| 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 available-for-sale 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 s e
As of September 2021 As of December 2020
$ in millions Derivative Derivative Derivative Derivative
Not accounted for as hedges
Exchange-traded $ $ $ 665 $ 660
OTC-cleared 14,960 13,847 18,832 16,809
Bilateral OTC 239,708 213,612 337,998 304,370
Total interest rates 254,963 227,919 357,495 321,839
OTC-cleared 4,789 5,200 4,137 4,517
Bilateral OTC 12,287 11,180 12,418 11,551
Total credit 17,076 16,380 16,555 16,068
Exchange-traded 208 18 133 22
OTC-cleared 446 325 401 631
Bilateral OTC 77,690 74,705 101,830 102,676
Total currencies 78,344 75,048 102,364 103,329
Exchange-traded 10,803 11,538 4,476 4,177
OTC-cleared 489 456 195 187
Bilateral OTC 36,707 30,745 9,320 13,691
Total commodities 47,999 42,739 13,991 18,055
Exchange-traded 42,055 41,626 29,006 31,944
OTC-cleared 8 7 – –
Bilateral OTC 41,624 49,790 47,867 49,072
Total equities 83,687 91,423 76,873 81,016
Subtotal 482,069 453,509 567,278 540,307
Accounted for as hedges
OTC-cleared 5 – 1 –
Bilateral OTC 1,000 – 1,346 –
Total interest rates 1,005 – 1,347 –
OTC-cleared 66 17 – 87
Bilateral OTC 195 122 4 372
Total currencies 261 139 4 459
Subtotal 1,266 139 1,351 459
Total gross fair value $ 483,335 $ 453,648 $ 568,629 $ 540,766
Offset in the consolidated balance sheets
Exchange-traded $ (46,978 ) $ (46,978 ) $ (29,549 ) $ (29,549 )
OTC-cleared (19,180 ) (19,180 ) (21,315 ) (21,315 )
Bilateral OTC (281,429 ) (281,429 ) (372,142 ) (372,142 )
Counterparty netting (347,587 ) (347,587 ) (423,006 ) (423,006 )
OTC-cleared (1,151 ) (430 ) (1,926 ) (720 )
Bilateral OTC (63,014 ) (52,125 ) (74,116 ) (58,449 )
Cash collateral netting (64,165 ) (52,555 ) (76,042 ) (59,169 )
Total amounts offset $(411,752 ) $(400,142 ) $(499,048 ) $(482,175 )
Included in the consolidated balance sheets
Exchange-traded $ 6,383 $ 6,664 $ 4,731 $ 7,254
OTC-cleared 432 242 325 196
Bilateral OTC 64,768 46,600 64,525 51,141
Total $ 71,583 $ 53,506 $ 69,581 $ 58,591
Not offset in the consolidated balance sheets
Cash collateral $ (1,092 ) $ (1,857 ) $ (979 ) $ (2,427 )
Securities collateral (15,932 ) (7,606 ) (17,297 ) (9,943 )
Total $ 54,559 $ 44,043 $ 51,305 $ 46,221
Notional Amounts as of
$ in millions September December
Not accounted for as hedges
Exchange-traded $ 2,802,116 $ 3,722,558
OTC-cleared 16,154,313 13,789,571
Bilateral OTC 11,610,308 11,076,460
Total interest rates 30,566,737 28,588,589
Exchange-traded 44 –
OTC-cleared 580,846 515,197
Bilateral OTC 595,708 558,813
Total credit 1,176,598 1,074,010
Exchange-traded 17,031 7,413
OTC-cleared 195,425 157,687
Bilateral OTC 6,667,786 6,041,663
Total currencies 6,880,242 6,206,763
Exchange-traded 354,299 242,193
OTC-cleared 2,596 2,315
Bilateral OTC 242,751 206,253
Total commodities 599,646 450,761
Exchange-traded 1,291,539 948,937
OTC-cleared 258 –
Bilateral OTC 1,318,136 1,126,572
Total equities 2,609,933 2,075,509
Subtotal 41,833,156 38,395,632
Accounted for as hedges
OTC-cleared 208,439 182,311
Bilateral OTC 5,021 6,641
Total interest rates 213,460 188,952
OTC-cleared 3,178 1,767
Bilateral OTC 19,514 14,055
Total currencies 22,692 15,822
Exchange-traded 986 –
Total commodities 986 –
Subtotal 237,138 204,774
