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 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 2017 As of December 2016 $ in millions Derivative Derivative Derivative Derivative Not accounted for as hedges Exchange-traded $ 554 $ 644 $ 443 $ 382 OTC-cleared 5,392 2,773 189,471 168,946 Bilateral OTC 274,986 249,750 309,037 289,491 Total interest rates 280,932 253,167 498,951 458,819 OTC-cleared 5,727 5,670 4,837 4,811 Bilateral OTC 16,966 15,600 21,530 18,770 Total credit 22,693 21,270 26,367 23,581 Exchange-traded 23 363 36 176 OTC-cleared 988 847 796 798 Bilateral OTC 94,481 95,127 111,032 106,318 Total currencies 95,492 96,337 111,864 107,292 Exchange-traded 4,135 3,854 3,219 3,187 OTC-cleared 197 197 189 197 Bilateral OTC 9,748 12,097 8,945 10,487 Total commodities 14,080 16,148 12,353 13,871 Exchange-traded 10,552 10,335 8,576 8,064 Bilateral OTC 40,735 45,253 39,516 45,826 Total equities 51,287 55,588 48,092 53,890 Subtotal 464,484 442,510 697,627 657,453 Accounted for as hedges OTC-cleared 21 – 4,347 156 Bilateral OTC 2,309 3 4,180 10 Total interest rates 2,330 3 8,527 166 OTC-cleared 15 30 30 40 Bilateral OTC 34 114 55 64 Total currencies 49 144 85 104 Subtotal 2,379 147 8,612 270 Total gross fair value $ 466,863 $ 442,657 $ 706,239 $ 657,723 Offset in consolidated statements of financial condition Exchange-traded $ (12,963 ) $ (12,963 ) $ (9,727 ) $ (9,727 ) OTC-cleared (9,267 ) (9,267 ) (171,864 ) (171,864 ) Bilateral OTC (341,824 ) (341,824 ) (385,647 ) (385,647 ) Counterparty netting (364,054 ) (364,054 ) (567,238 ) (567,238 ) OTC-cleared (2,423 ) (180 ) (27,560 ) (2,940 ) Bilateral OTC (53,049 ) (38,792 ) (57,769 ) (40,046 ) Cash collateral netting (55,472 ) (38,972 ) (85,329 ) (42,986 ) Total amounts offset $(419,526 ) $(403,026 ) $(652,567 ) $(610,224 ) Included in consolidated statements of financial condition Exchange-traded $ 2,301 $ 2,233 $ 2,547 $ 2,082 OTC-cleared 650 70 246 144 Bilateral OTC 44,386 37,328 50,879 45,273 Total $ 47,337 $ 39,631 $ 53,672 $ 47,499 Not offset in consolidated statements of financial condition Cash collateral $ (602 ) $ (2,375 ) $ (535 ) $ (2,085 ) Securities collateral (13,947 ) (8,722 ) (15,518 ) (10,224 ) Total $ 32,788 $ 28,534 $ 37,619 $ 35,190 Notional Amounts as of December $ in millions 2017 2016 Not accounted for as hedges Exchange-traded $10,212,510 $ 4,425,532 OTC-cleared 14,739,556 16,646,145 Bilateral OTC 12,862,328 11,131,442 Total interest rates 37,814,394 32,203,119 OTC-cleared 386,163 378,432 Bilateral OTC 868,226 1,045,913 Total credit 1,254,389 1,424,345 Exchange-traded 10,450 13,800 OTC-cleared 98,549 62,799 Bilateral OTC 7,331,516 5,576,748 Total currencies 7,440,515 5,653,347 Exchange-traded 239,749 227,707 OTC-cleared 3,925 3,506 Bilateral OTC 250,547 196,899 Total commodities 494,221 428,112 Exchange-traded 655,485 605,335 Bilateral OTC 1,127,812 959,112 Total equities 1,783,297 1,564,447 Subtotal 48,786,816 41,273,370 Accounted for as hedges OTC-cleared 52,785 55,328 Bilateral OTC 15,188 36,607 Total interest rates 67,973 91,935 OTC-cleared 2,210 1,703 Bilateral OTC 8,347 8,544 Total currencies 10,557 10,247 Subtotal 78,530 102,182 Total notional amounts $48,865,346 $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 $11.24 billion and $13.00 billion, respectively, as of December 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. During 2017, pursuant to a rule change at a clearing organization and to an election under the rules of another clearing organization, transactions with such clearing organizations are considered 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 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 consolidated statements of financial condition. As of December 2017 $ in millions Level 1 Level 2 Level 3 Total Assets Interest rates $ 18 $ 282,933 $ 311 $ 283,262 Credit – 19,053 3,640 22,693 Currencies – 95,401 140 95,541 Commodities – 13,727 353 14,080 Equities 8 50,870 409 51,287 Gross fair value 26 461,984 4,853 466,863 Counterparty netting in levels – (362,109 ) (1,051 ) (363,160 ) Subtotal $ 26 $ 99,875 $ 3,802 $ 103,703 Cross-level counterparty netting (894 ) Cash collateral netting (55,472 ) Net fair value $ 47,337 Liabilities Interest rates $ (28 ) $(252,421 ) $ (721 ) $(253,170 ) Credit – (19,135 ) (2,135 ) (21,270 ) Currencies – (96,160 ) (321 ) (96,481 ) Commodities – (15,842 ) (306 ) (16,148 ) Equities (28 ) (53,902 ) (1,658 ) (55,588 ) Gross fair value (56 ) (437,460 ) (5,141 ) (442,657 ) Counterparty netting in levels – 362,109 1,051 363,160 Subtotal $ (56 ) $ (75,351 ) $(4,090 ) $ (79,497 ) Cross-level counterparty netting 894 Cash collateral netting 38,972 Net fair value $ (39,631 ) 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 2017 2016 Interest rates, net $(410) $(381) Correlation (10)% to 95% (71%/79%) (10)% to 86% (56%/60%) Volatility (bps) 31 to 150 (84/78) 31 to 151 (84/57) Credit, net $1,505 $2,504 Correlation 28% to 84% (61%/60%) 35% to 91% (65%/68%) Credit spreads (bps) 1 to 633 (69/42) 1 to 993 (122/73) Upfront credit points 0 to 97 (42/38) 0 to 100 (43/35) Recovery rates 22% to 73% (68%/73%) 1% to 97% (58%/70%) Currencies, net $(181) $3 Correlation 49% to 72% (61%/62%) 25% to 70% (50%/55%) Commodities, net $47 $73 Volatility 9% to 79% (24%/24%) 13% to 68% (33%/33%) Natural gas spread $(2.38) to $3.34 ($(0.22)/$(0.12)) $(1.81) to $4.33 ($(0.14)/$(0.05)) Oil spread $(2.86) to $23.61 ($6.47/$2.35) $(19.72) to $64.92 Equities, net $(1,249) $(3,416) Correlation (36)% to 94% (50%/52%) (39)% to 88% (41%/41%) Volatility 4% to 72% (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 type 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. Year Ended December $ in millions 2017 2016 Total level 3 derivatives Beginning balance $(1,217 ) $ 495 Net realized gains/(losses) (119 ) (37 ) Net unrealized gains/(losses) (436 ) 777 Purchases 301 115 Sales (611 ) (3,557 ) Settlements 1,891 782 Transfers into level 3 (39 ) 352 Transfers out of level 3 (58 ) (144 ) Ending balance $ (288 ) $(1,217 ) 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) relates 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. Year Ended December $ in millions 2017 2016 Interest rates, net Beginning balance $ (381 ) $ (398 ) Net realized gains/(losses) (62 ) (41 ) Net unrealized gains/(losses) 20 (138 ) Purchases 4 5 Sales (14 ) (3 ) Settlements 30 36 Transfers into level 3 (12 ) 195 Transfers out of level 3 5 (37 ) Ending balance $ (410 ) $ (381 ) Credit, net Beginning balance $ 2,504 $ 2,793 Net realized gains/(losses) 42 – Net unrealized gains/(losses) (188 ) 196 Purchases 20 20 Sales (27 ) (73 ) Settlements (739 ) (516 ) Transfers into level 3 3 179 Transfers out of level 3 (110 ) (95 ) Ending balance $ 1,505 $ 2,504 Currencies, net Beginning balance $ 3 $ (34 ) Net realized gains/(losses) (39 ) (30 ) Net unrealized gains/(losses) (192 ) (42 ) Purchases 4 14 Sales (3 ) (2 ) Settlements 62 90 Transfers into level 3 (9 ) 1 Transfers out of level 3 (7 ) 6 Ending balance $ (181 ) $ 3 Commodities, net Beginning balance $ 73 $ (262 ) Net realized gains/(losses) (4 ) (23 ) Net unrealized gains/(losses) 216 101 Purchases 102 24 Sales (301 ) (119 ) Settlements (27 ) 391 Transfers into level 3 (25 ) (23 ) Transfers out of level 3 13 (16 ) Ending balance $ 47 $ 73 Equities, net Beginning balance $(3,416 ) $(1,604 ) Net realized gains/(losses) (56 ) 57 Net unrealized gains/(losses) (292 ) 660 Purchases 171 52 Sales (266 ) (3,360 ) Settlements 2,565 781 Transfers into level 3 4 – Transfers out of level 3 41 (2 ) Ending balance $(1,249 ) $(3,416 ) Level 3 Rollforward Commentary Year Ended December 2017. The net realized and unrealized losses on level 3 derivatives of $555 million (reflecting $119 million of net realized losses and $436 million of net unrealized losses) for 2017 included losses of $90 million and $465 million reported in market making and other principal transactions, respectively. The net unrealized losses on level 3 derivatives for 2017 were primarily attributable to losses on certain equity derivatives, reflecting the impact of changes in equity prices, losses on certain currency derivatives, primarily reflecting the impact of changes in foreign exchanges rates, and losses on certain credit derivatives, reflecting the impact of tighter credit spreads, partially offset by gains on certain commodity derivatives, reflecting the impact of an increase in commodity prices. Transfers into level 3 derivatives during 2017 were not material. Transfers out of level 3 derivatives during 2017 primarily reflected transfers of certain credit derivatives assets to level 2, principally due to certain unobservable inputs no longer being significant to the valuation of these derivatives. 