| Derivatives and Hedging Activities | Note 7.
Derivatives and Hedging Activities
Derivative Activities Derivatives are instruments that derive their value
from underlying asset prices, indices, reference rates and other
inputs, or a combination of these factors. Derivatives may be
traded on an exchange (exchange-traded) or they may be privately
negotiated contracts, which are usually referred to as OTC
derivatives. Certain of the firm’s OTC derivatives are
cleared and settled through central clearing counterparties
(OTC-cleared),
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 non-U.S. The firm enters into various types of derivatives,
including:
•
Futures and
Forwards.
•
Swaps.
•
Options Derivatives are reported on a net-by-counterparty
The tables below present the gross fair value and
the notional amounts 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.
As of June 2017
As of December 2016
$ in millions
Derivative
Derivative
Derivative
Derivative
Not accounted for as hedges
Exchange-traded
$ 455
$ 582
$ 443
$ 382
OTC-cleared 143,572 121,483 189,471 168,946
Bilateral OTC
279,604
256,454
309,037
289,491
Total interest rates
423,631
378,519
498,951
458,819
OTC-cleared 5,390 5,212 4,837 4,811
Bilateral OTC
18,542
16,667
21,530
18,770
Total credit
23,932
21,879
26,367
23,581
Exchange-traded 37 49 36 176
OTC-cleared 594 516 796 798
Bilateral OTC
104,801
102,717
111,032
106,318
Total currencies
105,432
103,282
111,864
107,292
Exchange-traded 2,852 2,866 3,219 3,187
OTC-cleared 211 226 189 197
Bilateral OTC
7,259
9,413
8,945
10,487
Total commodities
10,322
12,505
12,353
13,871
Exchange-traded 9,329 8,826 8,576 8,064
Bilateral OTC
38,557
43,501
39,516
45,826
Total equities
47,886
52,327
48,092
53,890
Subtotal
611,203
568,512
697,627
657,453
Accounted for as hedges
OTC-cleared 5,539 161 4,347 156
Bilateral OTC
2,928
7
4,180
10
Total interest rates
8,467
168
8,527
166
OTC-cleared 4 12 30 40
Bilateral OTC
10
189
55
64
Total currencies
14
201
85
104
Subtotal
8,481
369
8,612
270
Total gross fair value
$ 619,684
$ 568,881
$ 706,239
$ 657,723
Offset in condensed consolidated statements of financial
condition
Exchange-traded $ (10,719 ) $ (10,719 )
$ (9,727 )
$ (9,727 )
OTC-cleared (127,416 ) (127,416 ) (171,864 ) (171,864 )
Bilateral OTC
(354,816 )
(354,816 )
(385,647 )
(385,647 )
Counterparty netting
(492,951 )
(492,951 )
(567,238 )
(567,238 )
OTC-cleared (27,282 ) (97 ) (27,560 ) (2,940 )
Bilateral OTC
(51,036 )
(36,080 )
(57,769 )
(40,046 )
Cash collateral netting
(78,318 )
(36,177 )
(85,329 )
(42,986 )
Total amounts offset
$(571,269 )
$(529,128 )
$(652,567 )
$(610,224 )
Included in condensed consolidated statements of financial
condition
Exchange-traded
$ 1,954
$ 1,604
$ 2,547
$ 2,082
OTC-cleared 612 97 246 144
Bilateral OTC
45,849
38,052
50,879
45,273
Total
$ 48,415
$ 39,753
$ 53,672
$ 47,499
Not offset in condensed consolidated statements of financial
condition
Cash collateral
$ (565 )
$ (1,935 )
$ (535 )
$ (2,085 )
Securities collateral
(14,056 )
(8,848 )
(15,518 )
(10,224 )
Total
$ 33,794
$ 28,970
$ 37,619
$ 35,190
Notional Amounts as of
$ in millions
June 2017
December 2016
Not accounted for as hedges
Exchange-traded
$ 8,554,128 $ 4,425,532
OTC-cleared 18,107,397 16,646,145
Bilateral OTC
13,050,799
11,131,442
Total interest rates
39,712,324
32,203,119
OTC-cleared 384,450 378,432
Bilateral OTC
940,436
1,045,913
Total credit
1,324,886
1,424,345
Exchange-traded 16,169 13,800
OTC-cleared 89,197 62,799
Bilateral OTC
7,232,483
5,576,748
Total currencies
7,337,849
5,653,347
Exchange-traded 261,911 227,707
OTC-cleared 4,055 3,506
Bilateral OTC
219,218
196,899
Total commodities
485,184
428,112
Exchange-traded 712,038 605,335
Bilateral OTC
1,111,737
959,112
Total equities
1,823,775
1,564,447
Subtotal
50,684,018
41,273,370
Accounted for as hedges
OTC-cleared 54,847 55,328
Bilateral OTC
21,555
36,607
Total interest rates
76,402
91,935
OTC-cleared 2,898 1,703
Bilateral OTC
8,138
8,544
Total currencies
11,036
10,247
Subtotal
87,438
102,182
Total notional amounts
$50,771,456
$41,375,552 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 $13.88 billion
and $16.07 billion, respectively, as of June 2017, and
derivative assets and derivative liabilities of $19.92 billion
and $20.79 billion, respectively, as of December 2016,
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.