Total notional amounts $42,070,294 $38,600,406 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 $18.23 billion as of September 2021 and $20.60 billion as of December 2020, and derivative liabilities of $18.45 billion as of September 2021 and $22.98 billion as of December 2020, 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 September 2021
Assets
Interest rates $ $ 254,940 $ $
Credit – 13,868 3,208 17,076
Currencies – 78,350 255 78,605
Commodities – 46,708 1,291 47,999
Equities 90 82,363 1,234 83,687
Gross fair value 186 476,229 6,920 483,335
Counterparty netting in levels – (344,083 ) (877 ) (344,960 )
Subtotal $ $ 132,146 $ 6,043 $
Cross-level counterparty netting (2,627 )
Cash collateral netting (64,165 )
Net fair value $ 71,583
Liabilities
Interest rates $ ) $(227,231 ) $ ) $(227,919 )
Credit – (14,891 ) (1,489 ) (16,380 )
Currencies – (74,813 ) (374 ) (75,187 )
Commodities – (41,961 ) (778 ) (42,739 )
Equities (82 ) (88,396 ) (2,945 ) (91,423 )
Gross fair value (85 ) (447,292 ) (6,271 ) (453,648 )
Counterparty netting in levels – 344,083 877 344,960
Subtotal $ (85 ) $(103,209 ) $(5,394 ) $(108,688 )
Cross-level counterparty netting 2,627
Cash collateral netting 52,555
Net fair value $ (53,506 )
As of December 2020
Assets
Interest rates $ 297 $ $ $
Credit – 13,104 3,451 16,555
Currencies – 102,221 147 102,368
Commodities – 13,285 706 13,991
Equities 75 75,054 1,744 76,873
Gross fair value 372 561,232 7,025 568,629
Counterparty netting in levels (135 ) (420,685 ) (1,058 ) (421,878 )
Subtotal $ 237 $ $ $
Cross-level counterparty netting (1,128 )
Cash collateral netting (76,042 )
Net fair value $ 69,581
Liabilities
Interest rates $(229 ) $ ) $ (710 ) $ (321,839 )
Credit – (14,395 ) (1,673 ) (16,068 )
Currencies – (103,303 ) (485 ) (103,788 )
Commodities – (17,649 ) (406 ) (18,055 )
Equities (318 ) (78,122 ) (2,576 ) (81,016 )
Gross fair value (547 ) (534,369 ) (5,850 ) (540,766 )
Counterparty netting in levels 135 420,685 1,058 421,878
Subtotal $(412 ) $ ) $ ) $ )
Cross-level counterparty netting 1,128
Cash collateral netting 59,169
Net fair value $ (58,591 ) 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.
As of September 2021 As of December 2020
$ in millions, except inputs Amount or Range Average/ Median Amount or Range Average/ Median
Interest rates, net $247 $267
Correlation 25% to 81% 63%/62% (8)% to 81% 56%/60%
Volatility (bps) 31 to 150 65/54 31 to 150 65/53
Credit, net $1,719 $1,778
Credit spreads (bps) 1 to 576 113/87 2 to 699 109/74
Upfront credit points 2 to 100 40/30 7 to 90 40/30
Recovery rates 20% to 90% 47%/40% 25% to 90% 46%/40%
Currencies, net $(119) $(338)
Correlation 20% to 70% 39%/41% 20% to 70% 39%/41%
Volatility 20% to 20% 20%/20% 18% to 18% 18%/18%
Commodities, net $513 $300
Volatility 15% to 152% 37%/33% 15% to 87% 32%/30%
Natural gas spread $(1.39) to $4.36 $(0.07)/ $(0.03) $(1.00) to $2.13 $(0.13)/ $(0.09)
Oil spread $(0.93) to $(0.74) $(0.84)/ $(0.84) $8.30 to $11.20 $9.73/ $9.55
Electricity price $9.95 to $55.76 $34.19/ $35.69 N/A N/A
Equities, net $(1,711) $(832)
Correlation (70)% to 99% 62%/71% (70)% to 100% 52%/55%
Volatility 4% to 153% 18%/19% 3% to 129% 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 amount 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 flow 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.
