| 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 September 2018
As of December 2017
$ in millions
Derivative
Derivative
Derivative
Derivative
Not accounted for as hedges
Exchange-traded
$ 1,108
$ 1,346
$ 554
$ 644
OTC-cleared 1,974 1,515 5,392 2,773
Bilateral OTC
223,385
203,511
274,986
249,750
Total interest rates
226,467
206,372
280,932
253,167
OTC-cleared 5,993 5,510 5,727 5,670
Bilateral OTC
14,956
14,012
16,966
15,600
Total credit
20,949
19,522
22,693
21,270
Exchange-traded 21 31 23 363
OTC-cleared 1,489 1,262 988 847
Bilateral OTC
91,274
86,566
94,481
95,127
Total currencies
92,784
87,859
95,492
96,337
Exchange-traded 5,001 4,660 4,135 3,854
OTC-cleared 260 265 197 197
Bilateral OTC
13,953
15,751
9,748
12,097
Total commodities
19,214
20,676
14,080
16,148
Exchange-traded 11,938 11,373 10,552 10,335
Bilateral OTC
43,546
46,570
40,735
45,253
Total equities
55,484
57,943
51,287
55,588
Subtotal
414,898
392,372
464,484
442,510
Accounted for as hedges
OTC-cleared 2
– 21 –
Bilateral OTC
2,742
13
2,309
3
Total interest rates
2,744
13
2,330
3
OTC-cleared 108 14 15 30
Bilateral OTC
84
20
34
114
Total currencies
192
34
49
144
Subtotal
2,936
47
2,379
147
Total gross fair value
$ 417,834
$ 392,419
$ 466,863
$ 442,657
Offset in consolidated statements of financial condition
Exchange-traded $ (14,237 ) $ (14,237 ) $ (12,963 ) $ (12,963 )
OTC-cleared (8,400 ) (8,400 ) (9,267 ) (9,267 )
Bilateral OTC
(296,350 )
(296,350 )
(341,824 )
(341,824 )
Counterparty netting
(318,987 )
(318,987 )
(364,054 )
(364,054 )
OTC-cleared (1,105 )
– (2,423 ) (180 )
Bilateral OTC
(52,064 )
(34,111 )
(53,049 )
(38,792 )
Cash collateral netting
(53,169 )
(34,111 )
(55,472 )
(38,972 )
Total amounts offset
$(372,156 )
$(353,098 )
$(419,526 )
$(403,026 )
Included in consolidated statements of financial
condition
Exchange-traded
$ 3,831
$ 3,173
$ 2,301
$ 2,233
OTC-cleared 321 166 650 70
Bilateral OTC
41,526
35,982
44,386
37,328
Total
$ 45,678
$ 39,321
$ 47,337
$ 39,631
Not offset in consolidated statements of financial
condition
Cash collateral
$ (575 )
$ (1,600 )
$ (602 )
$ (2,375 )
Securities collateral
(12,448 )
(8,029 )
(13,947 )
(8,722 )
Total
$ 32,655
$ 29,692
$ 32,788
$ 28,534
Notional Amounts as of
$ in millions
September
December
Not accounted for as hedges
Exchange-traded $11,716,983 $10,212,510
OTC-cleared 16,940,763 14,739,556
Bilateral OTC
17,127,815
12,862,328
Total interest rates
45,785,561
37,814,394
OTC-cleared 405,303 386,163
Bilateral OTC
770,732
868,226
Total credit
1,176,035
1,254,389
Exchange-traded 6,328 10,450
OTC-cleared 113,192 98,549
Bilateral OTC
6,802,229
7,331,516
Total currencies
6,921,749
7,440,515
Exchange-traded 312,798 239,749
OTC-cleared 1,145 3,925
Bilateral OTC
262,073
250,547
Total commodities
576,016
494,221
Exchange-traded 702,478 655,485
Bilateral OTC
1,235,952
1,127,812
Total equities
1,938,430
1,783,297
Subtotal
56,397,791
48,786,816
Accounted for as hedges
OTC-cleared 84,380 52,785
Bilateral OTC
12,033
15,188
Total interest rates
96,413
67,973
OTC-cleared 2,837 2,210
Bilateral OTC
7,199
8,347
Total currencies
10,036
10,557
Subtotal
106,449
78,530
Total notional amounts
$56,504,240
$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 of $10.91 billion as of September 2018
and $11.24 billion as of December 2017, and derivative
liabilities of $11.68 billion as of September 2018 and
$13.00 billion 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.
