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 2018 As of December 2017 $ in millions Derivative Derivative Derivative Derivative Not accounted for as hedges Exchange-traded $ 760 $ 1,553 $ 554 $ 644 OTC-cleared 5,040 3,552 5,392 2,773 Bilateral OTC 227,274 211,091 274,986 249,750 Total interest rates 233,074 216,196 280,932 253,167 OTC-cleared 4,778 4,517 5,727 5,670 Bilateral OTC 14,658 13,784 16,966 15,600 Total credit 19,436 18,301 22,693 21,270 Exchange-traded 11 16 23 363 OTC-cleared 656 800 988 847 Bilateral OTC 85,772 87,953 94,481 95,127 Total currencies 86,439 88,769 95,492 96,337 Exchange-traded 4,445 4,093 4,135 3,854 OTC-cleared 433 439 197 197 Bilateral OTC 12,746 15,595 9,748 12,097 Total commodities 17,624 20,127 14,080 16,148 Exchange-traded 13,431 11,765 10,552 10,335 Bilateral OTC 34,687 40,668 40,735 45,253 Total equities 48,118 52,433 51,287 55,588 Subtotal 404,691 395,826 464,484 442,510 Accounted for as hedges OTC-cleared 2 – 21 – Bilateral OTC 3,024 7 2,309 3 Total interest rates 3,026 7 2,330 3 OTC-cleared 25 53 15 30 Bilateral OTC 54 61 34 114 Total currencies 79 114 49 144 Subtotal 3,105 121 2,379 147 Total gross fair value $ 407,796 $ 395,947 $ 466,863 $ 442,657 Offset in consolidated statements of financial condition Exchange-traded $ (14,377 ) $ (14,377 ) $ (12,963 ) $ (12,963 ) OTC-cleared (8,888 ) (8,888 ) (9,267 ) (9,267 ) Bilateral OTC (290,961 ) (290,961 ) (341,824 ) (341,824 ) Counterparty netting (314,226 ) (314,226 ) (364,054 ) (364,054 ) OTC-cleared (1,389 ) (164 ) (2,423 ) (180 ) Bilateral OTC (47,335 ) (38,963 ) (53,049 ) (38,792 ) Cash collateral netting (48,724 ) (39,127 ) (55,472 ) (38,972 ) Total amounts offset $(362,950 ) $(353,353 ) $(419,526 ) $(403,026 ) Included in consolidated statements of financial condition Exchange-traded $ 4,270 $ 3,050 $ 2,301 $ 2,233 OTC-cleared 657 309 650 70 Bilateral OTC 39,919 39,235 44,386 37,328 Total $ 44,846 $ 42,594 $ 47,337 $ 39,631 Not offset in consolidated statements of financial condition Cash collateral $ (614 ) $ (1,328 ) $ (602 ) $ (2,375 ) Securities collateral (12,740 ) (8,414 ) (13,947 ) (8,722 ) Total $ 31,492 $ 32,852 $ 32,788 $ 28,534 Notional Amounts as of December $ in millions 2018 2017 Not accounted for as hedges Exchange-traded $ 5,139,159 $10,212,510 OTC-cleared 14,290,327 14,739,556 Bilateral OTC 12,858,248 12,862,328 Total interest rates 32,287,734 37,814,394 OTC-cleared 394,494 386,163 Bilateral OTC 762,653 868,226 Total credit 1,157,147 1,254,389 Exchange-traded 5,599 10,450 OTC-cleared 113,360 98,549 Bilateral OTC 6,596,741 7,331,516 Total currencies 6,715,700 7,440,515 Exchange-traded 259,287 239,749 OTC-cleared 1,516 3,925 Bilateral OTC 244,958 250,547 Total commodities 505,761 494,221 Exchange-traded 635,988 655,485 Bilateral OTC 1,070,211 1,127,812 Total equities 1,706,199 1,783,297 Subtotal 42,372,541 48,786,816 Accounted for as hedges OTC-cleared 85,681 52,785 Bilateral OTC 12,022 15,188 Total interest rates 97,703 67,973 OTC-cleared 2,911 2,210 Bilateral OTC 8,089 8,347 Total currencies 11,000 10,557 Subtotal 108,703 78,530 Total notional amounts $42,481,244 $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 $10.68 billion as of December 2018 and $11.24 billion as of December 2017, and derivative liabilities of $11.95 billion as of December 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. • On November 19, 2018, a clearing organization revised its rules to calculate notional amounts for certain exchange-traded derivative contracts. The impact of this rule change, as of the effective date, was a decrease in the notional amounts of derivative contracts of approximately $7 trillion, substantially all of which related to interest rate derivatives, with no change to their fair value. 