• Electricity price represents the price per megawatt hour of electricity. 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 Ended September Nine Months Ended September
$ in millions 2021 2020 2021 2020
Total level 3 derivatives, net
Beginning balance $ 567 $3,060 $ 1,175 $ 25
Net realized gains/(losses) (33 ) (8 ) 73 142
Net unrealized gains/(losses) 453 (315 ) 34 1,465
Purchases 92 93 439 345
Sales (366 ) (288 ) (1,058 ) 181
Settlements (264 ) (189 ) 99 182
Transfers into level 3 (112 ) – (79 ) (74 )
Transfers out of level 3 312 (199 ) (34 ) (112 )
Ending balance $ 649 $2,154 $ $2,154 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 Ended September Nine Months Ended September
$ in millions 2021 2020 2021 2020
Interest rates, net
Beginning balance $ 308 $ 311 $ 267 $ 89
Net realized gains/(losses) (60 ) 3 (11 ) 12
Net unrealized gains/(losses) (56 ) 54 38 201
Purchases – 11 67 18
Sales (24 ) 1 (72 ) (15 )
Settlements 101 (59 ) 23 (40 )
Transfers into level 3 (20 ) (53 ) (1 ) (14 )
Transfers out of level 3 (2 ) (13 ) (64 ) 4
Ending balance $ 247 $ 255 $ $ 255
Credit, net
Beginning balance $ 1,750 $2,327 $ 1,778 $ 1,877
Net realized gains/(losses) (22 ) (1 ) (33 ) 6
Net unrealized gains/(losses) 11 (124 ) 129 175
Purchases 18 16 62 35
Sales (35 ) (8 ) (62 ) (23 )
Settlements (22 ) (189 ) (9 ) (38 )
Transfers into level 3 15 26 (60 ) 4
Transfers out of level 3 4 (61 ) (86 ) (50 )
Ending balance $ 1,719 $1,986 $ 1,719 $ 1,986
Currencies, net
Beginning balance $ ) $ (94 ) $ ) $ (211 )
Net realized gains/(losses) 9 18 (29 ) 8
Net unrealized gains/(losses) 43 (143 ) (7 ) (118 )
Purchases 1 5 41 5
Sales (5 ) (12 ) (12 ) (7 )
Settlements 36 (34 ) 235 77
Transfers into level 3 (4 ) (1 ) (20 ) (2 )
Transfers out of level 3 35 6 11 (7 )
Ending balance $ ) $ (255 ) $ ) $ (255 )
Commodities, net
Beginning balance $ $ 331 $ $ 247
Net realized gains/(losses) (23 ) 16 (76 ) 65
Net unrealized gains/(losses) 196 (84 ) 348 38
Purchases 16 1 38 2
Sales (4 ) (7 ) (34 ) (20 )
Settlements 6 (20 ) (56 ) (64 )
Transfers into level 3 25 (12 ) 16 (24 )
Transfers out of level 3 31 (30 ) (23 ) (49 )
Ending balance $ $ 195 $ $ 195
Equities, net
Beginning balance $(1,523 ) $ 185 $ ) $(1,977 )
Net realized gains/(losses) 63 (44 ) 222 51
Net unrealized gains/(losses) 259 (18 ) (474 ) 1,169
Purchases 57 60 231 285
Sales (298 ) (262 ) (878 ) 246
Settlements (385 ) 113 (94 ) 247
Transfers into level 3 (128 ) 40 (14 ) (38 )
Transfers out of level 3 244 (101 ) 128 (10 )
Ending balance $(1,711 ) $ (27 ) $(1,711 ) $ (27 ) Level 3 Rollforward Commentary Three Months Ended September 2021. The net realized and unrealized gains on level 3 derivatives of $420 million (reflecting $33 million of net realized losses and $453 million of net unrealized gains) for the three months ended September 2021 included gains of $405 million reported in market making and $15 million reported in other principal transactions. The net unrealized gains on level 3 derivatives for the three months ended September 2021 were primarily attributable to gains on certain equity derivatives (primarily reflecting the impact of changes in equity prices) and gains on certain commodity derivatives (primarily reflecting the impact of an increase in commodity prices). Transfers into level 3 derivatives during the three months ended September 2021 primarily reflected transfers of certain equity