| 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 $17.91 billion
and $16.78 billion, respectively, as of September 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 September 2016
As of December 2015
$
in millions
Derivative
Derivative
Notional
Derivative
Derivative
Notional
Derivatives not accounted for as hedges
Exchange-traded
$ 376
$ 425
$ 5,007,835
$ 310
$ 280 $ 4,402,843
OTC-cleared 299,669 281,538 19,319,515 211,272 192,401 20,738,687
Bilateral OTC
441,056
415,105
11,870,373
345,516
321,458
12,953,830
Total interest rates
741,101
697,068
36,197,723
557,098
514,139
38,095,360
OTC-cleared 5,187 5,071 412,498 5,203 5,596 339,244
Bilateral OTC
25,464
22,235
1,225,769
35,679
31,179
1,552,806
Total credit
30,651
27,306
1,638,267
40,882
36,775
1,892,050
Exchange-traded 13 134 9,709 183 204 13,073
OTC-cleared 228 297 43,677 165 128 14,617
Bilateral OTC
82,437
79,377
5,674,447
96,660
99,235
5,461,940
Total currencies
82,678
79,808
5,727,833
97,008
99,567
5,489,630
Exchange-traded 4,674 4,190 283,543 2,997 3,623 203,465
OTC-cleared 176 214 2,846 232 233 2,839
Bilateral OTC
9,021
10,579
198,855
17,445
17,215
230,750
Total commodities
13,871
14,983
485,244
20,674
21,071
437,054
Exchange-traded 8,088 8,391 624,544 9,372 7,908 528,419
Bilateral OTC
39,169
39,984
970,472
37,788
38,290
927,078
Total equities
47,257
48,375
1,595,016
47,160
46,198
1,455,497
Subtotal
915,558
867,540
45,644,083
762,822
717,750
47,369,591
Derivatives accounted for as hedges
OTC-cleared 6,462 30 57,947 4,567 85 51,446
Bilateral OTC
5,494
1
42,065
6,660
20
62,022
Total interest rates
11,956
31
100,012
11,227
105
113,468
OTC-cleared 2 46 1,538 24 6 1,333
Bilateral OTC
27
60
8,947
116
27
8,615
Total currencies
29
106
10,485
140
33
9,948
Subtotal
11,985
137
110,497
11,367
138
123,416
Total gross fair value/notional amount of derivatives
$ 927,543
$ 867,677
$45,754,580
$ 774,189
$ 717,888
$47,493,007
Amounts offset in the condensed consolidated statements of
financial condition
Exchange-traded $ (11,276 ) $ (11,276 )
$ (9,398 )
$ (9,398 )
OTC-cleared (284,021 ) (284,021 ) (194,928 ) (194,928 )
Bilateral OTC
(478,894 )
(478,894 )
(426,841 )
(426,841 )
Total counterparty netting
(774,191 )
(774,191 )
(631,167 )
(631,167 )
OTC-cleared (27,059 ) (2,542 ) (26,151 ) (3,305 )
Bilateral OTC
(71,549 )
(46,505 )
(62,981 )
(36,645 )
Total cash collateral netting
(98,608 )
(49,047 )
(89,132 )
(39,950 )
Total counterparty and cash collateral netting
$(872,799 )
$(823,238 )
$(720,299 )
$(671,117 )
Included in the condensed consolidated statements of financial
condition
Exchange-traded
$ 1,875
$ 1,864
$ 3,464
$ 2,617
OTC-cleared 644 633 384 216
Bilateral OTC
52,225
41,942
50,042
43,938
Total included in the condensed consolidated statements of
financial condition
$ 54,744
$ 44,439
$ 53,890
$ 46,771
Amounts not offset in the condensed consolidated statements of financial
condition
Cash collateral received/posted
$ (522 )
$ (2,016 )
$ (498 )
$ (1,935 )
Securities collateral received/posted
(17,910 )
(14,193 )
(14,008 )
(10,044 )
Total
$ 36,312
$ 28,230
$ 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 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 September 2016
$
in millions
Level 1
Level 2
Level 3
Total
Assets
Interest rates
$ 9 $ 752,087
$ 961 $ 753,057
Credit
— 24,863 5,788 30,651
