Leverage: A thoughtful approach

 
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Leverage: A thoughtful approach

IN BRIEF                                           Many individuals understandably have adopted a more
                                                   cautious view of debt in recent years. However, it is
Leverage is a powerful but often                   important to remember the strategic and valuable role
underutilized way to enhance wealth                a modest use of leverage can play, both in managing
and create financial flexibility.                  day-to-day finances and achieving longer-term
                                                   financial goals.
Conducting a review of your personal
balance sheet can help you see                     At J.P. Morgan, we view leverage as a potentially
where and how a borrowing strategy                 powerful resource that can be strategically employed
may be thoughtfully integrated to                  in many ways:
help you achieve immediate aims and                • Within the context of your overall balance sheet,
long-term goals.                                      leverage can help you monetize assets, providing
                                                      the liquidity to achieve personal or business
Adding modest leverage to a portfolio
                                                      objectives.
or specific investment can be a smart
strategy to help you meet your                     • Integrated into a well-planned asset allocation
objectives within risk parameters you                 strategy, leverage can help you manage certain risks
find acceptable.                                      and diversify a portfolio.
                                                   • As a tactical move, leverage can provide liquidity,
                                                      potentially enhance returns or help you achieve
                                                      other goals within risk parameters you find
                                                      acceptable.
                                                   However, before moving forward, we recommend a
                                                   complete balance sheet and cash flow review. Gaining
                                                   a clear picture of assets, liabilities and cash flows can
                                                   help you determine where and how leverage can best
                                                   be integrated into your financial plans. »

                                                   The views and strategies discussed in this paper may not be suitable to all
                                                   investors. This information is provided for informational purposes and is not
                                                   intended as an offer or solicitation for the purchase or sale of any financial
                                                   instrument. Please read the important information at the end of this paper.
2                                                                                   MANAGING WEALTH IN A NEW WORLD

CONSIDERING MODERATE LEVERAGE WITHIN YOUR BALANCE SHEET
Conducting a review of all your holdings—not just your investment portfolio—can help you determine if your
assets and liabilities are working well enough together to keep your financial plans on track, while managing risk
at a level you deem acceptable.

A balance sheet review can help you assess your            that he regularly employed in the course of running
progress toward important goals and objectives.            his oil business. As a result, he established three
It also gives you an opportunity to evaluate your          lines of credit: one to fund a trust for his children,
liquidity needs and identify potential funding             another to add liquidity to the partnership, and
sources, such as real estate, investments or artwork.      a third to enhance his own cash flow. Moreover,
In this broad context, we can help you determine if        looking ahead, the executive indicated an interest
you are exposed to too much risk, such as having           in further using credit as new investment
your wealth concentrated in a single stock. Using a        opportunities presented themselves.
modest amount of leverage may help you manage
this risk exposure.                                        Diversify holdings
                                                           Using leverage can help you diversify exposures and
Indeed, strategic financing is a flexible wealth
                                                           take advantage of timely opportunities.
management tool that can be applied to a wide
range of near- or longer-term objectives; for              Example: The CEO of a Brazilian agribusiness
example, allowing you to:                                  company acquired by a European conglomerate was
• Bridge gaps in your cash flow                            asked to lead a key growth initiative. In exchange
                                                           for doing so, he was offered a bonus incentive of
• Start or expand a business
                                                           $10 million per year of parent company stock,
• Diversify your portfolio                                 denominated in Euros, with a cash-out option at
• Potentially enhance the performance of                   the end of five years. By the third year, the business
   select investments                                      had met its growth target, earning the CEO his
Importantly, given the flexibility it offers as a wealth   bonus. However, his concentrated stock position
management tool, strategically using leverage may          was vulnerable to financial and currency market
allow you to achieve several objectives at the same        fluctuations. Working with his J.P. Morgan team, he
time—as the examples below illustrate.                     established a line of credit against the stock and is
                                                           currently using the funds to more broadly diversify
Gain liquidity                                             his portfolio, both in terms of asset classes and
Leverage can provide sufficient liquidity to help          currencies.
you face emergency expenses, satisfy tax or other
financial obligations, or gain flexibility in when or      Identify opportunities
how you take advantage of new opportunities.               Looking at both sides of your balance sheet can
                                                           help you identify cost savings and potential sources
Example: The CEO of an oil exploration company             of funding to help meet a range of liquidity,
also served as the head of a family limited                investment and wealth planning objectives.
partnership, which held diverse holdings—
securities, family vacation property, aircraft,            Example: Three years ago, a U.S.-based executive
real estate, fine art—and employed no leverage.            opted to cover the cost of a residential real estate
Historically, the partnership sold assets to acquire       purchase with funds from several personal loans.
new ones, willingly accepting that this strategy           Unaware of how far mortgage rates had fallen
might limit its growth potential.                          during the same period, a balance sheet review
                                                           helped her realize she could save more than $21,000
 balance sheet review allowed this executive to
A                                                          a month by replacing those three five-year loans
weigh these limitations against the potential gains        with a 15-year fixed-rate mortgage, which she
that could result from using leverage—a strategy
LEVERAGE: A THOUGHTFUL APPROACH                                                                                                            3