derivative liabilities from level 2 (principally due to certain unobservable inputs becoming significant to the valuation of these derivatives). Transfers out of level 3 derivatives during the three months ended September 2021 primarily reflected transfers of certain equity derivative liabilities to level 2 (principally due to increased transparency of certain volatility inputs used to value these derivatives). Nine Months Ended September 2021. The net realized and unrealized gains on level 3 derivatives of $107 million (reflecting $73 million of net realized gains and $34 million of net unrealized gains) for the nine months ended September 2021 included gains of $62 million reported in market making and $45 million reported in other principal transactions. The net unrealized gains on level 3 derivatives for the nine months ended September 2021 were primarily attributable to gains on certain commodity derivatives (primarily reflecting the impact of an increase in commodity prices) and gains on certain credit derivatives (primarily reflecting the impact of changes in foreign exchange rates), partially offset by losses on certain equity derivatives (primarily reflecting the impact of an increase in equity prices). The drivers of transfers into level 3 derivatives during the nine months ended September 2021 were not material. Transfers out of level 3 derivatives during the nine months ended September 2021 primarily reflected transfers of certain equity derivative liabilities to level 2 (principally due to increased transparency of certain volatility inputs used to value these derivatives), partially offset by transfers of certain credit derivative assets to level 2 (principally due to certain unobservable credit spread inputs no longer being significant to the valuation of these derivatives). 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. 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 2021
Assets
Interest rates $ 6,226 $12,817 $60,548 $ 79,591
Credit 1,779 2,253 3,298 7,330
Currencies 13,252 6,038 6,822 26,112
Commodities 12,428 9,757 1,107 23,292
Equities 10,156 6,449 2,790 19,395
Counterparty netting in tenors (2,824 ) (2,854 ) (2,789 ) (8,467 )
Subtotal $41,017 $34,460 $71,776 $147,253
Cross-tenor counterparty netting (17,888 )
Cash collateral netting (64,165 )
Total OTC derivative assets $ 65,200
Liabilities
Interest rates $ 4,705 $10,129 $36,542 $ 51,376
Credit 1,758 2,573 2,303 6,634
Currencies 11,988 5,898 4,999 22,885
Commodities 7,996 6,465 2,835 17,296
Equities 10,555 13,658 3,348 27,561
Counterparty netting in tenors (2,824 ) (2,854 ) (2,789 ) (8,467 )
Subtotal $34,178 $35,869 $47,238 $117,285
Cross-tenor counterparty netting (17,888 )
Cash collateral netting (52,555 )
Total OTC derivative liabilities $ 46,842
As of December 2020
Assets
Interest rates $ 8,913 $20,145 $74,893 $103,951
Credit 822 3,270 3,302 7,394
Currencies 13,887 7,400 9,303 30,590
Commodities 2,998 1,466 488 4,952
Equities 12,182 12,590 1,807 26,579
Counterparty netting in tenors (3,963 ) (4,458 ) (3,182 ) (11,603 )
Subtotal $34,839 $40,413 $86,611 $161,863
Cross-tenor counterparty netting (20,971 )
Cash collateral netting (76,042 )
Total OTC derivative assets $ 64,850
Liabilities
Interest rates $ 5,687 $11,967 $49,301 $ 66,955
Credit 1,268 3,462 2,177 6,907
Currencies 18,770 7,575 5,775 32,120
Commodities 3,455 1,545 4,315 9,315
