| Derivatives and Hedging Activities | Derivatives and Hedging Activities Derivative Activities Derivatives are instruments that derive their value from underlying asset prices, indices, reference rates and other inputs, or a combination of these factors. Derivatives may be traded on an exchange (exchange-traded) or they may be privately negotiated contracts, which are usually referred to as OTC derivatives. Certain of the firm’s OTC derivatives are cleared and settled through central clearing counterparties (OTC-cleared), while others are bilateral contracts between two counterparties (bilateral OTC). Market Making. As a market maker, the firm enters into derivative transactions to provide liquidity to clients and to facilitate the transfer and hedging of their risks. In this role, the firm typically acts as principal and is required to commit capital to provide execution, and maintains market-making positions in response to, or in anticipation of, client demand. Risk Management. The firm also enters into derivatives to actively manage risk exposures that arise from its market-making and investing and financing activities. The firm’s holdings and exposures are hedged, in many cases, on either a portfolio or risk-specific basis, as opposed to an instrument-by-instrument basis. The offsetting impact of this economic hedging is reflected in the same business segment as the related revenues. In addition, the firm may enter into derivatives designated as hedges under U.S. GAAP. These derivatives are used to manage interest rate exposure of certain fixed-rate unsecured borrowings and deposits and certain U.S. government securities classified as available-for-sale, foreign exchange risk of certain available-for-sale securities and the net investment in certain non-U.S. operations, and the price risk of certain commodities. The firm enters into various types of derivatives, including: • Futures and Forwards. Contracts that commit counterparties to purchase or sell financial instruments, commodities or currencies in the future. • Swaps. Contracts that require counterparties to exchange cash flows, such as currency or interest payment streams. The amounts exchanged are based on the specific terms of the contract with reference to specified rates, financial instruments, commodities, currencies or indices. • Options. Contracts in which the option purchaser has the right, but not the obligation, to purchase from or sell to the option writer financial instruments, commodities or currencies within a defined time period for a specified price. Derivatives are reported on a net-by-counterparty basis (i.e., the net payable or receivable for derivative assets and liabilities for a given counterparty) when a legal right of setoff exists under an enforceable netting agreement (counterparty netting). Derivatives are accounted for at fair value, net of cash collateral received or posted under enforceable credit support agreements (cash collateral netting). Derivative assets are included in trading assets trading liabilities Realized and unrealized gains and losses The tables below present the gross fair value and the notional amounts of derivative contracts by major product type, the amounts of counterparty and cash collateral netting in the consolidated balance sheets, as well as cash and securities collateral posted and received under enforceable credit support agreements that do not meet the criteria for netting under U.S. GAAP. As of December 2022 As of December 2021 $ in millions Derivative Derivative Derivative Derivative Not accounted for as hedges Exchange-traded $ 675 $ 1,385 $ 256 $ 557 OTC-cleared 74,297 72,979 13,795 12,692 Bilateral OTC 195,052 174,687 232,595 205,073 Total interest rates 270,024 249,051 246,646 218,322 OTC-cleared 1,516 1,802 3,665 4,053 Bilateral OTC 10,751 9,478 12,591 11,702 Total credit 12,267 11,280 16,256 15,755 Exchange-traded 1,041 22 417 10 OTC-cleared 520 589 423 338 Bilateral OTC 102,301 111,276 86,076 85,795 Total currencies 103,862 111,887 86,916 86,143 Exchange-traded 9,225 9,542 6,534 6,189 OTC-cleared 698 838 652 373 Bilateral OTC 30,017 22,745 28,359 25,969 Total commodities 39,940 33,125 35,545 32,531 Exchange-traded 26,302 26,607 33,840 35,518 OTC-cleared 685 19 8 5 Bilateral OTC 23,574 30,157 39,718 44,750 Total equities 50,561 56,783 73,566 80,273 Subtotal 476,654 462,126 458,929 433,024 Accounted for as hedges OTC-cleared – – 1 – Bilateral OTC 335 11 945 – Total interest rates 335 11 946 – OTC-cleared 29 29 34 27 Bilateral OTC 53 256 60 139 Total currencies 82 285 94 166 Subtotal 417 296 1,040 166 