| 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 basis. The offsetting impact of this economic hedging is reflected in the same business segment as the related revenues. In addition, the firm may enter into derivatives designated as hedges under U.S. GAAP. These derivatives are used to manage interest rate exposure of certain fixed-rate unsecured borrowings and deposits, foreign exchange risk of certain available-for-sale securities and the net investment in certain 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 meet
As of December 2021 As of December 2020
$ in millions Derivative Assets Derivative Liabilities Derivative Assets Derivative Liabilities
Not accounted for as hedges
Exchange-traded $ 256 $ 557 $ $
OTC-cleared 13,795 12,692 18,832 16,809
Bilateral OTC 232,595 205,073 337,998 304,370
Total interest rates 246,646 218,322 357,495 321,839
OTC-cleared 3,665 4,053 4,137 4,517
Bilateral OTC 12,591 11,702 12,418 11,551
Total credit 16,256 15,755 16,555 16,068
Exchange-traded 417 10 133 22
OTC-cleared 423 338 401 631
Bilateral OTC 86,076 85,795 101,830 102,676
Total currencies 86,916 86,143 102,364 103,329
Exchange-traded 6,534 6,189 4,476 4,177
OTC-cleared 652 373 195 187
Bilateral OTC 28,359 25,969 9,320 13,691
Total commodities 35,545 32,531 13,991 18,055
Exchange-traded 33,840 35,518 29,006 31,944
OTC-cleared 8 5 – –
Bilateral OTC 39,718 44,750 47,867 49,072
Total equities 73,566 80,273 76,873 81,016
Subtotal 458,929 433,024 567,278 540,307
Accounted for as hedges
OTC-cleared 1 – 1 –
Bilateral OTC 945 – 1,346 –
Total interest rates 946 – 1,347 –
OTC-cleared 34 27 – 87
Bilateral OTC 60 139 4 372
Total currencies 94 166 4 459
Subtotal 1,040 166 1,351 459
Total gross fair value $ 459,969 $ 433,190 $ $
Offset in the consolidated balance sheets
Exchange-traded $ (35,724 ) $ (35,724 ) $ (29,549 ) $ (29,549 )
OTC-cleared (16,979 ) (16,979 ) (21,315 ) (21,315 )
Bilateral OTC (279,189 ) (279,189 ) (372,142 ) (372,142 )
Counterparty netting (331,892 ) (331,892 ) (423,006 ) (423,006 )
OTC-cleared (1,033 ) (361 ) (1,926 ) (720 )
Bilateral OTC (63,084 ) (48,984 ) (74,116 ) (58,449 )
Cash collateral netting (64,117 ) (49,345 ) (76,042 ) (59,169 )
Total amounts offset $(396,009 ) $(381,237 ) $(499,048 ) $(482,175 )
Included in the consolidated balance sheets
Exchange-traded $ 5,323 $ 6,550 $ $
OTC-cleared 566 148 325 196
Bilateral OTC 58,071 45,255 64,525 51,141
Total $ 63,960 $ 51,953 $ $
Not offset in the consolidated balance sheets
Cash collateral $ (1,008 ) $ (1,939 ) $ ) $ (2,427 )
Securities collateral (15,751 ) (7,349 ) (17,297 ) (9,943 )
Total $ 47,201 $ 42,665 $ $
Notional Amounts as of December
$ in millions 2021 2020
Not accounted for as hedges
Exchange-traded $ 2,630,915 $ 3,722,558
OTC-cleared 17,874,504 13,789,571
Bilateral OTC 11,122,871 11,076,460
Total interest rates 31,628,290 28,588,589
OTC-cleared 463,477 515,197
Bilateral OTC 616,095 558,813
Total credit 1,079,572 1,074,010
Exchange-traded 14,617 7,413
OTC-cleared 194,124 157,687
Bilateral OTC 6,606,927 6,041,663
Total currencies 6,815,668 6,206,763
