| 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
capacity, the firm typically acts as principal and is 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 March 2016
As of December 2015
$
in millions
Derivative
Derivative
Notional
Derivative
Derivative
Notional
Derivatives not accounted for as hedges
Exchange-traded
$ 393
$ 464
$ 5,746,768
$ 310
$ 280 $ 4,402,843
OTC-cleared 322,805 306,746 23,524,475 211,272 192,401 20,738,687
Bilateral OTC
435,907
409,229
13,039,635
345,516
321,458
12,953,830
Total interest rates
759,105
716,439
42,310,878
557,098
514,139
38,095,360
OTC-cleared 5,695 6,006 443,266 5,203 5,596 339,244
Bilateral OTC
33,142
28,635
1,536,544
35,679
31,179
1,552,806
Total credit
38,837
34,641
1,979,810
40,882
36,775
1,892,050
Exchange-traded 51 108 21,293 183 204 13,073
OTC-cleared 267 242 19,281 165 128 14,617
Bilateral OTC
108,252
113,147
6,050,000
96,660
99,235
5,461,940
Total currencies
108,570
113,497
6,090,574
97,008
99,567
5,489,630
Exchange-traded 5,128 5,379 268,221 2,997 3,623 203,465
OTC-cleared 167 236 2,742 232 233 2,839
Bilateral OTC
14,575
15,344
235,205
17,445
17,215
230,750
Total commodities
19,870
20,959
506,168
20,674
21,071
437,054
Exchange-traded 9,545 8,343 538,880 9,372 7,908 528,419
Bilateral OTC
39,939
41,986
952,522
37,788
38,290
927,078
Total equities
49,484
50,329
1,491,402
47,160
46,198
1,455,497
Subtotal
975,866
935,865
52,378,832
762,822
717,750
47,369,591
Derivatives accounted for as hedges
OTC-cleared 6,606 84 58,840 4,567 85 51,446
Bilateral OTC
6,373
22
54,940
6,660
20
62,022
Total interest rates
12,979
106
113,780
11,227
105
113,468
OTC-cleared 6 29 1,364 24 6 1,333
Bilateral OTC
25
211
9,189
116
27
8,615
Total currencies
31
240
10,553
140
33
9,948
Subtotal
13,010
346
124,333
11,367
138
123,416
Total gross fair value/notional amount of derivatives
$ 988,876 1
$ 936,211 1
$52,503,165
$ 774,189 1
$ 717,888 1
$47,493,007
Amounts that have been offset in the condensed
consolidated statements of financial condition
Exchange-traded $ (11,374 ) $ (11,374 )
$ (9,398 )
$ (9,398 )
OTC-cleared (310,428 ) (310,428 ) (194,928 ) (194,928 )
Bilateral OTC
(512,487 )
(512,487 )
(426,841 )
(426,841 )
Total counterparty netting
(834,289 )
(834,289 )
(631,167 )
(631,167 )
OTC-cleared (24,829 ) (2,599 ) (26,151 ) (3,305 )
Bilateral OTC
(69,087 )
(45,140 )
(62,981 )
(36,645 )
Total cash collateral netting
(93,916 )
(47,739 )
(89,132 )
(39,950 )
Total counterparty and cash collateral netting
$(928,205 )
$(882,028 )
$(720,299 )
$(671,117 )
Amounts included in financial instruments owned/financial
instruments sold, but not yet purchased
Exchange-traded
$ 3,743
$ 2,920
$ 3,464
$ 2,617
OTC-cleared 289 316 384 216
Bilateral OTC
56,639
50,947
50,042
43,938
Total amounts included in the condensed consolidated
statements of financial condition
$ 60,671
$ 54,183
$ 53,890
$ 46,771
Amounts that have not been offset in the condensed
consolidated statements of financial condition
Cash collateral received/posted
$ (546 )
$ (2,725 )
$ (498 )
$ (1,935 )
Securities collateral received/posted
(16,108 )
(14,430 )
(14,008 )
(10,044 )
Total
$ 44,017
$ 37,028
$ 39,384
$ 34,792
1.
Includes derivative assets and derivative
liabilities of $22.33 billion and $23.50 billion,
respectively, as of March 2016, and derivative assets and
derivative liabilities of $17.09 billion and
$18.16 billion, respectively, as of December 2015, 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.
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.