Total gross fair value $ 477,071 $ 462,422 $ 459,969 $ 433,190 Offset in the consolidated balance sheets Exchange-traded $ (31,229) $ (31,229) $ (35,724) $ (35,724) OTC-cleared (75,349) (75,349) (16,979) (16,979) Bilateral OTC (254,304) (254,304) (279,189) (279,189) Counterparty netting (360,882) (360,882) (331,892) (331,892) OTC-cleared (1,388) (406) (1,033) (361) Bilateral OTC (55,388) (46,399) (63,084) (48,984) Cash collateral netting (56,776) (46,805) (64,117) (49,345) Total amounts offset $ (417,658) $ (407,687) $ (396,009) $ (381,237) Included in the consolidated balance sheets Exchange-traded $ 6,014 $ 6,327 $ 5,323 $ 6,550 OTC-cleared 1,008 501 566 148 Bilateral OTC 52,391 47,907 58,071 45,255 Total $ 59,413 $ 54,735 $ 63,960 $ 51,953 Not offset in the consolidated balance sheets Cash collateral $ (298) $ (1,887) $ (1,008) $ (1,939) Securities collateral (15,229) (4,329) (15,751) (7,349) Total $ 43,886 $ 48,519 $ 47,201 $ 42,665 Notional Amounts as of December $ in millions 2022 2021 Not accounted for as hedges Exchange-traded $ 4,241,937 $ 2,630,915 OTC-cleared 13,104,682 17,874,504 Bilateral OTC 11,137,127 11,122,871 Total interest rates 28,483,746 31,628,290 Exchange-traded 369 – OTC-cleared 529,543 463,477 Bilateral OTC 577,542 616,095 Total credit 1,107,454 1,079,572 Exchange-traded 9,012 14,617 OTC-cleared 150,561 194,124 Bilateral OTC 5,304,069 6,606,927 Total currencies 5,463,642 6,815,668 Exchange-traded 341,526 308,917 OTC-cleared 3,188 3,647 Bilateral OTC 255,208 234,322 Total commodities 599,922 546,886 Exchange-traded 1,107,659 1,149,777 OTC-cleared 1,639 198 Bilateral OTC 1,026,736 1,173,103 Total equities 2,136,034 2,323,078 Subtotal 37,790,798 42,393,494 Accounted for as hedges OTC-cleared 257,739 219,083 Bilateral OTC 3,156 4,499 Total interest rates 260,895 223,582 OTC-cleared 2,048 2,758 Bilateral OTC 7,701 18,658 Total currencies 9,749 21,416 Exchange-traded – 1,050 Total commodities – 1,050 Subtotal 270,644 246,048 Total notional amounts $ 38,061,442 $ 42,639,542 In the tables above: • Gross fair values exclude the effects of both counterparty netting and collateral, and therefore are not representative of the firm’s exposure. • Where the firm has received or posted collateral under credit support agreements, but has not yet determined such agreements are enforceable, the related collateral has not been netted. • Notional amounts, which represent the sum of gross long and short derivative contracts, provide an indication of the volume of the firm’s derivative activity and do not represent anticipated losses. • Total gross fair value of derivatives included derivative assets of $10.08 billion as of December 2022 and $17.48 billion as of December 2021, a nd derivative liabilities of $12.71 billion as of December 2022 and $17.29 billion as of December 2021, which are not subject to an enforceable netting agreement or are subject to a netting agreement that the firm has not yet determined to be enforceable. OTC Derivatives The table below presents OTC derivative assets and liabilities by tenor and major product type. $ in millions Less than 1 - 5 Greater than 5 Years Total As of December 2022 Assets Interest rates $ 5,509 $ 16,963 $ 53,943 $ 76,415 Credit 921 2,622 2,142 5,685 Currencies 12,284 7,819 7,085 27,188 Commodities 10,525 7,513 2,574 20,612 Equities 5,346 4,007 1,782 11,135 Counterparty netting in tenors (2,661) (3,942) (4,830) (11,433) Subtotal $ 31,924 $ 34,982 $ 62,696 $ 129,602 Cross-tenor counterparty netting (19,427) Cash collateral netting (56,776) Total OTC derivative assets $ 53,399 Liabilities Interest rates $ 9,351 $ 23,589 $ 21,467 $ 54,407 Credit 993 2,635 1,071 4,699 Currencies 18,987 8,736 8,712 36,435 Commodities 6,400 6,135 945 13,480 Equities 7,629 7,249 2,174 17,052 Counterparty netting in tenors (2,661) (3,942) (4,830) (11,433) Subtotal $ 40,699 $ 44,402 $ 29,539 $ 114,640 Cross-tenor counterparty netting (19,427) Cash collateral netting (46,805) Total OTC derivative liabilities $ 48,408 As of December 2021 Assets Interest rates $ 6,076 $ 11,655 $ 61,380 $ 79,111 Credit 1,800 2,381 3,113 7,294 Currencies 13,366 6,642 6,570 26,578 Commodities 10,178 7,348 770 18,296 Equities 11,075 6,592 2,100 19,767 Counterparty netting in tenors (3,624) (3,357) (2,673) (9,654) Subtotal $ 38,871 $ 31,261 $ 71,260 $ 141,392 Cross-tenor counterparty netting (18,638) Cash collateral netting (64,117) Total OTC derivative assets $ 58,637 Liabilities Interest rates $ 3,929 $ 10,932 $ 34,676 $ 49,537 Credit 1,695 3,257 1,841 6,793 Currencies 14,122 6,581 5,580 26,283 Commodities 7,591 6,274 1,763 