Exchange-traded 308,917 242,193
OTC-cleared 3,647 2,315
Bilateral OTC 234,322 206,253
Total commodities 546,886 450,761
Exchange-traded 1,149,777 948,937
OTC-cleared 198 –
Bilateral OTC 1,173,103 1,126,572
Total equities 2,323,078 2,075,509
Subtotal 42,393,494 38,395,632
Accounted for as hedges
OTC-cleared 219,083 182,311
Bilateral OTC 4,499 6,641
Total interest rates 223,582 188,952
OTC-cleared 2,758 1,767
Bilateral OTC 18,658 14,055
Total currencies 21,416 15,822
Exchange-traded 1,050 –
Total commodities 1,050 –
Subtotal 246,048 204,774
Total notional amounts $42,639,542 $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 $17.48 billion as of December 2021 and $20.60 billion as of December 2020, and derivative liabilities of $17.29 billion as of December 2021 and $22.98 billion as of December 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 2021
Assets
Interest rates $ 2 $ 246,525 $ 1,065 $ 247,592
Credit – 12,823 3,433 16,256
Currencies – 86,773 237 87,010
Commodities – 34,501 1,044 35,545
Equities 33 72,570 963 73,566
Gross fair value 35 453,192 6,742 459,969
Counterparty netting in levels – (329,164 ) (804 ) (329,968 )
Subtotal $ 35 $ 124,028 $ 5,938 $ 130,001
Cross-level counterparty netting (1,924 )
Cash collateral netting (64,117 )
Net fair value $ 63,960
Liabilities
Interest rates $ ) $(217,438 ) $ (882 ) $(218,322 )
Credit – (14,176 ) (1,579 ) (15,755 )
Currencies – (85,925 ) (384 ) (86,309 )
Commodities – (31,925 ) (606 ) (32,531 )
Equities (29 ) (77,393 ) (2,851 ) (80,273 )
Gross fair value (31 ) (426,857 ) (6,302 ) (433,190 )
Counterparty netting in levels – 329,164 804 329,968
Subtotal $ ) $ (97,693 ) $(5,498 ) $(103,222 )
Cross-level counterparty netting 1,924
Cash collateral netting 49,345
Net fair value $ (51,953 )
As of December 2020
Assets
Interest rates $ $ $ $
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 $ $ $ $
Cross-level counterparty netting (1,128 )
Cash collateral netting (76,042 )
Net fair value $
Liabilities
Interest rates $(229 ) $ ) $ (710 ) $ )
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 December 2021 As of December 2020
$ in millions, except inputs Amount or Range Average/ Median Amount or Range Average/ Median
Interest rates, net $183 $267
Correlation 25% to 81% 63%/62% (8)% to 81% 56%/60%
Volatility (bps) 31 to 100 59/54 31 to 150 65/53
Credit, net $1,854 $1,778
Credit spreads (bps) 1 to 568 136/107 2 to 699 109/74
Upfront credit points 2 to 100 34/26 7 to 90 40/30
Recovery rates 20% to 50% 37%/40% 25% to 90% 46%/40%
Currencies, net $(147) $(338)
Correlation 20% to 71% 40%/41% 20% to 70% 39%/41%
Volatility 19% to 19% 19%/19% 18% to 18% 18%/18%
Commodities, net $438 $300
Volatility 15% to 93% 32%/29% 15% to 87% 32%/30%
Natural gas spread $(1.33) to $2.60 $(0.11)/ $(1.00) to $2.13 $(0.13)/ $(0.09)
Oil spread $8.64 to $13.36/ $12.69 $8.30 to $11.20 $9.73/ $9.55
Electricity price $1.50 to $37.42/ $32.20 N/A N/A
Equities, net $(1,888) $(832)
Correlation (70)% to 99% 59%/62% (70)% to 100% 52%/55%
Volatility 3% to 150% 17%/17% 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.
