| 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.
•
Total gross fair value of derivatives includes
derivative assets and derivative liabilities of $25.39 billion
and $23.48 billion, respectively, as of June 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.
As of June 2016
As of December 2015
$ in millions
Derivative Assets
Derivative Liabilities
Notional Amount
Derivative Assets
Derivative Liabilities
Notional Amount
Derivatives not accounted for as hedges
Exchange-traded
$ 431
$ 515
$ 4,682,953
$ 310
$ 280 $ 4,402,843
OTC-cleared 367,324 352,081 25,201,605 211,272 192,401 20,738,687
Bilateral OTC
469,235
441,535
12,388,202
345,516
321,458
12,953,830
Total interest rates
836,990
794,131
42,272,760
557,098
514,139
38,095,360
OTC-cleared 4,743 4,805 363,034 5,203 5,596 339,244
Bilateral OTC
28,201
24,140
1,375,556
35,679
31,179
1,552,806
Total credit
32,944
28,945
1,738,590
40,882
36,775
1,892,050
Exchange-traded 54 171 20,054 183 204 13,073
OTC-cleared 144 106 15,910 165 128 14,617
Bilateral OTC
119,953
116,122
5,955,704
96,660
99,235
5,461,940
Total currencies
120,151
116,399
5,991,668
97,008
99,567
5,489,630
Exchange-traded 5,203 4,918 285,925 2,997 3,623 203,465
OTC-cleared 154 203 2,871 232 233 2,839
Bilateral OTC
10,567
11,669
225,844
17,445
17,215
230,750
Total commodities
15,924
16,790
514,640
20,674
21,071
437,054
Exchange-traded 9,662 8,627 610,638 9,372 7,908 528,419
Bilateral OTC
39,012
39,656
961,250
37,788
38,290
927,078
Total equities
48,674
48,283
1,571,888
47,160
46,198
1,455,497
Subtotal
1,054,683
1,004,548
52,089,546
762,822
717,750
47,369,591
Derivatives accounted for as hedges
OTC-cleared 7,088 28 59,212 4,567 85 51,446
Bilateral OTC
5,755
21
45,885
6,660
20
62,022
Total interest rates
12,843
49
105,097
11,227
105
113,468
OTC-cleared 4 17 1,530 24 6 1,333
Bilateral OTC
167
142
8,139
116
27
8,615
Total currencies
171
159
9,669
140
33
9,948
Subtotal
13,014
208
114,766
11,367
138
123,416
Total gross fair value/notional amount of derivatives
$ 1,067,697
$1,004,756
$52,204,312
$ 774,189
$ 717,888
$47,493,007
Amounts that have been offset in the condensed consolidated
statements of financial condition
Exchange-traded
$ (12,114 )
$ (12,114 )
$ (9,398 )
$ (9,398 )
OTC-cleared (354,769 ) (354,769 ) (194,928 ) (194,928 )
Bilateral OTC
(536,941 )
(536,941 )
(426,841 )
(426,841 )
Total counterparty netting
(903,824 )
(903,824 )
(631,167 )
(631,167 )
OTC-cleared (24,341 ) (2,113 ) (26,151 ) (3,305 )
Bilateral OTC
(76,586 )
(47,595 )
(62,981 )
(36,645 )
Total cash collateral netting
(100,927 )
(49,708 )
(89,132 )
(39,950 )
Total counterparty and cash collateral netting
$(1,004,751 )
$ (953,532 )
$(720,299 )
$(671,117 )
Amounts included in the condensed consolidated statements of
financial condition
Exchange-traded
$ 3,236
$ 2,117
$ 3,464 $2,617
OTC-cleared 347 358 384 216
Bilateral OTC
59,363
48,749
50,042
43,938
Total amounts included in the condensed consolidated statements
of financial condition
$ 62,946
$ 51,224
$ 53,890
$ 46,771
Amounts that have not been offset in the condensed consolidated
statements of financial condition
Cash collateral received/posted
$ (585 )
$ (2,191 )
$ (498 )
$ (1,935 )
Securities collateral received/posted
(17,820 )
(15,427 )
(14,008 )
(10,044 )
Total
$ 44,541
$ 33,606
$ 39,384
$ 34,792
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, included in the condensed
consolidated statements of financial condition.
