| 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. Risk
Management. 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 March 2018
As of December 2017
$ in millions
Derivative
Derivative
Derivative
Derivative
Not accounted for as hedges
Exchange-traded
$ 1,155
$ 1,076
$ 554
$ 644
OTC-cleared 6,190 3,273 5,392 2,773
Bilateral OTC
269,170
245,084
274,986
249,750
Total interest rates
276,515
249,433
280,932
253,167
OTC-cleared 6,067 5,768 5,727 5,670
Bilateral OTC
16,328
14,923
16,966
15,600
Total credit
22,395
20,691
22,693
21,270
Exchange-traded 19 26 23 363
OTC-cleared 761 604 988 847
Bilateral OTC
87,374
85,424
94,481
95,127
Total currencies
88,154
86,054
95,492
96,337
Exchange-traded 3,637 3,626 4,135 3,854
OTC-cleared 323 319 197 197
Bilateral OTC
9,504
11,254
9,748
12,097
Total commodities
13,464
15,199
14,080
16,148
Exchange-traded 10,977 10,795 10,552 10,335
Bilateral OTC
42,059
45,205
40,735
45,253
Total equities
53,036
56,000
51,287
55,588
Subtotal
453,564
427,377
464,484
442,510
Accounted for as hedges
OTC-cleared 21
– 21 –
Bilateral OTC
1,823
3
2,309
3
Total interest rates
1,844
3
2,330
3
OTC-cleared 23 38 15 30
Bilateral OTC
69
53
34
114
Total currencies
92
91
49
144
Subtotal
1,936
94
2,379
147
Total gross fair value
$ 455,500
$ 427,471
$ 466,863
$ 442,657
Offset in condensed consolidated statements of financial
condition
Exchange-traded $ (12,990 ) $ (12,990 ) $ (12,963 ) $ (12,963 )
OTC-cleared (9,799 ) (9,799 ) (9,267 ) (9,267 )
Bilateral OTC
(326,057 )
(326,057 )
(341,824 )
(341,824 )
Counterparty netting
(348,846 )
(348,846 )
(364,054 )
(364,054 )
OTC-cleared (2,640 ) (73 ) (2,423 ) (180 )
Bilateral OTC
(55,968 )
(41,685 )
(53,049 )
(38,792 )
Cash collateral netting
(58,608 )
(41,758 )
(55,472 )
(38,972 )
Total amounts offset
$(407,454 )
$(390,604 )
$(419,526 )
$(403,026 )
Included in condensed consolidated statements of financial
condition
Exchange-traded
$ 2,798
$ 2,533
$ 2,301
$ 2,233
OTC-cleared 946 130 650 70
Bilateral OTC
44,302
34,204
44,386
37,328
Total
$ 48,046
$ 36,867
$ 47,337
$ 39,631
Not offset in condensed consolidated statements of financial
condition
Cash collateral
$ (603 )
$ (1,297 )
$ (602 )
$ (2,375 )
Securities collateral
(14,467 )
(8,480 )
(13,947 )
(8,722 )
Total
$ 32,976
$ 27,090
$ 32,788
$ 28,534
Notional Amounts as of
$ in millions
March 2018
December
Not accounted for as hedges
Exchange-traded $15,059,754 $10,212,510
OTC-cleared 17,707,175 14,739,556
Bilateral OTC
15,306,289
12,862,328
Total interest rates
48,073,218
37,814,394
OTC-cleared 418,735 386,163
Bilateral OTC
871,616
868,226
Total credit
1,290,351
1,254,389
Exchange-traded 8,453 10,450
OTC-cleared 106,175 98,549
Bilateral OTC
7,577,689
7,331,516
Total currencies
7,692,317
7,440,515
Exchange-traded 260,059 239,749
OTC-cleared 3,504 3,925
Bilateral OTC
264,550
250,547
Total commodities
528,113
494,221
Exchange-traded 715,251 655,485
Bilateral OTC
1,173,206
1,127,812
Total equities
1,888,457
1,783,297
Subtotal
59,472,456
48,786,816
Accounted for as hedges
OTC-cleared 65,600 52,785
Bilateral OTC
12,252
15,188
Total interest rates
77,852
67,973
OTC-cleared 3,542 2,210
Bilateral OTC
7,621
8,347
Total currencies
11,163
10,557
Subtotal
89,015
78,530
Total notional amounts
$59,561,471
$48,865,346 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 $9.94 billion
and $12.58 billion, respectively, as of March 2018, and
$11.24 billion and $13.00 billion, respectively, as of
December 2017, 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.
