| Derivatives and Hedging Activities | Note 7. Derivatives and Hedging Activities Derivative Activities Derivatives are instruments that derive their value from underlying asset prices, indices, reference rates and other inputs, or a combination of these factors. Derivatives may be traded on an exchange (exchange-traded) or they may be privately negotiated contracts, which are usually referred to as OTC derivatives. Certain of the firm’s OTC derivatives are cleared and settled through central clearing counterparties (OTC-cleared), Market Making. Risk Management. instrument-by-instrument non-U.S. The firm enters into various types of derivatives, including:
• Futures and Forwards.
• Swaps.
• Options . Derivatives are reported on a net-by-counterparty The tables below present the gross fair value and the notional amounts of derivative contracts by major product type, the amounts of counterparty and cash collateral netting in the 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 2019 As of December 2018
$ in millions Derivative Assets Derivative Liabilities Derivative Assets Derivative Liabilities
Not accounted for as hedges
Exchange-traded $ 873 $ 1,381 $ 760 $ 1,553
OTC-cleared 14,141 13,047 5,040 3,552
Bilateral OTC 316,126 292,278 227,274 211,091
Total interest rates 331,140 306,706 233,074 216,196
OTC-cleared 6,355 6,530 4,778 4,517
Bilateral OTC 14,640 14,178 14,658 13,784
Total credit 20,995 20,708 19,436 18,301
Exchange-traded 14 13 11 16
OTC-cleared 446 407 656 800
Bilateral OTC 95,382 93,025 85,772 87,953
Total currencies 95,842 93,445 86,439 88,769
Exchange-traded 3,757 3,395 4,445 4,093
OTC-cleared 204 226 433 439
Bilateral OTC 7,986 11,754 12,746 15,595
Total commodities 11,947 15,375 17,624 20,127
Exchange-traded 13,936 14,671 13,431 11,765
Bilateral OTC 32,080 35,693 34,687 40,668
Total equities 46,016 50,364 48,118 52,433
Subtotal 505,940 486,598 404,691 395,826
Accounted for as hedges
OTC-cleared 2 – 2 –
Bilateral OTC 3,890 – 3,024 7
Total interest rates 3,892 – 3,026 7
OTC-cleared 30 15 25 53
Bilateral OTC 164 7 54 61
Total currencies 194 22 79 114
Subtotal 4,086 22 3,105 121
Total gross fair value $ 510,026 $ 486,620 $ 407,796 $ 395,947
Offset in consolidated statements of financial condition
Exchange-traded $ ) $ (15,524 ) $ (14,377 ) $ (14,377 )
OTC-cleared (19,497 ) (19,497 ) (8,888 ) (8,888 )
Bilateral OTC (358,411 ) (358,411 ) (290,961 ) (290,961 )
Counterparty netting (393,432 ) (393,432 ) (314,226 ) (314,226 )
OTC-cleared (1,230 ) (333 ) (1,389 ) (164 )
Bilateral OTC (65,492 ) (47,134 ) (47,335 ) (38,963 )
Cash collateral netting (66,722 ) (47,467 ) (48,724 ) (39,127 )
Total amounts offset $ (460,154 ) $ (440,899 ) $ (362,950 ) $(353,353 )
Included in consolidated statements of financial condition
Exchange-traded $ 3,056 $ 3,936 $ 4,270 $ 3,050
OTC-cleared 451 395 657 309
Bilateral OTC 46,365 41,390 39,919 39,235
Total $ 49,872 $ 45,721 $ 44,846 $ 42,594
Not offset in consolidated statements of financial condition
Cash collateral $ (1,288 ) $ (1,712 ) $ (614 ) $ (1,328 )
Securities collateral (15,415 ) (12,639 ) (12,740 ) (8,414 )
Total $ 33,169 $ 31,370 $ 31,492 $ 32,852
Notional Amounts as of
$ in millions September 2019 December 2018
Not accounted for as hedges
Exchange-traded $ 6,116,221 $ 5,139,159
OTC-cleared 20,158,357 14,290,327
Bilateral OTC 12,470,235 12,858,248
Total interest rates 38,744,813 32,287,734
OTC-cleared 421,052 394,494
Bilateral OTC 750,857 762,653
