| 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),
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 September 2017
As of December 2016
$ in millions
Derivative
Derivative
Derivative
Derivative
Not accounted for as hedges
Exchange-traded
$ 566
$ 801
$ 443
$ 382
OTC-cleared 5,273 2,910 189,471 168,946
Bilateral OTC
273,255
249,002
309,037
289,491
Total interest rates
279,094
252,713
498,951
458,819
OTC-cleared 5,934 5,774 4,837 4,811
Bilateral OTC
18,142
16,509
21,530
18,770
Total credit
24,076
22,283
26,367
23,581
Exchange-traded 38 49 36 176
OTC-cleared 859 780 796 798
Bilateral OTC
101,402
96,772
111,032
106,318
Total currencies
102,299
97,601
111,864
107,292
Exchange-traded 4,371 4,247 3,219 3,187
OTC-cleared 213 191 189 197
Bilateral OTC
7,730
9,900
8,945
10,487
Total commodities
12,314
14,338
12,353
13,871
Exchange-traded 11,174 9,656 8,576 8,064
Bilateral OTC
43,537
48,242
39,516
45,826
Total equities
54,711
57,898
48,092
53,890
Subtotal
472,494
444,833
697,627
657,453
Accounted for as hedges
OTC-cleared 10
– 4,347 156
Bilateral OTC
2,825
7
4,180
10
Total interest rates
2,835
7
8,527
166
OTC-cleared 8 33 30 40
Bilateral OTC
16
99
55
64
Total currencies
24
132
85
104
Subtotal
2,859
139
8,612
270
Total gross fair value
$ 475,353
$ 444,972
$ 706,239
$ 657,723
Offset in condensed consolidated statements of financial
condition
Exchange-traded $ (12,959 ) $ (12,959 )
$ (9,727 )
$ (9,727 )
OTC-cleared (9,429 ) (9,429 ) (171,864 ) (171,864 )
Bilateral OTC
(348,935 )
(348,935 )
(385,647 )
(385,647 )
Counterparty netting
(371,323 )
(371,323 )
(567,238 )
(567,238 )
OTC-cleared (2,590 ) (200 ) (27,560 ) (2,940 )
Bilateral OTC
(52,208 )
(35,483 )
(57,769 )
(40,046 )
Cash collateral netting
(54,798 )
(35,683 )
(85,329 )
(42,986 )
Total amounts offset
$(426,121 )
$(407,006 )
$(652,567 )
$(610,224 )
Included in condensed consolidated statements of financial
condition
Exchange-traded
$ 3,190
$ 1,794
$ 2,547
$ 2,082
OTC-cleared 278 59 246 144
Bilateral OTC
45,764
36,113
50,879
45,273
Total
$ 49,232
$ 37,966
$ 53,672
$ 47,499
Not offset in condensed consolidated statements of financial
condition
Cash collateral
$ (612 )
$ (2,173 )
$ (535 )
$ (2,085 )
Securities collateral
(14,192 )
(8,757 )
(15,518 )
(10,224 )
Total
$ 34,428
$ 27,036
$ 37,619
$ 35,190
Notional Amounts as of
$ in millions
September
December
Not accounted for as hedges
Exchange-traded
$ 9,804,797 $ 4,425,532
OTC-cleared 17,244,593 16,646,145
Bilateral OTC
14,402,975
11,131,442
Total interest rates
41,452,365
32,203,119
OTC-cleared 423,723 378,432
Bilateral OTC
973,991
1,045,913
Total credit
1,397,714
1,424,345
Exchange-traded 18,830 13,800
OTC-cleared 107,411 62,799
Bilateral OTC
7,883,247
5,576,748
Total currencies
8,009,488
5,653,347
Exchange-traded 281,291 227,707
OTC-cleared 4,066 3,506
Bilateral OTC
249,020
196,899
Total commodities
534,377
428,112
Exchange-traded 772,320 605,335
Bilateral OTC
1,210,740
959,112
Total equities
1,983,060
1,564,447
Subtotal
53,377,004
41,273,370
Accounted for as hedges
OTC-cleared 57,075 55,328
Bilateral OTC
19,654
36,607
Total interest rates
76,729
91,935
OTC-cleared 1,858 1,703
Bilateral OTC
8,255
8,544
Total currencies
10,113
10,247
Subtotal
86,842
102,182
Total notional amounts
$53,463,846
$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 included
derivative assets and derivative liabilities of $14.35 billion
and $14.91 billion, respectively, as of September 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. In addition,
during the third quarter of 2017, consistent with the rules of
another clearing organization, the firm elected to consider its
transactions with that clearing organization as settled each day.
