| 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 role,
the firm typically acts as principal and is required to commit
capital to provide execution, and maintains inventory in response
to, or in anticipation of, client demand. 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 tables below present the gross fair value and
the notional amount of derivative contracts by major product type,
the amounts of counterparty and cash collateral netting in the
consolidated statements of financial condition, as well as cash and
securities collateral posted and received under enforceable credit
support agreements that do not meet the criteria for netting under
U.S. GAAP.
As of December 2016
As of December 2015
$ in millions
Derivative
Derivative
Derivative
Derivative
Not accounted for as hedges
Exchange-traded
$ 443
$ 382
$ 310
$ 280
OTC-cleared 189,471 168,946 211,272 192,401
Bilateral OTC
309,037
289,491
345,516
321,458
Total interest rates
498,951
458,819
557,098
514,139
OTC-cleared 4,837 4,811 5,203 5,596
Bilateral OTC
21,530
18,770
35,679
31,179
Total credit
26,367
23,581
40,882
36,775
Exchange-traded 36 176 183 204
OTC-cleared 796 798 165 128
Bilateral OTC
111,032
106,318
96,660
99,235
Total currencies
111,864
107,292
97,008
99,567
Exchange-traded 3,219 3,187 2,997 3,623
OTC-cleared 189 197 232 233
Bilateral OTC
8,945
10,487
17,445
17,215
Total commodities
12,353
13,871
20,674
21,071
Exchange-traded 8,576 8,064 9,372 7,908
Bilateral OTC
39,516
45,826
37,788
38,290
Total equities
48,092
53,890
47,160
46,198
Subtotal
697,627
657,453
762,822
717,750
Accounted for as hedges
OTC-cleared 4,347 156 4,567 85
Bilateral OTC
4,180
10
6,660
20
Total interest rates
8,527
166
11,227
105
OTC-cleared 30 40 24 6
Bilateral OTC
55
64
116
27
Total currencies
85
104
140
33
Subtotal
8,612
270
11,367
138
Total gross fair value
$ 706,239
$ 657,723
$ 774,189
$ 717,888
Offset in the consolidated statements of financial
condition
Exchange-traded
$ (9,727 )
$ (9,727 )
$ (9,398 )
$ (9,398 )
OTC-cleared (171,864 ) (171,864 ) (194,928 ) (194,928 )
Bilateral OTC
(385,647 )
(385,647 )
(426,841 )
(426,841 )
Total counterparty netting
(567,238 )
(567,238 )
(631,167 )
(631,167 )
OTC-cleared (27,560 ) (2,940 ) (26,151 ) (3,305 )
Bilateral OTC
(57,769 )
(40,046 )
(62,981 )
(36,645 )
Total cash collateral netting
(85,329 )
(42,986 )
(89,132 )
(39,950 )
Total amounts offset
$(652,567 )
$(610,224 )
$(720,299 )
$(671,117 )
Included in the consolidated statements of financial
condition
Exchange-traded
$ 2,547
$ 2,082
$ 3,464
$ 2,617
OTC-cleared 246 144 384 216
Bilateral OTC
50,879
45,273
50,042
43,938
Total
$ 53,672
$ 47,499
$ 53,890
$ 46,771
Not offset in the consolidated statements of financial
condition
Cash collateral
$ (535 )
$ (2,085 )
$ (498 )
$ (1,935 )
Securities collateral
(15,518 )
(10,224 )
(14,008 )
(10,044 )
Total
$ 37,619
$ 35,190
$ 39,384
$ 34,792
Notional Amounts as of December
$ in millions
2016
2015
Not accounted for as hedges
Exchange-traded
$ 4,425,532 $ 4,402,843
OTC-cleared 16,646,145 20,738,687
Bilateral OTC
11,131,442
12,953,830
Total interest rates
32,203,119
38,095,360
OTC-cleared 378,432 339,244
Bilateral OTC
1,045,913
1,552,806
Total credit
1,424,345
1,892,050
Exchange-traded 13,800 13,073
OTC-cleared 62,799 14,617
Bilateral OTC
5,576,748
5,461,940
Total currencies
5,653,347
5,489,630
Exchange-traded 227,707 203,465
OTC-cleared 3,506 2,839
Bilateral OTC
196,899
230,750
Total commodities
428,112
437,054
Exchange-traded 605,335 528,419
Bilateral OTC
959,112
927,078
Total equities
1,564,447
1,455,497
Subtotal
41,273,370
47,369,591
Accounted for as hedges
OTC-cleared 55,328 51,446
Bilateral OTC
36,607
62,022
Total interest rates
91,935
113,468
OTC-cleared 1,703 1,333
Bilateral OTC
8,544
8,615
Total currencies
10,247
9,948
Subtotal
102,182
123,416
Total notional amount
$41,375,552
$47,493,007 In the tables above:
•
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 $19.92 billion
and $20.79 billion, respectively, as of December 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.