As of March 2016
$
in millions
Level 1
Level 2
Level 3
Total
Assets
Interest rates $ 17 $ 771,432
$ 635 $ 772,084
Credit
— 32,905 5,932 38,837
Currencies
— 108,415 186 108,601
Commodities
— 19,304 566 19,870
Equities
210
48,679
595
49,484
Gross fair value of derivative assets 227 980,735 7,914 988,876
Counterparty netting within levels
—
(830,841 )
(1,964 )
(832,805 )
Subtotal $227 $ 149,894 $ 5,950 $ 156,071
Cross-level counterparty netting (1,484 )
Cash collateral netting
(93,916 )
Fair value included in financial instruments owned
$ 60,671
Liabilities
Interest rates $ (17 ) $(715,510 ) $(1,018 ) $(716,545 )
Credit
— (31,530 ) (3,111 ) (34,641 )
Currencies
— (113,560 ) (177 ) (113,737 )
Commodities
— (20,102 ) (857 ) (20,959 )
Equities
(8 )
(47,625 )
(2,696 )
(50,329 )
Gross fair value of derivative liabilities (25 ) (928,327 ) (7,859 ) (936,211 )
Counterparty netting within levels
—
830,841
1,964
832,805
Subtotal $ (25 ) $ (97,486 ) $(5,895 ) $(103,406 )
Cross-level counterparty netting 1,484
Cash collateral netting
47,739
Fair value included in financial instruments sold, but
not yet purchased
$ (54,183 )
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 netting 1,480
Cash collateral netting
39,950
Fair value included in
$ (46,771 ) In the tables above:
•
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.
Significant Unobservable Inputs The table below presents the amount of level 3
assets (liabilities), and ranges, averages and medians of
significant unobservable inputs used to value the firm’s
level 3 derivatives.
Level 3 Assets (Liabilities) and Range of
Significant Unobservable Inputs (Average / Median) as of
$ in millions
March 2016
December 2015
Interest Rates $(383) $(398)
Correlation (10)% to 86% (56% / 60%) (25)% to 92% (53% / 55%)
Volatility (bps per annum)
31 to 151 (84 /
57)
31 to 152 (84 /
57)
Credit $2,821 $2,793
Correlation 35% to 90% (63% /
62%) 46% to 99% (68% / 66%)
Credit Spreads (bps) 1
to 909 (147 / 87) 1 1 to
1,019 (129 / 86) 1
Upfront Credit Points 0
to 99 (41 / 37) 0 to
100 (41 / 40)
Recovery Rates
20% to 75% (58% /
70%)
2% to 97% (58% /
70%)
Currencies $9 $(34)
Correlation
25% to 70% (51% /
55%)
25% to 70% (50% / 51%)
Commodities $(291) $(262)
Volatility 15% to 65% (37% /
37%) 11%
to 77% (35% / 34%)
Spread per million British thermal
units of natural gas $(1.38) to $3.97 ($(0.07) / $(0.03)) $(1.32) to $4.15 ($(0.05) / $(0.01))
Spread per barrel of oil and refined
products
$(12.60) to $63.72 ($7.54 / $8.96)
$(10.64) to $65.29 ($3.34 /$(3.31)) 1
Equities $(2,101) $(1,604)
Correlation (30)% to 91%
(40% / 46%) (65)% to 94% (42% / 48%)
Volatility
5% to 105%
(28% / 25%)
5% to 76%
(24% / 23%)
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. In the table above:
•
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 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 do not represent uncertainty in,
or possible ranges of, fair value measurements of the firm’s
level 3 derivatives.
•
Interest rates, currencies and equities derivatives
are valued using option pricing models, credit derivatives are
valued using option pricing, correlation and discounted cash flow
models, and commodities derivatives are valued using option pricing
and discounted cash flow models.
•
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.
•
Correlation within currencies and equities includes
cross-product correlation.
•
Derivative assets are shown as positive amounts and
derivative liabilities are shown as negative amounts.
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.
Level 3 Rollforward The table below presents changes in fair value for
all derivatives categorized as level 3 as of the end of the
period. 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 period-end.
•
For the three months ended March 2016, the net
realized and unrealized gains on level 3 derivative assets and
liabilities of $382 million (reflecting $79 million of
realized losses and $461 million of unrealized gains) include
gains/(losses) of $393 million and $(11) million reported
in “Market making” and “Other principal
transactions” respectively.