Total credit 1,171,909 1,157,147
Exchange-traded 5,490 5,599
OTC-cleared 131,956 113,360
Bilateral OTC 7,567,048 6,596,741
Total currencies 7,704,494 6,715,700
Exchange-traded 269,709 259,287
OTC-cleared 1,621 1,516
Bilateral OTC 240,621 244,958
Total commodities 511,951 505,761
Exchange-traded 910,044 635,988
Bilateral OTC 1,148,043 1,070,211
Total equities 2,058,087 1,706,199
Subtotal 50,191,254 42,372,541
Accounted for as hedges
OTC-cleared 117,810 85,681
Bilateral OTC 10,904 12,022
Total interest rates 128,714 97,703
OTC-cleared 4,322 2,911
Bilateral OTC 7,668 8,089
Total currencies 11,990 11,000
Subtotal 140,704 108,703
Total notional amounts $50,331,958 $ 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 $10.57 billion as of September 2019 and $10.68 billion as of December 2018, and derivative liabilities of $14.46 billion as of September 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 product type, as well as the impact of netting.
$ in millions Level 1 Level 2 Level 3 Total
As of September 2019
Assets
Interest rates $ 2 $ 334,415 $ 615 $ 335,032
Credit – 17,322 3,673 20,995
Currencies – 95,792 244 96,036
Commodities – 11,480 467 11,947
Equities 6 45,024 986 46,016
Gross fair value 8 504,033 5,985 510,026
Counterparty netting in levels – (391,727 ) (877 ) (392,604 )
Subtotal $ 8 $ 112,306 $ 5,108 $ 117,422
Cross-level counterparty netting (828 )
Cash collateral netting (66,722 )
Net fair value $ 49,872
Liabilities
Interest rates $ (5 ) $ (306,136 ) $ (565 ) $ (306,706 )
Credit – (18,935 ) (1,773 ) (20,708 )
Currencies – (93,037 ) (430 ) (93,467 )
Commodities – (15,069 ) (306 ) (15,375 )
Equities (9 ) (48,107 ) (2,248 ) (50,364 )
Gross fair value (14 ) (481,284 ) (5,322 ) (486,620 )
Counterparty netting in levels – 391,727 877 392,604
Subtotal $ (14 ) $ (89,557 ) $ (4,445 ) $ (94,016 )
Cross-level counterparty netting 828
Cash collateral netting 47,467
Net fair value $ (45,721 )
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 ) 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, September 2019 December 2018
Interest rates, net $50 $(109)
Correlation ( 53 81 51 60 ( 10 86 66 64
Volatility (bps) 31 150 79 76 31 150 74 65
Credit, net $1,900 $1,672
Credit spreads (bps) 1 559 89 54 1 810 109 63
Upfront credit points 2 98 39 32 2 99 44 40
Recovery rates 25 60 36 38 25 70 (40 40
Currencies, net $(186) $461
Correlation 20 70 37 36 10 70 40 36
Commodities, net $161 $112
Volatility 11 80 26 25 10 75 28 27
Natural gas spread $(1.93) to $3.47 ($(0.19)/$(0.19)) $(2.32) to $4.68 ($(0.26)/$(0.30))
Oil spread $ (9.05 23.94 ($ 4.20 2.72 $ (3.44 16.62 ($ 4.53 3.94
Equities, net $ (1,262 $ (1,546
Correlation ( 96 ( 68 97 48 51
Volatility 2% to 84% (15%/8%) 3 102 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 to changes in significant unobservable inputs, in isolation, as of each period-end:
• 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 Nine Months
$ in millions 2019 2018 2019 2018
Total level 3 derivatives
Beginning balance $598 $ 736 $590 $(288 )
Net realized gains/(losses) 75 57 89 102
Net unrealized gains/(losses) 162 (108 ) (49 ) 394
Purchases 133 145 420 325
Sales (222 ) (138 ) (607 ) (366 )
Settlements (44 ) (71 ) 220 368
Transfers into level 3 (33 ) (119 ) 60 82
Transfers out of level 3 (6 ) 208 (60 ) 93
Ending balance $663 $ 710 $663 $ 710 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 presents information, by product type, for derivatives included in the summary table above.
