands Reserves of which for: Other accruals 11,403 10,922 Dec. 31, 2011 11,403 Dec. 31, 2011 10,922

The reserves carried contain all obligations discernible as at year-end relating to past business transactions or past occurrences, valued in line with section 253 hgb. Reserves for jubilees contained in the gure were calculated using an actuarial expert opinion and on the basis of the Prof. Dr. Klaus Heubeck 2005 G actuarial death tables and in line with the valuation method as per section 253 para. 1 hgb. Other reserves consist of reserve regarding personnel expenditure and leasehold remediation cost. The Bank started accruing for its Restricted Stock Unit (rsu) obligation to employees 2011. The rsu accrual was 945 thousand.

notes 33

2.16. subordinated debt

in thousands Subordinated debt of which: Subordinated debt due to afliates Dec. 31, 2011 150,059 150,059 Dec. 31, 2010 150,043 150,043

The subordinated debt posted at year end 2011 amounted to 150,000,000 entered into on December 21, 2009. Interest payments are made quarterly starting on December 21, 2009. Interest is calculated on the basis of the respective 3-month euribor (European Inter-Bank Offered Rate). Pro-rated interest deferrals of 59,083 have likewise been entered under the item for Subordinated debt. The subordinated debt was guaranteed for 30 years at the closure of the contract. The subordinated debt meets the requirements of section 10 para. 5a German Banking Act (kwg).

2.17. profit participation rights

in thousands Prot participation rights J.P. Morgan Beteiligungs- und Verwaltungsgesellschaft mbH, Frankfurt am Main Dec. 31, 2011 150,000 150,000 Dec. 31, 2010 150,000 150,000

As per contractual agreement of December 21, 2009 J.P. Morgan AG issued new prot-participation rights of 150,000 thousand, which are held by J.P. Morgan Beteiligungs- und Verwaltungsgesellschaft mbH, Frankfurt am Main.

2.18. funds for general banking risks

in thousands Status at December 31, 2010 Addition Disposal Status at December 31, 2011 Dec. 31, 2011 56,300 56,300

2.19. paid-in capital

The capital stock is 160,000,000 subdivided into 160,000,000 unit shares. All 160,000,000 unit shares are held by J.P. Morgan Beteiligungs- und Verwaltungsgesellschaft mbH, Frankfurt am Main, and are wholly paid in.

34 notes

2.20. other items due to affiliates

in thousands Other items due to afliates Other assets Other liabilities Prot transfer 1,216 7,659 44,248 781 4,128 8,142 Dec. 31, 2011 Dec. 31, 2010

2.21. foreign currency assets and debts

in thousands Foreign currency assets and debts Assets Debts 1,378,831 1,252,360 1,227,231 1,211,847 Dec. 31, 2011 Dec. 31, 2010

2.22. contingent liabilities

in thousands Contingent liabilities Liabilities from warranties and guarantee agreements 127,687 139,774 Dec. 31, 2011 Dec. 31, 2010

Guarantees were secured using cash collateral to the amount of 7,729. All material guarantees are covered by counter guarantees.

notes 35

3. Notes to the Income Statement

3.1. net interest income
in thousands Net interest income Interest income from: Loan and money-market transactions Fixed-income securities and receivables in debt Interest expenses Jan. Dec. 2011 25,379 125,669 117,201 8,469 100,290 Jan. Dec. 2010 8,334 58,006 36,090 21,916 49,672

Interest income improved due to higher spreads and due to a signicant increase in the value of the Banks investment in interest bearing securities (where the funds had previously been held in the money market). Furthermore, an interest expense of 5,020 thousand was recorded on the prot participation right that was issued on December 21.

3.2. net commission income

in thousands Net commission income Jan. Dec. 2011 44,387 Jan. Dec. 2010 46,431

Net Commission income decreased marginally in 2011. Commission generated by the -clearing business increased further, but the increase was not sufcient to cover a decrease in commissions from the custodian bank which attracted new customers but saw an overall decrease in average the value of assets under custody.

3.3. other operating income

in thousands Other operating income of which from: Services rendered for group units Other operating income 27,412 1,767 40,765 1,549 Jan. Dec. 2011 29,179 Jan. Dec. 2010 42,314

Other operating income mainly includes services performed for group entities. It also includes net income from fx conversion. In 2011, changes to the cost allocation methodology resulted in a reduction in charge-out for services rendered to group companies. The reduction was largely offset by a decrease in service charge payments to group companies.

