| 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 securities collateral posted and received under enforceable credit support agreements that do not meet the criteria for netting under U.S. GAAP.
As of June 2022 As of December 2021
$ in millions Derivative Derivative Derivative Derivative
Not accounted for as hedges
Exchange-traded $ 1,087 $ 1,424 $ 256 $ 557
OTC-cleared 41,053 40,041 13,795 12,692
Bilateral OTC 193,273 166,941 232,595 205,073
Total interest rates 235,413 208,406 246,646 218,322
OTC-cleared 1,317 1,432 3,665 4,053
Bilateral OTC 15,534 13,927 12,591 11,702
Total credit 16,851 15,359 16,256 15,755
Exchange-traded 94 45 417 10
OTC-cleared 933 587 423 338
Bilateral OTC 117,437 118,184 86,076 85,795
Total currencies 118,464 118,816 86,916 86,143
Exchange-traded 15,609 15,494 6,534 6,189
OTC-cleared 871 971 652 373
Bilateral OTC 49,924 38,894 28,359 25,969
Total commodities 66,404 55,359 35,545 32,531
Exchange-traded 29,992 32,662 33,840 35,518
OTC-cleared 12 14 8 5
Bilateral OTC 34,746 40,475 39,718 44,750
Total equities 64,750 73,151 73,566 80,273
Subtotal 501,882 471,091 458,929 433,024
Accounted for as hedges
OTC-cleared 2 58 1 –
Bilateral OTC 519 9 945 –
Total interest rates 521 67 946 –
OTC-cleared 41 3 34 27
Bilateral OTC 579 55 60 139
Total currencies 620 58 94 166
Subtotal 1,141 125 1,040 166
Total gross fair value $ 503,023 $ 471,216 $ 459,969 $ 433,190
Offset in the consolidated balance sheets
Exchange-traded $ (40,580 ) $ (40,580 ) $ (35,724 ) $ (35,724 )
OTC-cleared (42,280 ) (42,280 ) (16,979 ) (16,979 )
Bilateral OTC (277,167 ) (277,167 ) (279,189 ) (279,189 )
Counterparty netting (360,027 ) (360,027 ) (331,892 ) (331,892 )
OTC-cleared (1,147 ) (108 ) (1,033 ) (361 )
Bilateral OTC (65,535 ) (47,302 ) (63,084 ) (48,984 )
Cash collateral netting (66,682 ) (47,410 ) (64,117 ) (49,345 )
Total amounts offset $(426,709 ) $(407,437 ) $(396,009 ) $(381,237 )
Included in the consolidated balance sheets
Exchange-traded $ 6,202 $ 9,045 $ 5,323 $ 6,550
OTC-cleared 802 718 566 148
Bilateral OTC 69,310 54,016 58,071 45,255
Total $ 76,314 $ 63,779 $ 63,960 $ 51,953
Not offset in the consolidated balance sheets
Cash collateral $ (572 ) $ (2,795 ) $ (1,008 ) $ (1,939 )
Securities collateral (16,914 ) (4,441 ) (15,751 ) (7,349 )
Total $ 58,828 $ 56,543 $ 47,201 $ 42,665
Notional Amounts as of
$ in millions June 2022 December
Not accounted for as hedges
Exchange-traded $ 3,251,469 $ 2,630,915
OTC-cleared 19,359,538 17,874,504
Bilateral OTC 10,607,894 11,122,871
Total interest rates 33,218,901 31,628,290
Exchange-traded 38 –
OTC-cleared 440,236 463,477
Bilateral OTC 592,007 616,095
Total credit 1,032,281 1,079,572
Exchange-traded 15,206 14,617
OTC-cleared 220,454 194,124
Bilateral OTC 5,970,998 6,606,927
Total currencies 6,206,658 6,815,668
Exchange-traded 417,329 308,917
OTC-cleared 3,911 3,647
Bilateral OTC 253,638 234,322
Total commodities 674,878 546,886
Exchange-traded 1,190,917 1,149,777
OTC-cleared 297 198
Bilateral OTC 1,097,269 1,173,103
Total equities 2,288,483 2,323,078
Subtotal 43,421,201 42,393,494
Accounted for as hedges
OTC-cleared 249,222 219,083
Bilateral OTC 3,495 4,499
Total interest rates 252,717 223,582
OTC-cleared 3,351 2,758
Bilateral OTC 20,133 18,658
Total currencies 23,484 21,416
Exchange-traded – 1,050