As of June 2016
$
in millions
Level 1
Level 2
Level 3
Total
Assets
Interest rates $ 13 $ 848,711 $ 1,109
$ 849,833
Credit
— 27,241 5,703 32,944
Currencies
— 120,071 251 120,322
Commodities
— 15,430 494 15,924
Equities
12
47,866
796
48,674
Gross fair value 25 1,059,319 8,353 1,067,697
Counterparty netting within levels
—
(900,236 )
(1,800 )
(902,036 )
Subtotal $ 25 $ 159,083 $ 6,553
$ 165,661
Cross-level counterparty netting (1,788 )
Cash collateral netting
(100,927 )
Net fair value
$ 62,946
Liabilities
Interest rates $(105 ) $ (793,022 ) $(1,053 )
$ (794,180 )
Credit
— (26,184 ) (2,761 ) (28,945 )
Currencies
— (116,324 ) (234 ) (116,558 )
Commodities
— (16,074 ) (716 ) (16,790 )
Equities
(36 )
(47,088 )
(1,159 )
(48,283 )
Gross fair value (141 ) (998,692 ) (5,923 ) (1,004,756 )
Counterparty netting within levels
—
900,236
1,800
902,036
Subtotal $(141 )
$ (98,456 ) $(4,123 )
$ (102,720 )
Cross-level counterparty netting 1,788
Cash collateral netting
49,708
Net fair value
$ (51,224 )
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 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 )
Net fair value
$ 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 (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
Net fair value
$ (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
June 2016
December 2015
Interest Rates $56 $(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 $2,942 $2,793
Correlation 37% to 99% (65% / 66% ) 46% to 99% (68% / 66% )
Credit spreads (bps) 1 to 909 (135 / 88 ) 1 1 to 1,019 (129 / 86 ) 1
Upfront credit points 0 to 100 (40 / 36 ) 0 to 100 (41 / 40 )
Recovery rates
22% to 73% (56% / 70% )
2% to 97% (58% / 70% )
Currencies $17 $(34 )
Correlation
25% to 70% (50% / 51% )
25% to 70% (50% / 51% )
Commodities $(222 ) $(262 )
Volatility 12% to 79% (35% /
34%) 11% to 77% (35% / 34%)
Natural gas spread
$(1.67) to $4.26 ($(0.04) / $0.00 )
$(1.32) to $4.15 ($(0.05) / $(0.01) )
Oil spread
$(12.38) to $60.76 ($5.05 / $(2.19) ) 1
$(10.64) to $65.29 ($3.34 / $(3.31) ) 1
Equities $(363 ) $(1,604 )
Correlation
(39)% to 90% (46% / 47% )
(65)% to 94% (42% / 48% )
Volatility
5% to 131% (27% / 24% )
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.
•
Natural gas spread represents the spread
per million British thermal units of natural gas.
•
Oil spread represents the spread per barrel of oil
and refined products.
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 June 2016, the net
realized and unrealized gains on level 3 derivative assets and
liabilities of $380 million (reflecting $60 million of
realized losses and $440 million of unrealized gains) include
gains/(losses) of $450 million and $(70) million reported
in “Market making” and “Other principal
transactions,” respectively.
•
For the six months ended June 2016, the net
realized and unrealized gains on level 3 derivative assets and
liabilities of $811 million (reflecting $136 million of
realized losses and $947 million of unrealized gains) include
gains/(losses) of $893 million and $(82) million reported
in “Market making” and “Other principal
transactions,” respectively.
•
For the three months ended June 2015, the net
realized and unrealized losses on level 3 derivative assets
and liabilities of $162 million (reflecting $35 million
of realized gains and $197 million of unrealized losses)
include gains/(losses) of $(168) million and $6 million
reported in “Market making” and “Other principal
transactions,” respectively.