Three Months Nine Months
$ in millions 2019 2018 2019 2018
Interest rates, net
Beginning balance $ 30 $ (166 ) $ (109 ) $ (410 )
Net realized gains/(losses) (21 ) (25 ) (28 ) (40 )
Net unrealized gains/(losses) 103 (110 ) 163 (54 )
Purchases 2 – 10 7
Sales – (2 ) (12 ) (8 )
Settlements (51 ) 32 41 178
Transfers into level 3 6 (18 ) (15 ) 31
Transfers out of level 3 (19 ) (3 ) – 4
Ending balance $ 50 $ (292 ) $ 50 $ (292 )
Credit, net
Beginning balance $ 1,676 $ 1,779 $ 1,672 $ 1,505
Net realized gains/(losses) 21 42 30 45
Net unrealized gains/(losses) 245 (164 ) 264 (95 )
Purchases 23 45 102 60
Sales (31 ) (9 ) (63 ) (41 )
Settlements (56 ) 52 (207 ) 202
Transfers into level 3 37 (3 ) 110 25
Transfers out of level 3 (15 ) 8 (8 ) 49
Ending balance $ 1,900 $ 1,750 $ 1,900 $ 1,750
Currencies, net
Beginning balance $ (31 ) $ 218 $ 461 $ (181 )
Net realized gains/(losses) (2 ) (19 ) (23 ) (37 )
Net unrealized gains/(losses) (147 ) 104 (311 ) 181
Purchases 6 7 9 22
Sales (8 ) (26 ) (12 ) (30 )
Settlements 17 (59 ) (293 ) 216
Transfers into level 3 (18 ) 3 (13 ) 28
Transfers out of level 3 (3 ) (29 ) (4 ) –
Ending balance $ (186 ) $ 199 $ (186 ) $ 199
Commodities, net
Beginning balance $ 134 $ 148 $ 112 $ 47
Net realized gains/(losses) 1 5 (18 ) 69
Net unrealized gains/(losses) 84 23 151 119
Purchases 7 25 27 37
Sales (16 ) (19 ) (124 ) (55 )
Settlements (46 ) (8 ) 2 (132 )
Transfers into level 3 6 (39 ) – 44
Transfers out of level 3 (9 ) – 11 6
Ending balance $ 161 $ 135 $ 161 $ 135
Equities, net
Beginning balance $ (1,211 ) $ (1,243 ) $ (1,546 ) $ (1,249 )
Net realized gains/(losses) 76 54 128 65
Net unrealized gains/(losses) (123 ) 39 (316 ) 243
Purchases 95 68 272 199
Sales (167 ) (82 ) (396 ) (232 )
Settlements 92 (88 ) 677 (96 )
Transfers into level 3 (64 ) (62 ) (22 ) (46 )
Transfers out of level 3 40 232 (59 ) 34
Ending balance $ (1,262 ) $ (1,082 ) $ (1,262 ) $ (1,082 ) Level 3 Rollforward Commentary Three Months Ended September 2019. gains gains gains gains/ ( ) ( ) The net unrealized gains on level 3 derivatives for the three months ended September 2019 were primarily attributable to gains on certain credit and interest rate derivatives, primarily reflecting the impact of a decrease in interest rates, partially offset by losses on certain currency derivatives, primarily reflecting the impact of a decrease in interest rates and changes in foreign exchange rates, and losses on certain equity derivatives, primarily reflecting the impact of an increase in equity prices. The drivers of both transfers into level 3 derivatives and transfers out of level 3 derivatives during the three months ended September 2019 were not material. Nine Months Ended September 2019. gains gains gains/( ) ( ) The net unrealized losses on level 3 derivatives for the nine months ended September 2019 were attributable to losses on certain equity derivatives, reflecting the impact of an increase in equity prices, losses on certain currency derivatives, primarily reflecting the impact of a decrease in interest rates and changes in foreign exchange rates, partially offset by gains on certain credit and interest rate derivatives, primarily reflecting the impact of a decrease in interest rates, and gains on certain commodity derivatives, reflecting the impact of changes in commodity prices. Transfers into level 3 derivatives during the nine months ended September 2019 primarily reflected transfers of certain credit derivative assets from level 2 primarily due to unobservable credit spread inputs becoming significant to the net risk of certain portfolios. The drivers of transfers out of level 3 derivatives during the nine months ended September 2019 were not material. Three Months Ended September 2018. 