| 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 balance sheets, 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 2019 As of December 2018
$ in millions Derivative Assets Derivative Liabilities Derivative Assets Derivative Liabilities
Not accounted for as hedges
Exchange-traded $ $ $ 760 $ 1,553
OTC-cleared 9,958 8,618 5,040 3,552
Bilateral OTC 266,387 242,046 227,274 211,091
Total interest rates 276,821 251,520 233,074 216,196
OTC-cleared 6,551 6,929 4,778 4,517
Bilateral OTC 14,178 13,860 14,658 13,784
Total credit 20,729 20,789 19,436 18,301
Exchange-traded 35 10 11 16
OTC-cleared 411 391 656 800
Bilateral OTC 79,887 81,613 85,772 87,953
Total currencies 80,333 82,014 86,439 88,769
Exchange-traded 2,390 2,272 4,445 4,093
OTC-cleared 180 243 433 439
Bilateral OTC 8,568 13,034 12,746 15,595
Total commodities 11,138 15,549 17,624 20,127
Exchange-traded 13,499 16,976 13,431 11,765
Bilateral OTC 36,162 39,531 34,687 40,668
Total equities 49,661 56,507 48,118 52,433
Subtotal 438,682 426,379 404,691 395,826
Accounted for as hedges
OTC-cleared – – 2 –
Bilateral OTC 3,182 1 3,024 7
Total interest rates 3,182 1 3,026 7
OTC-cleared 16 57 25 53
Bilateral OTC 16 153 54 61
Total currencies 32 210 79 114
Subtotal 3,214 211 3,105 121
Total gross fair value $ 441,896 $ 426,590 $ 407,796 $ 395,947
Offset in the consolidated balance sheets
Exchange-traded $ (14,159 ) $ (14,159 ) $ (14,377 ) $ (14,377 )
OTC-cleared (15,565 ) (15,565 ) (8,888 ) (8,888 )
Bilateral OTC (310,920 ) (310,920 ) (290,961 ) (290,961 )
Counterparty netting (340,644 ) (340,644 ) (314,226 ) (314,226 )
OTC-cleared (1,302 ) (526 ) (1,389 ) (164 )
Bilateral OTC (54,698 ) (41,618 ) (47,335 ) (38,963 )
Cash collateral netting (56,000 ) (42,144 ) (48,724 ) (39,127 )
Total amounts offset $(396,644 ) $(382,788 ) $(362,950 ) $(353,353 )
Included in the consolidated balance sheets
Exchange-traded $ 2,241 $ 5,955 $ 4,270 $ 3,050
OTC-cleared 249 147 657 309
Bilateral OTC 42,762 37,700 39,919 39,235
Total $ 45,252 $ 43,802 $ 44,846 $ 42,594
Not offset in the consolidated balance sheets
Cash collateral $ ) $ (1,603 ) $ (614 ) $ (1,328 )
Securities collateral (14,196 ) (9,252 ) (12,740 ) (8,414 )
Total $ 30,452 $ 32,947 $ 31,492 $ 32,852
Notional Amounts as of December
$ in millions 2019 2018
Not accounted for as hedges
Exchange-traded $ 4,757,300 $ 5,139,159
OTC-cleared 13,440,376 14,290,327
Bilateral OTC 11,668,171 12,858,248
Total interest rates 29,865,847 32,287,734
OTC-cleared 396,342 394,494
Bilateral OTC 707,935 762,653
Total credit 1,104,277 1,157,147
Exchange-traded 4,566 5,599
OTC-cleared 134,060 113,360
Bilateral OTC 5,926,602 6,596,741
Total currencies 6,065,228 6,715,700
Exchange-traded 230,018 259,287
OTC-cleared 2,639 1,516
Bilateral OTC 243,228 244,958
Total commodities 475,885 505,761
Exchange-traded 910,099 635,988
Bilateral OTC 1,182,335 1,070,211
Total equities 2,092,434 1,706,199
Subtotal 39,603,671 42,372,541
Accounted for as hedges
OTC-cleared 123,531 85,681
Bilateral OTC 9,714 12,022
Total interest rates 133,245 97,703
OTC-cleared 4,152 2,911
Bilateral OTC 9,247 8,089
Total currencies 13,399 11,000
Subtotal 146,644 108,703
Total notional amounts $39,750,315 $42,481,244 In the tables above:
• Gross fair values exclude the effects of both counterparty netting
• 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 $9.15 billion as of December 2019 and $10.68 billion as of December 2018, and derivative liabilities of $14.88 billion as of December 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. Fair Value of Derivatives by Level The table below presents 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 December 2019
Assets
Interest rates $ 3 $ 279,443 $ $ 280,003
Credit – 17,204 3,525 20,729
Currencies – 80,178 187 80,365
Commodities – 10,648 490 11,138
Equities 21 48,953 687 49,661
Gross fair value 24 436,426 5,446 441,896
Counterparty netting in levels – (340,325 ) (792 ) (341,117 )
Subtotal $ 24 $ 96,101 $ 4,654 $ 100,779
Cross-level counterparty netting 473
Cash collateral netting (56,000 )
Net fair value $ 45,252
Liabilities
Interest rates $ (3 ) $(251,050 ) $ ) $(251,521 )
Credit – (19,141 ) (1,648 ) (20,789 )
Currencies – (81,826 ) (398 ) (82,224 )
Commodities – (15,306 ) (243 ) (15,549 )
Equities (26 ) (53,817 ) (2,664 ) (56,507 )
Gross fair value (29 ) (421,140 ) (5,421 ) (426,590 )
Counterparty netting in levels – 340,325 792 341,117