36 notes

3.4. general administrative expenses

in thousands General administrative expenses of which for: Personnel expenses Wages and salaries Welfare payment and expenses, old-age provisions and support of which for: Old age provisions Other administrative expenses 27,551 24,291 3,260 599 47,329 28,550 23,482 5,068 1,957 42,098 Jan. Dec. 2011 74,880 Jan. Dec. 2010 70,648

General administrative expenses include the 2011 introduced bank levy of 1,814 thousand, the increase in sub-custodian charges of 940 thousand caused by an increased transaction volume as well as the rst time reporting of accruals for restricted stock units of 945 thousand.

3.5. other expenses

in thousands Other expenses Jan. Dec. 2011 7,218 Jan. Dec. 2010 4,326

Other expenses primarily include the pension result in accordance to idw rs hfa 30 with an expense of 4,858 thousand.

3.6. amortization and value impairments on receivables and specic securities as well as allocations to loans-business accruals
in thousands Income from allocations to receivables and specic securities as well as allocations to loans-buisiness accrual Jan. Dec. 2011 Jan. Dec. 2010

33

2,624

The amount of 2,572 thousand 2010 represents a realized prot from the sale of shares from a special fund.

notes 37

4. Other Information
Forward transactions which were not yet settled at year end consisted only of total return swaps. The total return swaps were concluded to hedge against market risks.
Fair market value as at Dec. 31, 2011 in thousands Total return swaps positive 22,888 negative 85,834 Fair market value as at Dec. 31, 2010 positive 46,308 negative 105,142

4.1. relations to affiliated companies

J.P. Morgan Beteiligungs- und Verwaltungsgesellschaft mbH, Frankfurt am Main, is the sole shareholder and a prot transfer agreement exists with it. Therefore, no dependent companies report pursuant to section 312 German Stock Corporation Act (AktG) needs to be compiled. The consolidated annual nancial statements for the smallest and largest group of companies is disclosed by JPMorgan Chase & Co., New York, whose shares are traded on the New York Stock Exchange and on some European and Asian exchanges. The consolidated annual nancial statements can be obtained on request from J.P. Morgan AG, Frankfurt am Main. The Bank is a member of the Deposit Security Fund of Bundesverband Deutscher Banken e.V.

4.2. number of employees

On average for the year there were 252 employees, the composition was as follows:
Number of Employees Annual average Spread of employees Holding full power of attorney Holding commercial power of attorney Commercial staff 12 135 105 15 136 97 2011 252 2010 248

Expatriates are not included in the above table.

4.3. total emolument of active board members

Total emolument for management board members was 1,662 thousand, of which 292 thousand is attributable to restricted stock units. Supervisory Board member remuneration was 5 thousand. No loans were granted to Board members during the business year.

38 notes

4.4. total emoluments for former board members and their dependents
Pension obligations for these persons totalled 19,673 thousand as at December 31, 2011. Total emoluments for former Board members and their dependents came to 669 thousand.

4.5. fee expenses

in thousands Fee Expenses entered in the business year for the audit of the nancial statements 2011 2010

290

259

Fee Expenses comprise nancial statement audit of 13 thousand (which includes an accrual release of 161 thousand); other auditor fees of 48 thousand; and tax advisory services of 229 thousand.

4.6. explanatory notes on other financial commitments

The company avails itself of services from various group member companies as part of its outsourcing functions. The business procurement contracts have a notice period of three months. The rental contract for the business premises runs until December 31, 2014.

notes 39

Management Board: Thomas Meyer (Banking Professional) Chairman of the Board, Treasury & Securities Services, Managing Director, J.P. Morgan AG Treasury & Security Services, Managing Director, J.P. Morgan AG Oliver Berger (Banking Professional) Worldwide Security Services, Managing Director, J.P. Morgan AG Burkhard Kbel-Sorger (Banking Professional) Chief Operating Ofcer, Executive Director, J.P. Morgan AG Supervisory Board: Mark S. Garvin (Managing Director) Chairman of Treasury & Securities Services International, J.P. Morgan Limited Alexander Caviezel (Managing Director) Treasury Services emea, J.P. Morgan Limited Karl-Georg Altenburg (Managing Director) Investment Bank, Senior Country Ofcer Germany, Austria & Switzerland, JPMorgan Chase Bank, n.a. Frankfurt Branch Alison P. Livesey (Managing Director) Compliance Managing Director, J.P. Morgan Limited Rudolf Wissel (Banking Professional) Staff representative of J.P. Morgan AG Thomas Freise (Commercial Professional) Staff representative of J.P. Morgan AG

