| 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 market-making positions 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 financing activities. 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 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 September 2020 As of December 2019
$ in millions Derivative Assets Derivative Liabilities Derivative Assets Derivative Liabilities
Not accounted for as hedges
Exchange-traded $ $ $ 476 $ 856
OTC-cleared 17,102 15,395 9,958 8,618
Bilateral OTC 346,474 312,065 266,387 242,046
Total interest rates 364,240 328,343 276,821 251,520
OTC-cleared 2,633 2,792 6,551 6,929
Bilateral OTC 14,446 13,080 14,178 13,860
Total credit 17,079 15,872 20,729 20,789
Exchange-traded 71 10 35 10
OTC-cleared 329 457 411 391
Bilateral OTC 86,034 84,153 79,887 81,613
Total currencies 86,434 84,620 80,333 82,014
Exchange-traded 3,814 3,368 2,390 2,272
OTC-cleared 243 227 180 243
Bilateral OTC 10,498 14,002 8,568 13,034
Total commodities 14,555 17,597 11,138 15,549
Exchange-traded 28,592 32,863 13,499 16,976
Bilateral OTC 42,649 46,668 36,162 39,531
Total equities 71,241 79,531 49,661 56,507
Subtotal 553,549 525,963 438,682 426,379
Accounted for as hedges
OTC-cleared 3 – – –
Bilateral OTC 1,421 – 3,182 1
Total interest rates 1,424 – 3,182 1
OTC-cleared 10 19 16 57
Bilateral OTC 18 96 16 153
Total currencies 28 115 32 210
Subtotal 1,452 115 3,214 211
Total gross fair value $ 555,001 $ 526,078 $ 441,896 $ 426,590
Offset in the consolidated balance sheets
Exchange-traded $ (29,075 ) $ (29,075 ) $ (14,159 ) $ (14,159 )
OTC-cleared (18,420 ) (18,420 ) (15,565 ) (15,565 )
Bilateral OTC (369,760 ) (369,760 ) (310,920 ) (310,920 )
Counterparty netting (417,255 ) (417,255 ) (340,644 ) (340,644 )
OTC-cleared (1,573 ) (336 ) (1,302 ) (526 )
Bilateral OTC (71,653 ) (51,789 ) (54,698 ) (41,618 )
Cash collateral netting (73,226 ) (52,125 ) (56,000 ) (42,144 )
Total amounts offset $(490,481 ) $(469,380 ) $(396,644 ) $(382,788 )
Included in the consolidated balance sheets
Exchange-traded $ $ $ 2,241 $ 5,955
OTC-cleared 327 134 249 147
Bilateral OTC 60,127 48,515 42,762 37,700
Total $ 64,520 $ 56,698 $ 45,252 $ 43,802
Not offset in the consolidated balance sheets
Cash collateral $ (1,140 ) $ (1,700 ) $ (604 ) $ (1,603 )
Securities collateral (17,096 ) (11,515 ) (14,196 ) (9,252 )
Total $ 46,284 $ $ 30,452 $ 32,947
Notional Amounts as of
$ in millions September 2020 December 2019
Not accounted for as hedges
Exchange-traded $ 3,897,833 $ 4,757,300
OTC-cleared 16,266,950 13,440,376
Bilateral OTC 13,299,418 11,668,171
Total interest rates 33,464,201 29,865,847
OTC-cleared 547,677 396,342
Bilateral OTC 618,220 707,935
Total credit 1,165,897 1,104,277
Exchange-traded 2,647 4,566
OTC-cleared 177,785 134,060
Bilateral OTC 6,250,229 5,926,602
Total currencies 6,430,661 6,065,228
Exchange-traded 223,284 230,018
OTC-cleared 2,354 2,639
Bilateral OTC 208,868 243,228
Total commodities 434,506 475,885
Exchange-traded 1,102,199 910,099
Bilateral OTC 1,238,886 1,182,335
Total equities 2,341,085 2,092,434
Subtotal 43,836,350 39,603,671
Accounted for as hedges
OTC-cleared 181,135 123,531
Bilateral OTC 6,559 9,714
Total interest rates 187,694 133,245
OTC-cleared 3,274 4,152
Bilateral OTC 9,274 9,247
Total currencies 12,548 13,399
Subtotal 200,242 146,644
Total notional amounts $44,036,592 $39,750,315 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 $19.33 billion as of September 2020 and $9.15 billion as of December 2019, and derivative liabilities of $20.99 billion as of September 2020 and $14.88 billion as of December 2019, which are not subject to an enforceable netting agreement or are subject to a netting agreement that the firm has not yet determined to be enforceable.
