| 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
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 December 2015
As of December 2014
$
in millions
Derivative
Derivative
Notional
Derivative
Derivative
Notional
Derivatives not accounted for as hedges
Exchange-traded
$ 310
$ 280
$ 4,402,843
$ 228
$ 238 $ 3,151,865
OTC-cleared 211,272 192,401 20,738,687 351,801 330,298 30,408,636
Bilateral OTC
345,516
321,458
12,953,830
434,333
409,071
13,552,017
Total interest rates
557,098
514,139
38,095,360
786,362
739,607
47,112,518
OTC-cleared 5,203 5,596 339,244 5,812 5,663 378,099
Bilateral OTC
35,679
31,179
1,552,806
49,036
44,491
2,122,859
Total credit
40,882
36,775
1,892,050
54,848
50,154
2,500,958
Exchange-traded 183 204 13,073 69 69 17,214
OTC-cleared 165 128 14,617 100 96 13,304
Bilateral OTC
96,660
99,235
5,461,940
109,747
108,442
5,535,685
Total currencies
97,008
99,567
5,489,630
109,916
108,607
5,566,203
Exchange-traded 2,997 3,623 203,465 7,683 7,166 321,378
OTC-cleared 232 233 2,839 313 315 3,036
Bilateral OTC
17,445
17,215
230,750
20,994
21,065
345,065
Total commodities
20,674
21,071
437,054
28,990
28,546
669,479
Exchange-traded 9,372 7,908 528,419 9,592 9,636 541,711
Bilateral OTC
37,788
38,290
927,078
49,339
49,013
983,784
Total equities
47,160
46,198
1,455,497
58,931
58,649
1,525,495
Subtotal
762,822
717,750
47,369,591
1,039,047
985,563
57,374,653
Derivatives accounted for as hedges
OTC-cleared 4,567 85 51,446 2,713 228 31,109
Bilateral OTC
6,660
20
62,022
11,559
34
95,389
Total interest rates
11,227
105
113,468
14,272
262
126,498
OTC-cleared 24 6 1,333 12 3 1,205
Bilateral OTC
116
27
8,615
113
13
8,431
Total currencies
140
33
9,948
125
16
9,636
Subtotal
11,367
138
123,416
14,397
278
136,134
Total gross fair value/notional amount of derivatives
$ 774,189 1
$ 717,888 1
$47,493,007
$1,053,444 1
$ 985,841 1
$57,510,787
Amounts that have been offset in the consolidated
statements of financial condition
Exchange-traded
$ (9,398 )
$ (9,398 )
$ (15,039 ) $ (15,039 )
OTC-cleared (194,928 ) (194,928 ) (335,792 ) (335,792 )
Bilateral OTC
(426,841 )
(426,841 )
(535,839 )
(535,839 )
Total counterparty netting
(631,167 )
(631,167 )
(886,670 )
(886,670 )
OTC-cleared (26,151 ) (3,305 ) (24,801 ) (738 )
Bilateral OTC
(62,981 )
(36,645 )
(78,703 )
(35,417 )
Total cash collateral netting
(89,132 )
(39,950 )
(103,504 )
(36,155 )
Total counterparty and cash collateral netting
$(720,299 )
$(671,117 )
$ (990,174 )
$(922,825 )
Amounts included in financial instruments owned/financial
instruments sold, but not yet purchased
Exchange-traded
$ 3,464
$ 2,617
$ 2,533
$ 2,070
OTC-cleared 384 216 158 73
Bilateral OTC
50,042
43,938
60,579
60,873
Total amounts included in the consolidated statements
of financial condition
$ 53,890
$ 46,771
$ 63,270
$ 63,016
Amounts that have not been offset in the consolidated
statements of financial condition
Cash collateral received/posted
$ (498 )
$ (1,935 )
$ (980 )
$ (2,940 )
Securities collateral received/posted
(14,008 )
(10,044 )
(14,742 )
(18,159 )
Total
$ 39,384
$ 34,792
$ 47,548
$ 41,917
1.
Includes derivative assets and derivative liabilities of
$17.09 billion and $18.16 billion, respectively, as of
December 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, as described below.
•
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. The significant
unobservable inputs used to value the firm’s level 3
derivatives are described below.
•
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 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.