•
During the second quarter of 2018, consistent with
the rules of a clearing organization, the firm elected to consider
its transactions with that clearing organization as settled each
day. As of December 2017, the impact of this change would have
been a reduction in gross interest rate derivative assets of
$3.6 billion and gross interest rate derivative liabilities of
$1.9 billion, 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 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 table below presents 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.
$ in millions
Level 1
Level 2
Level 3
Total
As of September 2018
Assets
Interest rates $ 32 $ 228,754 $ $ 229,211
Credit
– 17,472 3,477 20,949
Currencies
– 92,600 376 92,976
Commodities
– 18,834 380 19,214
Equities
30
54,795
659
55,484
Gross fair value 62 412,455 5,317 417,834
Counterparty netting in levels
(1 )
(317,063 )
(896 )
(317,960 )
Subtotal $ 61
$ 95,392 $ 4,421
$ 99,874
Cross-level counterparty netting
(1,027 )
Cash collateral netting
(53,169 )
Net fair value
$ 45,678
Liabilities
Interest rates
$ (1 ) $(205,667 ) $ ) $(206,385 )
Credit
– (17,795 ) (1,727 ) (19,522 )
Currencies
– (87,716 ) (177 ) (87,893 )
Commodities
– (20,431 ) (245 ) (20,676 )
Equities
(190 )
(56,012 )
(1,741 )
(57,943 )
Gross fair value (191 ) (387,621 ) (4,607 ) (392,419 )
Counterparty netting in levels
1
317,063
896
317,960
Subtotal $(190 ) $ (70,558 ) $(3,711 ) $ (74,459 )
Cross-level counterparty netting
1,027
Cash collateral netting
34,111
Net fair value
$ (39,321 )
As of December 2017
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 $ ) $ ) $ ) $ )
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 $ ) $ ) $ ) $ )
Cross-level counterparty netting
894
Cash collateral netting
38,972
Net fair value
$ )
In the table 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 level 3
derivatives.
Level 3 Assets (Liabilities) and Range of Significant Unobservable Inputs (Average/Median) as of
$ in millions
September 2018
December 2017
Interest rates, net $(292) $(410)
Correlation
(10)% to 96% (79%/85%)
(10)% to 95% (71%/79%)
Volatility (bps)
31 to 150 (83/77)
31 to 150 (84/78)
Credit, net $1,750 $1,505
Correlation N/A
28% to 84% (61%/60%)
Credit spreads (bps) 1 to 612 (83/41) 1 to 633 (69/42)
Upfront credit points 2 to 97 (40/36) 0 to 97 (42/38)
Recovery rates
25% to 70% (43%/40%)
22% to 73% (68%/73%)
Currencies, net $199 $(181)
Correlation
10% to 70% (41%/47%)
49% to 72% (61%/62%)
Commodities, net $135 $47
Volatility
10% to 69% (25%/26%) 9% to 79% (24%/24%)
Natural gas spread
$(1.77) to $3.81 ($(0.27)/$(0.33))
$(2.38) to $3.34 ($(0.22)/$(0.12))
Oil spread
$2.77 to $14.58 ($6.39/$5.22)
$(2.86) to $23.61
Equities, net $(1,082) $(1,249)
Correlation
(68)% to 97% (43%/45%)
(36)% to 94% (50%/52%)
Volatility
3% to 85% (19%/17%)
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 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 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 was not significant to the valuation of
level 3 credit derivatives as of September 2018.
