| Derivatives and Hedging Activities | Note 7.
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
capacity, the firm typically acts as principal and is consequently
required to commit capital to provide execution. As a market maker,
it is essential to maintain an inventory of financial instruments
sufficient to meet expected client and market demands. Risk
Management. The firm also enters into
derivatives to actively manage risk exposures that arise from its
market-making and investing and lending activities in derivative
and cash instruments. 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 in certain
fixed-rate unsecured long-term and short-term borrowings, and
deposits, and to manage foreign currency exposure on the net
investment in certain non-U.S. operations.
The firm enters into various types of derivatives,
including:
•
Futures and
Forwards.
•
Swaps.
•
Options. 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 and
liabilities are included in “Financial instruments owned, at
fair value” and “Financial instruments sold, but not
yet purchased, at fair value,” respectively. Realized and
unrealized gains and losses on derivatives not designated as hedges
under ASC 815 are included in “Market making” and
“Other principal transactions” in Note 4.
The table below presents the gross fair value and
the notional amount of derivative contracts by major product type,
the amounts of counterparty and cash collateral netting in the
condensed consolidated statements of financial condition, 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.
In the table below:
•
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.
As of June 2015
As of December 2014
$
in millions
Derivative
Derivative
Notional
Derivative
Derivative
Notional
Derivatives not accounted for as hedges
Exchange-traded
$ 265
$ 261
$ 3,297,942
$ 228
$ 238 $ 3,151,865
OTC-cleared 243,453 220,466 26,297,086 351,801 330,298 30,408,636
Bilateral OTC
361,531
337,954
13,423,822
434,333
409,071
13,552,017
Total interest rates
605,249
558,681
43,018,850
786,362
739,607
47,112,518
OTC-cleared 6,109 5,979 441,067 5,812 5,663 378,099
Bilateral OTC
36,573
32,991
1,847,118
49,036
44,491
2,122,859
Total credit
42,682
38,970
2,288,185
54,848
50,154
2,500,958
Exchange-traded 76 242 19,955 69 69 17,214
OTC-cleared 107 58 12,665 100 96 13,304
Bilateral OTC
95,156
99,549
5,565,689
109,747
108,442
5,535,685
Total currencies
95,339
99,849
5,598,309
109,916
108,607
5,566,203
Exchange-traded 5,324 5,065 322,798 7,683 7,166 321,378
OTC-cleared 185 181 2,368 313 315 3,036
Bilateral OTC
13,149
15,124
287,989
20,994
21,065
345,065
Total commodities
18,658
20,370
613,155
28,990
28,546
669,479
Exchange-traded 9,243 9,055 585,950 9,592 9,636 541,711
Bilateral OTC
44,976
46,124
1,071,701
49,339
49,013
983,784
Total equities
54,219
55,179
1,657,651
58,931
58,649
1,525,495
Subtotal
816,147
773,049
53,176,150
1,039,047
985,563
57,374,653
Derivatives accounted for as hedges
OTC-cleared 1,566 131 39,730 2,713 228 31,109
Bilateral OTC
9,634
11
80,626
11,559
34
95,389
Total interest rates
11,200
142
120,356
14,272
262
126,498
OTC-cleared 2 14 1,154 12 3 1,205
Bilateral OTC
101
35
8,069
113
13
8,431
Total currencies
103
49
9,223
125
16
9,636
Subtotal
11,303
191
129,579
14,397
278
136,134
Total gross fair value/notional amount of derivatives
$ 827,450 1
$ 773,240 1
$53,305,729
$1,053,444 1
$ 985,841 1
$57,510,787
Amounts that have been offset in the condensed
Exchange-traded $ (12,228 ) $ (12,228 )
$ (15,039 ) $ (15,039 )
OTC-cleared (224,199 ) (224,199 ) (335,792 ) (335,792 )
Bilateral OTC
(447,672 )
(447,672 )
(535,839 )
(535,839 )
Total counterparty netting
(684,099 )
(684,099 )
(886,670 )
(886,670 )
OTC-cleared (26,955 ) (2,553 ) (24,801 ) (738 )
Bilateral OTC
(61,895 )
(34,862 )
(78,703 )
(35,417 )
Total cash collateral netting
(88,850 )
(37,415 )
(103,504 )
(36,155 )
Total counterparty and cash collateral netting
$(772,949 )
$(721,514 )
$ (990,174 )
$(922,825 )
Amounts included in financial instruments owned/
Exchange-traded
$ 2,680
$ 2,395
$ 2,533
$ 2,070
OTC-cleared 268 77 158 73
Bilateral OTC
51,553
49,254
60,579
60,873
Total amounts included in the condensed consolidated
$ 54,501
$ 51,726
$ 63,270
$ 63,016
Amounts that have not been offset in the condensed
Cash collateral received/posted
$ (577 )
$ (1,898 )
$ (980 )
$ (2,940 )
Securities collateral received/posted
(13,358 )
(11,915 )
(14,742 )
(18,159 )
Total
$ 40,566
$ 37,913
$ 47,548
$ 41,917
1.