Pursuant to a rule change at a clearing
organization in the first quarter of 2017, transactions with this
clearing organization are considered settled each day. The
impact of reflecting transactions with this clearing organization
as settled would have been a reduction in gross interest rate and
credit derivative assets and liabilities as of December 2016
of $24.58 billion and $27.36 billion, respectively, and a
corresponding decrease in counterparty and cash collateral netting,
with no impact to the condensed 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. 10-year 2-year
•
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 in 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 classified 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 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 2017
$ in millions
Level 1
Level 2
Level 3
Total
Assets
Interest rates $ 92 $ 431,419
$ 587 $ 432,098
Credit
— 19,515 4,417 23,932
Currencies
— 105,269 177 105,446
Commodities
— 9,945 377 10,322
Equities
13
47,365
508
47,886
Gross fair value 105 613,513 6,066 619,684
Counterparty netting in levels
—
(490,115 )
(1,416 )
(491,531 )
Subtotal $ 105 $ 123,398 $ 4,650 $ 128,153
Cross-level counterparty netting
(1,420 )
Cash collateral netting
(78,318 )
Net fair value
$ 48,415
Liabilities
Interest rates $(542 ) $(377,239 )
$ (906 ) $(378,687 )
Credit
— (19,461 ) (2,418 ) (21,879 )
Currencies
— (103,331 ) (152 ) (103,483 )
Commodities
— (12,246 ) (259 ) (12,505 )
Equities
(386 )
(50,570 )
(1,371 )
(52,327 )
Gross fair value (928 ) (562,847 ) (5,106 ) (568,881 )
Counterparty netting in levels
—
490,115
1,416
491,531
Subtotal $(928 ) $ (72,732 ) $(3,690 ) $ (77,350 )
Cross-level counterparty netting
1,420
Cash collateral netting
36,177
Net fair value
$ (39,753 )
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 in 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 in 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 )
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 in levels.
Where the counterparty netting is across levels, the netting is
included 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
June 2017
December 2016
Interest rates, net $(319) $(381)
Correlation
(10)% to 86% (56%/60%)
(10)% to 86% (56%/60%)
Volatility (bps)
31 to 151 (84/57)
31 to 151 (84/57)
Credit, net $1,999 $2,504
Correlation
36% to 88% (66%/67%)
35% to 91% (65%/68%)
Credit spreads (bps) 1 to 737 (89/44) 1 to 993 (122/73)
Upfront credit points 0 to 99 (47/40) 0 to 100 (43/35)
Recovery rates
22% to 93% (57%/60%)
1% to 97% (58%/70%)
Currencies, net $25 $3
Correlation
25% to 70% (50%/55%)
25% to 70% (50%/55%)
Commodities, net $118 $73
Volatility 9% to 61% (27%/26%) 13% to 68% (33%/33%)
Natural gas spread
$(1.61) to $3.60 ($(0.18)/$(0.09))
$(1.81) to $4.33 ($(0.14)/$(0.05))
Oil spread
$(11.13) to $58.64 ($11.49/$0.33)
$(19.72) to $64.92 ($25.30/$16.43)
Equities, net $(863) $(3,416)
Correlation (35)% to 92%
(43%/41%) (39)% to 88% (41%/41%)
Volatility
5% to 85% (24%/22%)
5% to 72% (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.