•
For the three months ended March 2015, the net
realized and unrealized gains on level 3 derivative assets and
liabilities of $749 million (reflecting $113 million of
realized gains and $636 million of unrealized gains) include
gains/(losses) of $784 million and $(35) 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/
Net
Net
Purchases
Sales
Settlements
Transfers
Transfers
Asset/
Three Months Ended March 2016
Interest rates — net
$ (398 ) $ (11 ) $ 28
$ 3
$ (10 ) $ 17 $ $ (12 )
$ (383 )
Credit — net 2,793 (26 ) 210 33 (57 ) (75 ) 8 (65 ) 2,821
Currencies — net (34 ) (21 ) (5 ) 6 (1 ) 61
– 3 9
Commodities — net (262 ) (5 ) 41 47 (18 ) (37 ) (26 ) (31 ) (291 )
Equities — net
(1,604 )
(16 )
187
26
(1,739 )
140
2
903
(2,101 )
Total derivatives — net
$ 495
$ (79 )
$461
$115
$(1,825 )
$ 106
$ (16 )
$ 798
$ 55
Three Months Ended March 2015
Interest rates — net
$ (40 ) $ (8 ) $ 85 $ 23
$ (22 )
$ 4 $ (27 ) $ (51 )
$ (36 )
Credit — net 3,530 134 479 58 (132 ) (507 ) 286 (259 ) 3,589
Currencies — net (267 ) (31 ) 30 8 (4 ) 85 5 (8 ) (182 )
Commodities — net (1,142 ) 7 (49 ) – (10 ) 6 (9 ) (189 ) (1,386 )
Equities — net
(1,375 )
11
91
41
(553 )
804
27
180
(774 )
Total derivatives — net
$ 706
$113
$636
$130
$ (721 )
$ 392
$282
$(327 )
$ 1,211
Level 3 Rollforward Commentary Three Months
ended March 2016. The net unrealized gain on
level 3 derivatives of $461 million for the three months
ended March 2016 was primarily attributable to gains on
certain credit derivatives, reflecting the impact of changes in
interest rates and widening of certain credit spreads, and gains on
certain equity derivatives, reflecting the impact of changes in
equity prices. Transfers out of level 3 derivatives during
the three months ended March 2016 primarily reflected
transfers of certain equity derivative liabilities to level 2,
principally due to certain unobservable inputs no longer being
significant to the valuation of these derivatives. Three Months
Ended March 2015. The net unrealized gain on
level 3 derivatives of $636 million for the three months
ended March 2015 was primarily attributable to gains on credit
derivatives, primarily reflecting the impact of a decrease in
interest rates, changes in foreign exchange rates and wider credit
spreads. Transfers into level 3 derivatives during the
three months ended March 2015 primarily reflected transfers of
certain credit derivative assets from level 2, principally due
to unobservable credit spread inputs becoming significant to the
valuation of certain derivatives and to the net risk of certain
portfolios. Transfers out of level 3 derivatives during
the three months ended March 2015 primarily reflected
transfers of certain credit derivative assets to level 2,
principally due to increased transparency of correlation and
upfront credit point inputs used to value these derivatives,
transfers of certain commodity derivative assets to level 2,
principally due to increased transparency of natural gas spread
inputs used to value these derivatives and unobservable volatility
inputs no longer being significant to the valuation of certain
other commodity derivatives and transfers of certain equity
derivative liabilities to level 2, principally due to
unobservable inputs no longer being significant to the valuation of
these derivatives.
OTC Derivatives The table below presents the fair values of OTC
derivative assets and liabilities by tenor and major product
type.
$
in millions
Less than
1 - 5
Greater than
Total
As of March 2016
Assets
Interest rates $ 5,106 $26,561 $ 93,300 $124,967
Credit 1,621 4,022 6,575 12,218
Currencies 15,721 7,668 7,442 30,831
Commodities 5,199 2,925 228 8,352
Equities 5,299 7,537 1,986 14,822
Counterparty netting within tenors
(3,737 )
(5,868 )
(5,387 )
(14,992 )
Subtotal $29,209 $42,845 $104,144 $176,198
Cross-tenor counterparty netting (25,354 )
Cash collateral netting
(93,916 )
Total
$ 56,928
Liabilities
Interest rates $ 6,871 $15,388 $ 47,096 $ 69,355
Credit 2,370 3,827 1,826 8,023
Currencies 17,616 9,389 8,904 35,909
Commodities 4,593 1,985 2,613 9,191
Equities 8,606 5,767 2,497 16,870
Counterparty netting within tenors
(3,737 )
(5,868 )
(5,387 )
(14,992 )
Subtotal $36,319 $30,488 $ 57,549 $124,356
Cross-tenor counterparty netting (25,354 )
Cash collateral netting
(47,739 )
Total
$ 51,263
As of December 2015
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 netting (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
In the table 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
Options.
•
Credit Indices,
Baskets and Tranches.
•
Total Return
Swaps. 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 March 2016, written and purchased credit
derivatives had total gross notional amounts of
$970.66 billion and $1.01 trillion, respectively, for
total net notional purchased protection of $38.60 billion. 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. Substantially all of
the firm’s written and purchased credit derivatives are
credit default swaps.
The table below presents certain information about
credit derivatives.
Credit Spread on Underlier (basis
points)
$ in millions
0 - 250
251 - 500
501 -
Greater than
Total
As of March 2016
Maximum Payout/Notional Amount of Written Credit Derivatives by
Tenor
Less than 1 year $241,215 $ 6,035 $ 2,678
$ 8,852 $258,780
1 - 5 years 525,268 36,418 17,789 21,490 600,965
Greater than 5 years
92,695
12,286
4,343
1,595
110,919
Total
$859,178
$54,739
$24,810
$ 31,937
$970,664
Maximum Payout/Notional Amount of Purchased Credit
Derivatives
Offsetting $766,408 $46,382 $17,797 $ 22,474 $853,061
Other
127,323
10,073
8,313
10,493
156,202
Fair Value of Written Credit Derivatives
Asset $ 16,961
$ 961
$ 180
$ 111 $ 18,213
Liability
3,427
2,163
1,787
10,339
17,716
Net asset/(liability)
$ 13,534
$ (1,202 )
$ (1,607 )
$(10,228 )
$ 497
As of December 2015
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 ) 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 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.”
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 t |