could repay at any time with no penalties. The                          restaurants in other cities. In fact, using financing
monthly savings are now earmarked for a charitable                      was critical to the startup’s growth strategy, as it
organization she supports.                                              was not yet possible for the new restaurant business
                                                                        to obtain standalone financing.
Fund growth plans
                                                                        Taking the advice of his J.P. Morgan team, the client
As markets change or when business opportunities
                                                                        pledged securities and established a line of credit to
appear, having ready access to credit can position
                                                                        use as working capital for the business. Importantly,
you to respond quickly.
                                                                        this strategy not only allowed him to fund his
Example: After opening his first successful restaurant                  restaurant venture during its build-out stage and
with 100% equity, a London-based hedge fund                             achieve his goal of expansion, it also allowed him to
manager now wanted to finance his plans to open                         preserve his cash and keep his portfolio intact.

  Adaptable to any rate environment

  It is a given that in periods when interest rates are low, the strategic use of credit may be particularly attractive, allowing you to
  cost-effectively acquire assets, for example. However, even in a rising-rate environment, using credit may be advantageous,
  affording you the liquidity to meet obligations, such as large tax payments, or to be opportunistic in countless ways.

  At J.P. Morgan, we believe that leverage can be effectively used in all market cycles. Thus, we help you consider “how” and
  not just “when” to employ the strategic use of credit.

   IN A LOW-RATE ENVIRONMENT                      IN A RISING-RATE ENVIRONMENT                   IN A HIGH-RATE ENVIRONMENT
   Consider floating-rate credit facilities       Lock in fixed-rate loans, interest rate        While borrowing costs are higher,
   that allow you to benefit from the lower       swaps, equity collars or other strategies      they are more stable than in a rising-
   cost of credit                                 designed to mitigate interest rate risk        rate environment
                                                  (that is, control your credit costs) for
                                                  longer-term credit needs

   Dial up the use of leverage on high-           Apply floating-rate strategies for             Apply floating-rate strategies for
   conviction investment ideas to take            shorter-term uses                              shorter-term uses
   advantage of the low cost of capital

   Take advantage of the potential to             Understand that higher borrowing costs         Employ financing more selectively
   enhance portfolio profitability due to         may affect profitability
   the low cost of funds
4                                                                                                                                   MANAGING WEALTH IN A NEW WORLD

THE ROLE OF LEVERAGE IN YOUR PORTFOLIO
Leverage can add an important dimension to a portfolio, providing liquidity to help you diversify your holdings
to manage risk, fund new investments or potentially enhance returns.

You may be comfortable with the asset allocation                                              While strategic asset allocation is the main driver
of your current portfolio and still want to pursue                                            of portfolio returns, adding a moderate amount
potentially higher returns. There are several strategies                                      of leverage to your portfolio may allow you to boost
that you can consider to meet this objective, such as:                                        your overall portfolio returns. It also can help you
                                                                                              slightly adjust your risk profile, without significantly
•   Change your risk tolerance level
                                                                                              altering the targeted risk/return relationship of
•   Add illiquid assets                                                                       your portfolio.
•   Go down in credit quality
•   Extend duration                                                                           Assess how much leverage is appropriate
                                                                                              Generally speaking, leverage strategies can be
•   Add leverage in a thoughtful way
                                                                                              designed to fit the financial objectives and risk
Similar to selecting portfolio managers or taking                                             parameters of various types of investors.
advantage of opportunistic trading ideas, employing
                                                                                              For investors with a Conservative portfolio, we
leverage can be part of an overlay of timely moves
                                                                                              typically recommend that leverage levels not exceed
made to complement the strategic asset allocation
                                                                                              20%; for investors with a Balanced portfolio, we
that is the bedrock of your financial investments.
                                                                                              typically recommend up to 15%. Keeping leverage

    Modest leverage can boost potential returns—within your current asset allocation and risk profile

    Adding modest leverage may increase returns while subjecting a portfolio to more volatility, but without taking on the asset risk associated with
    a wholly different asset allocation.