• During the first quarter of 2020, consistent with the rules of a clearing organization, the firm elected to consider its transactions with that clearing organization as settled each day. The impact of this change would have been a reduction in gross credit derivative assets of $3.97 billion and liabilities of $4.15 billion as of December 2019, and a corresponding decrease in counterparty and cash collateral netting, with no impact to the consolidated balance sheets. 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 September 2020
Assets
Interest rates $ 184 $ 364,601 $ 879 $ 365,664
Credit – 13,315 3,764 17,079
Currencies – 86,292 170 86,462
Commodities – 14,010 545 14,555
Equities 23 69,109 2,109 71,241
Gross fair value 207 547,327 7,467 555,001
Counterparty netting in levels (68 ) (414,710 ) (1,156 ) (415,934 )
Subtotal $ 139 $ 132,617 $ 6,311 $ 139,067
Cross-level counterparty netting (1,321 )
Cash collateral netting (73,226 )
Net fair value $ 64,520
Liabilities
Interest rates $(109 ) $(327,610 ) $ (624 ) $(328,343 )
Credit – (14,094 ) (1,778 ) (15,872 )
Currencies – (84,310 ) (425 ) (84,735 )
Commodities – (17,247 ) (350 ) (17,597 )
Equities (15 ) (77,380 ) (2,136 ) (79,531 )
Gross fair value (124 ) (520,641 ) (5,313 ) (526,078 )
Counterparty netting in levels 68 414,710 1,156 415,934
Subtotal $ (56 ) $(105,931 ) $(4,157 ) $(110,144 )
Cross-level counterparty netting 1,321
Cash collateral netting 52,125
Net fair value $ (56,698 )
As of December 2019
Assets
Interest rates $ $ $ $
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 $ $ $ $
Cross-level counterparty netting 473
Cash collateral netting (56,000 )
Net fair value $
Liabilities
Interest rates $ ) $ ) $ ) $ )
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 $ ) $ ) $ ) $ )
Cross-level counterparty netting (473 )
Cash collateral netting 42,144
Net fair value $ ) 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. 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. 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 Unobservable Inputs (Average/Median) as of
$ in millions, except inputs September 2020 December 2019
Interest rates, net $255 $89
Correlation (38)% to 81% (52%/60%) (42)% to 81% (52%/60%)
Volatility (bps) 31 to 150 (65/53) 31 to 150 (70/61)
Credit, net $1,986 $1,877
Credit spreads (bps) 2 to 748 (124/90) 1 to 559 (96/53)
Upfront credit points 7 to 90 (47/50) 2 to 90 (38/32)
Recovery rates 25% to 90% (48%/40%) 10% to 60% (31%/25%)
Currencies, net $(255) $(211)
Correlation 20% to 70% (39%/41%) 20% to 70% (37%/36%)
Volatility 19% to 20% (20%/20%) N/A
Commodities, net $195 $247
Volatility 14% to 105% (39%/33%) 9% to 57% (26%/25%)
Natural gas spread $(1.44) to $1.89 ($(0.12)/$(0.09)) $(1.93) to $1.69 ($(0.16)/$(0.17))
Oil spread $4.73 to $9.98 ($8.15/$8.33) $(4.86) to $19.77 ($9.82/$11.15)
Equities, net $(27) $(1,977)
Correlation (70)% to 99% (50%/55%) (70)% to 99% (42%/45%)
Volatility 3% to 128% (24%/22%) 2% to 72% (14%/7%) 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.
• Volatility was not significant to the valuation of level 3 currency derivatives as of December 2019.
• 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 provides 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 2020 2019 2020 2019
Total level 3 derivatives, net
Beginning balance $3,060 $ 598 $ 25 $ 590
Net realized gains/(losses) (8 ) 75 142 89
Net unrealized gains/(losses) (315 ) 162 1,465 (49 )
Purchases 93 133 345 420
Sales (288 ) (222 ) 181 (607 )
Settlements (189 ) (44 ) 182 220
Transfers into level 3 – (33 ) (74 ) 60
Transfers out of level 3 (199 ) (6 ) (112 ) (60 )
Ending balance $2,154 $ 663 $2,154 $ 663 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.