15,628 Equities 8,268 12,944 3,587 24,799 Counterparty netting in tenors (3,624) (3,357) (2,673) (9,654) Subtotal $ 31,981 $ 36,631 $ 44,774 $ 113,386 Cross-tenor counterparty netting (18,638) Cash collateral netting (49,345) Total OTC derivative liabilities $ 45,403 In the table above: • Tenor is based on remaining contractual maturity. • Counterparty netting within the same product type and tenor category is included within such product type and tenor category. • Counterparty netting across product types within the same tenor category is included in counterparty netting in tenors. Where the counterparty netting is across tenor categories, the netting is included in cross-tenor counterparty netting. See Note 4 for an overview of the firm’s fair value measurement policies, valuation techniques and significant inputs used to determine the fair value of derivatives, and Note 5 for information about derivatives within the fair value hierarchy. Credit Derivatives The firm enters into a broad array of credit derivatives to facilitate client transactions and to manage the credit risk associated with market-making and investing and financing activities. Credit derivatives are actively managed based on the firm’s net risk position. Credit derivatives are generally individually negotiated contracts and can have various settlement and payment conventions. Credit events include failure to pay, bankruptcy, acceleration of indebtedness, restructuring, repudiation and dissolution of the reference entity. The firm enters into the following types of credit derivatives: • Credit Default Swaps. Single-name credit default swaps protect the buyer against the loss of principal on one or more bonds, loans or mortgages (reference obligations) in the event the issuer of the reference obligations suffers a credit event. The buyer of protection pays an initial or periodic premium to the seller and receives protection for the period of the contract. If there is no credit event, as defined in the contract, the seller of protection makes no payments to the buyer. If a credit event occurs, the seller of protection is required to make a payment to the buyer, calculated according to the terms of the contract. • Credit Options. In a credit option, the option writer assumes the obligation to purchase or sell a reference obligation at a specified price or credit spread. The option purchaser buys the right, but does not assume the obligation, to sell the reference obligation to, or purchase it from, the option writer. The payments on credit options depend either on a particular credit spread or the price of the reference obligation. • Credit Indices, Baskets and Tranches. Credit derivatives may reference a basket of single-name credit default swaps or a broad-based index. If a credit event occurs in one of the underlying reference obligations, the protection seller pays the protection buyer. The payment is typically a pro-rata portion of the transaction’s total notional amount based on the underlying defaulted reference obligation. In certain transactions, the credit risk of a basket or index is separated into various portions (tranches), each having different levels of subordination. The most junior tranches cover initial defaults and once losses exceed the notional amount of these junior tranches, any excess loss is covered by the next most senior tranche. • Total Return Swaps. A total return swap transfers the risks relating to economic performance of a reference obligation from the protection buyer to the protection seller. Typically, the protection buyer receives a floating rate of interest and protection against any reduction in fair value of the reference obligation, and the protection seller receives the cash flows associated with the reference obligation, plus any increase in the fair value of the reference obligation. The firm economically hedges its exposure to written credit derivatives primarily by entering into offsetting purchased credit derivatives with identical underliers. Substantially all of the firm’s purchased credit derivative transactions are with financial institutions and are subject to stringent collateral thresholds. In addition, upon the occurrence of a specified trigger event, the firm may take possession of the reference obligations underlying a particular written credit derivative, and consequently may, upon liquidation of the reference obligations, recover amounts on the underlying reference obligations in the event of default. As of December 2022, written credit derivatives had a total gross notional amount of $528.31 billion and