Includes derivative assets and derivative liabilities of
$18.98 billion and $20.53 billion, respectively, as of
June 2015, and derivative assets and derivative liabilities of
$25.93 billion and $26.19 billion, respectively, as of
December 2014, 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.
Valuation Techniques for Derivatives The firm’s level 2 and level 3
derivatives are valued using derivative pricing models (e.g.,
discounted cash flow models, correlation models, and models that
incorporate option pricing methodologies, such as Monte Carlo
simulations). Price transparency of derivatives can generally be
characterized by product type.
•
Interest
Rate.
•
Credit.
•
Currency.
•
Commodity.
•
Equity. Liquidity is essential to observability of all
product types. If transaction volumes decline, previously
transparent prices and other inputs may become unobservable.
Conversely, even highly structured products may at times have
trading volumes large enough to provide observability of prices and
other inputs. See Note 5 for an overview of the firm’s
fair value measurement policies.
Level 1 Derivatives Level 1 derivatives include short-term
contracts for future delivery of securities when the underlying
security is a level 1 instrument, and exchange-traded
derivatives if they are actively traded and are valued at their
quoted market price.
Level 2 Derivatives Level 2 derivatives include OTC derivatives
for which all significant valuation inputs are corroborated by
market evidence and exchange-traded derivatives that are not
actively traded and/or that are valued using models that calibrate
to market-clearing levels of OTC derivatives. In evaluating the
significance of a valuation input, the firm considers, among other
factors, a portfolio’s net risk exposure to that input.
The selection of a particular model to value a
derivative depends on the contractual terms of and specific risks
inherent in the instrument, as well as the availability of pricing
information in the market. For derivatives that trade in liquid
markets, model selection does not involve significant management
judgment because outputs of models can be calibrated to
market-clearing levels. Valuation models require a variety of inputs, such
as contractual terms, market prices, yield curves, discount rates
(including those derived from interest rates on collateral received
and posted as specified in credit support agreements for
collateralized derivatives), credit curves, measures of volatility,
prepayment rates, loss severity rates and correlations of such
inputs. Significant inputs to the valuations of level 2
derivatives can be verified to market transactions, broker or
dealer quotations or other alternative pricing sources with
reasonable levels of price transparency. Consideration is given to
the nature of the quotations (e.g., indicative or firm) and the
relationship of recent market activity to the prices provided from
alternative pricing sources.
Level 3 Derivatives Level 3 derivatives are valued using models
which utilize observable level 1 and/or level 2 inputs,
as well as unobservable level 3 inputs.
•
For the majority of the firm’s interest rate and
currency derivatives classified within level 3, significant
unobservable inputs include correlations of certain currencies and
interest rates (e.g., the correlation between Euro inflation and
Euro interest rates) and specific interest rate volatilities.