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 level 3 interest rate and currency
derivatives, significant unobservable inputs include correlations
of certain currencies and interest rates (e.g., the correlation
between Euro inflation and Euro interest rates). In addition, for
level 3 interest rate derivatives, significant unobservable
inputs include 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 March 2018
$ in millions
Level 1
Level 2
Level 3
Total
Assets
Interest rates $ 31 $ 277,689
$ 639 $ 278,359
Credit
– 18,910 3,485 22,395
Currencies
– 87,951 295 88,246
Commodities
– 13,193 271 13,464
Equities
8
52,482
546
53,036
Gross fair value 39 450,225 5,236 455,500
Counterparty netting in levels
(10 )
(346,820 )
(1,122 )
(347,952 )
Subtotal $ 29 $ 103,405 $ 4,114 $ 107,548
Cross-level counterparty netting
(894 )
Cash collateral netting
(58,608 )
Net fair value
$ 48,046
Liabilities
Interest rates $(151 ) $(248,397 )
$ (888 ) $(249,436 )
Credit
– (18,488 ) (2,203 ) (20,691 )
Currencies
– (86,019 ) (126 ) (86,145 )
Commodities
– (15,001 ) (198 ) (15,199 )
Equities
(5 )
(54,582 )
(1,413 )
(56,000 )
Gross fair value (156 ) (422,487 ) (4,828 ) (427,471 )
Counterparty netting in levels
10
346,820
1,122
347,952
Subtotal $(146 ) $ (75,667 ) $(3,706 ) $ (79,519 )
Cross-level counterparty netting
894
Cash collateral netting
41,758
Net fair value
$ (36,867 )
As of December 2017
$ in millions
Level 1
Level 2
Level 3
Total
Assets
Interest rates $ $
$ $
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 $
$ $ $
Cross-level counterparty netting
(894 )
Cash collateral netting
(55,472 )
Net fair value
$
Liabilities
Interest rates $ (28 ) $(252,421 )
$ ) $(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 )
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 Unobservable Inputs (Average/Median) as of
$ in millions
March 2018
December 2017
Interest rates, net $(249) $(410)
Correlation
(10)% to 95% (70%/78%)
(10)% to 95% (71%/79%)
Volatility (bps)
31 to 150 (84/77)
31 to 150 (84/78)
Credit, net $1,282 $1,505
Correlation
59% to 91% (73%/73%)
28% to 84% (61%/60%)
Credit spreads (bps) 1 to 507 (73/39) 1 to 633 (69/42)
Upfront credit points 0 to 95 (42/38) 0 to 97 (42/38)
Recovery rates
22% to 73% (62%/73%)
22% to 73% (68%/73%)
Currencies, net $169 $(181)
Correlation
10% to 72% (41%/33%)
49% to 72% (61%/62%)
Commodities, net $73 $47
Volatility
8% to 46% (25%/25%) 9% to 79% (24%/24%)
Natural gas spread
$(2.19) to $0.64 ($(0.34)/$(0.26))
$(2.38) to $3.34 ($(0.22)/$(0.12))
Oil spread
$(9.48) to $24.64 ($1.31/$(1.49))
$(2.86) to $23.61
Equities, net $(867) $(1,249)
Correlation
(40)% to 94% (40%/40%)
(36)% to 94% (50%/52%)
Volatility
3% to 77% (23%/21%)
4% to 72% (24%/22%) 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.