                                    Sample asset allocations for various types of investors

                                                     CONSERVATIVE                                              BALANCED                                   GROWTH

                                                                                                                                                           15%
                Equities                                         30%                                            30%
                                                        50%                                                              40%
                                                                                                                                                                  50%
                Alternatives
                                                                                                                                                         35%
                Fixed Income/Cash                                20%                                               30%

                                          No leverage                Levered 20%                  No leverage               Levered 15%                 No leverage*

           Expected
           equilibrium                        5.9%                        6.4%                        7.2%                       7.8%                        8.1%
           return**

           Expected
           volatility
                                              7.0%                        8.4%                      10.2%                       11.7%                       12.5%

                                    Less Risk                                                                                                                    More Risk

     * We typically do not recommend adding leverage to Growth-modeled portfolios as these types of portfolios are already positioned for more aggressive risk/return potential.
    ** “Equilibrium return” represents the value around which market returns will tend to fluctuate over a long period of time. It is a forward-looking assessment based
        on our best estimates and does not represent a promise or estimate of actual returns. Please see “Understanding ‘equilibrium’ estimates” on back page for further
        explanation.
    Source: J.P. Morgan Portfolio Construction, November 2011
    These are J.P. Morgan Global Strategic Model Allocations and are presented for illustrative purposes only. All statistics are pre-tax. Your actual portfolio will be
    constructed based upon investments for which you are eligible and based on your personal investment requirements and circumstances. Consult your advisor
    regarding the minimum asset size necessary to fully implement these allocations. See back page for important information.
LEVERAGE: A THOUGHTFUL APPROACH                                                                                                                                                5

levels low helps position a portfolio a bit further                                      asset allocation and risk profile without moving to a
along the risk continuum, thereby enhancing the                                          completely different type of portfolio.
likelihood of higher returns without dramatically
                                                                                         Any investment associated with leverage includes
altering the portfolio’s risk classification (see chart
                                                                                         additional risks, such as potentially higher volatility,
on previous page).
                                                                                         exposure to rising interest rates (borrowing costs)
However, exceeding these recommended levels may                                          and margin calls, which may occur if the underlying
result, for example, in a Conservative portfolio going                                   investment declines below its minimum lending
beyond the risk levels generally associated with a                                       values. Leverage also will magnify losses as well
conservative approach.                                                                   as gains.
In determining whether to incorporate leverage                                           It is for these reasons that we typically do not
in your existing portfolio, it is helpful to view                                        recommend adding leverage to a Growth portfolio.
the potential impact of a moderate amount of                                             As this type of portfolio is already positioned for
leverage on the value of your portfolio over a longer                                    more aggressive risk/return potential, introducing
timeframe (see chart below). While adding leverage                                       leverage will likely exacerbate its volatility. Still, for
introduces additional risk, it allows you to enhance                                     some investors, the potential rewards and risks may
the likelihood of higher returns within your current                                     be acceptable.

  A look at the potential impact of leverage at year 15

  Adding modest leverage adds risk to enhance the likelihood of higher returns, but without moving to a completely different type of portfolio.
  Assumptions in hypothetical scenario: Initial net value = $10 million; output is net of leverage and does not include taxes; long-term borrowing =
  3.5% (a longer-term estimate of cash + 100 basis points).