•
For level 3 credit derivatives, significant
unobservable inputs include illiquid credit spreads and upfront
credit points, which are unique to specific reference obligations
and reference entities, recovery rates and certain correlations
required to value credit and mortgage derivatives (e.g., the
likelihood of default of the underlying reference obligation
relative to one another).
•
For level 3 equity derivatives, significant
unobservable inputs generally include equity volatility inputs for
options that are very long-dated and/or have strike prices that
differ significantly from current market prices. In addition, the
valuation of certain structured trades requires the use of
level 3 correlation inputs, such as the correlation of the
price performance of two or more individual stocks or the
correlation of the price performance for a basket of stocks to
another asset class such as commodities.
•
For level 3 commodity derivatives, significant
unobservable inputs include volatilities for options with strike
prices that differ significantly from current market prices and
prices or spreads for certain products for which the product
quality or physical location of the commodity is not aligned with
benchmark indices. Subsequent to the initial valuation of a
level 3 derivative, the firm updates the level 1 and
level 2 inputs to reflect observable market changes and any
resulting gains and losses are recorded in level 3.
Level 3 inputs are changed when corroborated by evidence such
as similar market transactions, third-party pricing services and/or
broker or dealer quotations or other empirical market data. In
circumstances where the firm cannot verify the model value by
reference to market transactions, it is possible that a different
valuation model could produce a materially different estimate of
fair value. See below for further information about significant
unobservable inputs used in the valuation of level 3
derivatives.
Valuation Adjustments Valuation adjustments are integral to determining
the fair value of derivative portfolios and are used to adjust the
mid-market valuations produced by derivative pricing models to the
appropriate exit price valuation. These adjustments incorporate
bid/offer spreads, the cost of liquidity, credit valuation
adjustments and funding valuation adjustments, which account for
the credit and funding risk inherent in the uncollateralized
portion of derivative portfolios. The firm also makes funding
valuation adjustments to collateralized derivatives where the terms
of the agreement do not permit the firm to deliver or repledge
collateral received. Market-based inputs are generally used when
calibrating valuation adjustments to market-clearing levels. In addition, for derivatives that include
significant unobservable inputs, the firm makes model or exit price
adjustments to account for the valuation uncertainty present in the
transaction.
Significant Unobservable Inputs The table below presents the ranges, averages and
medians of significant unobservable inputs used to value the
firm’s level 3 derivatives. In the table below:
•
Ranges represent the significant unobservable inputs that
were used in the valuation of each type of derivative.
•
Averages represent the arithmetic average of the inputs
and are not weighted by the relative fair value or notional of the
respective financial instruments. An average greater than the
median indicates that the majority of inputs are below the
average.
•
The ranges, averages and medians of these inputs are not
representative of the appropriate inputs to use when calculating
the fair value of any one derivative. For example, the highest
correlation presented in the tables below for interest rate
derivatives is appropriate for valuing a specific interest rate
derivative but may not be appropriate for valuing any other
interest rate derivative. Accordingly, the ranges of inputs
presented below do not represent uncertainty in, or possible ranges
of, fair value measurements of the firm’s level 3
derivatives.
•
The fair value of any one instrument may be determined
using multiple valuation techniques. For example, option pricing
models and discounted cash flows models are typically used together
to determine fair value. Therefore, the level 3 balance
encompasses both of these techniques.