Total commodities – 1,050
Subtotal 276,201 246,048
Total notional amounts $43,697,402 $42,639,542 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 $14.45 billion as of June 2022 and $17.48 billion as of December 2021, and derivative liabilities of $17.55 billion as of June 2022 and $17.29 billion as of December 2021, 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 June 2022
Assets
Interest rates $ 34 $ 234,108 $ 1,792 $ 235,934
Credit – 13,372 3,479 16,851
Currencies – 118,706 378 119,084
Commodities – 63,981 2,423 66,404
Equities 40 63,157 1,553 64,750
Gross fair value 74 493,324 9,625 503,023
Counterparty netting in levels – (355,234 ) (1,277 ) (356,511 )
Subtotal $ 74 $ 138,090 $ 8,348 $ 146,512
Cross-level counterparty netting (3,516 )
Cash collateral netting (66,682 )
Net fair value $ 76,314
Liabilities
Interest rates $ (9 ) $(207,707 ) $ (757 ) $(208,473 )
Credit – (14,044 ) (1,315 ) (15,359 )
Currencies – (118,257 ) (617 ) (118,874 )
Commodities – (54,371 ) (988 ) (55,359 )
Equities (19 ) (70,358 ) (2,774 ) (73,151 )
Gross fair value (28 ) (464,737 ) (6,451 ) (471,216 )
Counterparty netting in levels – 355,234 1,277 356,511
Subtotal $(28 ) $(109,503 ) $(5,174 ) $(114,705 )
Cross-level counterparty netting 3,516
Cash collateral netting 47,410
Net fair value $ (63,779 )
As of December 2021
Assets
Interest rates $ $ $ $
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 $ $ $ $
Cross-level counterparty netting (1,924 )
Cash collateral netting (64,117 )
Net fair value $
Liabilities
Interest rates $ ) $ ) $ ) $ )
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 $ ) $ ) $ ) $ )
Cross-level counterparty netting 1,924
Cash collateral netting 49,345
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.
As of June 2022 As of December 2021
$ in millions, except inputs Amount or Range Average/ Median Amount or Range Average/ Median
Interest rates, net $1,035 $183
Correlation (10)% to 81% 59%/62% 25% to 81% 63%/62%
Volatility (bps) 31 to 100 63/61 31 to 100 59/54
Credit, net $2,164 $1,854
Credit spreads (bps) 6 to 910 197/123 1 to 568 136/107
Upfront credit points 1 to 100 41/35 2 to 100 34/26
Recovery rates 20% to 75% 42%/40% 20% to 50% 37%/40%
Currencies, net $(239) $(147)
Correlation 20% to 71% 40%/41% 20% to 71% 40%/41%
Volatility 21% to 21% 21%/21% 19% to 19% 19%/19%
Commodities, net $1,435 $438
Volatility 27% to 127% 48%/41% 15% to 93% 32%/29%
Natural gas spread $(2.29) to $9.78 $(0.14)/ $(0.18) $(1.33) to $2.60 $(0.11)/ $(0.07)
Oil spread $(5.00) to $46.27 $19.89/ $13.68 $8.64 to $22.68 $13.36/ $12.69
Electricity price $2.70 to $568.77 $57.43/ $46.08 $1.50 to $289.96 $37.42/ $32.20
Equities, net $(1,221) $(1,888)
Correlation (70)% to 99% 64%/68% (70)% to 99% 59%/62%
Volatility 2% to 111% 18%/20% 3% to 150% 17%/17% 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 June Six Months Ended June
$ in millions 2022 2021 2022 2021
Total level 3 derivatives, net
Beginning balance $ 915 $ 645 $ 440 $1,175
Net realized gains/(losses) 97 119 329 73
Net unrealized gains/(losses) 2,084 (408 ) 3,225 (458 )
Purchases 128 29 187 134
Sales (704 ) (294 ) (1,345 ) (756 )
Settlements 791 568 583 509
Transfers into level 3 149 (260 ) 76 (181 )
Transfers out of level 3 (286 ) 168 (321 ) 71
Ending balance $3,174 $ 567 $ $ 567 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 June Six Months Ended June