A clearing organization adopted a rule change in
the first quarter of 2017 that requires transactions to be
considered settled each day. Certain other clearing organizations
allow for similar treatment. To the extent transactions with these
clearing organizations are considered settled, the impact would be
a reduction in gross interest rate and credit derivative assets and
liabilities, and a corresponding decrease in counterparty and cash
collateral netting, with no impact to the consolidated statements
of financial condition.
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.
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 consolidated
statements of financial condition.
As of December 2016
$ in millions
Level 1
Level 2
Level 3
Total
Assets
Interest rates $ 46 $ 506,818
$ 614 $ 507,478
Credit
— 21,388 4,979 26,367
Currencies
— 111,762 187 111,949
Commodities
— 11,950 403 12,353
Equities
1
47,667
424
48,092
Gross fair value 47 699,585 6,607 706,239
Counterparty netting within levels
(12 )
(564,100 )
(1,417 )
(565,529 )
Subtotal $ 35 $ 135,485 $ 5,190 $ 140,710
Cross-level counterparty netting
(1,709 )
Cash collateral netting
(85,329 )
Net fair value
$ 53,672
Liabilities
Interest rates $ (27 ) $(457,963 )
$ (995 ) $ (458,985 )
Credit
— (21,106 ) (2,475 ) (23,581 )
Currencies
— (107,212 ) (184 ) (107,396 )
Commodities
— (13,541 ) (330 ) (13,871 )
Equities
(967 )
(49,083 )
(3,840 )
(53,890 )
Gross fair value (994 ) (648,905 ) (7,824 ) (657,723 )
Counterparty netting within levels
12
564,100
1,417
565,529
Subtotal $(982 ) $ (84,805 ) $(6,407 )
$ (92,194 )
Cross-level counterparty netting
1,709
Cash collateral netting
42,986
Net fair value
$ (47,499 )
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
$ in millions
2016
2015
Interest rates, net $(381) $(398)
Correlation
(10)% to 86% (56%/60%)
(25)% to 92% (53%/55%)
Volatility (bps)
31 to 151 (84/57)
31 to 152 (84/57)
Credit, net $2,504 $2,793
Correlation 35% to 91%
(65%/68%) 46% to 99%
(68%/66%)
Credit spreads (bps) 1 to 993 (122/73) 1 to 1,019 (129/86)
Upfront credit points 0 to 100 (43/35) 0 to 100 (41/40)
Recovery rates
1% to 97% (58%/70%)
2% to 97% (58%/70%)
Currencies, net $3 $(34)
Correlation
25% to 70% (50%/55%)
25% to 70% (50%/51%)
Commodities, net $73 $(262)
Volatility 13% to 68%
(33%/33%) 11% to 77%
(35%/34%)
Natural gas spread
$(1.81) to $4.33 ($(0.14)/$(0.05))
$(1.32) to $4.15 ($(0.05)/$(0.01))
Oil spread
$(19.72) to $64.92 ($25.30/$16.43)
$(10.64) to $65.29 ($3.34/$(3.31))
Equities, net $(3,416) $(1,604)
Correlation (39)% to 88%
(41%/41%) (65)% to 94%
(42%/48%)
Volatility
5% to 72% (24%/23%)
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 a summary of the changes
in fair value for all level 3 derivatives. In the table
below:
•
Changes in fair value are presented for all
derivative assets and liabilities that are categorized as
level 3 as of the end of the period.
•
Net unrealized gains/(losses) relate to instruments
that were still held at period-end.
•
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.
Year Ended December
$ in millions
2016
2015
Total level 3 derivatives
Beginning balance
$ 495 $ 706
Net realized gains/(losses) (37 ) 67
Net unrealized gains/(losses) 777 679
Purchases 115 240
Sales (3,557 ) (1,864 )
Settlements 782 1,498
Transfers into level 3 352 (4 )
Transfers out of level 3
(144 )
(827 )
Ending balance
$(1,217 )
$ 495
The table below disaggregates, by product type, the
information for level 3 derivatives included in the summary
table above.