Level 3
Derivative Product Type
Valuation Techniques and
Significant Unobservable Inputs
Range of Significant Unobservable Inputs (Average
/ Median)
As of June 2015 As of December 2014
Interest rates
Option pricing models:
Correlation 1
Volatility
(25)% to 86% (53% / 55%)
31 basis points per annum (bpa) to
153 bpa (84 bpa / 57 bpa)
(16)% to 84% (37% / 40%)
36 basis points per annum (bpa) to
156 bpa (100 bpa / 115 bpa)
Credit
Option pricing models, correlation models and discounted cash
flows models:
Correlation 1
Credit spreads
Upfront credit points
Recovery rates
5% to 97% (68% / 69%)
1 basis points (bps) to 803 bps
(120 bps / 97 bps) 2
0 points to 99 points (41 points /
40 points)
10% to 72% (48% / 40%)
5% to 99% (71% / 72%)
1 basis points (bps) to 700 bps
(116 bps / 79 bps) 2
0 points to 99 points (40 points /
30 points)
14% to 87% (44% / 40%)
Currencies
Option pricing models:
Correlation 1
55% to 80% (69% / 73%)
55% to 80% (69% / 73%)
Commodities
Option pricing models and discounted cash flows models:
Volatility
Spread per million British Thermal units (MMBTU) of natural
gas
Spread per Metric Tonne (MT) of coal
Spread per barrel of oil and refined products
15% to 56% (31% / 30%)
$(1.76) to $6.99 ($(0.08) / $(0.05))
$(9.63) to $(4.50) ($(8.07) / $(8.21))
$(8.14) to $56.54 ($10.31 / $1.85) 2
16% to 68% (33% / 32%)
$(1.66) to $4.45 ($(0.13) / $(0.03))
$(10.50) to $3.00 ($(4.04) / $(6.74))
$(15.35) to $80.55 ($22.32 / $13.50) 2
Equities
Option pricing models:
Correlation 1
Volatility
28% to 99% (63% / 61%)
5% to 83% (25% / 23%)
30% to 99% (62% / 55%)
5% to 90% (23% / 21%)
1.
The
range of unobservable inputs for correlation across derivative
product types (i.e., cross-asset correlation) was (45)% to 80%
(Average: 32% / Median: 40%) as of June 2015, and (34)% to 80%
(Average: 33% / Median: 35%) as of December 2014.
2.
The
difference between the average and the median for these spread
inputs indicates that the majority of the inputs fall in the lower
end of the range.
Range of Significant Unobservable Inputs The following provides further information about
the ranges of significant unobservable inputs used to value the
firm’s level 3 derivative instruments.
•
Correlation.
•
Volatility.
•
Credit spreads,
upfront credit points and recovery rates.
•
Commodity prices and
spreads.
Sensitivity of Fair Value Measurement to Changes
in Significant Unobservable Inputs The following provides a description of the
directional sensitivity of the firm’s level 3 fair value
measurements to changes in significant unobservable inputs, in
isolation. Due to the distinctive nature of each of the
firm’s level 3 derivatives, the interrelationship of
inputs is not necessarily uniform within each product type.
•
Correlation.
•
Volatility.
•
Credit spreads,
upfront credit points and recovery rates.
•
Commodity prices and
spreads.
Fair Value of Derivatives by Level The tables below present the fair value of
derivatives on a gross basis by level and major product type as
well as the impact of netting. In the tables below:
•
The gross fair values exclude the effects of both
counterparty netting and collateral netting, and therefore are not
representative of the firm’s exposure.
•
Counterparty netting is reflected in each level to the
extent that receivable and payable balances are netted within the
same level and is included in “Counterparty and cash
collateral netting.” Where the counterparty netting is across
levels, the netting is reflected in “Cross-Level
Netting.”