Year Ended December
$ in millions 2021 2020
Total level 3 derivatives, net
Beginning balance $ 1,175 $ 25
Net realized gains/(losses) 265 226
Net unrealized gains/(losses) 452 612
Purchases 501 319
Sales (1,541 ) (724 )
Settlements (59 ) 750
Transfers into level 3 (131 ) (40 )
Transfers out of level 3 (222 ) 7
Ending balance $ 440 $1,175 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 2021 2020
Interest rates, net
Beginning balance $ 267 $ 89
Net realized gains/(losses) 72 12
Net unrealized gains/(losses) 316 226
Purchases 124 12
Sales (341 ) (28 )
Settlements 18 (34 )
Transfers into level 3 2 (13 )
Transfers out of level 3 (275 ) 3
Ending balance $ 183 $ 267
Credit, net
Beginning balance $ 1,778 $ 1,877
Net realized gains/(losses) (21 ) 28
Net unrealized gains/(losses) 409 110
Purchases 53 39
Sales (217 ) (50 )
Settlements (77 ) (229 )
Transfers into level 3 (70 ) 47
Transfers out of level 3 (1 ) (44 )
Ending balance $ 1,854 $ 1,778
Currencies, net
Beginning balance $ (338 ) $ (211 )
Net realized gains/(losses) 9 (8 )
Net unrealized gains/(losses) 155 (210 )
Purchases 7 1
Sales (10 ) (20 )
Settlements 32 117
Transfers into level 3 (17 ) (2 )
Transfers out of level 3 15 (5 )
Ending balance $ (147 ) $ (338 )
Commodities, net
Beginning balance $ 300 $ 247
Net realized gains/(losses) (80 ) (12 )
Net unrealized gains/(losses) 355 159
Purchases 42 37
Sales (15 ) (22 )
Settlements (149 ) (60 )
Transfers into level 3 (3 ) (27 )
Transfers out of level 3 (12 ) (22 )
Ending balance $ 438 $ 300
Equities, net
Beginning balance $ (832 ) $(1,977 )
Net realized gains/(losses) 285 206
Net unrealized gains/(losses) (783 ) 327
Purchases 275 230
Sales (958 ) (604 )
Settlements 117 956
Transfers into level 3 (43 ) (45 )
Transfers out of level 3 51 75
Ending balance $(1,888 ) $ (832 ) Level 3 Rollforward Commentary Year Ended December 2021. The net realized and unrealized gains on level 3 derivatives of $717 million (reflecting $265 million of net realized gains and $452 million of net unrealized gains) for 2021 included gains of $700 million reported in market making and gains of $17 million reported in other principal transactions. The net unrealized gains on level 3 derivatives for 2021 were primarily attributable to gains on certain credit and currency derivatives (in each case, primarily reflecting the impact of changes in foreign exchange rates), gains on certain commodity derivatives (primarily reflecting the impact of an increase in commodity prices) and gains on certain interest rate derivatives (primarily reflecting the impact of an increase in interest 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 2021 were not material. Transfers out of level 3 derivatives during 2021 primarily reflected transfers of certain interest rate derivative assets to level 2 (principally due to increased transparency of certain volatility inputs used to value these derivatives). Year Ended December 2020. The net realized and unrealized gains on level 3 derivatives of $838 million (reflecting $226 million of net realized gains and $612 million of net unrealized gains) for 2020 included gains of $900 million reported in market making and losses of $62 million reported in other principal transactions. The net unrealized gains on level 3 derivatives for 2020 were primarily attributable to gains on certain equity derivatives (primarily reflecting the impact of an increase in equity prices), gains on certain interest rate derivatives (primarily reflecting the impact of a decrease in interest rates and changes in foreign exchange rates), gains on certain commodity derivatives (primarily reflecting the impact of changes in commodity prices), and gains on certain credit derivatives (primarily reflecting the impact of a decrease in interest rates), partially offset by losses on certain currency derivatives (primarily reflecting the impact of changes in foreign exchange rates and a decrease in interest rates). The drivers of both transfers into level 3 derivatives and transfers out of level 3 derivatives during 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 December 2021
Assets
Interest rates $ 6,076 $11,655 $61,380 $ 79,111
Credit 1,800 2,381 3,113 7,294
Currencies 13,366 6,642 6,570 26,578
Commodities 10,178 7,348 770 18,296
