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December 6, 2004
JPMorgan Third Party Provider
Management National Association of State
Treasurers Conference
S T R I C T L Y   P R I V A T E   A N D 
 C O N F I D E N T I A L
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Agenda

• Third Party Provider Management
• Provider Selection
• Contractual Arrangements
• Ongoing Management
• JPMorgan Internal Risk Management
• Appendix
• Financial Risk Management
• Operations Risk Management
• Due Diligence

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Third Party Vendor Selection Criteria and Process

• Selection Criteria
• Financial strength/credit evaluation
• Qualify per applicable regulations
• Risk regulatory compliance
• Settlement portfolio servicing skills
• Security control
• Reputation market share
• Communications/systems sophisticated
• Quality of personnel
• Flexibility and attention to the relationship
• Local settlement/clearing association membership
• Fees
• RFP sent to Short List of Sub-custodians
• On Site Visits Conducted to Prospective
  Sub-custodians
• Review of Foreign Counsel Securities Law Survey
• RFP/Due Diligence Evaluation Analysis
• Consultation with firms Risk Management, Credit,
  Legal, Operations departments

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Contractual Arrangements with Subcustodian Bank

• JPMorgans relationships with its subcustodian
  banks are governed by contracts, which set forth
  responsibilities and specific performance
  criteria
• All third party subcustodian banks (including
  JPMorgan Chase affiliates) sign a subcustodian
  agreement. Among other things, the subcustody
  agreement includes specific provisions designed
  to assure compliance with applicable regulations.
• All subcustodian banks also enter into an Agent
  Service Agreement which has three main purposes
• To provide the subcustodian with clear guidelines
  as to the manner in which it should act on behalf
  of JPMorgan and should communicate with JPMorgan
• To communicate the specific service standards
  required of the subcustodian
• To provide JPMorgan with a performance
  measurement tool to evaluate the subcustodian
  banks service quality.
• As part of each subcustodians compliance with
  JPMISs agreements and procedures, we require
  notifications through Annual Attestation letters
  of internal control problems that would have a
  material impact on the subcustodians ability to
  provide a satisfactory level of service.

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Subcustodian Management Continual Monitoring
Process
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Sub Custodian Bank Monitoring

• Effective monitoring of third party vendors
  requires continual monitoring across multiple
  disciplines
• Financial Strength
• Creditworthiness
• Cash Exposure
• Legal / Contractual
• Local regulatory compliance
• Compliance with our requirements
• Operational Performance
• Performance Management
• Performance Measurement
• Due Diligence
• On-site reviews of sub custodian
• Meetings with key market participants

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Sub Custodian Performance Measurement

• A formal performance measurement program is
  critical for successful risk management.
  JPMorgan actively manages the performance of
  third party vendors through detailed reporting
  and analysis.
• Metrics
• 40 different indicators are utilized to manage
  and monitor performance
• Data includes KPIs for all products as well as
  query response times
• Metrics are compared against pre-determined
  benchmarks to derive a RAG rating
• Scorecards
• Monthly scorecards are created with metrics and
  provided to all sub custodians
• Historical trending of data provides a view of
  overall performance of a vendor and highlights
  issues
• Analysis
• Reviews of data are performed at individual
  vendor as well as at the product level
• Specific and generic improvement initiatives are
  implemented as a result

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JPMorgan Enterprise-wide Operational Risk
Management Tool (Horizon)

• Horizon helps organizations transform operational
  risk management from regulatory requirements such
  as Basel II, the Sarbanes-Oxley Act and FDICIA
  into a competitive advantage by helping
  management
• Identify areas of highest risk
• Document controls established to mitigate risk
• Evaluate the effectiveness of controls for
  different business units
• Establish and monitor issues and their action
  plans
• Record and analyze Risk/Loss Events

Horizons triangle approach integrates the
three separate operational risk processes with
this cohesive view, true risk management is
achievable
J P M O R G A N   H O R I Z O N   -   R I S K 
 M A N A G E M E N T   S O L U T I O N
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Appendix Subcustodian Bank Monitoring
Performance Analysis

• Performance Analysis Agent Service Agreement
  documents key service standards for the following
  service categories
• Transaction Capture
• International Trade Management
• Securities Lending
• Asset Reconciliation
• Cash Management
• Income Processing
• Corporate Actions
• Taxation
• Proxy Voting
• Network Service Management
• Offshore Fund
• Operational Staff of 800 works with the
  subcustodians on a day to basis in conjunction
  with Network Management to review the above
  standards.

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Appendix Subcustodian Bank Monitoring Financial
Strength - Creditworthiness

• Daily on line research via NewsAgent
• Network Mgt. updates (via the agents)
• Public Credit Agency ratings updates (twice
  daily)
• Proprietary internal risk ratings for financial
  institutions and country risk
• Monthly reviews of operational data (NSM KPIs,
  Assets under Custody, trade volumes, etc.)
• Quarterly reviews of financial results
• Annual analysis of
• Global Markets Credit internal credit opinions
• Annual Reports
• Formal reports by Fitch / IBCA
• Research from JPMorgan Flemings Asset Management
  (JPMFAM)

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Appendix Subcustodian Bank MonitoringFinancial
Strength - Cash Exposure with Sub Custodians

• Daily reviews of cash positions with
  subcustodians
• Enables JPMIS Risk Management to quickly focus on
  abnormally high balances and /or high risk banks
• Asset Trend analysis - Monthly, Quarterly,
  Semi-Annual and Annual breakdowns
• Highlights the following
• Market level issues
• Agent performance concerns
• Internal processing improvements
• Client trends
• Seasonal impact
• Systems constraints (either with JPMorgan or the
  agent)

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Appendix Due Diligence - On-Site Visits

• On-site reviews are conducted at least once
  during a calendar year, sometimes more or less
  depending on the local market activity
• A due diligence review incorporates
• Subcustodian bank continues to meet the high
  service standards established by JPMorgan
• market issues
• service issues
• product development initiatives.
• Meetings with local regulators and market
  participants lead to a greater understanding of
  market practice and enhance JPMorgans ability to
  represent clients interests.