•
For level 3 equity derivatives, significant
unobservable inputs generally include equity volatility inputs for
options that are 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. 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 December 2015 As of December 2014
Interest rates
($398 million and $40 million of net level 3
liabilities as of December 2015 and December 2014,
respectively)
Option pricing models:
•
•
(25)% to 92% (53% / 55%)
31 basis points per annum (bpa)
to 152 bpa (84 bpa / 57 bpa)
(16)% to 84% (37% / 40%)
36 basis points per annum (bpa)
to 156 bpa (100 bpa / 115 bpa)
Credit
($2.79 billion and $3.53 billion of net level 3
assets as of December 2015
Option pricing models, correlation models and discounted cash
flows models:
•
•
•
•
46% to 99% (68% / 66%)
1 basis points (bps) to 1,019 bps
(129 bps / 86 bps) 1
0 points to 100 points (41 points / 40 points)
2% to 97% (58% / 70%)
5% to 99% (71% / 72%)
1 basis points (bps) to 700 bps
(116 bps / 79 bps) 1
0 points to 99 points (40 points / 30 points)
14% to 87% (44% / 40%)
Currencies
($34 million and $267 million of net level 3
liabilities as of December 2015 and December 2014,
respectively)
Option pricing models:
• cross-product
25% to 70% (50% / 51%)
22% to 80% (47% / 50%)
Commodities
($262 million and $1.14 billion of
net level 3 liabilities as of December 2015 and
December 2014, respectively)
Option pricing models and discounted cash flows models:
•
•
•
•
11% to 77% (35% / 34%)
$(1.32) to $4.15 ($(0.05) / $(0.01))
N/A
$(10.64) to $65.29 ($3.34 / $(3.31)) 1
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) 1
Equities
($1.60 billion and $1.38 billion of
Option pricing models:
• cross-product
•
(65)% to 94% (42% / 48%)
5% to 76% (24% / 23%)
(34)% to 99% (47% / 49%)
5% to 90% (23% / 21%)
1.
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 is 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 is a description of the directional
sensitivity of the firm’s level 3 fair value
measurements to changes in significant unobservable inputs, in
isolation:
•
Correlation.
•
Volatility.
•
Credit spreads,
upfront credit points and recovery rates.
•
Commodity prices and
spreads. 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.
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 netting within
levels.” Where the counterparty netting is across levels, the
netting is reflected in “Cross-level counterparty
netting.”
•
Derivative assets are shown as positive amounts and
derivative liabilities are shown as negative amounts.
Derivatives at Fair Value as of
December 2015
$
in millions
Level 1
Level 2
Level 3
Total
Assets
Interest rates $ 4 $ 567,761
$ 560 $ 568,325
Credit
— 34,832 6,050 40,882
Currencies
— 96,959 189 97,148
Commodities
— 20,087 587 20,674
Equities
46
46,491
623
47,160
Gross fair value of derivative assets 50 766,130 8,009 774,189
Counterparty netting within levels
—
(627,548 )
(2,139 )
(629,687 )
Subtotal $ 50 $ 138,582 $ 5,870 $ 144,502
Cross-level counterparty netting (1,480 )
Cash collateral netting
(89,132 )
Fair value included in financial instruments owned
$ 53,890
Liabilities
Interest rates $(11 ) $(513,275 )
$ (958 ) $(514,244 )
Credit
— (33,518 ) (3,257 ) (36,775 )
Currencies
— (99,377 ) (223 ) (99,600 )
Commodities
— (20,222 ) (849 ) (21,071 )
Equities
(18 )
(43,953 )
(2,227 )
(46,198 )
Gross fair value of derivative liabilities (29 ) (710,345 ) (7,514 ) (717,888 )
Counterparty netting within levels
—
627,548
2,139
629,687
Subtotal $(29 ) $ (82,797 ) $(5,375 ) $ (88,201 )
Cross-level counterparty 1,480
Cash collateral netting
39,950
Fair value included in financial instruments sold, but not
yet purchased
$ (46,771 )
Derivatives at Fair Value as of December 2014
$
in millions
Level 1
Level 2
Level 3
Total
Assets
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 netting within levels
—
(882,841 )
(2,717 )
(885,558 )
Subtotal $ 298 $ 160,514 $ 7,074 $ 167,886
Cross-level counterparty netting (1,112 )
Cash collateral netting
(103,504 )
Fair value included in financial instruments owned
$ 63,270
Liabilities
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 netting within levels
—
882,841
2,717
885,558
Subtotal $(108 )
$ (93,807 ) $(6,368 ) $ (100,283 )
Cross-level counterparty netting 1,112
Cash collateral netting
36,155
Fair value included in financial instruments sold, but
not yet purchased
$ (63,016 )
Level 3 Rollforward The table below presents changes in fair value for
all derivatives categorized as level 3 as of the end of the
year. In the table 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.
•
Positive amounts for transfers into level 3 and
negative amounts for transfers out of level 3 represent net
transfers of derivative assets. 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.