Derivative Assets at Fair Value as
of June 2015
$
in millions
Level 1
Level 2
Level 3
Cross-Level
Cash Collateral
Total
Interest rates
$ 9
$ 616,049
$ 391
$ —
$ — $ 616,449
Credit
— 35,656 7,026
—
— 42,682
Currencies
— 95,283 159
—
— 95,442
Commodities
— 17,969 689
—
— 18,658
Equities
10
53,731
478
—
—
54,219
Gross fair value of derivative assets 19 818,688 8,743
—
— 827,450
Counterparty and cash collateral netting
—
(679,871 )
(2,568 )
(1,660 )
(88,850 )
(772,949 )
Fair value included in financial instruments owned
$ 19
$ 138,817
$ 6,175
$(1,660 )
$ (88,850 )
$ 54,501
Derivative Liabilities at Fair Value
as of June 2015
$
in millions
Level 1
Level 2
Level 3
Cross-Level
Cash Collateral
Total
Interest rates
$ 9
$ 558,345
$ 469
$ —
$ — $ 558,823
Credit
— 34,912 4,058
—
— 38,970
Currencies
— 99,590 308
—
— 99,898
Commodities
— 19,627 743
—
— 20,370
Equities
6
52,346
2,827
—
—
55,179
Gross fair value of derivative liabilities 15 764,820 8,405
—
— 773,240
Counterparty and cash collateral netting
—
(679,871 )
(2,568 )
(1,660 )
(37,415 )
(721,514 )
Fair value included in financial instruments
$ 15
$ 84,949
$ 5,837
$(1,660 )
$ (37,415 )
$ 51,726
Derivative Assets at Fair Value as of
December 2014
$
in millions
Level 1
Level 2
Level 3
Cross-Level
Cash Collateral
Total
Interest rates $123 $ 800,028 $ 483
$ —
$ — $ 800,634
Credit — 47,190 7,658 — — 54,848
Currencies — 109,891 150 — — 110,041
Commodities — 28,124 866 — — 28,990
Equities
175
58,122
634
—
—
58,931
Gross fair value of derivative assets 298 1,043,355 9,791 — — 1,053,444
Counterparty and cash collateral netting
—
(882,841 )
(2,717 )
(1,112 )
(103,504 )
(990,174 )
Fair value included in financial instruments
$298
$ 160,514
$ 7,074
$(1,112 )
$(103,504 )
$ 63,270
Derivative Liabilities at Fair Value as
of December 2014
$
in millions
Level 1
Level 2
Level 3
Cross-Level
Cash Collateral
Total
Interest rates $ 14 $ 739,332 $ 523
$ —
$ — $ 739,869
Credit — 46,026 4,128 — — 50,154
Currencies — 108,206 417 — — 108,623
Commodities — 26,538 2,008 — — 28,546
Equities
94
56,546
2,009
—
—
58,649
Gross fair value of derivative liabilities 108 976,648 9,085 — — 985,841
Counterparty and cash collateral netting
—
(882,841 )
(2,717 )
(1,112 )
(36,155 )
(922,825 )
Fair value included in financial instruments
$108
$ 93,807
$ 6,368
$(1,112 )
$ (36,155 )
$ 63,016
Level 3 Rollforward The tables below present changes in fair value for
all derivatives categorized as level 3 as of the end of the
period. In the tables below:
•
If a derivative was transferred to level 3 during a
reporting period, its entire gain or loss for the period is
included in level 3. Transfers between levels are reported at
the beginning of the reporting period in which they occur.
•
Negative amounts for transfers into level 3 and
positive amounts for transfers out of level 3 represent net
transfers of derivative liabilities.
•
A derivative with level 1 and/or level 2 inputs
is classified in level 3 in its entirety if it has at least
one significant level 3 input.
•
If there is one significant level 3 input, the
entire gain or loss from adjusting only observable inputs (i.e.,
level 1 and level 2 inputs) is classified as
level 3.
•
Gains or losses that have been reported in level 3
resulting from changes in level 1 or level 2 inputs are
frequently offset by gains or losses attributable to level 1
or level 2 derivatives and/or level 1, level 2 and
level 3 cash instruments. As a result, gains/(losses) included
in the level 3 rollforward below do not necessarily represent
the overall impact on the firm’s results of operations,
liquidity or capital resources.