Currencies
— 82,474 233 82,707
Commodities
— 13,469 402 13,871
Equities
11
46,612
634
47,257
Gross fair value 20 919,505 8,018 927,543
Counterparty netting within levels
(1 )
(770,662 )
(1,925 )
(772,588 )
Subtotal $ 19 $ 148,843 $ 6,093 $ 154,955
Cross-level counterparty netting (1,603 )
Cash collateral netting
(98,608 )
Net fair value
$ 54,744
Liabilities
Interest rates $ (22 ) $(696,170 )
$ (907 ) $(697,099 )
Credit
— (24,429 ) (2,877 ) (27,306 )
Currencies
— (79,713 ) (201 ) (79,914 )
Commodities
— (14,579 ) (404 ) (14,983 )
Equities
(554 )
(46,484 )
(1,337 )
(48,375 )
Gross fair value (576 ) (861,375 ) (5,726 ) (867,677 )
Counterparty netting within levels
1
770,662
1,925
772,588
Subtotal $(575 ) $ (90,713 ) $(3,801 ) $ (95,089 )
Cross-level counterparty netting 1,603
Cash collateral netting
49,047
Net fair value
$ (44,439 )
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
September 2016
December 2015
Interest rates — net $54 $(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 — net $2,911 $2,793
Correlation 29% to 92% (60% / 59% ) 46% to 99% (68% / 66% )
Credit spreads (bps) 1 to 960 (113 / 68 ) 1 to 1,019 (129 / 86 )
Upfront credit points 0 to 100 (42 / 37 ) 0 to 100 (41 / 40 )
Recovery rates
1% to 97% (61% / 70% )
2% to 97% (58% / 70% )
Currencies — net $32 $(34 )
Correlation
25% to 70% (51% / 55% )
25% to 70% (50% / 51% )
Commodities — net $(2 ) $(262 )
Volatility 10% to 67% (34% / 34% ) 11% to 77% (35% / 34% )
Natural gas spread
$(2.20) to $4.01 ($(0.06) / $(0.02) )
$(1.32) to $4.15 ($(0.05) / $(0.01) )
Oil spread
$(11.15) to $64.66 ($10.95 / $6.92 )
$(10.64) to $65.29 ($3.34 / $(3.31) )
Equities — net $(703 ) $(1,604 )
Correlation
(49)% to 87% (44% / 45% )
(65)% to 94% (42% / 48% )
Volatility
5% to 107% (25% / 24% )
5% to 76% (24% / 23% ) In the table above:
•
Derivative assets are shown as positive amounts and
derivative liabilities are shown as negative amounts.
•
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. For example, the difference between the average and the
median for credit spreads and oil spread inputs indicates that the
majority of the inputs fall in the lower end of the range.
•
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. 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 September 2016, the
net realized and unrealized losses on level 3 derivative
assets and liabilities of $154 million (reflecting
$17 million of realized gains and $171 million of
unrealized losses) include losses of $16 million and
$138 million reported in “Market making” and
“Other principal transactions,” respectively.
•
For the nine months ended September 2016, the
net realized and unrealized gains on level 3 derivative assets
and liabilities of $510 million (reflecting $110 million
of realized losses and $620 million of unrealized gains)
include gains/(losses) of $686 million and $(176) million
reported in “Market making” and “Other principal
transactions,” respectively.
•
For the three months ended September 2015, the
net realized and unrealized gains on level 3 derivative assets
and liabilities of $869 million (reflecting $22 million
of realized losses and $891 million of unrealized gains)
include gains of $647 million and $222 million reported
in “Market making” and “Other principal
transactions,” respectively.