Subtotal $(29 ) $ (80,815 ) $(4,629 ) $ (85,473 )
Cross-level counterparty netting (473 )
Cash collateral netting 42,144
Net fair value $ (43,802 )
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 $ ) See Note 4 for an overview of the firm’s fair value measurement policies and the valuation techniques and significant inputs used to determine the fair value of derivatives. In the table above:
• 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 derivative 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, except inputs 2019 2018
Interest rates, net $89 $(109)
Correlation (42)% to 81% (52%/60%) (10)% to 86% (66%/64%)
Volatility (bps) 31 to 150 (70/61) 31 to 150 (74/65)
Credit, net $1,877 $1,672
Credit spreads (bps) 1 to 559 (96/53) 1 to 810 (109/63)
Upfront credit points 2 to 90 (38/32) 2 to 99 (44/40)
Recovery rates 10% to 60% (31%/25%) 25% to 70% (40%/40%)
Currencies, net $(211) $461
Correlation 20% to 70% (37%/36%) 10% to 70% (40%/36%)
Commodities, net $247 $112
Volatility 9% to 57% (26%/25%) 10% to 75% (28%/27%)
Natural gas spread $(1.93) to $1.69 ($(0.16)/$(0.17)) $(2.32) to $4.68 ($(0.26)/$(0.30))
Oil spread $(4.86) to $19.77 ($9.82/$11.15) $(3.44) to $16.62 ($4.53/$3.94)
Equities, net $(1,977) $(1,546)
Correlation (70)% to 99% (42%/45%) (68)% to 97% (48%/51%)
Volatility 2% to 72% (14%/7%) 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 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.
Year Ended December
$ in millions 2019 2018
Total level 3 derivatives, net
Beginning balance $ 590 $ (288 )
Net realized gains/(losses) 118 (113 )
Net unrealized gains/(losses) (454 ) 1,251
Purchases 444 612
Sales (668 ) (1,510 )
Settlements 236 573
Transfers into level 3 7 34
Transfers out of level 3 (248 ) 31
Ending balance $ 25 $ 590 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 trading 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.
Year Ended December
$ in millions 2019 2018
Interest rates, net
Beginning balance $ ) $ (410 )
Net realized gains/(losses) (24 ) (51 )
Net unrealized gains/(losses) 199 122
Purchases 8 8
Sales (13 ) (2 )
Settlements 40 171
Transfers into level 3 – (9 )
Transfers out of level 3 (12 ) 62
Ending balance $ $ (109 )
Credit, net
Beginning balance $ 1,672 $ 1,505
Net realized gains/(losses) 42 (23 )
Net unrealized gains/(losses) 273 2
Purchases 146 53
Sales (114 ) (65 )
Settlements (251 ) 244
Transfers into level 3 108 (35 )
Transfers out of level 3 1 (9 )
Ending balance $ 1,877 $ 1,672
Currencies, net
Beginning balance $ $ (181 )
Net realized gains/(losses) (32 ) (51 )
Net unrealized gains/(losses) (327 ) 372
Purchases 11 36
Sales (1 ) (25 )
Settlements (306 ) 212
Transfers into level 3 (14 ) 101
Transfers out of level 3 (3 ) (3 )
Ending balance $ ) $ 461
Commodities, net
Beginning balance $ $ 47
Net realized gains/(losses) (34 ) 18
Net unrealized gains/(losses) 219 61
Purchases 25 42
Sales (81 ) (64 )
Settlements (6 ) 12
Transfers into level 3 8 21
Transfers out of level 3 4 (25 )
Ending balance $ $ 112
Equities, net
Beginning balance $(1,546 ) $(1,249 )
Net realized gains/(losses) 166 (6 )
Net unrealized gains/(losses) (818 ) 694
Purchases 254 473
Sales (459 ) (1,354 )
Settlements 759 (66 )
Transfers into level 3 (95 ) (44 )
Transfers out of level 3 (238 ) 6
Ending balance $(1,977 ) $(1,546 ) Level 3 Rollforward Commentary Year Ended December 2019. The net unrealized losses on level 3 derivatives for 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 and changes in foreign exchange rates), partially offset by gains on certain credit derivatives (primarily reflecting the impact of a decrease in interest rates), gains on certain commodity derivatives (primarily reflecting the impact of changes in commodity prices), and gains on certain interest rate derivatives (primarily reflecting the impact of a decrease in interest rates). The drivers of transfers into level 3 derivatives during 2019 were not material. Transfers out of level 3 derivatives during 2019 primarily reflected transfers of certain equity derivative assets to level 2, principally due to certain unobservable inputs no longer being significant to the valuation of these derivatives. Year Ended December 2018. 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. OTC Derivatives The table below presents OTC derivative assets and liabilities by tenor and major product type.