Level 3 Derivative Assets and
Liabilities at Fair Value for the Three Months Ended
June 2015
$
in millions
Asset/
Net
Net unrealized
Purchases
Sales
Settlements
Transfers
Transfers
Asset/ (liability)
Interest rates — net
$ (36 ) $(10 ) $ 17
$ 4
$ (4 ) $ (14 ) $ (45 )
$ 10
$ (78 )
Credit — net 3,589 16 (332 ) 39 (75 ) (205 ) (49 ) (15 ) 2,968
Currencies — net (182 ) (12 ) 10 14 (12 ) 32 13 (12 ) (149 )
Commodities — net (1,386 ) 21 136 4 (36 ) 18 (97 ) 1,286 (54 )
Equities — net
(774 )
20
(28 )
44
(1,507 )
184
(4 )
(284 )
(2,349 )
Total derivatives — net
$ 1,211
$ 35 1
$(197 ) 1
$105
$(1,634 )
$ 15
$(182 )
$ 985
$ 338
1.
The
aggregate amounts include gains/(losses) of approximately
$(168) million and $6 million reported in “Market
making” and “Other principal transactions,”
respectively.
The net unrealized loss on level 3 derivatives
of $197 million for the three months ended June 2015 was
primarily attributable to losses on certain credit derivatives,
principally reflecting the impact of an increase in interest rates
and changes in foreign exchange rates, partially offset by gains on
certain commodity derivatives, primarily reflecting the impact of
an increase in commodity prices. Transfers into level 3 derivatives during the
three months ended June 2015 reflected transfers of certain
commodity derivative liabilities into level 3, principally due
to unobservable volatility inputs becoming significant to the
valuation of these derivatives.
Transfers out of level 3 derivatives during
the three months ended June 2015 primarily reflected transfers
of certain commodity derivative liabilities to level 2,
principally due to increased transparency of oil and refined
products spread inputs used to value these derivatives and
transfers of certain equity derivative assets to level 2,
principally due to unobservable inputs no longer being significant
to the valuation of these derivatives.
Level 3 Derivative Assets and
Liabilities at Fair Value for the Six Months Ended
June 2015
$
in millions
Asset/
Net
Net unrealized
Purchases
Sales
Settlements
Transfers
Transfers
Asset/ (liability)
Interest rates — net
$ (40 ) $ 17
$ (4 )
$ 4
$ (33 )
$ 9 $ 15
$ (46 )
$ (78 )
Credit — net 3,530 134 3 97 (205 ) (737 ) 261 (115 ) 2,968
Currencies — net (267 ) (51 ) 50 24 (17 ) 90 16 6 (149 )
Commodities — net (1,142 ) 29 55 27 (13 ) (87 ) (40 ) 1,117 (54 )
Equities — net
(1,375 )
49
(200 )
80
(1,825 )
872
(18 )
68
(2,349 )
Total derivatives — net
$ 706
$178 1
$ (96 ) 1
$232
$(2,093 )
$ 147
$234
$1,030
$ 338
1.
The
aggregate amounts include gains/(losses) of approximately
$108 million and $(26) million reported in “Market
making” and “Other principal transactions,”
respectively.
The net unrealized loss on level 3 derivatives
of $96 million for the six months ended June 2015
reflected losses on certain equity derivatives, primarily due to an
increase in equity prices. Transfers into level 3 derivatives during the
six months ended June 2015 reflected transfers of certain
credit derivative assets from level 2, principally due to
unobservable credit spread inputs becoming significant to the
valuation of certain credit derivatives and to the net risk of
certain portfolios.
Transfers out of level 3 derivatives during
the six months ended June 2015 reflected transfers of certain
commodity derivative liabilities to level 2, principally due
to increased transparency of oil and refined products spread inputs
used to value these derivatives.