•
Net unrealized gains/(losses) relate to instruments that
were still held at year-end.
•
For the year ended December 2015, the net realized
and unrealized gains on level 3 derivative assets and
liabilities of $746 million (reflecting $67 million of
realized gains and $679 million of unrealized gains) include
gains of approximately $518 million and $228 million
reported in “Market making” and “Other principal
transactions” respectively.
•
For the year ended December 2014, the net realized
and unrealized losses on level 3 derivative assets and
liabilities of $306 million (reflecting $123 million of
realized losses and $183 million of unrealized losses) include
losses of approximately $276 million and $30 million
reported in “Market making” and “Other principal
transactions” respectively.
•
See “Level 3 Rollforward Commentary”
below for an explanation of the net unrealized gains/(losses) on
level 3 derivative assets and liabilities and the activity
related to transfers into and out of level 3.
Level 3 Derivative Assets and
Liabilities at Fair Value
$
in millions
Asset/ (liability) balance, beginning of year
Net realized gains/ (losses)
Net gains/
Purchases
Sales
Settlements
Transfers into level 3
Transfers out of level 3
Asset/ (liability) balance, end of year
Year Ended December 2015
Interest rates — net
$ (40 ) $ (53 )
$ 66
$ 3
$ (31 )
$ (144 ) $(149 )
$ (50 )
$ (398 )
Credit — net 3,530 92 804 80 (237 ) (640 ) 206 (1,042 ) 2,793
Currencies — net (267 ) (49 ) 40 32 (10 ) 162 (1 ) 59 (34 )
Commodities — net (1,142 ) 34 (52 )
— (234 ) 1,034 (35 ) 133 (262 )
Equities — net
(1,375 )
43
(179 )
125
(1,352 )
1,086
(25 )
73
(1,604 )
Total derivatives — net
$ 706
$ 67
$ 679
$240
$(1,864 )
$ 1,498
$ (4 )
$ (827 )
$ 495
Year Ended December 2014
Interest rates — net
$ (86 ) $ (50 ) $ (101 ) $ 97
$ (2 )
$ 92 $ 14
$ (4 )
$ (40 )
Credit — net 4,176 64 1,625 151 (138 ) (1,693 ) (194 ) (461 ) 3,530
Currencies — net (200 ) (70 ) (175 ) 19 — 172 (9 ) (4 ) (267 )
Commodities — net 60 (19 ) (1,096 ) 38 (272 ) 95 84 (32 ) (1,142 )
Equities — net
(959 )
(48 )
(436 )
344
(979 )
270
(115 )
548
(1,375 )
Total derivatives — net
$ 2,991
$(123 )
$ (183 )
$649
$(1,391 )
$(1,064 )
$(220 )
$ 47
$ 706
Level 3 Rollforward Commentary Year Ended
December 2015. The net unrealized gain on
level 3 derivatives of $679 million for 2015 was
primarily attributable to gains on certain credit derivatives,
reflecting the impact of wider credit spreads, and changes in
foreign exchange and interest rates. Transfers into level 3 derivatives during 2015
primarily reflected transfers of certain credit derivative assets
from level 2, primarily due to unobservable credit spread
inputs becoming significant to the valuations of these derivatives,
and transfers of certain interest rate derivative liabilities from
level 2, primarily due to certain unobservable inputs becoming
significant to the valuations of these derivatives. Transfers out of level 3 derivatives during
2015 primarily reflected transfers of certain credit derivative
assets to level 2, principally due to increased transparency
and reduced significance of certain unobservable credit spread
inputs used to value these derivatives. Year Ended
December 2014. The net unrealized loss on
level 3 derivatives of $183 million for 2014 was
primarily attributable to the impact of a decrease in commodity
prices on certain commodity derivatives, a decrease in equity
prices on certain equity derivatives, and the impact of changes in
foreign exchange rates on certain currency derivatives, largely
offset by the impact of tighter credit spreads and a decrease in
interest rates on certain credit derivatives. Transfers into level 3 derivatives during 2014
primarily reflected transfers of certain credit derivative
liabilities from level 2, principally due to unobservable
credit spread inputs becoming significant to the valuation of these
derivatives and transfers of certain equity derivative liabilities
from level 2, primarily due to reduced transparency of
volatility inputs used to value these derivatives. Transfers out of level 3 derivatives during
2014 primarily reflected transfers of certain equity derivative
liabilities to level 2, principally due to unobservable
correlation inputs no longer being significant to the valuation of
these derivatives, and transfers of certain credit derivative
assets to level 2, principally due to unobservable credit
spread inputs no longer being significant to the net risk of
certain portfolios.