Equities 11,075 6,592 2,100 19,767
Counterparty netting in tenors (3,624 ) (3,357 ) (2,673 ) (9,654 )
Subtotal $38,871 $31,261 $71,260 $141,392
Cross-tenor counterparty netting (18,638 )
Cash collateral netting (64,117 )
Total OTC derivative assets $ 58,637
Liabilities
Interest rates $ 3,929 $10,932 $34,676 $ 49,537
Credit 1,695 3,257 1,841 6,793
Currencies 14,122 6,581 5,580 26,283
Commodities 7,591 6,274 1,763 15,628
Equities 8,268 12,944 3,587 24,799
Counterparty netting in tenors (3,624 ) (3,357 ) (2,673 ) (9,654 )
Subtotal $31,981 $36,631 $44,774 $113,386
Cross-tenor counterparty netting (18,638 )
Cash collateral netting (49,345 )
Total OTC derivative liabilities $ 45,403
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 December 2021, written credit derivatives had a total gross notional amount of $510.24 billion and purchased credit derivatives had a total gross notional amount of $569.34 billion, for total net notional purchased protection of $59.10 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 - 500 501 - Greater 1,000 Total
As of December 2021
Maximum Payout/Notional Amount of Written Credit Derivatives by Tenor
Less than 1 year $120,456 $ 6,173 $ 1,656 $ 4,314 $132,599
1 - 5 years 305,255 14,328 12,754 3,814 336,151
Greater than 5 years 35,558 3,087 2,529 311 41,485
Total $461,269 $23,588 $16,939 $ 8,439 $510,235
Maximum Payout/Notional Amount of Purchased Credit Derivatives
Offsetting $381,715 $17,210 $12,806 $ 6,714 $418,445
Other $138,214 $ 7,780 $ 3,576 $ 1,322 $150,892
Fair Value of Written Credit Derivatives
Asset $ 9,803 $ 924 $ 318 $ 137 $ 11,182
Liability 941 123 1,666 1,933 4,663
Net asset/(liability) $ 8,862 $ 801 $ (1,348 ) $(1,796 ) $ 6,519
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 $ $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.
Year Ended December
$ in millions 2021 2020 2019
CVA, net of hedges $25 $(143 ) $(289 )
FVA, net of hedges 60 173 485
Total $85 $ 30 $ 196 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 2021 2020
Fair value of assets $ 845 $ 1,450
Fair value of liabilities (124 ) (1,220 )
Net asset/(liability) $ 721 $ 230
Notional amount $10,743 $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 December
$ in millions 2021 2020
Net derivative liabilities under bilateral agreements $34,315 $43,368
Collateral posted $29,214 $35,296
Additional collateral or termination payments:
One-notch $ 345 $ 481
Two-notch $ 1,536 $ 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 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 in 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 2021 2020 2019
Interest rate hedges $(6,638 ) $ 3,862 $ 3,196
Hedged borrowings and deposits $ 6,085 $(4,557 ) $ )
Interest expense $ 5,650 $ 8,938 $17,376 The table below presents the carrying value of deposits and unsecured borrowings that are 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 Cumulative
As of December 2021
Deposits $ 14,131 $ 246
Unsecured short-term borrowings $ 2,167 $ 5
Unsecured long-term borrowings $144,934 $ 6,169
As of December 2020
Deposits $ 17,303 $ 649
Unsecured short-term borrowings $ 5,976 $ 53
Unsecured long-term borrowings $115,242 $11,624 In the table above, cumulative hedging adjustment included $5.91 billion as of December 2021 and $6.34 billion as of December 2020 of hedging adjustments from prior hedging relationships that were de-designated In addition, The firm designates foreign exchange forward contracts as fair value hedges of the foreign exchange risk of non-U.S. available-for-sale. available-for-sale During 2021, the firm designated commodity futures contracts as fair value hedges of the price risk of certain precious metals included in commodities within trading assets. As of December 2021, the carrying value of such commodities was $1.05 billion and the amortized cost was $1.02 billion. Changes in spot rates of such commodities are reflected as an adjustment to their carrying value, and the related gains/(losses) on both the commodities and the designated futures contracts are included in market making. The contractual forward points on the designated futures contracts are amortized into earnings ratably over the life of the contract and other gains/(losses) as a result of changes in the forward points are in |