Level 3 Derivative Assets and
Liabilities at Fair Value for the Three Months Ended
June 2014
$
in millions
Asset/
Net
Net unrealized period-end
Purchases
Sales
Settlements
Transfers
Transfers level 3
Asset/ balance, end of
Interest rates — net
$ (31 ) $ (10 ) $ (51 ) $ 2
$ (6 )
$ 4 $ (5 ) $ (32 ) $ (129 )
Credit — net 3,958 26 233 122 (110 ) (429 ) 195 (95 ) 3,900
Currencies — net (143 ) (17 ) (36 ) 2 — 120 — (7 ) (81 )
Commodities — net 43 5 (42 ) — (9 ) (22 ) (3 ) 21 (7 )
Equities — net
(1,883 )
(25 )
1,004
144
(1,110 )
2
(23 )
392
(1,499 )
Total derivatives — net
$ 1,944
$ (21 ) 1
$1,108 1
$270
$(1,235 )
$(325 )
$164
$ 279
$ 2,184
1.
The
aggregate amounts include gains/(losses) of approximately
$1.11 billion and $(26) million reported in “Market
making” and “Other principal transactions,”
respectively.
The net unrealized gain on level 3 derivatives
of $1.11 billion for the three months ended June 2014
principally resulted from changes in observable inputs and was
primarily attributable to the impact of an increase in equity
prices on certain equity derivatives. Transfers into level 3 derivatives during the
three months ended June 2014 reflected transfers of certain
credit derivative assets from level 2, principally due to
unobservable credit spread inputs becoming significant to the
valuation of these derivatives and reduced transparency of upfront
credit point inputs used to value certain other credit
derivatives.
Transfers out of level 3 derivatives during
the three months ended June 2014 primarily reflected transfers
of certain equity derivative liabilities to level 2,
principally due to unobservable inputs no longer being significant
to the valuation of these derivatives and transfers of certain
credit derivatives to level 2, principally due to unobservable
inputs no longer being significant to the net risk of certain
portfolios.
Level 3 Derivative Assets and
Liabilities at Fair Value for the Six Months Ended
June 2014
$
in millions
Asset/
Net
Net unrealized still held at
Purchases
Sales
Settlements
Transfers
Transfers
Asset/ balance, end of
Interest rates — net $ (86 ) $(34 ) $ (83 ) $ 4
$ (7 ) $ 81 $ 13 $ (17 ) $ (129 )
Credit — net 4,176 69 564 90 (122 ) (891 ) 117 (103 ) 3,900
Currencies — net (200 ) (43 ) (3 ) 6 (15 ) 177 (2 ) (1 ) (81 )
Commodities — net 60 64 (91 ) 10 (38 ) 39 (12 ) (39 ) (7 )
Equities — net
(959 )
(33 )
1,393
155
(2,210 )
217
(45 )
(17 )
(1,499 )
Total derivatives — net
$2,991
$ 23 1
$1,780 1
$265
$(2,392 )
$(377 )
$ 71
$(177 )
$ 2,184
1.
The
aggregate amounts include gains/(losses) of approximately
$1.85 billion and $(49) million reported in “Market
making” and “Other principal transactions,”
respectively.
The net unrealized gain on level 3 derivatives
of $1.78 billion for the six months ended June 2014
principally resulted from changes in observable inputs and was
primarily attributable to the impact of an increase in equity
prices on certain equity derivatives. Transfers into level 3 derivatives during the
six months ended June 2014 primarily reflected transfers from
level 2 of certain credit derivative assets, principally due
to reduced transparency of upfront credit point inputs used to
value these derivatives. Transfers out of level 3 derivatives during
the six months ended June 2014 primarily reflected transfers
of certain credit derivatives to level 2, principally due to
unobservable inputs no longer being significant to the net risk of
certain portfolios.
Impact of Credit Spreads on Derivatives On an ongoing basis, the firm realizes gains or
losses relating to changes in credit risk through the unwind of
derivative contracts and changes in credit mitigants. The net gain/(loss), including hedges, attributable
to the impact of changes in credit exposure and credit spreads
(counterparty and the firm’s) on derivatives was
$78 million and $56 million for the three months ended
June 2015 and June 2014, respectively, and
$(21) million and $149 million for the six months ended
June 2015 and June 2014, respectively.