Three Months Nine Months
$ in millions 2020 2019 2020 2019
Interest rates, net
Beginning balance $ 311 $ 30 $ $ (109 )
Net realized gains/(losses) 3 (21 ) 12 (28 )
Net unrealized gains/(losses) 54 103 201 163
Purchases 11 2 18 10
Sales 1 – (15 ) (12 )
Settlements (59 ) (51 ) (40 ) 41
Transfers into level 3 (53 ) 6 (14 ) (15 )
Transfers out of level 3 (13 ) (19 ) 4 –
Ending balance $ 255 $ 50 $ 255 $ 50
Credit, net
Beginning balance $2,327 $ 1,676 $ 1,877 $ 1,672
Net realized gains/(losses) (1 ) 21 6 30
Net unrealized gains/(losses) (124 ) 245 175 264
Purchases 16 23 35 102
Sales (8 ) (31 ) (23 ) (63 )
Settlements (189 ) (56 ) (38 ) (207 )
Transfers into level 3 26 37 4 110
Transfers out of level 3 (61 ) (15 ) (50 ) (8 )
Ending balance $1,986 $ 1,900 $ 1,986 $ 1,900
Currencies, net
Beginning balance $ (94 ) $ (31 ) $ (211 ) $ 461
Net realized gains/(losses) 18 (2 ) 8 (23 )
Net unrealized gains/(losses) (143 ) (147 ) (118 ) (311 )
Purchases 5 6 5 9
Sales (12 ) (8 ) (7 ) (12 )
Settlements (34 ) 17 77 (293 )
Transfers into level 3 (1 ) (18 ) (2 ) (13 )
Transfers out of level 3 6 (3 ) (7 ) (4 )
Ending balance $ (255 ) $ (186 ) $ (255 ) $ (186 )
Commodities, net
Beginning balance $ 331 $ 134 $ 247 $ 112
Net realized gains/(losses) 16 1 65 (18 )
Net unrealized gains/(losses) (84 ) 84 38 151
Purchases 1 7 2 27
Sales (7 ) (16 ) (20 ) (124 )
Settlements (20 ) (46 ) (64 ) 2
Transfers into level 3 (12 ) 6 (24 ) –
Transfers out of level 3 (30 ) (9 ) (49 ) 11
Ending balance $ 195 $ 161 $ 195 $ 161
Equities, net
Beginning balance $ 185 $(1,211 ) $(1,977 ) $(1,546 )
Net realized gains/(losses) (44 ) 76 51 128
Net unrealized gains/(losses) (18 ) (123 ) 1,169 (316 )
Purchases 60 95 285 272
Sales (262 ) (167 ) 246 (396 )
Settlements 113 92 247 677
Transfers into level 3 40 (64 ) (38 ) (22 )
Transfers out of level 3 (101 ) 40 (10 ) (59 )
Ending balance $ (27 ) $(1,262 ) $ (27 ) $(1,262 ) Level 3 Rollforward Commentary Three Months Ended September 2020. The net realized and unrealized losses on level 3 derivatives of $323 million (reflecting $8 million of net realized losses and $315 million of net unrealized losses) for the three months ended September 2020 included losses of $289 million reported in market making and losses of $34 million reported in other principal transactions. The net unrealized losses on level 3 derivatives for the three months ended September 2020 were primarily attributable to losses on certain currency derivatives (primarily reflecting the impact of changes in foreign exchange rates) and losses on certain credit derivatives (primarily reflecting the impact of tighter credit spreads). The drivers of transfers into level 3 derivatives during the three months ended September 2020 were not material. Transfers out of level 3 derivatives during the three months ended September 2020 primarily reflected transfers of certain equity derivative assets to level 2 (principally due to increased transparency of certain volatility inputs used to value these derivatives). Nine Months Ended September 2020. The net realized and unrealized gains on level 3 derivatives of $1.61 billion (reflecting $142 million of net realized gains and $1.47 billion of net unrealized gains) for the nine months ended September 2020 included gains of $1.67 billion reported in market making and losses of $61 million reported in other principal transactions. The net unrealized gains on level 3 derivatives for the nine months ended September 2020 were primarily attributable to gains on certain equity derivatives (primarily reflecting the impact of changes in underlying equity prices) and gains on certain interest rate derivatives (primarily reflecting the impact of a decrease in interest rates). The drivers of both transfers into level 3 derivatives and out of level 3 derivatives during the nine months ended September 2020 were not material. Three Months Ended September 2019. The net realized and unrealized gains on level 3 derivatives of $237 million (reflecting $75 million of net realized gains and $162 million of net unrealized gains) for the three months ended September 2019 included gains/(losses) of $245 million reported in market making and $(8) million reported in other principal transactions. 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. The net realized and unrealized gains on level 3 derivatives of $40 million (reflecting $89 million of net realized gains and $49 million of net unrealized losses) for the nine months ended September 2019 included gains/(losses) of $99 million reported in market making and $(59) million reported in other principal transactions. 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. OTC Derivatives The table below presents OTC derivative assets and liabilities by tenor and major product type.