Three Months Ended June
Six Months Ended June
$ in millions
2017
2016
2017
2016
Total level 3 derivatives
Beginning balance $ 97
$ 55 $(1,217 ) $ 495
Net realized gains/(losses) (125 ) (60 ) (163 ) (136 )
Net unrealized gains/(losses) 103 440 (43 ) 947
Purchases 75 110 234 171
Sales (200 ) (150 ) (313 ) (249 )
Settlements 506 1,587 1,681 918
Transfers into level 3 (39 ) 426 25 359
Transfers out of level 3
543
22
756
(75 )
Ending balance
$ 960
$2,430
$ 960
$2,430 In the table above:
•
Changes in fair value are presented for all
derivative assets and liabilities that are classified in
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 into level 3
during a reporting period, its entire gain or loss for the period
is classified 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 in
level 3.
•
Gains or losses that have been classified 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.
The table below disaggregates, by major product
type, the information for level 3 derivatives included in the
summary table above.
Three Months Ended June
Six Months Ended June
$ in millions
2017
2016
2017
2016
Interest rates, net
Beginning balance
$ (282 ) $ (383 )
$ (381 ) $ (398 )
Net realized gains/(losses) (6 ) (6 ) (24 ) (16 )
Net unrealized gains/(losses) (45 ) 98 56 182
Purchases 1 — 3 2
Sales
— — (3 ) (8 )
Settlements (5 ) (20 ) 40 36
Transfers into level 3 7 375 (10 ) 288
Transfers out of level 3
11
(8 )
—
(30 )
Ending balance
$ (319 )
$ 56
$ (319 )
$ 56
Credit, net
Beginning balance $ 2,239 $ 2,821 $ 2,504 $ 2,793
Net realized gains/(losses) 10 (40 ) 60 (59 )
Net unrealized gains/(losses) 1 5 (192 ) 349
Purchases 9 14 64 41
Sales (17 ) (2 ) (66 ) (39 )
Settlements (177 ) 49 (334 ) (150 )
Transfers into level 3 48 78 49 98
Transfers out of level 3
(114 )
17
(86 )
(91 )
Ending balance
$ 1,999
$ 2,942
$ 1,999
$ 2,942
Currencies, net
Beginning balance
$ 24
$ 9
$ 3
$ (34 )
Net realized gains/(losses) (7 ) (7 ) (33 ) (33 )
Net unrealized gains/(losses) (13 ) 20 (20 ) 9
Purchases 1 2 4 11
Sales
— —
— (3 )
Settlements 18 (14 ) 66 56
Transfers into level 3 2 6
— 2
Transfers out of level 3
—
1
5
9
Ending balance
$ 25
$ 17
$ 25
$ 17
Commodities, net
Beginning balance
$ 78 $ (291 )
$ 73 $ (262 )
Net realized gains/(losses) 1 14 10 18
Net unrealized gains/(losses) 63 141 131 160
Purchases 6 23 23 34
Sales (39 ) (99 ) (51 ) (123 )
Settlements 21 21 (37 ) 8
Transfers into level 3 (32 ) (8 ) (38 ) (10 )
Transfers out of level 3
20
(23 )
7
(47 )
Ending balance
$ 118
$ (222 )
$ 118
$ (222 )
Equities, net
Beginning balance $(1,962 ) $(2,101 ) $(3,416 ) $(1,604 )
Net realized gains/(losses) (123 ) (21 ) (176 ) (46 )
Net unrealized gains/(losses) 97 176 (18 ) 247
Purchases 58 71 140 83
Sales (144 ) (49 ) (193 ) (76 )
Settlements 649 1,551 1,946 968
Transfers into level 3 (64 ) (25 ) 24 (19 )
Transfers out of level 3
626
35
830
84
Ending balance
$ (863 )
$ (363 )
$ (863 )
$ (363 )
Level 3 Rollforward Commentary Three Months
Ended June 2017. The net realized and unrealized
losses on level 3 derivatives of $22 million (reflecting
$125 million of net realized losses and $103 million of
net unrealized gains) for the three months ended June 2017
included gains/(losses) of $59 million and $(81) million
reported in “Market making” and “Other principal
transactions,” respectively. The net unrealized gains on level 3
derivatives for the three months ended June 2017 were
primarily attributable to gains on certain equity derivatives,
reflecting the impact of changes in the prices of underlying
indices. Transfers into level 3 derivatives during the
three months ended June 2017 were not material. Transfers out of level 3 derivatives during
the three months ended June 2017 primarily reflected transfers
of certain equity derivative liabilities to level 2,
principally due to certain unobservable inputs no longer being
significant to the valuation of these derivatives. Six Months
Ended June 2017. The net realized and unrealized
losses on level 3 derivatives of $206 million (reflecting
$163 million of net realized losses and $43 million of
net unrealized losses) for the six months ended June 2017
included losses of $33 million and $173 million reported
in “Market making” and “Other principal
transactions,” respectively. The net unrealized losses on level 3
derivatives for the six months ended June 2017 were primarily
attributable to losses on certain credit derivatives, reflecting
the impact of tighter credit spreads, partially offset by gains on
certain commodity derivatives, reflecting the impact of a decrease
in commodity prices. Transfers into level 3 derivatives during the
six months ended June 2017 were not material. Transfers out of level 3 derivatives during
the six months ended June 2017 primarily reflected transfers
of certain equity derivative liabilities to level 2,
principally due to certain unobservable inputs no longer being
significant to the valuation of these derivatives.