Year Ended December
$ in millions
2016
2015
Interest rates, net
Beginning balance
$ (398 )
$ (40 )
Net realized gains/(losses) (41 ) (53 )
Net unrealized gains/(losses) (138 ) 66
Purchases 5 3
Sales (3 ) (31 )
Settlements 36 (144 )
Transfers into level 3 195 (149 )
Transfers out of level 3
(37 )
(50 )
Ending balance
$ (381 )
$ (398 )
Credit, net
Beginning balance $ 2,793 $ 3,530
Net realized gains/(losses)
— 92
Net unrealized gains/(losses) 196 804
Purchases 20 80
Sales (73 ) (237 )
Settlements (516 ) (640 )
Transfers into level 3 179 206
Transfers out of level 3
(95 )
(1,042 )
Ending balance
$ 2,504
$ 2,793
Currencies, net
Beginning balance
$ (34 ) $ (267 )
Net realized gains/(losses) (30 ) (49 )
Net unrealized gains/(losses) (42 ) 40
Purchases 14 32
Sales (2 ) (10 )
Settlements 90 162
Transfers into level 3 1 (1 )
Transfers out of level 3
6
59
Ending balance
$ 3
$ (34 )
Commodities, net
Beginning balance
$ (262 ) $(1,142 )
Net realized gains/(losses) (23 ) 34
Net unrealized gains/(losses) 101 (52 )
Purchases 24 —
Sales (119 ) (234 )
Settlements 391 1,034
Transfers into level 3 (23 ) (35 )
Transfers out of level 3
(16 )
133
Ending balance
$ 73
$ (262 )
Equities, net
Beginning balance $(1,604 ) $(1,375 )
Net realized gains/(losses) 57 43
Net unrealized gains/(losses) 660 (179 )
Purchases 52 125
Sales (3,360 ) (1,352 )
Settlements 781 1,086
Transfers into level 3
— (25 )
Transfers out of level 3
(2 )
73
Ending balance
$(3,416 )
$(1,604 )
Level 3 Rollforward Commentary Year Ended
December 2016. The net realized and unrealized
gains on level 3 derivatives of $740 million (reflecting
$37 million of net realized losses and $777 million of
net unrealized gains) for 2016, include gains/losses of
approximately $980 million and $(240) million reported in
“Market making” and “Other principal
transactions” respectively. The net unrealized gain on level 3 derivatives
of $777 million for the year ended December 2016 was
primarily attributable to gains on certain equity derivatives,
reflecting the impact of an increase in equity prices. Transfers into level 3 derivatives during 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
2016 primarily reflected transfers of certain credit derivatives
assets to level 2, primarily due to unobservable credit spread
inputs no longer being significant to the net risk of certain
portfolios. Year Ended
December 2015. The net realized and unrealized
gains on level 3 derivative assets and liabilities of
$746 million (reflecting $67 million of net realized
gains and $679 million of net unrealized gains) for 2015,
include gains of approximately $518 million and
$228 million reported in “Market making” and
“Other principal transactions” respectively. The net unrealized gain on level 3 derivatives
of $679 million for 2015 was primarily attributable to gains
on certain credit derivatives, reflecting the impact of wider
credit spreads, and changes in foreign exchange and interest
rates. Transfers into level 3 derivatives during 2015
primarily reflected transfers of certain credit derivative assets
from level 2, primarily due to unobservable credit spread
inputs becoming significant to the valuations of these derivatives,
and transfers of certain interest rate derivative liabilities from
level 2, primarily due to certain unobservable inputs becoming
significant to the valuations of these derivatives. Transfers out of level 3 derivatives during
2015 primarily reflected transfers of certain credit derivative
assets to level 2, principally due to increased transparency
and reduced significance of certain unobservable credit spread
inputs used to value these derivatives.
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 December 2016
Assets
Interest rates $ 5,845 $18,376 $79,507 $103,728
Credit 1,763 2,695 4,889 9,347
Currencies 18,344 8,292 8,428 35,064
Commodities 3,273 1,415 179 4,867
Equities 3,141 9,249 1,341 13,731
Counterparty netting within tenors
(3,543 )
(5,550 )
(3,794 )
(12,887 )
Subtotal $28,823 $34,477 $90,550 $153,850
Cross-tenor counterparty netting
(17,396 )
Cash collateral netting
(85,329 )
Total
$ 51,125
Liabilities
Interest rates $ 5,679 $10,814 $38,812 $ 55,305
Credit 2,060 3,328 1,167 6,555
Currencies 14,720 9,771 5,879 30,370
Commodities 2,546 1,555 2,315 6,416
Equities 7,000 10,426 2,614 20,040
Counterparty netting within tenors
(3,543 )
(5,550 )
(3,794 )
(12,887 )
Subtotal $28,462 $30,344 $46,993 $105,799
Cross-tenor counterparty netting
(17,396 )
Cash collateral netting
(42,986 )
Total
$ 45,417
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 December 2016, written and purchased
credit derivatives had total gross notional amounts of
$690.47 billion and $733.98 billion, respectively, for
total net notional purchased protection of $43.51 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 - 1,000
Greater 1,000
Total
As of December 2016
Maximum Payout/Notional Amount of Written Credit Derivatives by
Tenor
Less than 1 year $207,727 $ 5,819 $ 1,016
$ 8,629 $223,191
1 – 5 years 375,208 17,255 8,643 7,986 409,092
Greater than 5 years
52,977
3,928
1,045
233
58,183
Total
$635,912
$27,002
$10,704
$ 16,848
$690,466
Maximum Payout/Notional Amount of Purchased Credit
Derivatives
Offsetting $558,305 $20,588 $10,133 $ 15,186 $604,212
Other
119,509
7,712
1,098
1,446
129,765
Fair Value of Written Credit Derivatives
Asset $ 13,919
$ 606
$ 187
$ 45 $ 14,757
Liability
2,436
902
809
5,686
9,833
Net asset/(liability)
$ 11,483
$ (296 )
$ (622 )
$ (5,641 )
$ 4,924
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 de |