Three Months
$ in millions
2018
2017
Total level 3 derivatives
Beginning balance $(288 ) $(1,217 )
Net realized gains/(losses) 52 (15 )
Net unrealized gains/(losses) 219 769
Purchases 134 79
Sales (124 ) (458 )
Settlements 329 871
Transfers into level 3 41 (10 )
Transfers out of level 3
45
78
Ending balance
$ 408
$ 97 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.
Three Months Ended March
$ in millions
2018
2017
Interest rates, net
Beginning balance
$ (410 ) $ (381 )
Net realized gains/(losses) (5 ) (22 )
Net unrealized gains/(losses) 105 103
Purchases 6 4
Sales (7 ) (9 )
Settlements 29 46
Transfers into level 3 38 (10 )
Transfers out of level 3
(5 )
(13 )
Ending balance
$ (249 )
$ (282 )
Credit, net
Beginning balance $ 1,505 $ 2,504
Net realized gains/(losses) 15 43
Net unrealized gains/(losses) (297 ) (174 )
Purchases 19 16
Sales (23 ) (20 )
Settlements 55 (135 )
Transfers into level 3 (15 ) 13
Transfers out of level 3
23
(8 )
Ending balance
$ 1,282
$ 2,239
Currencies, net
Beginning balance
$ (181 )
$ 3
Net realized gains/(losses) (17 ) (22 )
Net unrealized gains/(losses) 125 (13 )
Purchases 7 2
Sales (2 ) –
Settlements 210 51
Transfers into level 3 27 (2 )
Transfers out of level 3
–
5
Ending balance
$ 169
$ 24
Commodities, net
Beginning balance
$ 47
$ 73
Net realized gains/(losses) (6 ) –
Net unrealized gains/(losses) 31 20
Purchases 12 13
Sales (1 ) (13 )
Settlements (8 ) (21 )
Transfers into level 3 (8 ) (9 )
Transfers out of level 3
6
15
Ending balance
$ 73
$ 78
Equities, net
Beginning balance $(1,249 ) $(3,416 )
Net realized gains/(losses) 65 (14 )
Net unrealized gains/(losses) 255 833
Purchases 90 44
Sales (91 ) (416 )
Settlements 43 930
Transfers into level 3 (1 ) (2 )
Transfers out of level 3
21
79
Ending balance
$ (867 )
$(1,962 )
Level 3 Rollforward Commentary Three Months
Ended March 2018. The net unrealized gains on level 3
derivatives for the three months ended March 2018 were
primarily attributable to gains on certain equity derivatives,
reflecting the impact of a decrease in equity prices, gains on
certain currency derivatives, primarily reflecting the impact of
changes in foreign exchange rates, and gains on certain interest
rate derivatives, primarily reflecting the impact of an increase in
interest rates, partially offset by losses on certain credit
derivatives reflecting the impact of changes in foreign exchange
rates. Transfers into level 3 derivatives during the
three months ended March 2018 were not material. Transfers out of level 3 derivatives during
the three months ended March 2018 were not material. Three Months
Ended March 2017. The net realized and unrealized
gains on level 3 derivatives of $754 million (reflecting
$15 million of net realized losses and $769 million of
net unrealized gains) for the three months ended March 2017
included gains/(losses) of $848 million and $(94) million
reported in market making and other principal transactions,
respectively. The net unrealized gains on level 3
derivatives for the three months ended March 2017 were
primarily attributable to gains on certain equity derivatives,
reflecting the impact of an increase in equity prices. Transfers into level 3 derivatives during the
three months ended March 2017 were not material. Transfers out of level 3 derivatives during
the three months ended March 2017 primarily reflected
transfers of certain equity derivative liabilities to level 2,
principally due to certain unobservable volatility inputs not 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 March 2018
Assets
Interest rates $ 3,677 $15,658 $57,443 $ 76,778
Credit 883 4,183 3,194 8,260
Currencies 10,902 6,032 8,366 25,300
Commodities 3,804 1,642 172 5,618
Equities 7,104 5,426 1,399 13,929
Counterparty netting in tenors
(3,184 )
(3,871 )
(2,564 )
(9,619 )
Subtotal $23,186 $29,070 $68,010 $120,266
Cross-tenor counterparty netting
(16,410 )
Cash collateral netting
(58,608 )
Total
$ 45,248
Liabilities
Interest rates $ 5,888 $ 8,646 $33,401 $ 47,935
Credit 1,891 3,364 1,300 6,555
Currencies 12,452 6,586 4,155 23,193
Commodities 3,216 1,709 2,440 7,365
Equities 6,568 7,355 3,150 17,073
Counterparty netting in tenors
(3,184 )
(3,871 )
(2,564 )
(9,619 )
Subtotal $26,831 $23,789 $41,882 $ 92,502
Cross-tenor counterparty netting
(16,410 )
Cash collateral netting
(41,758 )
Total
$ 34,334
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 In the table above:
•
Tenor is based on remaining contractual
maturity.