Three Months
Ended June 2016. The net realized and unrealized
gains on level 3 derivatives of $380 million (reflecting
$60 million of net realized losses and $440 million of
net unrealized gains) for the three months ended June 2016
included gains/(losses) of $450 million and $(70) million
reported in “Market making” and “Other principal
transactions,” respectively. The net unrealized gains on level 3
derivatives for the three months ended June 2016 were
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 realized and unrealized
gains on level 3 derivatives of $811 million (reflecting
$136 million of net realized losses and $947 million of
net unrealized gains) for the six months ended June 2016
included gains/(losses) of $893 million and $(82) million
reported in “Market making” and “Other principal
transactions,” respectively. The net unrealized gains on level 3
derivatives for the six months ended June 2016 were 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.
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 June 2017
Assets
Interest rates $ 4,710 $19,949 $76,881 $101,540
Credit 1,019 3,795 3,746 8,560
Currencies 13,965 6,635 8,812 29,412
Commodities 2,644 1,492 169 4,305
Equities 3,237 6,009 1,389 10,635
Counterparty netting in tenors
(2,611 )
(5,268 )
(3,754 )
(11,633 )
Subtotal $22,964 $32,612 $87,243 $142,819
Cross-tenor counterparty netting
(18,040 )
Cash collateral netting
(78,318 )
Total
$ 46,461
Liabilities
Interest rates $ 5,742 $10,153 $32,110 $ 48,005
Credit 1,848 3,378 1,281 6,507
Currencies 15,041 7,782 4,612 27,435
Commodities 2,519 1,502 2,452 6,473
Equities 6,743 5,709 3,127 15,579
Counterparty netting in tenors
(2,611 )
(5,268 )
(3,754 )
(11,633 )
Subtotal $29,282 $23,256 $39,828 $ 92,366
Cross-tenor counterparty netting
(18,040 )
Cash collateral netting
(36,177 )
Total
$ 38,149
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 in 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 in 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
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 in
tenors. Where the counterparty netting is across tenor categories,
the netting is included 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 generally 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. pro-rata
•
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 2017, written and purchased credit
derivatives had total gross notional amounts of
$645.82 billion and $679.07 billion, respectively, for
total net notional purchased protection of $33.25 billion. 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. 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 -
501 -
Greater
Total
As of June 2017
Maximum Payout/Notional Amount of Written Credit Derivatives by Tenor
Less than 1 year $210,926 $ 6,034 $ 1,235 $ 5,366 $223,561
1 - 5 years 342,468 11,032 9,412 6,600 369,512
Greater than 5 years
49,030
2,944
577
200
52,751
Total
$602,424
$20,010
$11,224
$12,166
$645,824
Maximum Payout/Notional Amount of Purchased Credit
Derivatives
Offsetting $509,195 $13,080 $10,483 $10,780 $543,538
Other
126,404
6,883
1,219
1,032
135,538
Fair Value of Written Credit Derivatives
Asset $ 14,269
$ 487
$ 170
$ 25 $ 14,951
Liability
1,532
534
923
4,301
7,290
Net asset/(liability)
$ 12,737
$ (47 )
$ (753 )
$ (4,276 )
$ 7,661
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 In the table above:
•
Fair values exclude the effects of both netting of
receivable balances with payable balances under enforceable net |