$ in millions Less than 1 Year 1 - 5 Years Greater than 5 Years Total
As of December 2019
Assets
Interest rates $ 5,521 $15,183 $57,394 $ 78,098
Credit 678 3,259 3,183 7,120
Currencies 10,236 5,063 6,245 21,544
Commodities 2,507 1,212 302 4,021
Equities 7,332 4,509 1,294 13,135
Counterparty netting in tenors (3,263 ) (3,673 ) (2,332 ) (9,268 )
Subtotal $23,011 $25,553 $66,086 $114,650
Cross-tenor counterparty netting (15,639 )
Cash collateral netting (56,000 )
Total OTC derivative assets $ 43,011
Liabilities
Interest rates $ 3,654 $ 9,113 $36,470 $ 49,237
Credit 1,368 4,052 1,760 7,180
Currencies 12,486 6,906 4,036 23,428
Commodities 2,796 1,950 3,804 8,550
Equities 5,755 7,381 3,367 16,503
Counterparty netting in tenors (3,263 ) (3,673 ) (2,332 ) (9,268 )
Subtotal $22,796 $25,729 $47,105 $ 95,630
Cross-tenor counterparty netting (15,639 )
Cash collateral netting (42,144 )
Total OTC derivative liabilities $ 37,847
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 to facilitate client transactions and to manage the credit risk associated with market-making and investing and financing 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 2019, written credit derivatives had a total gross notional amount of $522.57 billion and purchased credit derivatives had a total gross notional amount of $581.76 billion, for total net notional purchased protection of $59.19 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 December 2019
Maximum Payout/Notional Amount of Written Credit Derivatives by Tenor
Less than 1 year $143,566 $ 7,155 $ $ 2,953 $154,433
1 – 5 years 292,444 10,125 5,482 8,735 316,786
Greater than 5 years 48,109 2,260 427 554 51,350
Total $484,119 $19,540 $ 6,668 $12,242 $522,569
Maximum Payout/Notional Amount of Purchased Credit Derivatives
Offsetting $395,127 $14,492 $ 5,938 $10,543 $426,100
Other $149,092 $ 2,617 $ 1,599 $ 2,354 $155,662
Fair Value of Written Credit Derivatives
Asset $ 13,103 $ $ $ $ 13,911
Liability 1,239 448 372 3,490 5,549
Net asset/(liability) $ 11,864 $ ) $ ) $ ) $ 8,362
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 ) $ ) $ ) $ 1,402 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 and Funding Spreads on Derivatives The firm realizes gains or losses on its derivative contracts. These gains or losses, include credit valuation adjustments (CVA) relating to uncollateralized derivative assets and liabilities, which represents the gains or losses (including hedges) attributable to the impact of changes in credit exposure, counterparty credit spreads, liability funding spreads (which includes the firm’s own credit), probability of default and assumed recovery. These gains or losses also include funding valuation adjustments (FVA) relating to uncollateralized derivative assets, which represents the gains or losses (including hedges) attributable to the impact of changes in expected funding exposures and funding spreads. The table below presents information about CVA and FVA.