•
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 March 2018, written and purchased credit
derivatives had total gross notional amounts of
$638.66 billion and $651.71 billion, respectively, for
total net notional purchased protection of $13.05 billion. 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. 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 March 2018
Maximum Payout/Notional Amount of Written Credit Derivatives by Tenor
Less than 1 year $186,125 $ 6,401
$ 541 $ 3,750 $196,817
1 – 5 years 324,297 10,169 8,868 6,181 349,515
Greater than 5 years
83,191
5,894
2,575
672
92,332
Total
$593,613
$22,464
$11,984
$10,603
$638,664
Maximum Payout/Notional Amount of Purchased Credit Derivatives
Offsetting $507,206 $15,315 $10,960 $ 9,256 $542,737
Other
99,322
6,705
1,811
1,131
108,969
Fair Value of Written Credit Derivatives
Asset $ 13,723
$ 754
$ 220
$ 137 $ 14,834
Liability
1,246
394
922
3,625
6,187
Net asset/(liability)
$ 12,477
$ 360
$ (702 )
$ (3,488 )
$ 8,647
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 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 remaining contractual
maturity.
•
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.
•
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
$152 million and $11 million for the three months ended
March 2018 and March 2017, respectively.
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
$ in millions
March
December
Fair value of assets
$ 895 $ 882
Fair value of liabilities
1,393
1,200
Net liability
$ 498
$ 318
Notional amount
$9,638
$9,578 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
downgrade by all rating agencies. A downgrade by any one rating
agency, depending on the agency’s relative ratings of the
firm at the time of the downgrade, may have an impact which is
comparable to the impact of a downgrade by all rating agencies.
The table below presents the aggregate fair value
of net derivative liabilities under such agreements (excluding
application of collateral posted to reduce these liabilities), the
related aggregate fair value of the assets posted as collateral and
the additional collateral or termination payments that could have
been called by counterparties in the event of
a one-notch two-notch
As of
$ in millions
March
December
Net derivative liabilities under bilateral agreements $27,062 $29,877
Collateral posted $23,997 $25,329
Additional collateral or termination payments:
One-notch
$ 307
$ 358
Two-notch
$ 950
$ 1,856
Hedge Accounting The firm applies hedge accounting for
(i) certain interest rate swaps used to manage the interest
rate exposure of certain fixed-rate unsecured long-term and
short-term borrowings and certain fixed-rate certificates of
deposit and (ii) certain foreign currency forward contracts
and foreign currency-denominated debt used to manage foreign
currency exposures on the firm’s net investment in
certain non-U.S. To qualify for hedge accounting, the hedging
instrument must be highly effective at reducing the risk from the
exposure being hedged. Additionally, the firm must formally
document the hedging relationship at inception and assess the
hedging relationship at least on a quarterly basis to ensure the
hedging instrument continues to be highly effective over the life
of the hedging relationship.
Fair Value Hedges The firm designates certain interest rate swaps as
fair value hedges of certain fixed-rate unsecured long-term and
short-term debt and fixed-rate certificates of deposit. These
interest rate swaps hedge changes in fair value attributable to the
designated benchmark interest rate (e.g., London Interbank Offered
Rate (LIBOR) or Overnight Index Swap Rate), effectively converting
a substantial portion of fixed-r |