Equities 9,702 14,095 3,986 27,783
Counterparty netting in tenors (3,963 ) (4,458 ) (3,182 ) (11,603 )
Subtotal $34,919 $34,186 $62,372 $131,477
Cross-tenor counterparty netting (20,971 )
Cash collateral netting (59,169 )
Total OTC derivative liabilities $ 51,337 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 2021, written credit derivatives had a total gross notional amount of $564.94 billion and purchased credit derivatives had a total gross notional amount of $612.88 billion, for total net notional purchased protection of $47.94 billion. As of December 2020, written credit derivatives had a total gross notional amount of $515.85 billion and purchased credit derivatives had a total gross notional amount of $558.18 billion, for total net notional purchased protection of $42.33 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 2021
Maximum Payout/Notional Amount of Written Credit Derivatives by Tenor
Less than 1 year $105,584 $10,289 $ 807 $ 4,042 $120,722
1 – 5 years 332,858 24,819 4,838 3,563 366,078
Greater than 5 years 68,202 6,816 2,504 613 78,135
Total $506,644 $41,924 $8,149 $ 8,218 $564,935
Maximum Payout/Notional Amount of Purchased Credit Derivatives
Offsetting $440,512 $28,582 $6,350 $ 6,376 $481,820
Other $108,898 $19,072 $2,218 $ 870 $131,058
Fair Value of Written Credit Derivatives
Asset $ 10,165 $ 1,430 $ 295 $ 228 $ 12,118
Liability 894 991 597 1,608 4,090
Net asset/(liability) $ 9,271 $ 439 $ (302 ) $(1,380 ) $ 8,028
As of December 2020
Maximum Payout/Notional Amount of Written Credit Derivatives by Tenor
Less than 1 year $ 96,049 $ 5,826 $ 450 $ $104,728
1 – 5 years 331,145 17,913 8,801 4,932 362,791
Greater than 5 years 44,132 3,839 272 88 48,331
Total $471,326 $27,578 $9,523 $ $515,850
Maximum Payout/Notional Amount of Purchased Credit Derivatives
Offsetting $407,315 $19,822 $8,679 $ $442,907
Other $103,604 $ 7,272 $3,619 $776 $115,271
Fair Value of Written Credit Derivatives
Asset $ 10,302 $ 638 $ 256 $ $ 11,314
Liability 1,112 1,119 387 2,001 4,619
Net asset/(liability) $ 9,190 $ (481 ) $ (131 ) $ ) $ 6,695 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 represent the gains or losses (including hedges) attributable to the impact of changes in credit exposure, counterparty credit spreads, liability funding spreads (which include 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 represent 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 2021 2020 2021 2020
CVA, net of hedges $49 $103 $(14 ) $ 52
FVA, net of hedges 17 101 54 (78 )
Total $66 $204 $ 40 $(26 ) 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 $ 881 $ 1,450
Fair value of liabilities (1,389 ) (1,220 )
Net asset/(liability) $ (508 ) $ 230
Notional amount $11,765 $12,548 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 $36,431 $43,368
Collateral posted $30,647 $35,296
Additional collateral or termination payments:
One-notch $ 331 $ 481
Two-notch $ 1,353 $ 1,388 Hedge Accounting The firm applies hedge accounting for (i) 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 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 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 (SOFR) 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., 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 interest rate fair value hedges, gains or losses on derivatives are included in interest expense. The change in fair |