purchased credit derivatives had a total gross notional amount of $579.14 billion, for total net notional purchased protection of $50.83 billion. As of December 2021, written credit derivatives had a total gross notional amount of $510.24 billion and purchased credit derivatives had a total gross notional amount of $569.34 billion, for total net notional purchased protection of $59.10 billion. The firm’s written and purchased credit derivatives primarily consist of credit default swaps. The table below presents information about credit derivatives. Credit Spread on Underlier (basis points) $ in millions 0 - 250 251 - 501 - Greater Total As of December 2022 Maximum Payout/Notional Amount of Written Credit Derivatives by Tenor Less than 1 year $ 108,703 $ 12,166 $ 1,879 $ 4,135 $ 126,883 1 - 5 years 306,484 28,188 13,724 9,092 357,488 Greater than 5 years 39,302 2,916 1,416 305 43,939 Total $ 454,489 $ 43,270 $ 17,019 $ 13,532 $ 528,310 Maximum Payout/Notional Amount of Purchased Credit Derivatives Offsetting $ 372,360 $ 33,149 $ 14,817 $ 11,757 $ 432,083 Other 128,828 13,211 2,615 2,407 147,061 Fair Value of Written Credit Derivatives Asset $ 5,405 $ 460 $ 132 $ 84 $ 6,081 Liability 681 1,081 1,027 2,673 5,462 Net asset/(liability) $ 4,724 $ (621) $ (895) $ (2,589) $ 619 As of December 2021 Maximum Payout/Notional Amount of Written Credit Derivatives by Tenor Less than 1 year $ 120,456 $ 6,173 $ 1,656 $ 4,314 $ 132,599 1 - 5 years 305,255 14,328 12,754 3,814 336,151 Greater than 5 years 35,558 3,087 2,529 311 41,485 Total $ 461,269 $ 23,588 $ 16,939 $ 8,439 $ 510,235 Maximum Payout/Notional Amount of Purchased Credit Derivatives Offsetting $ 381,715 $ 17,210 $ 12,806 $ 6,714 $ 418,445 Other $ 138,214 $ 7,780 $ 3,576 $ 1,322 $ 150,892 Fair Value of Written Credit Derivatives Asset $ 9,803 $ 924 $ 318 $ 137 $ 11,182 Liability 941 123 1,666 1,933 4,663 Net asset/(liability) $ 8,862 $ 801 $ (1,348) $ (1,796) $ 6,519 In the table above: • Fair values exclude the effects of both netting of receivable balances with payable balances under enforceable netting agreements, and netting of cash received or posted under enforceable credit support agreements, and therefore are not representative of the firm’s credit exposure. • Tenor is based on remaining contractual maturity. • The credit spread on the underlier, together with the tenor of the contract, are indicators of payment/performance risk. The firm is less likely to pay or otherwise be required to perform where the credit spread and the tenor are lower. • Offsetting purchased credit derivatives represent the notional amount of purchased credit derivatives that economically hedge written credit derivatives with identical underliers. • Other purchased credit derivatives represent the notional amount of all other purchased credit derivatives not included in offsetting. Impact of Credit and Funding Spreads on Derivatives The firm realizes gains or losses on its derivative contracts. These gains or losses include credit valuation adjustments (CVA) relating to uncollateralized derivative assets and liabilities, which represent the gains or losses (including hedges) attributable to the impact of changes in credit exposure, counterparty credit spreads, liability funding spreads (which include the firm’s own credit), probability of default and assumed recovery. These gains or losses also include funding valuation adjustments (FVA) relating to uncollateralized derivative assets, which represent the gains or losses (including hedges) attributable to the impact of changes in expected funding exposures and funding spreads. The table below presents information about CVA and FVA. Year Ended December $ in millions 2022 2021 2020 CVA, net of hedges $ 320 $ 25 $ (143) FVA, net of hedges (193) 60 173 Total $ 127 $ 85 $ 30 Bifurcated Embedded Derivatives The table below presents the fair value and the notional amount of derivatives that have been bifurcated from their related borrowings. As of December $ in millions 2022 2021 Fair value of assets $ 288 $ 845 Fair value of liabilities (392) (124) Net asset/(liability) $ (104) $ 721 Notional amount $ 8,892 $ 10,743 In the table above, derivatives that have been bifurcated from their related borrowings are recorded at fair value and primarily consist of interest rate, equity and commodity products. These derivatives are included in unsecured short- and long-term borrowings, as well as other secured financings, with the related borrowings. Derivatives with Credit-Related Contingent Features Certain of the firm’s derivatives have been transacted under bilateral