•
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, as of both September 2018 and
December 2017, 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
$ in millions
2018
2017
2018
2017
Total level 3 derivatives
Beginning balance $ 736 $ 960 $(288 ) $(1,217 )
Net realized gains/(losses) 57 (24 ) 102 (82 )
Net unrealized gains/(losses) (108 ) 12 394 (144 )
Purchases 145 48 325 146
Sales (138 ) (786 ) (366 ) (935 )
Settlements (71 ) (299 ) 368 2,163
Transfers into level 3 (119 ) (34 ) 82 (6 )
Transfers out of level 3
208
6
93
(42 )
Ending balance
$ 710
$(117 )
$ 710
$ (117 ) 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.
•
Transfers between levels of the fair value
hierarchy are reported at the beginning of the reporting period in
which they occur. 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.
•
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
Nine Months
$ in millions
2018
2017
2018
2017
Interest rates, net
Beginning balance
$ (166 ) $ (319 )
$ (410 ) $ (381 )
Net realized gains/(losses) (25 ) (34 ) (40 ) (77 )
Net unrealized gains/(losses) (110 ) 38 (54 ) 68
Purchases
– 1 7 5
Sales (2 ) (4 ) (8 ) (12 )
Settlements 32 5 178 78
Transfers into level 3 (18 ) – 31 (11 )
Transfers out of level 3
(3 )
(14 )
4
3
Ending balance
$ (292 )
$ (327 )
$ (292 )
$ (327 )
Credit, net
Beginning balance $ 1,779 $ 1,999 $ 1,505 $ 2,504
Net realized gains/(losses) 42 23 45 52
Net unrealized gains/(losses) (164 ) 54 (95 ) (149 )
Purchases 45 15 60 30
Sales (9 ) (27 ) (41 ) (40 )
Settlements 52 (356 ) 202 (607 )
Transfers into level 3 (3 ) 8 25 45
Transfers out of level 3
8
45
49
(74 )
Ending balance
$ 1,750
$ 1,761
$ 1,750
$ 1,761
Currencies, net
Beginning balance
$ 218
$ 25
$ (181 )
$ 3
Net realized gains/(losses) (19 ) (9 ) (37 ) (30 )
Net unrealized gains/(losses) 104 (52 ) 181 (87 )
Purchases 7 1 22 3
Sales (26 ) – (30 ) –
Settlements (59 ) 26 216 88
Transfers into level 3 3 3 28 11
Transfers out of level 3
(29 )
(30 )
–
(24 )
Ending balance
$ 199
$ (36 )
$ 199
$ (36 )
Commodities, net
Beginning balance
$ 148 $ 118
$ 47
$ 73
Net realized gains/(losses) 5 (4 ) 69 23
Net unrealized gains/(losses) 23 80 119 135
Purchases 25 3 37 19
Sales (19 ) (58 ) (55 ) (120 )
Settlements (8 ) (1 ) (132 ) (42 )
Transfers into level 3 (39 ) (47 ) 44 (40 )
Transfers out of level 3
–
(25 )
6
18
Ending balance
$
$ 66
$ 135
$ 66
Equities, net
Beginning balance $(1,243 ) $ (863 ) $(1,249 ) $(3,416 )
Net realized gains/(losses) 54 – 65 (50 )
Net unrealized gains/(losses) 39 (108 ) 243 (111 )
Purchases 68 28 199 89
Sales (82 ) (697 ) (232 ) (763 )
Settlements (88 ) 27 (96 ) 2,646
Transfers into level 3 (62 ) 2 (46 ) (11 )
Transfers out of level 3
232
30
34
35
Ending balance
$(1,082 )
$(1,581 )
$(1,082 )
$(1,581 )
Level 3 Rollforward Commentary Three Months
Ended September 2018. The net realized and unrealized
losses on level 3 derivatives of $51 million (reflecting
$57 million of net realized gains and $108 million of net
unrealized losses) for the three months ended September 2018
included gains/(losses) of $27 million reported in market
making and $(78) million reported in other principal
transactions. The net unrealized losses on level 3
derivatives for the three months ended September 2018 were
primarily attributable to losses on certain credit derivatives,
primarily reflecting the impact of tighter credit spreads, and
losses on certain interest rate derivatives, primarily reflecting
the impact of an increase in interest rates, partially offset by
gains on certain currency derivatives, primarily reflecting the
impact of changes in foreign exchange rates. Transfers into level 3 derivatives during the
three months ended September 2018 primarily reflected
transfers of certain equity derivative liabilities from
level 2, primarily due to reduced transparency of volatility
inputs used to value these derivatives and transfers of certain
commodity derivative liabilities from level 2, primarily due
to reduced transparency of natural gas spread inputs used to value