Frankfurt am Main, April 18, 2012 J.P. Morgan AG Frankfurt am Main Management board

thomas meyer

oliver berger

burkhard kbel-sorger

40 schedule of changes

schedule of changes in equity capital for business 2011

Other Prot Reserves 23,777 Prot participation right 150,000

in thousands Status at Jan. 1, 2010 Annual prot before prot appropriation Prot transfer to JPM BV Status at Dec. 31, 2010 Status at Jan. 1, 2011 Merger Amendment JPM Services Annual prot before prot appropriation Prot transfer to JPM BV Status at Dec. 31, 2011

Paid-in Capital 160,000

Capital Reserves 85,312

Statutory Reserve 6,000

Unappropriated Prot 16,011 22,091 8,142

Total 291,100 22,091 8,142 305,049 305,049 352

160,000 160,000

85,312 85,312 352

6,000 6,000

23,777 23,777

29,960 29,960

150,000 150,000

14,288 44,248 160,000 85,664 6,000 23,777 0

14,288 44,248 275,441 150,000

The cash reserves increased in the scal year 2011, as the result of a contribution from the shareholder due to a correction. This was for the shares of the former JP Morgan Services, and the subsequent merger in 2008. In the rst application of BilMoG, and the year thereafter, the capital reserve as dened by section 272 paragraph 2 subsection 4 of hgb was not considered to be available for distribution under section 268 paragraph 8 sentence 1 of hgb. When calculating the disbursements blocked by law as a result of activating assets to meet pension obligations an amount was generated which was not considered as being accessible for distribution. This was recognized in retained earnings. In the 2011 calculation this has been adjusted and distributed with the annual prot.

cash flow statement 41

cash flow statement 2011

in thousands Prot of the year Non-cash positions in net prot and adjustments to reconcile net prot with net cash provided by operating activities: Write-downs, depreciation, adjustments, write-ups to xed and other assets, changes in provisions and net changes due to hedge accounting Change in other non-cash positions Prot / loss from the sale of assets Prot from the sale of xed assets Other adjustments (net interest income) Subtotal Change in assets and liabilities from operating activities after correction for non-cash components: Claims on banks Claims on customers Securities held for trading purposes Other assets from operating activities Liabilities to banks Liabilities to customers Securitized liabilities Other liabilities from operating activities Interest and dividends received Interest paid Income tax paid Net cash provided by operating activities Net cash used by investing activities Proceeds from the sale of: Financial investments Fixed assets Payments for the acquisitions of: Financial investments Fixed assets Effects of changes in the group of companies included in the consolidation Payments from the acquisition of subsidiaries Net cash provided by nancing activities Proceeds from capital increases Dividends paid Other nancing activities (subordinated capital) Cash and cash equivalents at the end of the previous period Net cash provided by operating activities Net cash used by investing activities Net cash provided by nancing activities Effects of exchange-rate changes on cash and cash equivalents Cash and cash equivalents at the end of the period of which: cash on hand Balances with central banks Debt issued by public-sector borrowers and bills of exchange rediscountable at central banks 352 16 0 0 16 330,493 328,985 1,525 16 0 0 0 0 0 0 10 0 0 10 384 925,833 595,724 10 10 330,493 0 330,493 0 222 776 602,244 168 921 42 6,594 94 328,985 1,525 925,833 595,724 697 4,849,627 344,659 73,089 7,382 125,669 100,290 5,051 5.038,103 681,103 8,950 21,130 58,006 49,672 4,139,471 98,287 5,341,610 1,922,599 0 0 25,379 7,380 2,572 39 8,334 4,538 3,710 6,608 2011 14,288 2010 22,092