$ in millions Less than 1 - 5 Greater than Total
As of September 2020
Assets
Interest rates $ 8,579 $21,362 $73,807 $103,748
Credit 685 3,532 3,989 8,206
Currencies 11,128 6,001 9,069 26,198
Commodities 3,244 1,916 542 5,702
Equities 8,406 10,223 2,204 20,833
Counterparty netting in tenors (3,506 ) (4,047 ) (3,365 ) (10,918 )
Subtotal $ 28,536 $38,987 $86,246 $153,769
Cross-tenor counterparty netting (20,089 )
Cash collateral netting (73,226 )
Total OTC derivative assets $ 60,454
Liabilities
Interest rates $ 5,192 $12,242 $48,777 $ 66,211
Credit 845 3,577 2,577 6,999
Currencies 11,282 7,237 6,013 24,532
Commodities 2,962 1,862 4,365 9,189
Equities 9,165 12,627 3,058 24,850
Counterparty netting in tenors (3,506 ) (4,047 ) (3,365 ) (10,918 )
Subtotal $25,940 $33,498 $61,425 $120,863
Cross-tenor counterparty netting (20,089 )
Cash collateral netting (52,125 )
Total OTC derivative liabilities $ 48,649
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 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 September 2020, written credit derivatives had a total gross notional amount of $558.19 billion and purchased credit derivatives had a total gross notional amount of $607.73 billion, for total net notional purchased protection of $49.54 billion. 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. 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 - 501 - Greater Total
As of September 2020
Maximum Payout/Notional Amount of Written Credit Derivatives by Tenor
Less than 1 year $ 98,080 $11,545 $ 1,550 $ 2,408 $113,583
1 – 5 years 296,222 25,444 16,824 12,623 351,113
Greater than 5 years 80,575 6,704 5,313 898 93,490
Total $474,877 $43,693 $23,687 $15,929 $558,186
Maximum Payout/Notional Amount of Purchased Credit Derivatives
Offsetting $421,367 $33,354 $20,018 $15,043 $489,782
Other $100,867 $11,085 $ 3,932 $ 2,062 $117,946
Fair Value of Written Credit Derivatives
Asset $ 7,598 $ 428 $ $ $ 8,440
Liability 1,116 774 1,942 3,357 7,189
Net asset/(liability) $ 6,482 $ ) $ ) $ ) $ 1,251
As of December 2019
Maximum Payout/Notional Amount of Written Credit Derivatives by Tenor
Less than 1 year $143,566 $ 7,155 $ 759 $ 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 $ 446 $ 160 $ 202 $ 13,911
Liability 1,239 448 372 3,490 5,549
Net asset/(liability) $ 11,864 $ (2 ) $ (212 ) $ (3,288 ) $ 8,362 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.
Three Months Nine Months
$ in millions 2020 2019 2020 2019
CVA, net of hedges $103 $ 40 $ 52 $(158 )
FVA, net of hedges 101 (11 ) (78 ) 261
Total $204 $ 29 $(26 ) $ 103 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 December
Fair value of assets $ 1,475 $ 1,148
Fair value of liabilities (1,094 ) (1,717 )
Net asset/(liability) $ 381 $ (569 )
Notional amount $12,670 $11,003 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, as well as other secured financings, 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
$ in millions September December
Net derivative liabilities under bilateral agreements $38,819 $32,800
Collateral posted $34,104 $28,510
Additional collateral or termination payments:
One-notch $ 406 $ 358
Two-notch $ 912 $ 1,268 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- and short-term borrowings and certain fixed-rate certificates of deposit, (ii) foreign exchange forward contracts used to manage the foreign exchange risk of certain available-for-sale securities and (iii) 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- 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), Secured Overnight Financing Rate 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 these hedging relationships in achieving offsetting changes in the fair values of the hedging instrument and the risk being hedged (i.e., |