agreements with counterparties who may require the firm to post collateral or terminate the transactions based on changes in the firm’s credit ratings. The firm assesses the impact of these bilateral agreements by determining the collateral or termination payments that would occur assuming a downgrade by all rating agencies. A downgrade by any one rating agency, depending on the agency’s relative ratings of the firm at the time of the downgrade, may have an impact which is comparable to the impact of a downgrade by all rating agencies. The table below presents information about net derivative liabilities under bilateral agreements (excluding collateral posted), the fair value of collateral posted and additional collateral or termination payments that could have been called by counterparties in the event of a one- or two-notch downgrade in the firm’s credit ratings. As of December $ in millions 2022 2021 Net derivative liabilities under bilateral agreements $ 33,059 $ 34,315 Collateral posted $ 27,657 $ 29,214 Additional collateral or termination payments: One-notch downgrade $ 343 $ 345 Two-notch downgrade $ 1,115 $ 1,536 Hedge Accounting The firm applies hedge accounting for (i) interest rate swaps used to manage the interest rate exposure of certain fixed-rate unsecured long- and short-term borrowings, certain fixed-rate certificates of deposit and certain U.S. government securities classified as available-for-sale, (ii) foreign currency forward contracts used to manage the foreign exchange risk of certain available-for-sale, (iii) foreign currency forward contracts and foreign currency-denominated debt used to manage foreign exchange risk on the firm’s net investment in certain non-U.S. operations and (iv) commodity futures contracts used to manage the price risk of certain commodities. To qualify for hedge accounting, the hedging instrument must be highly effective at reducing the risk from the exposure being hedged. Additionally, the firm must formally document the hedging relationship at inception and assess the hedging relationship at least on a quarterly basis to ensure the hedging instrument continues to be highly effective over the life of the hedging relationship. Fair Value Hedges The firm designates interest rate swaps as fair value hedges of certain fixed-rate unsecured long- and short-term debt and fixed-rate certificates of deposit and, beginning in the second quarter of 2022, of certain U.S. government securities classified as available-for-sale. These interest rate swaps hedge changes in fair value attributable to the designated benchmark interest rate (e.g., London Interbank Offered Rate (LIBOR), Secured Overnight Financing Rate (SOFR) or Overnight Index Swap Rate), effectively converting a substantial portion of these fixed-rate financial instruments into floating-rate financial instruments. The firm applies a statistical method that utilizes regression analysis when assessing the effectiveness of these hedging relationships in achieving offsetting changes in the fair values of the hedging instrument and the risk being hedged (i.e., interest rate risk). An interest rate swap is considered highly effective in offsetting changes in fair value attributable to changes in the hedged risk when the regression analysis results in a coefficient of determination of 80% or greater and a slope between 80% and 125%. For qualifying interest rate fair value hedges, gains or losses on derivatives are included in interest income/expense. The change in fair value of the hedged items attributable to the risk being hedged is reported as an adjustment to its carrying value (hedging adjustment) and is also included in interest income/expense. When a derivative is no longer designated as a hedge, any remaining difference between the carrying value and par value of the hedged item is amortized in interest income/expense over the remaining life of the hedged item using the effective interest method. See Note 23 for further information about interest income and interest expense. The table below presents the gains/(losses) from interest rate derivatives accounted for as hedges and the related hedged items. Year Ended December $ in millions 2022 2021 2020 Investments Interest rate hedges $ 366 $ – $ – Hedged investments (350) – – Gains/(losses) $ 16 $ – $ – Borrowings and deposits Interest rate hedges $ (22,183) $ (6,638) $ 3,862 Hedged borrowings and deposits 21,662 6,085 (4,557) Gains/(losses) $ (521) $ (553) $ (695) The table below presents the carrying value of investments, deposits and unsecured borrowings that are designated in an