•
For the nine months ended September 2015, the
net realized and unrealized gains on level 3 derivative assets
and liabilities of $1.13 billion (reflecting $158 million
of realized gains and $967 million of unrealized gains)
include gains of $945 million and $180 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 period
Net realized gains/ (losses)
Net unrealized gains/ (losses)
Purchases
Sales
Settlements
Transfers into level 3
Transfers out of level 3
Asset/ (liability) balance, end of period
Three Months Ended September 2016
Interest rates — net
$ 56 $ (23 ) $ (48 )
$ —
$ (2 )
$ 61
$ 9
$ 1
$ 54
Credit — net 2,942 7 (31 ) 12 (6 ) (110 ) 101 (4 ) 2,911
Currencies — net 17 (12 ) (14 ) 1
— 39
— 1 32
Commodities — net (222 ) (2 ) (25 ) 1 (4 ) 34 6 210 (2 )
Equities — net
(363 )
47
(53 )
29
(26 )
(218 )
3
(122 )
(703 )
Total derivatives — net
$ 2,430
$ 17
$(171 )
$ 43
$ (38 )
$ (194 )
$ 119
$ 86
$2,292
Nine Months Ended September 2016
Interest rates — net
$ (398 ) $ (43 ) $ 129
$ 3
$ (5 )
$ 95 $ 304
$ (31 )
$ 54
Credit — net 2,793 (50 ) 359 68 (38 ) (393 ) 191 (19 ) 2,911
Currencies — net (34 ) (39 ) 2 15 (4 ) 84 1 7 32
Commodities — net (262 ) 22 34 27 (118 ) 12 10 273 (2 )
Equities — net
(1,604 )
—
96
78
(114 )
824
(6 )
23
(703 )
Total derivatives — net
$ 495
$(110 )
$ 620
$191
$(279 )
$ 622
$ 500
$ 253
$2,292
Three Months Ended September 2015
Interest rates — net
$ (78 ) $ (27 )
$ 1 $ 2 $ (1 )
$ 10 $(112 )
$ 5 $ (200 )
Credit — net 2,968 39 416 32 (46 ) 109 (5 ) (219 ) 3,294
Currencies — net (149 ) (18 ) 183 4 — 37 (4 ) 107 160
Commodities — net (54 ) 1 (27 ) 2 (56 ) (4 ) 7 154 23
Equities — net
(2,349 )
(17 )
318
39
(407 )
1,513
(88 )
107
(884 )
Total derivatives — net
$ 338
$ (22 )
$ 891
$ 79
$(510 )
$1,665
$(202 )
$ 154
$2,393
Nine Months Ended September 2015
Interest rates — net
$ (40 ) $ (10 ) $ (4 ) $ 5 $ (32 )
$ 31 $(105 ) $ (45 ) $ (200 )
Credit — net 3,530 147 553 56 (151 ) (700 ) 127 (268 ) 3,294
Currencies — net (267 ) (71 ) 301 31 (8 ) 108 (19 ) 85 160
Commodities — net (1,142 ) 9 (68 ) — (87 ) (95 ) (20 ) 1,426 23
Equities — net
(1,375 )
83
185
105
(694 )
942
(148 )
18
(884 )
Total derivatives — net
$ 706
$ 158
$ 967
$197
$(972 )
$ 286
$(165 )
$1,216
$2,393
Level 3 Rollforward Commentary Three Months
Ended September 2016. The net unrealized loss on
level 3 derivatives of $171 million for the three months
ended September 2016 was primarily attributable to losses on
certain equity derivatives reflecting the impact of an increase in
equity prices, and losses on certain interest rate derivatives
reflecting the impact of a decrease in interest rates. Transfers into level 3 derivatives during the
three months ended September 2016 primarily reflected
transfers of certain credit derivative assets from level 2,
principally due to unobservable credit spread inputs becoming
significant to the net risk of certain portfolios. Transfers out of level 3 derivatives during
the three months ended September 2016 primarily reflected
transfers of certain commodity derivative liabilities to
level 2, principally due to unobservable volatility inputs no
longer being significant to the valuation of these derivatives and
transfers of certain equity derivative assets to level 2,
primarily due to increased transparency of unobservable correlation
and volatility inputs used to value these derivatives. Nine Months
Ended September 2016. The net unrealized gain on
level 3 derivatives of $620 million for the nine months
ended September 2016 was primarily attributable to gains on
certain credit and interest rate derivatives, principally
reflecting the impact of a decrease in interest rates. Transfers into level 3 derivatives during the
nine months ended September 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, and transfers of certain
credit derivative assets from level 2 primarily due to
unobservable credit spread inputs becoming significant to the net
risk of certain portfolios. Transfers out of level 3 derivatives during
the nine months ended September 2016 primarily reflected
transfers of certain commodity derivative liabilities to
level 2, principally due to unobservable volatility
inputs no longer being significant to the valuation of these
derivatives. Three Months
Ended September 2015. The net unrealized gain on
level 3 derivatives of $891 million for the three months
ended September 2015 was primarily attributable to gains on
certain credit derivatives, reflecting the impact of a decrease in
interest rates, wider credit spreads, and changes in foreign
exchange rates, and gains on certain equity derivatives, reflecting
the impact of decreases in global equity prices.