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. $ in millions Level 1 Level 2 Level 3 Total As of December 2018 Assets Interest rates $ 12 $ 235,680 $ 408 $ 236,100 Credit – 15,992 3,444 19,436 Currencies – 85,837 681 86,518 Commodities – 17,193 431 17,624 Equities 10 47,168 940 48,118 Gross fair value 22 401,870 5,904 407,796 Counterparty netting in levels – (312,611 ) (956 ) (313,567 ) Subtotal $ 22 $ 89,259 $ 4,948 $ 94,229 Cross-level counterparty netting (659 ) Cash collateral netting (48,724 ) Net fair value $ 44,846 Liabilities Interest rates $(24 ) $(215,662 ) $ (517 ) $(216,203 ) Credit – (16,529 ) (1,772 ) (18,301 ) Currencies – (88,663 ) (220 ) (88,883 ) Commodities – (19,808 ) (319 ) (20,127 ) Equities (37 ) (49,910 ) (2,486 ) (52,433 ) Gross fair value (61 ) (390,572 ) (5,314 ) (395,947 ) Counterparty netting in levels – 312,611 956 313,567 Subtotal $(61 ) $ (77,961 ) $(4,358 ) $ (82,380 ) Cross-level counterparty netting 659 Cash collateral netting 39,127 Net fair value $ (42,594 ) 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 $ in millions 2018 2017 Interest rates, net $(109) $(410) Correlation (10)% to 86% (66%/64%) (10)% to 95% (71%/79%) Volatility (bps) 31 to 150 (74/65) 31 to 150 (84/78) Credit, net $1,672 $1,505 Correlation N/A 28% to 84% (61%/60%) Credit spreads (bps) 1 to 810 (109/63) 1 to 633 (69/42) Upfront credit points 2 to 99 (44/40) 0 to 97 (42/38) Recovery rates 25% to 70% (40%/40%) 22% to 73% (68%/73%) Currencies, net $461 $(181) Correlation 10% to 70% (40%/36%) 49% to 72% (61%/62%) Commodities, net $112 $47 Volatility 10% to 75% (28%/27%) 9% to 79% (24%/24%) Natural gas spread $(2.32) to $4.68 ($(0.26)/$(0.30)) $(2.38) to $3.34 Oil spread $(3.44) to $16.62 ($4.53/$3.94) $(2.86) to $23.61 Equities, net $(1,546) $(1,249) Correlation (68)% to 97% (48%/51%) (36)% to 94% (50%/52%) Volatility 3% to 102% (20%/18%) 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 December 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 December 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 level 3 derivatives. Year Ended December $ in millions 2018 2017 Total level 3 derivatives Beginning balance $ (288 ) $(1,217 ) Net realized gains/(losses) (113 ) (119 ) Net unrealized gains/(losses) 1,251 (436 ) Purchases 612 301 Sales (1,510 ) (611 ) Settlements 573 1,891 Transfers into level 3 34 (39 ) Transfers out of level 3 31 (58 ) Ending balance $ 590 $ (288 ) 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. Year Ended December $ in millions 2018 2017 Interest rates, net Beginning balance $ (410 ) $ (381 ) Net realized gains/(losses) (51 ) (62 ) Net unrealized gains/(losses) 122 20 Purchases 8 4 Sales (2 ) (14 ) Settlements 171 30 Transfers into level 3 (9 ) (12 ) Transfers out of level 3 62 5 Ending balance $ (109 ) $ (410 ) Credit, net Beginning balance $ 1,505 $ 2,504 Net realized gains/(losses) (23 ) 42 Net unrealized gains/(losses) 2 (188 ) Purchases 53 20 Sales (65 ) (27 ) Settlements 244 (739 ) Transfers into level 3 (35 ) 3 Transfers out of level 3 (9 ) (110 ) Ending balance $ 1,672 $ 1,505 Currencies, net Beginning balance $ (181 ) $ 3 Net realized gains/(losses) (51 ) (39 ) Net unrealized gains/(losses) 372 (192 ) Purchases 36 4 Sales (25 ) (3 ) Settlements 212 62 Transfers into level 3 101 (9 ) Transfers out of level 3 (3 ) (7 ) Ending balance $ 461 $ (181 ) Commodities, net Beginning balance $ 47 $ 73 Net realized gains/(losses) 18 (4 ) Net unrealized gains/(losses) 61 216 Purchases 42 102 Sales (64 ) (301 ) Settlements 12 (27 ) Transfers into level 3 21 (25 ) Transfers out of level 3 (25 ) 13 Ending balance $ 112 $ 47 Equities, net Beginning balance $(1,249 ) $(3,416 ) Net realized gains/(losses) (6 ) (56 ) Net unrealized gains/(losses) 694 (292 ) Purchases 473 171 Sales (1,354 ) (266 ) Settlements (66 ) 2,565 Transfers into level 3 (44 ) 4 Transfers out of level 3 6 41 Ending balance $(1,546 ) $(1,249 ) Level 3 Rollforward Commentary Year Ended December 2018. The net realized and unrealized gains on level 3 derivatives of $1.14 billion (reflecting $113 million of net realized losses and $1.25 billion of net unrealized gains) for 2018 included gains of $1.11 billion reported in market making and $28 million reported in other principal transactions. The net unrealized gains on level 3 derivatives for 2018 were primarily attributable to gains on certain equity derivatives, reflecting the impact of a decrease in certain equity prices and gains on certain currency derivatives, primarily reflecting the impact of changes in foreign exchange rates. Both transfers into level 3 derivatives and transfers out of level 3 derivatives during 2018 were not material. 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 reported in market making and $465 million reported in other principal transactions. 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. 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 2018 Assets Interest rates $ 2,810 $13,177 $47,426 $ 63,413 Credit 807 3,676 3,364 7,847 Currencies 10,976 5,076 6,486 22,538 Commodities 4,978 2,101 145 7,224 Equities 4,962 5,244 1,329 11,535 Counterparty netting in tenors (3,409 ) (3,883 ) (2,822 ) (10,114 ) Subtotal $21,124 $25,391 $55,928 $102,443 Cross-tenor counterparty netting (13,143 ) Cash collateral netting (48,724 ) Total OTC derivative assets $40,576 Liabilities Interest rates $ 4,193 $ 9,153 $29,377 $ 42,723 Credit 1,127 4,173 1,412 6,712 Currencies 13,553 6,871 4,474 24,898 Commodities 4,271 2,663 3,145 10,079 Equities 9,278 5,178 3,060 17,516 Counterparty netting in tenors (3,409 ) (3,883 ) (2,822 ) (10,114 ) Subtotal $29,013 $24,155 $38,646 $ 91,814 Cross-tenor counterparty netting (13,143 ) Cash collateral netting (39,127 ) Total OTC derivative liabilities $ 39,544 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 OTC derivative assets $ 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 OTC derivative liabilities $ 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 December 2018, written credit derivatives had a total gross notional amount of $554.17 billion and purchased credit derivatives had a total gross notional amount of $603.00 billion, for total net notional purchased protection of $48.83 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 than 1,000 Total As of December 2018 Maximum Payout/Notional Amount of Written Credit Derivatives by Tenor Less than 1 year $145,828 $ 9,763 $ 1,151 $ 3,848 $160,590 1 – 5 years 298,228 21,100 13,835 7,520 340,683 Greater than 5 years 45,690 5,966 1,121 122 52,899 Total $489,746 $36,829 $16,107 $11,490 $554,172 Maximum Payout/Notional Amount of Purchased Credit Derivatives Offsetting $413,445 $25,373 $14,243 $ 8,841 $461,902 Other 115,754 14,273 7,555 3,513 141,095 Fair Value of Written Credit Derivatives Asset $ 8,656 $ 543 $ 95 $ 80 $ 9,374 Liability 1,990 1,415 1,199 3,368 7,972 Net asset/(liability) $ 6,666 $ (872 ) $ (1,104 ) $ (3,288 ) $ 1,402 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 ) $ ) $ 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 gains/(losses), including hedges, attributable to the impact of changes in credit exposure and credit spreads (counterparty and the firm’s) on derivatives was $371 million for 2018, $66 million for 2017 and $85 million for 2016. 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 2018 2017 Fair value of assets $ 980 $ 882 Fair value of liabilities 1,297 1,200 Net liability $ 317 $ 318 Notional amount $10,229 $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 information about net derivative liabilities |