Year Ended December
$ in millions 2019 2018 2017
CVA, net of hedges $(289 ) $ 371 $ 66
FVA, net of hedges 485 (194 ) 288
Total $ 196 $ 177 $354 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 2019 2018
Fair value of assets $ 1,148 $ 980
Fair value of liabilities 1,717 1,297
Net liability $ $ 317
Notional amount $11,003 $10,229 In the table above, derivatives that have been bifurcated from their related borrowings are recorded at fair value and primarily consist of interest rate, equity and commodity products. These derivatives are included in unsecured short- and long-term borrowings with the related borrowings. 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 bilateral agreements (excluding collateral posted), the fair value of collateral posted and additional collateral or termination payments that could have been called by counterparties in the event of a one- two-notch
As of December
$ in millions 2019 2018
Net derivative liabilities under bilateral agreements $32,800 $29,583
Collateral posted $28,510 $24,393
Additional collateral or termination payments:
One-notch $ $ 262
Two-notch $ 1,268 $ 959 Hedge Accounting The firm applies hedge accounting for (i) certain interest rate swaps used to manage the interest rate exposure of certain fixed-rate unsecured long-term and short-term borrowings and certain fixed-rate certificates of deposit and (ii) certain foreign currency forward contracts and foreign currency-denominated debt used to manage foreign currency exposures on the firm’s net investment in certain non-U.S. To qualify for hedge accounting, the hedging instrument must be highly effective at reducing the risk from the exposure being hedged. Additionally, the firm must formally document the hedging relationship at inception and assess the hedging relationship at least on a quarterly basis to ensure the hedging instrument continues to be highly effective over the life of the hedging relationship. Fair Value Hedges The firm designates certain interest rate swaps as fair value hedges of certain fixed-rate unsecured long-term and short-term debt and fixed-rate certificates of deposit. These interest rate swaps hedge changes in fair value attributable to the designated benchmark interest rate (e.g., London Interbank Offered Rate (LIBOR) or Overnight Index Swap Rate), effectively converting a substantial portion of fixed-rate obligations into floating-rate obligations. The firm applies a statistical method that utilizes regression analysis when assessing the effectiveness of its fair value hedging relationships in achieving offsetting changes in the fair values of the hedging instrument and the risk being hedged (i.e., interest rate risk). An interest rate swap is considered highly effective in offsetting changes in fair value attributable to changes in the hedged risk when the regression analysis results in a coefficient of determination of 80% or greater and a slope between 80% and 125%. For qualifying fair value hedges, gains or losses on derivatives are included in interest expense. The change in fair value of the hedged item attributable to the risk being hedged is reported as an adjustment to its carrying value (hedging adjustment) and is also included in interest expense. When a derivative is no longer designated as a hedge, any remaining difference between the carrying value and par value of the hedged item is amortized to interest expense over the remaining life of the hedged item using the effective interest method. See Note 23 for further information about interest income and interest expense. The table below presents the gains/(losses) from interest rate derivatives accounted for as hedges and the related hedged borrowings and deposits, and total interest expense.
Year Ended December
$ in millions 2019 2018 2017
Interest rate hedges $ 3,196 $ ) $ )
Hedged borrowings and deposits $ ) $ 1,295 $ 2,183
Interest expense $17,376 $15,912 $10,181 In the table above:
• The difference between gains/(losses) from interest rate hedges and hedged borrowings and deposits was primarily due to the amortization of prepaid credit spreads resulting from the passage of time.
• Hedge ineffectiveness was $(684) million for 2017. The table below presents the carrying value of the hedged items that are currently designated in a hedging relationship and the related cumulative hedging adjustment (increase/(decrease)) from current and prior hedging relationships included in such carrying values.
$ in millions Carrying Value Cumulative Hedging Adjustment
As of December 2019
Deposits $19,634 $
Unsecured short-term borrowings $ 6,008 $
Unsecured long-term borrowings $87,874 $7,292
As of December 2018
Deposits $11,924 $ (156 )
Unsecured short-term borrowings $ 4,450 $ (12 )
Unsecured long-term borrowings $68,839 $2,759 In the table above, cumulative hedging adjustment included $3.48 billion as of December 2019 and $1.74 billion as of December 2018 of hedging adjustments from prior hedging relationships that were de-designated In addition, Net Investment Hedges The firm seeks to reduce the impact of fluctuations in foreign exchange rates on its net investments in certain non-U.S. The table below presents the gains/(losses) from net investment hedging.
Year Ended December
$ in millions 2019 2018 2017
Hedges:
Foreign currency forward contract $ 6 $577 $(805 )
Foreign currency-denominated debt $(19 ) $ ) $ (67 ) Gains or losses on individual net investments in non-U.S. non-U.S. non-U.S. The firm had designated $3.05 billion as of December 2019 and $1.99 billion as of December 2018 of foreign currency-denominated debt, included in unsecured long-term and short-term borrowings, as hedges of net investments in non-U.S. |