                 Range of projected wealth values: Year 15
         ($MM)
            70                      CONSERVATIVE                                                   BALANCED                                       GROWTH

           60

           50

           40

           30
                                                                                        26.6                           27.8                          29.2
  Median                                                  23.8
                             22.9
           20
  CVaR
           10                13.7                         13.2                          12.7                           12.2                           11.9
            0
                        No leverage                  Levered 20%                    No leverage                   Levered 15%                    No leverage*

                 Less Risk                                                                                                                                   More Risk
  The top of each bar represents the “95th percentile” wealth value (i.e., the high point for 95% of all probable wealth values modeled in this scenario). The bottom of
  each bar represents the “5th percentile” wealth value (i.e., the lowest point for all but 5% of the probable wealth values modeled in this scenario). The most darkly
  shaded area indicates the range in and around the “50th percentile” or median. The white line indicates the median, the middle wealth value of the entire range of
  probable wealth values.
  CVaR: The average allocation value in the worst 5% of the simulations.
  * We typically do not recommend adding leverage to Growth-modeled portfolios as these types of portfolio are already positioned for more aggressive risk/return potential.
  Source: J.P. Morgan Portfolio Construction, November 2011
  This projection is for illustrative purposes only and does not represent investment in any particular vehicle. References to future wealth values are not promises or even
  estimates of actual returns you may experience. Furthermore, the material is incomplete without reference to, and should be viewed in conjunction with, the verbal
  briefing provided by your J.P. Morgan representative.
6                                                                                                                                 MANAGING WEALTH IN A NEW WORLD

APPLYING LEVERAGE AS A TACTICAL MOVE
Selectively adding leverage to an investment strategy can potentially generate yield or augment returns on
high-conviction positions without significantly altering your risk exposure.

Not every investment is a suitable leverage                                                 Managing market risks
candidate. Generally, we recommend adding                                                   It is important to keep in mind that changes in
leverage to investments with lower price volatility,                                        interest rates or other market risks can magnify
shorter maturities and higher liquidity levels. This                                        gains and losses. Adding leverage to a fixed income
reduces the probability, and potential impact, of a                                         strategy may be positively or negatively impacted by
margin call.                                                                                changing interest rates, credit spreads and foreign
                                                                                            exchange rates, for example. Similarly, the value of
An investor seeking higher yield might choose to
                                                                                            an equity investment may be affected by share price
purchase bonds with longer maturities or those of
                                                                                            or dividend changes.
lesser credit quality, perhaps overlooking that:
• Lower-quality securities carry a greater risk of                                          For these reasons, we view leverage as a strategy
   default, thereby adding volatility to the portfolio                                      that can also be used tactically, ideally moving
   (see chart below).                                                                       the amount of leverage up or down according to
                                                                                            the prevailing market environment and your own
• Extending maturity (that is, adding duration)
                                                                                            personal situation.
   magnifies declines in principal value when
   interest rates rise.
                                                                                                Downside scenarios
In contrast, adding modest leverage to high-quality                                             At J.P. Morgan, we consider downside scenarios
bonds to take advantage of a market dislocation,                                                as well as potential gains. To that end, we
for example, may enhance returns. This may allow                                                recommend borrowing an amount less than
you to maintain your income level without having                                                the maximum loan-to-value ratio (the advance
to move further out on the yield curve or invest in                                             rate) that is established for any investment. In
lower-quality securities to obtain higher yields.                                               this way, you can seek to enhance returns while
                                                                                                reducing the probability of a margin call.

    Moving to lower-quality investments adds risk

     Lower-quality investments can expose your portfolio to principal volatility and default risk.
                                                                          10-year default rates
     3500
                       CCC rated Global High Yield Spreads                 CCC – C		 17.50
                       BB rated Global High Yield Spreads                    BB		 0.79
     3000
                       A rated Investment Grade Spreads                       A		 0.12

     2500

     2000

      1500

     1000

      500

        0

         1/2000       1/2001       1/2002       1/2003       1/2004       1/2005       1/2006      1/2007        1/2008       1/2009       1/2010       1/2011       1/2012

    Sources: J.P. Morgan, Bloomberg, November 2011
    Past performance is not a reliable indicator of future results. Spreads are relative to U.S. Treasuries. Investors may get back less than the amount invested.
LEVERAGE: A THOUGHTFUL APPROACH                                                                                                                      7