42 auditors report

auditors report

We have audited the annual nancial statements prepared by the J.P. Morgan AG, Frankfurt am Main, comprising the balance sheet, the income statement, the notes to the nancial statements, the statement of cash ows and the statement of changes in equity, together with the bookkeeping system, and the management report of the J.P. Morgan AG, Frankfurt am Main, for the business year from January 1 to December 31, 2011. The maintenance of the books and records and the preparation of the annual nancial statements and management report in accordance with German commercial law are the responsibility of the Companys Board of Managing. Our responsibility is to express an opinion on the annual nancial statements, together with the bookkeeping system, and the management report based on our audit. We conducted our audit of the annual nancial statements in accordance with (Article) 317 hgb (Handelsgesetzbuch: German Commercial Code) and German generally accepted standards for the audit of nancial statements promulgated by the Institut der Wirtschaftsprfer (Institute of Public Auditors in Germany) (idw). Those standards require that we plan and perform the audit such that misstatements materially affecting the presentation of the net assets, nancial position and results of operations in the annual nancial statements in accordance with (German) principles of proper accounting and in the management report are detected with reasonable assurance. Knowledge of the business activities and the economic and legal environment of the Company and expectations as to possible misstatements are taken into account in the determination of audit procedures. The effectiveness of the accounting-related internal control system and the evidence supporting the disclosures in the books and records, the annual nancial statements and the management report are examined primarily on a test basis within the framework of the audit. The audit includes assessing the accounting principles used and signicant estimates made by the Companys Board of Managing Directors, as well as evaluating the overall presentation of the annual nancial statements and management report. We believe that our audit provides a reasonable basis for our opinion. Our audit has not led to any reservations.

auditors report 43

In our opinion based on the ndings of our audit, the annual nancial statements comply with the legal requirements and give a true and fair view of the net assets, nancial position and results of operations of the Company in accordance with (German) principles of proper accounting. The management report is consistent with the annual nancial statements and as a whole provides a suitable view of the Companys position and suitably presents the opportunities and risks of future development. Frankfurt am Main, April 18, 2012 PricewaterhouseCoopers Aktiengesellschaft Wirtschaftsprfungsgesellschaft

eva handrick Wirtschaftsprfer (German Public Auditor)

ppa. muriel atton Wirtschaftsprfer (German Public Auditor)

44 supervisory board report

supervisory board report

supervisory and control

The Supervisory Board supervised the Management Board throughout the year on the basis of written and oral reports and discharged its duties according to the law. Important matters of business management were examined by the Supervisory Board and reviewed together with the Management Board. The Supervisory Board met ve times to discuss the Banks economic situation, its strategy and risk management. Furthermore the Supervisory Board was informed in detail on the risk management by means of the MaRisk reports quarterly.

personnel changes of the management board

During the year 2011 the Management Board was comprised of Thomas Meyer (Chairman), Oliver Berger and Burkhard Kuebel-Sorger.

personnel changes of the supervisory board

During the year 2011 the Supervisory Board was comprised of: Mark S. Garvin (Chairman), Alexander Caviezel (Deputy Chairman), Karl-Georg Altenburg, Alison Livesey as well as Rudolf Wissel and Thomas Freise as representatives of the employees.

audit committee
The meeting of the audit committee in the nancial year 2011 was held on 26 April 2011. The audit committee is responsible for the supervision of the accounting process, the effectiveness of the internal control system, the effectiveness of the risk management system and the effectiveness of the internal audit system as well as the statutory auditor, in particular, the independence of the auditor and any additionally performed services of the auditor. On the basis of the recommendation of the audit committee ( 124 (3) 2 AktG) the Supervisory Board proposes to the shareholders to elect PriceWaterhouseCoopers AG, Frankfurt am Main, as statutory auditor for the year-end Financial Statements and the Management Report for the nancial year 2012.

annual statement of accounts

The year-end nancial statements and the management report for the nancial year 2011 as well as all relevant accounting records have been examined by the duly appointed auditing rm PricewaterhouseCoopers AG, Frankfurt am Main. The auditing rm issued an unqualied audit opinion.

supervisory board report 45

The year-end nancial statements and the management report have been reviewed by the audit committee and have been discussed with the auditors during the meeting on 23 April 2012. Based on the nal result of the audit committee the Supervisory Board did not raise any objections. Financial statements as of 31 December 2011 and the management report as presented by the Management Board have been approved by the Supervisory Board today. The annual statement of accounts is herewith determined. The Supervisory Board would like to express its thanks to the Board of Management and to all employees for their performance and commitment.

April 23, 2012 The Supervisory Board

mark s. garvin Chairman

46 imprint

published by
J.P. Morgan AG, Frankfurt am Main Junghofstrae 14 60311 Frankfurt am Main

layout / design
heisters & partner, Corporate & Brand Communication, Mainz

printing
Druckerei und Verlag Klaus Koch GmbH, Wiesbaden

J.P. Morgan AG, Frankfurt am Main Junghofstrae 14 60311 Frankfurt am Main, Germany