Transfers into level 3 derivatives during the
three months ended September 2015 primarily reflected
transfers of certain interest rate liabilities from level 2,
principally due to certain unobservable inputs becoming significant
to the valuation of these derivatives, and transfers of certain
equity derivative liabilities from level 2, primarily due to
unobservable volatility inputs becoming significant to the
valuation of these derivatives. Transfers out of level 3 derivatives during
the three months ended September 2015 primarily reflected
transfers of certain commodity derivative liabilities to
level 2, principally due to increased transparency of
volatility inputs used to value these derivatives, transfers of
certain equity derivative liabilities and currency derivative
liabilities to level 2, primarily due to certain unobservable
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
not being significant to the net risk of certain portfolios. Nine Months
Ended September 2015. The net unrealized gain on
level 3 derivatives of $967 million for the nine months
ended September 2015 was primarily attributable to gains on
certain credit derivatives, principally reflecting the impact of
wider credit spreads and a decrease in interest rates, and gains on
certain currency derivatives, reflecting the impact of changes in
foreign exchange rates. Transfers into level 3 derivatives during the
nine months ended September 2015 primarily reflected transfers
of certain equity derivative liabilities from level 2,
primarily due to reduced transparency of volatility inputs used to
value these derivatives, transfers of certain interest rate
derivative liabilities from level 2, primarily due to
unobservable inputs becoming significant to the valuations of these
derivatives, and transfers of certain credit derivative assets from
level 2, principally due to unobservable credit spread inputs
becoming significant to the valuation of these derivatives. Transfers out of level 3 derivatives during
the nine months ended September 2015 primarily reflected
transfers of certain commodity derivative liabilities to
level 2, principally due to increased transparency of oil and
refined product spread inputs used to value these derivatives, and
transfers of certain credit derivative assets to level 2,
principally due to unobservable credit spread inputs not being
significant to the net risk of certain portfolios.
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 Year
1 - 5 Years
Greater than 5 Years
Total
As of September 2016
Assets
Interest rates $ 6,008 $22,669 $100,614 $129,291
Credit 1,646 3,264 6,587 11,497
Currencies 11,981 6,832 9,093 27,906
Commodities 3,094 2,024 222 5,340
Equities 3,551 8,478 1,645 13,674
Counterparty netting within tenors
(3,787 )
(5,350 )
(5,114 )
(14,251 )
Subtotal $22,493 $37,917 $113,047 $173,457
Cross-tenor counterparty netting (21,980 )
Cash collateral netting
(98,608 )
Total
$52,869
Liabilities
Interest rates $ 7,662 $12,921 $ 52,702 $ 73,285
Credit 2,513 3,548 2,091 8,152
Currencies 10,623 7,262 7,107 24,992
Commodities 2,922 1,351 2,663 6,936
Equities 4,707 7,070 2,711 14,488
Counterparty netting within tenors
(3,787 )
(5,350 )
(5,114 )
(14,251 )
Subtotal $24,640 $26,802 $ 62,160 $113,602
Cross-tenor counterparty netting (21,980 )
Cash collateral netting
(49,047 )
Total
$ 42,575
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.
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