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 included gains/(losses) of approximately $980 million and $(240) million reported in market making and other principal transactions, respectively. The net unrealized gains on level 3 derivatives for 2016 were 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. 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 December 2017 Assets Interest rates $ 3,717 $15,445 $57,200 $ 76,362 Credit 760 4,079 3,338 8,177 Currencies 12,184 6,219 7,245 25,648 Commodities 3,175 2,526 181 5,882 Equities 4,969 5,607 1,387 11,963 Counterparty netting in tenors (3,719 ) (4,594 ) (2,807 ) (11,120 ) Subtotal $21,086 $29,282 $66,544 $116,912 Cross-tenor counterparty netting (16,404 ) Cash collateral netting (55,472 ) Total $ 45,036 Liabilities Interest rates $ 4,517 $ 8,471 $33,193 $ 46,181 Credit 2,078 3,588 1,088 6,754 Currencies 14,326 7,119 4,802 26,247 Commodities 3,599 2,167 2,465 8,231 Equities 6,453 6,647 3,381 16,481 Counterparty netting in tenors (3,719 ) (4,594 ) (2,807 ) (11,120 ) Subtotal $27,254 $23,398 $42,122 $ 92,774 Cross-tenor counterparty netting (16,404 ) Cash collateral netting (38,972 ) Total $ 37,398 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 December 2017, written and purchased credit derivatives had total gross notional amounts of $611.04 billion and $643.37 billion, respectively, for total net notional purchased protection of $32.33 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 December 2017 Maximum Payout/Notional Amount of Written Credit Derivatives by Tenor Less than 1 year $182,446 $ 8,531 $ 705 $ 4,067 $195,749 1 – 5 years 335,872 10,201 8,747 7,553 362,373 Greater than 5 years 49,440 2,142 817 519 52,918 Total $567,758 $20,874 $10,269 $12,139 $611,040 Maximum Payout/Notional Amount of Purchased Credit Derivatives Offsetting $492,325 $13,424 $ 9,395 $10,663 $525,807 Other 99,861 14,483 1,777 1,442 117,563 Fair Value of Written Credit Derivatives Asset $ 14,317 $ 513 $ 208 $ 155 $ 15,193 Liability 896 402 752 3,920 5,970 Net asset/(liability) $ 13,421 $ 111 $ (544 ) $ (3,765 ) $ 9,223 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 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 derivatives and on remaining contractual maturity for other credit derivatives. • The credit spread on the underlier, together with the tenor of the contract, are indicators of payment/performance risk. The firm is less likely to pay or otherwise be required to perform where the credit spread and the tenor are lower. • Offsetting purchased credit derivatives represent the notional amount of purchased credit derivatives that economically hedge written credit derivatives with identical underliers and are included in offsetting. • Other purchased credit derivatives represent the notional amount of all other purchased credit derivatives not included in offsetting. Impact of Credit Spreads on Derivatives On an ongoing basis, the firm realizes gains or losses relating to changes in credit risk through the unwind of derivative contracts and changes in credit mitigants. The net gain, including hedges, attributable to the impact of changes in credit exposure and credit spreads (counterparty and the firm’s) on derivatives was $66 million for 2017, $85 million for 2016 and $9 million for 2015. Bifurcated Embedded Derivatives The table below presents the fair value and the notional amount of derivatives that have been bifurcated from their related borrowings. As of December $ in millions 2017 2016 Fair value of assets $ 882 $ 676 Fair value of liabilities 1,200 864 Net liability $ 318 $ 188 Notional amount $9,578 $8,726 In the table above, these derivatives, which are recorded at fair value, primarily consist of interest rate, equity and commodity products and are included in unsecured short-term borrowings and unsecured long-term borrowings with the related borrowings. See Note 8 for further information. Derivatives with Credit-Related Contingent Features Certain of the firm’s derivatives have been transacted under bilateral agreements with counterparties who may require the firm to post collateral or terminate the transactions based on changes in the firm’s credit ratings. The firm assesses the impact of these bilateral agreements by determining the collateral or termination payments that would occur assuming a downgr |