| 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 March 2019
As of December 2018
$ in millions
Derivative
Derivative
Derivative
Derivative
Not accounted for as hedges
Exchange-traded $
$ 1,255
$ 760
$ 1,553
OTC-cleared 7,219 5,973 5,040 3,552
Bilateral OTC
247,629
229,113
227,274
211,091
Total interest rates
255,449
236,341
233,074
216,196
OTC-cleared 5,703 5,215 4,778 4,517
Bilateral OTC
14,338
14,324
14,658
13,784
Total credit
20,041
19,539
19,436
18,301
Exchange-traded 11 14 11 16
OTC-cleared 698 602 656 800
Bilateral OTC
79,011
77,888
85,772
87,953
Total currencies
79,720
78,504
86,439
88,769
Exchange-traded 2,729 2,546 4,445 4,093
OTC-cleared 305 317 433 439
Bilateral OTC
7,951
10,548
12,746
15,595
Total commodities
10,985
13,411
17,624
20,127
Exchange-traded 11,061 11,029 13,431 11,765
Bilateral OTC
33,821
41,397
34,687
40,668
Total equities
44,882
52,426
48,118
52,433
Subtotal
411,077
400,221
404,691
395,826
Accounted for as hedges
OTC-cleared
–
– 2 –
Bilateral OTC
3,208
4
3,024
7
Total interest rates
3,208
4
3,026
7
OTC-cleared 53 36 25 53
Bilateral OTC
84
17
54
61
Total currencies
137
53
79
114
Subtotal
3,345
57
3,105
121
Total gross fair value
$ 414,422
$ 400,278
$ 407,796
$ 395,947
Offset in consolidated statements of financial condition
Exchange-traded $ (11,820 ) $ (11,820 ) $ (14,377 ) $ (14,377 )
OTC-cleared (11,928 ) (11,928 ) (8,888 ) (8,888 )
Bilateral OTC
(297,392 )
(297,392 )
(290,961 )
(290,961 )
Counterparty netting
(321,140 )
(321,140 )
(314,226 )
(314,226 )
OTC-cleared (1,605 ) (7 ) (1,389 ) (164 )
Bilateral OTC
(49,810 )
(38,799 )
(47,335 )
(38,963 )
Cash collateral netting
(51,415 )
(38,806 )
(48,724 )
(39,127 )
Total amounts offset
$(372,555 )
$(359,946 )
$(362,950 )
$(353,353 )
Included in consolidated statements of financial
condition
Exchange-traded
$ 2,582
$ 3,024
$ 4,270
$ 3,050
OTC-cleared 445 208 657 309
Bilateral OTC
38,840
37,100
39,919
39,235
Total
$ 41,867
$ 40,332
$ 44,846
$ 42,594
Not offset in consolidated statements of financial
condition
Cash collateral $ )
$ (1,391 )
$ (614 )
$ (1,328 )
Securities collateral
(12,777 )
(8,995 )
(12,740 )
(8,414 )
Total
$ 28,491
$ 29,946
$ 31,492
$ 32,852
Notional Amounts as of
$ in millions
March 2019
December 2018
Not accounted for as hedges
Exchange-traded
$ 5,814,243 $ 5,139,159
OTC-cleared 19,542,492 14,290,327
Bilateral OTC
14,860,761
12,858,248
Total interest rates
40,217,496
32,287,734
OTC-cleared 386,010 394,494
Bilateral OTC
741,127
762,653
Total credit
1,127,137
1,157,147
Exchange-traded 7,396 5,599
OTC-cleared 112,778 113,360
Bilateral OTC
7,208,580
6,596,741
Total currencies
7,328,754
6,715,700
Exchange-traded 261,210 259,287
OTC-cleared 1,425 1,516
Bilateral OTC
237,984
244,958
Total commodities
500,619
505,761
Exchange-traded 712,848 635,988
Bilateral OTC
1,104,537
1,070,211
Total equities
1,817,385
1,706,199
Subtotal
50,991,391
42,372,541
Accounted for as hedges
OTC-cleared 90,907 85,681
Bilateral OTC
11,946
12,022
Total interest rates
102,853
97,703
OTC-cleared 3,397 2,911
Bilateral OTC
7,231
8,089
Total currencies
10,628
11,000
Subtotal
113,481
108,703
Total notional amounts
$51,104,872
$42,481,244 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 $9.27 billion as of March 2019 and
$10.68 billion as of December 2018, and derivative
liabilities of $15.77 billion as of March 2019 and
$14.58 billion as of December 2018, 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 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 March 2019
Assets
Interest rates $ 84 $ 258,105
$ 468 $ 258,657
Credit
– 16,526 3,515 20,041
Currencies
– 79,597 260 79,857
Commodities
– 10,678 307 10,985
Equities
8
43,954
920
44,882
Gross fair value 92 408,860 5,470 414,422
Counterparty netting in levels
–
(319,366 )
(812 )
(320,178 )
Subtotal $ 92
$ 89,494 $ 4,658
$ 94,244
Cross-level counterparty netting
(962 )
Cash collateral netting
(51,415 )
Net fair value
$ 41,867
Liabilities
Interest rates $(83 ) $(235,775 )
$ (487 ) $(236,345 )
Credit
– (17,898 ) (1,641 ) (19,539 )
Currencies
– (78,326 ) (231 ) (78,557 )
Commodities
– (13,249 ) (162 ) (13,411 )
Equities
(6 )
(48,783 )
(3,637 )
(52,426 )