                                                                             Leverage tailored to your personal circumstances
   Case study: Applying leverage to an opportunistic                         Leverage can offer you a number of benefits within
   investment idea
                                                                             the context of your personal situation and risk
                                                                             appetite, allowing you to achieve important near-
   In the summer of 2011, a pullback in credit markets                       or longer-term goals, such as buying a residence
   generated an outsized increase in short-dated yields relative             or making tax-efficient investments. It also can be
   to longer-dated bonds. This created an opportunity to earn                part of a well-thought-out strategy for preserving
   attractive yields with limited interest rate risk (duration of            generational wealth and growing your portfolio by
   2.3 years).                                                               enhancing investment returns.
   Believing that this dislocation would soon reverse, at the                Your J.P. Morgan team can evaluate your liquidity
   end of October we recommended applying modest leverage                    needs and help you determine the right financing
   to a portfolio of diversified credits, which was by then                  structure. Additionally, your dedicated Capital Advisor,
   yielding 5.8%.                                                            as part of your J.P. Morgan team, can provide a wide
                                                                             range of ideas beyond the ones outlined in this paper.
   Seeing further opportunity, we recommended adding 50%
   leverage to the strategy. This increased the yield to 9.7%
   (assuming borrowing costs of 1.9%) with limited interest
   rate risk. For example, if the leverage amount maximized
   the 65% loan-to-value ratio of the underlying securities, the
   strategy would have to fall by about 23% before a collateral
   shortfall would occur.

   A timely application of leverage offers an opportunity to
   enhance portfolio performance.

“J.P. Morgan Private Bank” is a marketing name for private banking business conducted by JPMorgan Chase & Co. and its subsidiaries worldwide.
 Bank products and services are offered by JPMorgan Chase Bank, N.A. and its affiliates. This material is not intended as an offer or solicitation for
 the purchase or sale of any financial instrument. J.P. Morgan Securities LLC or its brokerage affiliates may hold a position or act as market maker
 in the financial instruments of any issuer discussed herein or act as an underwriter, placement agent, advisor or lender to such issuer. The views
 and strategies described herein may not be suitable for all investors. The discussion of loans or other extensions of credit in this material is for
 illustrative purposes only. No commitment to lend should be construed or implied.
 In the United Kingdom, this material is approved by J.P. Morgan International Bank Limited (JPMIB) with the registered office located at 125 London
 Wall EC2Y 5AJ, registered in England No. 03838766, and is authorized and regulated by the Financial Services Authority. In addition, this material
 may be distributed by: JPMorgan Chase Bank, N.A. (JPMCB) Paris branch, which is regulated by the French banking authorities Autorité de Contrôle
 Prudentiel and Autorité des Marchés Financiers; J.P. Morgan (Suisse) SA, regulated by the Swiss Financial Market Supervisory Authority; JPMCB
 Dubai branch, regulated by the Dubai Financial Services Authority; JPMCB Bahrain branch, licensed as a conventional wholesale bank by the Central
 Bank of Bahrain (for professional clients only); JPMCB Hong Kong branch, regulated by the Hong Kong Monetary Authority and JPMCB Singapore
 branch, regulated by the Monetary Authority of Singapore.
 Past performance is no guarantee of future results. The material above is intended for informational purposes only. Opinions expressed herein are
 those of J.P. Morgan Private Bank and may differ from those of other J.P. Morgan employees and affiliates. This information in no way constitutes
 J.P. Morgan research and should not be treated as such. Further, the views expressed herein may differ from that contained in J.P. Morgan research
 reports. The above summary/prices/quotes/statistics have been obtained from sources deemed to be reliable, but we do not guarantee their
 accuracy or completeness; any yield referenced is indicative and subject to change. Investors cannot invest directly in an index.
IMPORTANT INFORMATION
Please note that lines of credit are extended at the discretion of J.P. Morgan, and J.P. Morgan has no commitment to extend a line of credit or make
loans available under the line of credit. Any extension of credit is subject to credit approval by the lender in accordance with the terms contained in
definitive loan documents.
RELATED TO PAGES 4 AND 5
Sample asset allocations
All statistics are pre-tax. For further information, see “Understanding ‘equilibrium’ estimates” below. For illustrative purposes only.
These are J.P. Morgan Global Strategic Model Allocations and are presented for illustrative purposes only. Your actual portfolio will be constructed
based upon investments for which you are eligible and based upon your personal investment requirements and circumstances. Consult your advisor
regarding the minimum asset size necessary to fully implement these allocations.
J.P. Morgan offers specialized financial services through legal entities licensed for specific activities. The type of account you open, your investment
objectives, and other factors will ultimately determine the range of products and services of which you can avail yourself. Not all accounts or services
can provide a strategic investment plan.
Investment strategies shown may not be suitable for all investors. Speak with your J.P. Morgan representative concerning your personal investment
needs and allocation requirements.
Understanding “equilibrium” estimates
Our investment management research incorporates our proprietary projections of the “equilibrium” returns and volatility of each asset class over the
long term, as well as equilibrium estimates of the correlations among asset classes. Clearly, financial firms cannot predict how markets will perform
in the future. But we do believe that by analyzing current economic and market conditions and historical market trends, and then, most critically,
making projections of future economic growth, inflation and real yields for each country, we can estimate the “equilibrium” performance for an
entire asset class. The “equilibrium” return is simply the central tendency over a very long period of time around which market returns will tend to
fluctuate, because it represents the value inherent in that market. It is possible—indeed, probable—that actual returns will vary considerably from
this equilibrium, even for a number of years. But we believe that market returns will always at some point return to the equilibrium trend. We further
believe that these kinds of forward-looking assessments are far more accurate than historical trends in deciding what asset class performance will
be, and how best to determine an optimal asset mix.
In reviewing this material, please understand that all references to expected return are not promises, or even estimates, of actual returns one
may achieve. They simply show what the equilibrium return should be, according to our best estimates. Also note that actual performance may be
affected by the expertise of the person who actually manages these investments, both in picking individual securities and possibly adjusting the mix
periodically to take advantage of asset class undervaluations and overvaluations caused by market trends.
RELATED TO PAGES 6 AND 7
The estimated yields are for illustration/discussion purposes only and are subject to significant limitations. An investor should not expect to achieve
actual yields similar to the estimated yields shown above. The estimated yields are the manager’s estimate based on the manager’s assumptions,
as well as past and current market conditions, which are subject to change. Because of the inherent limitations of the estimated yields, potential
investors should not rely on them when making a decision on whether or not to invest in this strategy. The estimated yields cannot account for the
impact that economic and market factors have on the implementation of an actual investment program. Unlike actual performance, the estimated
yields do not reflect actual trading, liquidity constraints, fees, expenses and other factors that could impact the future returns of the strategy. The
manager’s ability to achieve the estimated yields is subject to risk factors over which the manager may have no or limited control. No representation
is made that the strategy will achieve the estimated yield or its investment objective. Prospective investors should understand the risk factors
associated with the strategy. Actual returns could be higher or lower than the estimated yields. This assumption does not take into account variations
in credit risk.