51 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 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. 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 September 2019
Assets
Interest rates $ 5,328 $ 18,864 $ 68,296 $ 92,488
Credit 587 3,380 3,948 7,915
Currencies 14,036 5,691 7,256 26,983
Commodities 2,835 1,056 358 4,249
Equities 4,572 4,836 1,219 10,627
Counterparty netting in tenors (3,130 ) (4,464 ) (3,172 ) (10,766 )
Subtotal $ 24,228 $ 29,363 $ 77,905 $ 131,496
Cross-tenor counterparty netting (17,958 )
Cash collateral netting (66,722 )
Total OTC derivative assets $ 46,816
Liabilities
Interest rates $ 6,351 $ 10,728 $ 46,576 $ 63,655
Credit 1,222 4,178 2,229 7,629
Currencies 11,118 8,386 4,911 24,415
Commodities 2,388 2,192 3,458 8,038
Equities 5,608 5,797 2,834 14,239
Counterparty netting in tenors (3,130 ) (4,464 ) (3,172 ) (10,766 )
Subtotal $ 23,557 $ 26,817 $ 56,836 $ 107,210
Cross-tenor (17,958 )
Cash collateral netting (47,467 )
Total OTC derivative liabilities $ 41,785
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 September 2019, written credit derivatives had a total gross notional amount of $550.50 billion and purchased credit derivatives had a total gross notional amount of $621.43 billion, for total net notional purchased protection of $70.93 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. The firm’s written and purchased credit derivatives primarily consist of 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 September 2019
Maximum Payout/Notional Amount of Written Credit Derivatives by Tenor
Less than 1 year $ 129,944 $ 11,234 $ 564 $ 3,135 $ 144,877
1 – 5 years 293,226 11,842 6,824 9,402 321,294
Greater than 5 years 74,674 7,601 1,045 1,011 84,331
Total $ 497,844 $ 30,677 $ 8,433 $ 13,548 $ 550,502
Maximum Payout/Notional Amount of Purchased Credit Derivatives
Offsetting $ 425,624 $ 18,199 $ 7,663 $ 12,340 $ 463,826
Other $ 147,746 $ 6,237 $ 1,711 $ 1,909 $ 157,603
Fair Value of Written Credit Derivatives
Asset $ 11,718 $ 592 $ 203 $ 217 $ 12,730
Liability 1,009 1,210 549 3,936 6,704
Net asset/(liability) $ 10,709 $ (618 ) $ (346 ) $ (3,719 ) $ 6,026
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 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 $40 million for the three months ended September 2019, $(88) million for the three months ended September 2018, $(158) million for the nine months ended September 2019 and $123 million for the nine months ended September 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 September 2019 December 2018
Fair value of assets $ 1,144 $ 980
Fair value of liabilities 1,638 1,297
Net liability $ 494 $ 317
Notional amount $ 10,979 $ 10,229 In the table above, these derivatives, which are recorded at fair value, primarily consist of i |