Gross fair value (89 ) (394,031 ) (6,158 ) (400,278 )
Counterparty netting in levels
–
319,366
812
320,178
Subtotal $(89 ) $ (74,665 ) $(5,346 ) $ (80,100 )
Cross-level counterparty netting
962
Cash collateral netting
38,806
Net fair value
$ (40,332 )
As of December 2018
Assets
Interest rates $ $
$ $
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 $
$ $
$
Cross-level counterparty netting
(659 )
Cash collateral netting
(48,724 )
Net fair value
$
Liabilities
Interest rates $ ) $ )
$ ) $ )
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 $ ) $ ) $ ) $ )
Cross-level counterparty netting
659
Cash collateral netting
39,127
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
March 2019
December 2018
Interest rates, net $(19) $(109)
Correlation
(55)% to 81% (50%/60%)
(10)% to 86% (66%/64%)
Volatility (bps)
31 to 150 (79/76)
31 to 150 (74/65)
Credit, net $1,874 $1,672
Credit spreads (bps) 1 to 697 (96/55) 1 to 810 (109/63)
Upfront credit points 2 to 99 (45/41) 2 to 99 (44/40)
Recovery rates
25% to 60% (38%/33%)
25% to 70% (40%/40%)
Currencies, net $29 $461
Correlation
10% to 70% (43%/36%)
10% to 70% (40%/36%)
Commodities, net $145 $112
Volatility
8% to 48% (22%/22%)
10% to 75% (28%/27%)
Natural gas spread
$(2.61) to $3.19 ($(0.26)/$(0.27))
$(2.32) to $4.68 ($(0.26)/$(0.30))
Oil spread
$(6.53) to $7.47 ($1.65/$4.77)
$(3.44) to $16.62 ($4.53/$3.94)
Equities, net $(2,717) $(1,546)
Correlation
(68)% to 97% (45%/44%)
(68)% to 97% (48%/51%)
Volatility
3% to 87% (18%/16%)
3% to 102% (20%/18%) 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 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 March 2019 and December 2018, 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.
Three Months
$ in millions
2019
2018
Total level 3 derivatives
Beginning balance
$ 590 $(288 )
Net realized gains/(losses) 49 52
Net unrealized gains/(losses) (91 ) 219
Purchases 110 134
Sales (1,574 ) (124 )
Settlements 384 329
Transfers into level 3 (34 ) 41
Transfers out of level 3
(122 )
45
Ending balance
$ (688 )
$ 408 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
$ in millions
2019
2018
Interest rates, net
Beginning balance
$ (109 ) $ (410 )
Net realized gains/(losses)
– (5 )
Net unrealized gains/(losses) 111 105
Purchases 2 6
Sales (4 ) (7 )
Settlements (17 ) 29
Transfers into level 3 (11 ) 38
Transfers out of level 3
9
(5 )
Ending balance
$ (19 )
$ (249 )
Credit, net
Beginning balance $ 1,672 $ 1,505
Net realized gains/(losses) 8 15
Net unrealized gains/(losses) 80 (297 )
Purchases 42 19
Sales (28 ) (23 )
Settlements (32 ) 55
Transfers into level 3 55 (15 )
Transfers out of level 3
77
23
Ending balance
$ 1,874
$ 1,282
Currencies, net
Beginning balance
$ 461 $ (181 )
Net realized gains/(losses) (12 ) (17 )
Net unrealized gains/(losses) (131 ) 125
Purchases 2 7
Sales (16 ) (2 )
Settlements 29 210
Transfers into level 3 (1 ) 27
Transfers out of level 3
(303 )
–
Ending balance
$ 29
$ 169
Commodities, net
Beginning balance
$ 112
$ 47
Net realized gains/(losses) 18 (6 )
Net unrealized gains/(losses) 15 31
Purchases 3 12
Sales (6 ) (1 )
Settlements (12 ) (8 )
Transfers into level 3 (8 ) (8 )
Transfers out of level 3
23
6
Ending balance
$ 145
$ 73
Equities, net
Beginning balance $(1,546 ) $(1,249 )
Net realized gains/(losses) 35 65
Net unrealized gains/(losses) (166 ) 255
Purchases 61 90
Sales (1,520 ) (91 )
Settlements 416 43
Transfers into level 3 (69 ) (1 )
Transfers out of level 3
72
21
Ending balance
$(2,717 )
$ (867 )
Level 3 Rollforward Commentary Three Months
Ended March 2019. The net realized and unrealized
losses on level 3 derivatives of $42 million (reflecting
$49 million of net realized gains and $91 million of net
unrealized losses) for the three months ended March 2019
included losses of $28 million reported in market making and
$14 million reported in other principal
transactions. The net unrealized losses on level 3
derivatives for the three months ended March 2019 were
primarily attributable to losses on certain equity derivatives,
primarily reflecting the impact of an increase in equity prices,
losses on certain currency derivatives, primarily reflecting the