Bifurcated Embedded Derivatives The table below presents the fair value and the
notional amount of derivatives that have been bifurcated from their
related borrowings. These derivatives, which are recorded at fair
value, primarily consist of interest rate, equity and commodity
products and are included in “Unsecured short-term
borrowings” and “Unsecured long-term borrowings”
with the related borrowings. See Note 8 for further
information.
As of
$
in millions
June
December
Fair value of assets
$ 394 $ 390
Fair value of liabilities
850
690
Net liability
$ 456
$ 300
Notional amount
$7,224
$7,735
OTC Derivatives The tables below present the fair values of OTC
derivative assets and liabilities by tenor and major product type.
In the tables below:
•
Tenor is based on expected duration for mortgage-related
credit derivatives and generally on remaining contractual maturity
for other derivatives.
•
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 and cash
collateral netting.” Where the counterparty netting is across
tenor categories, the netting is reflected in “Cross-Tenor
Netting.”
OTC Derivative Assets as of
June 2015
$
in millions
Less than
1 - 5
Greater than
Cross-Tenor
Cash Collateral
Total
Interest rates $ 5,356 $24,710 $ 82,916
$ —
$ — $ 112,982
Credit 1,264 5,051 5,139
—
— 11,454
Currencies 13,188 8,910 6,321
—
— 28,419
Commodities 4,871 3,188 170
—
— 8,229
Equities 5,566 7,338 3,642
—
— 16,546
Counterparty and cash collateral netting
(3,557 )
(6,755 )
(4,961 )
(21,686 )
(88,850 )
(125,809 )
Total
$26,688
$42,442
$ 93,227
$(21,686 )
$ (88,850 )
$ 51,821
OTC Derivative Liabilities as of
June 2015
$
in millions
Less than
1 - 5
Greater than
Cross-Tenor
Cash Collateral
Total
Interest rates $ 6,170 $15,847 $ 33,346
$ —
$ —
$ 55,363
Credit 1,655 4,605 1,481
—
— 7,741
Currencies 14,128 9,369 9,211
—
— 32,708
Commodities 4,784 2,227 3,188
—
— 10,199
Equities 8,780 5,497 3,417
—
— 17,694
Counterparty and cash collateral netting
(3,557 )
(6,755 )
(4,961 )
(21,686 )
(37,415 )
(74,374 )
Total
$31,960
$30,790
$ 45,682
$(21,686 )
$ (37,415 )
$ 49,331
OTC Derivative Assets as of
December 2014
$
in millions
Less than
1 - 5
Greater than
Cross-Tenor
Cash Collateral
Total
Interest rates $ 7,064 $25,049 $ 90,553
$ —
$ — $ 122,666
Credit 1,696 6,093 5,707 — — 13,496
Currencies 17,835 9,897 6,386 — — 34,118
Commodities 8,298 4,068 161 — — 12,527
Equities 4,771 9,285 3,750 — — 17,806
Counterparty and cash collateral netting
(4,479 )
(7,016 )
(4,058 )
(20,819 )
(103,504 )
(139,876 )
Total
$35,185
$47,376
$102,499
$(20,819 )
$(103,504 )
$ 60,737
OTC Derivative Liabilities as of
December 2014
$
in millions
Less than
1 - 5
Greater than
Cross-Tenor
Cash Collateral
Total
Interest rates $ 7,001 $17,649 $ 37,242
$ —
$ — $ 61,892
Credit 2,154 4,942 1,706 — — 8,802
Currencies 18,549 7,667 6,482 — — 32,698
Commodities 5,686 4,105 2,810 — — 12,601
Equities 7,064 6,845 3,571 — — 17,480
Counterparty and cash collateral netting
(4,479 )
(7,016 )
(4,058 )
(20,819 )
(36,155 )
(72,527 )
Total
$35,975
$34,192
$ 47,753
$(20,819 )
$ (36,155 )
$ 60,946
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
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