•
For the six months ended June 2015, the net
realized and unrealized gains on level 3 derivative assets and
liabilities of $82 million (reflecting $178 million of
realized gains and $96 million of unrealized losses) include
gains/(losses) of $108 million and $(26) 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 June 2016
Interest rates — net
$ (383 )
$ (6 ) $ 98
$ —
$ —
$ (20 ) $ 375
$ (8 )
$ 56
Credit — net 2,821 (40 ) 5 14 (2 ) 49 78 17 2,942
Currencies — net 9 (7 ) 20 2
— (14 ) 6 1 17
Commodities — net (291 ) 14 141 23 (99 ) 21 (8 ) (23 ) (222 )
Equities — net
(2,101 )
(21 )
176
71
(49 )
1,551
(25 )
35
(363 )
Total derivatives — net
$ 55
$ (60 )
$ 440
$110
$ )
$1,587
$ 426
$ 22
$
Six Months Ended June 2016
Interest rates — net
$ (398 ) $ (16 ) $ 182
$ 2 $ )
$ 36 $ 288
$ (30 )
$ 56
Credit — net 2,793 (59 ) 349 41 (39 ) (150 ) 98 (91 ) 2,942
Currencies — net (34 ) (33 ) 9 11 (3 ) 56 2 9 17
Commodities — net (262 ) 18 160 34 (123 ) 8 (10 ) (47 ) (222 )
Equities — net
(1,604 )
(46 )
247
83
(76 )
968
(19 )
84
(363 )
Total derivatives — net
$ 495
$(136 )
$ 947
$171
$ )
$ 918
$ 359
$ (75 )
$
Three Months Ended June 2015
Interest rates — net $ ) $ ) $ 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
$
$ 35
$(197 )
$105
$(1,634 )
$ 15
$(182 )
$ 985
$ 338
Six Months Ended June 2015
Interest rates — net $ ) $ 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
$ (96 )
$232
$(2,093 )
$ 147
$ 234
$1,030
$ 338
Level 3 Rollforward Commentary Three Months
Ended June 2016. The net unrealized gain on
level 3 derivatives of $440 million for the three months
ended June 2016 was primarily attributable to gains on certain
equity derivatives reflecting the impact of changes in equity
prices, and gains on certain commodity derivatives, reflecting the
impact of an increase in commodity prices. Transfers into level 3 derivatives during the
three months ended June 2016 primarily reflected transfers of
certain interest rate derivative assets from level 2,
principally due to reduced transparency of certain unobservable
inputs used to value these derivatives. Transfers out of level 3 derivatives during
the three months ended June 2016 were not material. Six Months
Ended June 2016. The net unrealized gain on
level 3 derivatives of $947 million for the six months
ended June 2016 was primarily attributable to gains on certain
credit derivatives, principally reflecting the impact of a decrease
in interest rates, and gains on certain equity derivatives
reflecting the impact of changes in equity prices. Transfers into level 3 derivatives during the
six months ended June 2016 primarily reflected transfers of
certain interest rate derivative assets from level 2,
principally due to reduced transparency of certain unobservable
inputs used to value these derivatives. Transfers out of level 3 derivatives during
the six months ended June 2016 were not material.
Three Months
Ended June 2015. 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. Six Months
Ended June 2015. 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.
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 June 2016
Assets
Interest rates $ 6,527 $26,846 $ 99,960 $ 133,333
Credit 2,280 3,504 6,084 11,868
Currencies 22,446 7,560 9,190 39,196
Commodities 3,925 2,080 207 6,212
Equities 4,041 7,572 1,680 13,293
Counterparty netting within tenors
(3,277 )
(5,934 )
(6,041 )
(15,252 )
Subtotal $35,942 $41,628 $111,080 $ 188,650
Cross-tenor counterparty netting (28,013 )
Cash collateral netting
(100,927 )
Total
$ 59,710
Liabilities
Interest rates $ 8,471 $15,228 $ 53,896
$ 77,595
Credit 2,724 3,705 1,440 7,869
Currencies 17,887 8,510 8,919 35,316
Commodities 3,252 1,653 2,459 7,364
Equities 5,012 6,266 2,658 13,936
Counterparty netting within tenors
(3,277 )
(5,934 )
(6,041 )
(15,252 )
Subtotal $34,069 $29,428 $ 63,331 $ 126,828
Cross-tenor counterparty netting (28,013 )
Cash collateral netting
(49,708 )
Total
$ 49,107
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 June 2016, written and purchased credit
derivatives had total gross notional amounts of
$849.74 billion and $888.95 billion, respectively, for
total net notional purchased protection of $39.21 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 credi |