The impact of reflecting transactions with these two clearing
organizations as settled would have been a reduction in gross
derivative assets and liabilities as of December 2016 of
$189.08 billion and $166.04 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 September 2017
$ in millions
Level 1
Level 2
Level 3
Total
Assets
Interest rates
$ 4 $ 281,349
$ 576 $ 281,929
Credit
– 20,258 3,818 24,076
Currencies
– 102,146 177 102,323
Commodities
– 11,943 371 12,314
Equities
9
54,352
350
54,711
Gross fair value 13 470,048 5,292 475,353
Counterparty netting in levels
–
(369,339 )
(1,018 )
(370,357 )
Subtotal $ 13 $ 100,709 $ 4,274 $ 104,996
Cross-level counterparty netting (966 )
Cash collateral netting
(54,798 )
Net fair value
$ 49,232
Liabilities
Interest rates
$ (8 ) $(251,809 )
$ (903 ) $(252,720 )
Credit
– (20,226 ) (2,057 ) (22,283 )
Currencies
– (97,520 ) (213 ) (97,733 )
Commodities
– (14,033 ) (305 ) (14,338 )
Equities
(28 )
(55,939 )
(1,931 )
(57,898 )
Gross fair value (36 ) (439,527 ) (5,409 ) (444,972 )
Counterparty netting in levels
–
369,339
1,018
370,357
Subtotal $ (36 ) $ (70,188 ) $(4,391 ) $ (74,615 )
Cross-level counterparty netting 966
Cash collateral netting
35,683
Net fair value
$ (37,966 )
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
September 2017
December 2016
Interest rates, net $(327) $(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 $1,761 $2,504
Correlation 35% to 91% (59%/59%)
35% to 91% (65%/68%)
Credit spreads (bps) 1 to 637 (89/50) 1 to 993 (122/73)
Upfront credit points 0 to 95 (41/36) 0 to 100 (43/35)
Recovery rates
22% to 97% (64%/70%)
1% to 97% (58%/70%)
Currencies, net $(36) $3
Correlation
25% to 72% (49%/46%)
25% to 70% (50%/55%)
Commodities, net $66 $73
Volatility 9% to 65% (27%/27%) 13% to 68% (33%/33%)
Natural gas spread
$(2.24) to $2.84 ($(0.22)/$(0.12))
$(1.81) to $4.33 ($(0.14)/$(0.05))
Oil spread
$(7.10) to $60.00 ($4.67/$(1.54))
$(19.72) to $64.92
Equities, net $(1,581) $(3,416)
Correlation
(35)% to 94% (51%/48%)
(39)% to 88% (41%/41%)
Volatility
3% to 87% (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
Nine Months Ended September
$ in millions
2017
2016
2017
2016
Total level 3 derivatives
Beginning balance $ 960 $2,430 $(1,217 ) $ 495
Net realized gains/(losses) (24 ) 17 (82 ) (110 )
Net unrealized gains/(losses) 12 (171 ) (144 ) 620
Purchases 48 43 146 191
Sales (786 ) (38 ) (935 ) (279 )
Settlements (299 ) (194 ) 2,163 622
Transfers into level 3 (34 ) 119 (6 ) 500
Transfers out of level 3
6
86
(42 )
253
Ending balance
$(117 )
$2,292
$ (117 )
$2,292 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 September
Nine Months Ended September
$ in millions
2017
2016
2017
2016
Interest rates, net
Beginning balance
$ (319 )
$ 56
$ (381 ) $ (398 )
Net realized gains/(losses) (34 ) (23 ) (77 ) (43 )
Net unrealized gains/(losses) 38 (48 ) 68 129
Purchases 1 – 5 3
Sales (4 ) (2 ) (12 ) (5 )
Settlements 5 61 78 95
Transfers into level 3
– 9 (11 ) 304
Transfers out of level 3
(14 )
1
3
(31 )
Ending balance
$ (327 )
$ 54
$ (327 )
$ 54
Credit, net
Beginning balance $ 1,999 $2,942 $ 2,504 $ 2,793
Net realized gains/(losses) 23 7 52 (50 )
Net unrealized gains/(losses) 54 (31 ) (149 ) 359
Purchases 15 12 30 68
Sales (27 ) (6 ) (40 ) (38 )
Settlements (356 ) (110 ) (607 ) (393 )
Transfers into level 3 8 101 45 191
Transfers out of level 3
45
(4 )
(74 )
(19 )
Ending balance
$ 1,761
$2,911
$ 1,761
$ 2,911
Currencies, net
Beginning balance
$ 25
$ 17
$ 3
$ (34 )
Net realized gains/(losses) (9 ) (12 ) (30 ) (39 )
Net unrealized gains/(losses) (52 ) (14 ) (87 ) 2
Purchases 1 1 3 15
Sales
– –
– (4 )
Settlements 26 39 88 84
Transfers into level 3 3 – 11 1
Transfers out of level 3
(30 )
1
(24 )
7
Ending balance
$ (36 )
$ 32
$ (36 )
$ 32
Commodities, net
Beginning balance
$ 118 $ (222 )
$ 73 $ (262 )
Net realized gains/(losses) (4 ) (2 ) 23 22
Net unrealized gains/(losses) 80 (25 ) 135 34
Purchases 3 1 19 27
Sales (58 ) (4 ) (120 ) (118 )
Settlements (1 ) 34 (42 ) 12
Transfers into level 3 (47 ) 6 (40 ) 10
Transfers out of level 3
(25 )
210
18
273
Ending balance
$ 66
$ (2 )
$ 66
$ (2 )
Equities, net
Beginning balance
$ (863 ) $ (363 ) $(3,416 ) $(1,604 )
Net realized gains/(losses)
– 47 (50 ) –
Net unrealized gains/(losses) (108 ) (53 ) (111 ) 96
Purchases 28 29 89 78
Sales (697 ) (26 ) (763 ) (114 )
Settlements 27 (218 ) 2,646 824
Transfers into level 3 2 3 (11 ) (6 )
Transfers out of level 3
30
(122 )
35
23
Ending balance
$(1,581 )
$ (703 )
$(1,581 )
$ (703 )
Level 3 Rollforward Commentary Three Months