RISK CONSIDERATIONS
Leverage as a return-enhancement strategy As a tactical investment strategy, leverage may be dialed up or down over time, according to
market conditions. A leveraged investment strategy is relatively attractive in a low interest rate environment when the cost of borrowing is modest,
though using leverage in a rising-rate environment may also be effective at an appropriate level. However, even in a low-rate environment, not
all investments are suitable leverage candidates. Generally, we recommend you consider adding leverage to those investments with lower price
volatility and higher liquidity levels.
Leverage may add risk to a portfolio Adding leverage to an investment can magnify gains as well as losses. Please consider the following:
   Margin calls J.P. Morgan establishes a maximum loan-to-value ratio for investments (i.e., the maximum amount of a loan collateralized by that
   financial investment). If the market declines, and the value of the underlying asset moves lower than the lending value required to support the
   loan, J.P. Morgan will request additional funds to maintain the required lending value amount. A “margin call” requirement can be met either with
   cash or additional securities. In exercising its remedies, J.P. Morgan will not be required to marshal assets or act in accordance with any fiduciary
   duty it otherwise might have.
   Increased collateral requirements At any time, and without prior written notice, J.P. Morgan can decrease the advance rate for an investment
   securing a loan, thereby triggering a margin call. Loans collateralized by securities involve certain risks and may not be suitable for all investors.
   If the market declines, you may be required to deposit additional securities and/or cash into your account.
   Sale of securities In the event that a margin call is not met, J.P. Morgan has the right to sell securities held in the accounts to satisfy the obligation,
   as well as the right to decide which assets to sell. J.P. Morgan will attempt to notify a client before a collateral sale is made. However, we are not
   required to do so. Some or all of the securities sold to meet a margin/maintenance call may be sold at prices higher than their initial cost, which
   may result in adverse tax consequences. You should consult your tax advisor in order to fully understand the tax implications associated with
   pledging securities in connection with a margin loan. Please read your Customer Agreement carefully so that you understand your obligations.
   Higher borrowing costs Borrowing costs may increase over time if short-term interest rates move higher.

© 2011 JPMorgan Chase & Co. All rights reserved.                                                                                                     0711-231-01
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