interest rate hedging relationship and the related cumulative hedging adjustment (increase/(decrease)) from current and prior hedging relationships included in such carrying values. $ in millions Carrying Cumulative As of December 2022 Assets Investments $ 10,804 $ (350) Liabilities Deposits $ 6,311 $ (280) Unsecured short-term borrowings $ 7,295 $ (47) Unsecured long-term borrowings $ 151,215 $ (15,134) As of December 2021 Liabilities Deposits $ 14,131 $ 246 Unsecured short-term borrowings $ 2,167 $ 5 Unsecured long-term borrowings $ 144,934 $ 6,169 In the table above: • Cumulative hedging adjustment included $5.09 billion as of December 2022 and $5.91 billion as of December 2021 of hedging adjustments from prior hedging relationships that were de-designated and substantially all were related to unsecured long-term borrowings. • The amortized cost of investments was $11.49 billion as of December 2022. In addition, cumulative hedging adjustments for items no longer designated in a hedging relationship were $111 million as of December 2022 and $68 million as of December 2021 and were substantially all related to unsecured long-term borrowings. The firm designates foreign currency forward contracts as fair value hedges of the foreign exchange risk of non-U.S. government securities classified as available-for-sale. See Note 8 for information about the amortized cost and fair value of such securities. The effectiveness of such hedges is assessed based on changes in spot rates. The gains/(losses) on the hedges (relating to both spot and forward points) and the foreign exchange gains/(losses) on the related available-for-sale securities are included in market making. The net gains/(losses) on hedges and related available-for-sale securities were $(30) million (reflecting a gain of $266 million related to hedges and a loss of $296 million on the related hedged available-for-sale securities) for 2022. The gross and net gains/(losses) were not material for both 2021 and 2020. The firm designates commodity futures contracts as fair value hedges of the price risk of certain precious metals included in commodities within trading assets. As of December 2022, there were no such hedges outstanding, and as of December 2021, the carrying value of such commodities was $1.05 billion and the amortized cost was $1.02 billion. Changes in spot rates of such commodities are reflected as an adjustment to their carrying value, and the related gains/(losses) on both the commodities and the designated futures contracts are included in market making. The contractual forward points on the designated futures contracts are amortized into earnings ratably over the life of the contract and other gains/(losses) as a result of changes in the forward points are included in other comprehensive income/(loss). The cumulative hedging adjustment was not material as of both December 2022 and December 2021, and the related gains/(losses) were not material for both 2022 and 2021. Net Investment Hedges The firm seeks to reduce the impact of fluctuations in foreign exchange rates on its net investments in certain non-U.S. operations through the use of foreign currency forward contracts and foreign currency-denominated debt. For foreign currency forward contracts designated as hedges, the effectiveness of the hedge is assessed based on the overall changes in the fair value of the forward contracts (i.e., based on changes in forward rates). For foreign currency-denominated debt designated as a hedge, the effectiveness of the hedge is assessed based on changes in spot rates. For qualifying net investment hedges, all gains or losses on the hedging instruments are included in currency translation. The table below presents the gains/(losses) from net investment hedging. Year Ended December $ in millions 2022 2021 2020 Hedges: Foreign currency forward contract $ 1,713 $ 755 $ (126) Foreign currency-denominated debt $ (269) $ 386 $ (297) Gains or losses on individual net investments in non-U.S. operations are reclassified from accumulated other comprehensive income/(loss) to other principal transactions in the consolidated statements of earnings when such net investments are sold or substantially liquidated. The gross and net gains and losses on hedges and the related net investments in non-U.S. operations reclassified to earnings from accumulated other comprehensive income/(loss) were not material for both 2022 and 2021, and $61 million (reflecting a gain of $214 million related to hedges and a loss of $153 million on the related net investments in non-U.S. operations) for 2020. |