Ended September 2017. The net realized and unrealized
losses on level 3 derivatives of $12 million (reflecting
$24 million of net realized losses and $12 million of net
unrealized gains) for the three months ended September 2017
included gains/(losses) of $63 million and $(75) million
reported in “Market making” and “Other principal
transactions,” respectively. The net unrealized gains on level 3
derivatives for the three months ended September 2017 were not
material. Both transfers into level 3 derivatives and
transfers out of level 3 derivatives during the three months
ended September 2017 were not material. Nine Months
Ended September 2017. The net realized and unrealized
losses on level 3 derivatives of $226 million (reflecting
$82 million of net realized losses and $144 million of
net unrealized losses) for the nine months ended
September 2017 included gains/(losses) of $28 million and
$(254) million reported in “Market making” and
“Other principal transactions,”
respectively. The net unrealized losses on level 3
derivatives for the nine months ended September 2017 were
primarily attributable to losses on certain credit derivatives,
reflecting the impact of tighter credit spreads, and losses on
certain equity derivatives, reflecting the impact of changes in
equity prices, partially offset by gains on certain commodity
derivatives, reflecting the impact of an increase in commodity
prices. Both transfers into level 3 derivatives and
transfers out of level 3 derivatives during the nine months
ended September 2017 were not material. Three Months
Ended September 2016. The net realized and unrealized
losses on level 3 derivatives of $154 million (reflecting
$17 million of realized gains and $171 million of
unrealized losses) for the three months ended September 2016
included losses of $16 million and $138 million reported
in “Market making” and “Other principal
transactions,” respectively. The net unrealized losses on level 3
derivatives for the three months ended September 2016 were
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 realized and unrealized
gains on level 3 derivatives of $510 million (reflecting
$110 million of realized losses and $620 million of
unrealized gains) for the nine months ended September 2016
included gains/(losses) of $686 million and
$(176) million reported in “Market making” and
“Other principal transactions,”
respectively. The net unrealized gains on level 3
derivatives for the nine months ended September 2016 were
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.
OTC Derivatives The table below presents the fair values of OTC
derivative assets and liabilities by tenor and major product
type.
$ in millions
Less than
1 - 5
Greater than
Total
As of September 2017
Assets
Interest rates $ 4,086 $16,288 $55,464 $ 75,838
Credit 1,309 3,554 3,948 8,811
Currencies 14,652 6,158 8,454 29,264
Commodities 2,648 1,596 191 4,435
Equities 3,394 6,659 1,471 11,524
Counterparty netting in tenors
(3,426 )
(4,746 )
(3,082 )
(11,254 )
Subtotal $22,663 $29,509 $66,446 $118,618
Cross-tenor counterparty netting
(17,778 )
Cash collateral netting
(54,798 )
Total
$ 46,042
Liabilities
Interest rates $ 5,347 $ 9,276 $31,772 $ 46,395
Credit 2,020 3,650 1,347 7,017
Currencies 13,124 6,998 4,542 24,664
Commodities 2,340 1,767 2,476 6,583
Equities 7,335 5,680 3,213 16,228
Counterparty netting in tenors
(3,426 )
(4,746 )
(3,082 )
(11,254 )
Subtotal $26,740 $22,625 $40,268 $ 89,633
Cross-tenor counterparty netting
(17,778 )
Cash collateral netting
(35,683 )
Total
$ 36,172
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 September 2017, written and purchased
credit derivatives had total gross notional amounts of
$670.14 billion and $727.59 billion, respectively, for
total net notional purchased protection of $57.45 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 than 1,000
Total
As of September 2017
Maximum Payout/Notional Amount of Written Credit Derivatives by Tenor
Less than 1 year $208,398 $ 6,880
$ 731 $ 5,048 $221,057
1 - 5 years 327,617 10,426 7,711 7,961 353,715
Greater than 5 years
86,151
5,518
2,578
1,118
95,365
Total
$622,166
$22,824
$11,020
$14,127
$670,137
Maximum Payout/Notional Amount of Purchased Credit
Derivatives
Offsetting $537,389 $17,554 $ 9,831 $12,257 $577,031
Other
136,997
9,672
2,024
1,867
150,560
Fair Value of Written Credit Derivatives
Asset $ 14,519
$ 732
$ 229
$ 164 $ 15,644
Liability
1,614
452
810
4,370
7,246
Net asset/(liability)
$ 12,905
$ 280
$ (581 )
$ (4,206 )
$ 8,398
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 o |