impact of a decrease in interest rates, partially offset by gains
on certain interest rate derivatives, primarily reflecting the
impact of a decrease in interest rates and changes in foreign
exchange rates. Transfers into level 3 derivatives during the
three months ended March 2019 were not material. Transfers out of level 3 derivatives during
the three months ended March 2019 primarily reflected
transfers of certain currency derivative assets to level 2,
principally due to certain unobservable inputs no longer being
significant to the valuation of these derivatives, partially offset
by transfers of certain credit derivative liabilities to
level 2, principally due to certain unobservable credit spread
inputs no longer being significant to the valuation of these
derivatives, and transfers of certain equity derivative liabilities
to level 2, principally due to increased transparency and
reduced significance of volatility and correlation inputs used to
value these derivatives. Three Months
Ended March 2018. The net realized and unrealized
gains on level 3 derivatives of $271 million (reflecting
$52 million of net realized gains and $219 million of net
unrealized gains) for the three months ended March 2018
included gains of $184 million reported in market making and
$87 million reported in other principal
transactions. 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. Both transfers into level 3 derivatives and
transfers out of level 3 derivatives during the three months
ended March 2018 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
Greater than
Total
As of March 2019
Assets
Interest rates $ 4,523 $13,257 $48,013 $ 65,793
Credit 901 3,276 3,696 7,873
Currencies 10,817 5,296 6,084 22,197
Commodities 2,900 1,284 173 4,357
Equities 3,222 5,325 1,190 9,737
Counterparty netting in tenors
(2,381 )
(4,005 )
(2,650 )
(9,036 )
Subtotal $19,982 $24,433 $56,506 $100,921
Cross-tenor counterparty netting (10,221 )
Cash collateral netting
(51,415 )
Total OTC derivative assets
$ 39,285
Liabilities
Interest rates $ 5,653 $ 8,986 $28,090 $ 42,729
Credit 1,028 4,511 1,832 7,371
Currencies 9,845 7,114 4,034 20,993
Commodities 2,530 1,454 2,982 6,966
Equities 8,703 5,683 2,926 17,312
Counterparty netting in tenors
(2,381 )
(4,005 )
(2,650 )
(9,036 )
Subtotal $25,378 $23,743 $37,214 $ 86,335
Cross-tenor counterparty netting (10,221 )
Cash collateral netting
(38,806 )
Total OTC derivative liabilities
$ 37,308
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 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 2019, written credit derivatives
had a total gross notional amount of $530.40 billion and
purchased credit derivatives had a total gross notional amount of
$596.76 billion, for total net notional purchased protection
of $66.36 billion. 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. 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
Total
As of March 2019
Maximum Payout/Notional Amount of Written Credit Derivatives by Tenor
Less than 1 year $123,030 $ 7,548 $ 1,053 $ 2,782 $134,413
1 – 5 years 281,554 15,327 8,980 6,194 312,055
Greater than 5 years
73,217
8,001
2,210
505
83,933
Total
$477,801
$30,876
$12,243
$ 9,481
$530,401
Maximum Payout/Notional Amount of Purchased Credit
Derivatives
Offsetting $420,734 $22,348 $10,634 $ 8,634 $462,350
Other
120,611
8,997
3,042
1,757
134,407
Fair Value of Written Credit Derivatives
Asset
$ 9,600
$ 623
$ 147
$ 125 $ 10,495
Liability
1,540
1,344
831
2,762
6,477
Net asset/(liability)
$ 8,060
$ (721 )
$ (684 )
$ (2,637 )
$ 4,018
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 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
$(163) million for the three months ended March 2019 and
$152 million for the three months ended March 2018.
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
$ 978
$ 980
Fair value of liabilities
1,381
1,297
Net liability
$ 403
$ 317
Notional amount
$10,627
$10,229 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 under such bilateral agreements (excluding
application of collateral posted), the related fair value of
collateral posted 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 millio |