these derivatives. Transfers out of level 3 derivatives during
the three months ended September 2018 primarily reflected
transfers of certain equity derivative liabilities to level 2,
principally due to certain unobservable inputs no longer being
significant to the valuation of these derivatives. Nine Months
Ended September 2018. The net realized and unrealized
gains on level 3 derivatives of $496 million (reflecting
$102 million of net realized gains and $394 million of
net unrealized gains) for the nine months ended September 2018
included gains of $446 million reported in market making and
$50 million reported in other principal
transactions. The net unrealized gains on level 3
derivatives for the nine months ended September 2018 were
primarily attributable to gains on certain equity derivatives,
reflecting the impact of a decrease in certain equity prices, gains
on certain currency derivatives, primarily reflecting the impact of
changes in foreign exchange rates, and gains on certain commodity
derivatives, reflecting the impact of an increase in commodity
prices, partially offset by losses on certain credit derivatives,
primarily reflecting the impact of an increase in interest
rates. Both transfers into level 3 derivatives and
transfers out of level 3 derivatives during the nine months
ended September 2018 were not material.
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 reported in market
making and $(75) million reported in other principal
transactions. The drivers of 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
reported in market making and $(254) million reported in other
principal transactions. 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.
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 Years
Greater than
Total
As of September 2018
Assets
Interest rates $ 4,161 $12,203 $47,612 $ 63,976
Credit 775 3,833 3,569 8,177
Currencies 13,173 6,248 6,355 25,776
Commodities 4,316 3,797 129 8,242
Equities 4,460 6,826 1,843 13,129
Counterparty netting in tenors
(2,564 )
(4,190 )
(2,457 )
(9,211 )
Subtotal $24,321 $28,717 $57,051 $110,089
Cross-tenor counterparty netting
(15,073 )
Cash collateral netting
(53,169 )
Total
$ 41,847
Liabilities
Interest rates $ 3,897 $ 8,750 $28,264 $ 40,911
Credit 1,168 3,914 1,668 6,750
Currencies 11,089 5,726 3,868 20,683
Commodities 4,153 3,027 2,865 10,045
Equities 6,475 6,912 2,767 16,154
Counterparty netting in tenors
(2,564 )
(4,190 )
(2,457 )
(9,211 )
Subtotal $24,218 $24,139 $36,975 $ 85,332
Cross-tenor counterparty netting
(15,073 )
Cash collateral netting
(34,111 )
Total
$ 36,148
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 September 2018, written credit
derivatives had a total gross notional amount of
$573.41 billion and purchased credit derivatives had a total
gross notional amount of $602.65 billion, for total net
notional purchased protection of $29.24 billion. As of
December 2017, written credit derivatives had a total gross
notional amount of $611.04 billion and purchased credit
derivatives had a total gross notional amount of
$643.37 billion, 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 information about credit
derivatives.
Credit Spread on Underlier (basis
points)
$ in millions
0 - 250
251 - 500
501 - 1,000
Greater 1,000
Total
As of September 2018
Maximum Payout/Notional Amount of Written Credit Derivatives by Tenor
Less than 1 year $136,481 $ 8,178
$ 630 $ 3,213 $148,502
1 – 5 years 300,104 15,624 9,279 5,731 330,738
Greater than 5 years
79,858
11,322
2,648
337
94,165
Total
$516,443
$35,124
$12,557
$ 9,281
$573,405
Maximum Payout/Notional Amount of Purchased Credit Derivatives
Offsetting $448,097 $25,275 $10,406 $ 7,210 $490,988
Other
100,073
7,661
1,585
2,344
111,663
Fair Value of Written Credit Derivatives
Asset $ 11,911
$ 716
$ 170
$ 98 $ 12,895
Liability
1,485
1,412
706
2,615
6,218
Net asset/(liability)
$ 10,426
$ )
$ )
$ )
$ 6,677
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 suppor |