OTC Derivatives The tables below present the fair values of OTC
derivative assets and liabilities by tenor and major product
type.
OTC Derivatives as of
December 2015
$
in millions
Less than 1 Year
1 - 5 Years
Greater than 5 Years
Total
Assets
Interest rates $ 4,231 $23,278 $ 81,401 $ 108,910
Credit 1,664 4,547 5,842 12,053
Currencies 14,646 8,936 6,353 29,935
Commodities 6,228 3,897 231 10,356
Equities 4,806 7,091 1,550 13,447
Counterparty netting within tenors
(3,660 )
(5,751 )
(5,270 )
(14,681 )
Subtotal $27,915 $41,998 $ 90,107 $ 160,020
Cross-tenor counterparty (20,462 )
Cash collateral netting
(89,132 )
Total
$ 50,426
Liabilities
Interest rates $ 5,323 $13,945 $ 35,592
$ 54,860
Credit 1,804 4,704 1,437 7,945
Currencies 12,378 9,940 10,048 32,366
Commodities 4,464 3,136 2,526 10,126
Equities 5,154 5,802 2,994 13,950
Counterparty netting within tenors
(3,660 )
(5,751 )
(5,270 )
(14,681 )
Subtotal $25,463 $31,776 $ 47,327 $ 104,566
Cross-tenor counterparty netting (20,462 )
Cash collateral netting
(39,950 )
Total
$ 44,154
OTC Derivatives as of
December 2014
$
in millions
Less than 1 Year
1 - 5 Years
Greater than 5 Years
Total
Assets
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 netting within tenors
(4,479 )
(7,016 )
(4,058 )
(15,553 )
Subtotal $35,185 $47,376 $102,499 $ 185,060
Cross-tenor counterparty netting (20,819 )
Cash collateral netting
(103,504 )
Total
$ 60,737
Liabilities
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 netting within tenors
(4,479 )
(7,016 )
(4,058 )
(15,553 )
Subtotal $35,975 $34,192 $ 47,753 $ 117,920
Cross-tenor counterparty netting (20,819 )
Cash collateral netting
(36,155 )
Total
$ 60,946
In the tables above:
•
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 netting within
tenors.” Where the counterparty netting is across tenor
categories, the netting is reflected in “Cross-tenor
counterparty netting.”
Credit Derivatives The firm enters into a broad array of credit
derivatives in locations around the world to facilitate client
transactions and to manage the credit risk associated with
market-making and investing and lending activities. Credit
derivatives are actively managed based on the firm’s net risk
position. Credit derivatives are 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.
•
Credit Indices,
Baskets and Tranches.
•
Total Return
Swaps.
•
Credit
Options. 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 2015, written and purchased
credit derivatives had total gross notional amounts of
$923.48 billion and $968.68 billion, respectively, for
total net notional purchased protection of $45.20 billion. As
of December 2014, written and purchased credit derivatives had
total gross notional amounts of $1.22 trillion and
$1.28 trillion, respectively, for total net notional purchased
protection of $59.35 billion. Substantially all of the
firm’s written and purchased credit derivatives are credit
default swaps.
The tables below present certain information about
credit derivatives. In the tables below:
•
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 expected duration for mortgage-related
credit derivatives and on remaining contractual maturity for other
credit derivatives.
•
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 and are
included in “Offsetting.”
•
Other purchased credit derivatives represent the notional
amount of all other purchased credit derivatives not included in
“Offsetting.”
As of December 2015
Credit Spread on Underlier (basis
points)
$
in millions
0 - 250
251 - 500
501 - 1,000
Greater than 1,000
Total
Maximum Payout/Notional Amount of Written Credit Derivatives by
Tenor
Less than 1 year
$ 240,468 $ 2,859 $ 2,881 $ 10,533
$ 256,741
1 – 5 years 514,986 42,399 16,327 26,271 599,983
Greater than 5 years
57,054
6,481
1,567
1,651
66,753
Total
$ 812,508
$51,739
$20,775
$ 38,455
$ 923,477
Maximum Payout/Notional Amount of Purchased Credit
Derivatives
Offsetting
$ 722,436 $46,313 $19,556 $ 33,266
$ 821,571
Other
132,757
6,383
3,372
4,598
147,110
Fair Value of Written Credit Derivatives
Asset
$ 17,110
$ 924 $108 $190
$ 18,332
Liability
2,756
2,596
1,942
12,485
19,779
Net asset/(liability)
$ 14,354
$ (1,672 )
$ (1,834 )
$(12,295 )
$ (1,447 )
As of December 2014
Credit Spread on Underlier (basis
points)
$
in millions
0 - 250
251 - 500
501 - 1,000
Greater |