$ in millions 2022 2021 2022 2021
Interest rates, net
Beginning balance $ $ 319 $ $ 267
Net realized gains/(losses) 1 33 (41 ) 56
Net unrealized gains/(losses) 286 (42 ) 909 97
Purchases 44 – 64 2
Sales (37 ) (33 ) (69 ) (55 )
Settlements 301 60 160 6
Transfers into level 3 21 (1 ) 4 2
Transfers out of level 3 96 (28 ) (175 ) (67 )
Ending balance $ 1,035 $ 308 $ 1,035 $ 308
Credit, net
Beginning balance $ 1,834 $ 1,875 $ 1,854 $ 1,778
Net realized gains/(losses) (41 ) 5 (28 ) (14 )
Net unrealized gains/(losses) 384 18 188 29
Purchases 5 10 20 8
Sales (48 ) (26 ) (53 ) (28 )
Settlements 19 6 180 49
Transfers into level 3 36 (82 ) 27 (36 )
Transfers out of level 3 (25 ) (56 ) (24 ) (36 )
Ending balance $ 2,164 $ 1,750 $ 2,164 $ 1,750
Currencies, net
Beginning balance $ ) $ (289 ) $ ) $ (338 )
Net realized gains/(losses) 39 28 46 28
Net unrealized gains/(losses) (21 ) (169 ) 11 (90 )
Purchases – 1 1 4
Sales (6 ) (30 ) (8 ) (36 )
Settlements 5 272 13 245
Transfers into level 3 (121 ) (57 ) (129 ) (70 )
Transfers out of level 3 – 10 (26 ) 23
Ending balance $ ) $ (234 ) $ ) $ (234 )
Commodities, net
Beginning balance $ $ 212 $ $ 300
Net realized gains/(losses) (26 ) 9 49 (59 )
Net unrealized gains/(losses) 806 135 1,195 129
Purchases 13 4 27 16
Sales (11 ) (2 ) (131 ) (8 )
Settlements 33 (67 ) (44 ) (84 )
Transfers into level 3 218 (3 ) 174 (17 )
Transfers out of level 3 (426 ) (22 ) (273 ) (11 )
Ending balance $ 1,435 $ 266 $ 1,435 $ 266
Equities, net
Beginning balance $(1,935 ) $(1,472 ) $(1,888 ) $ (832 )
Net realized gains/(losses) 124 44 303 62
Net unrealized gains/(losses) 629 (350 ) 922 (623 )
Purchases 66 14 75 104
Sales (602 ) (203 ) (1,084 ) (629 )
Settlements 433 297 274 293
Transfers into level 3 (5 ) (117 ) – (60 )
Transfers out of level 3 69 264 177 162
Ending balance $(1,221 ) $(1,523 ) $(1,221 ) $(1,523 ) Level 3 Rollforward Commentary Three Months Ended June 2022. The net realized and unrealized gains on level 3 derivatives of $2.18 billion (reflecting $97 million of net realized gains and $2.08 billion of net unrealized gains) for the three months ended June 2022 included gains of $2.18 billion reported in market making and gains of $1 million reported in other principal transactions. The net unrealized gains on level 3 derivatives for the three months ended June 2022 were primarily attributable to gains on certain commodity derivatives (primarily reflecting the impact of an increase in commodity prices), gains on certain equity derivatives (primarily reflecting the impact of a decrease in equity prices), and gains on certain credit derivatives and interest rate derivatives (in each case, primarily reflecting the impact of an increase in interest rates). Transfers into level 3 derivatives during the three months ended June 2022 primarily reflected transfers of certain commodity derivative assets from level 2 (principally due to decreased transparency of certain electricity price inputs used to value these derivatives), partially offset by transfers of certain currency derivative liabilities from level 2 (principally due to decreased transparency of certain interest rate inputs used to value these derivatives). Transfers out of level 3 derivatives during the three months ended June 2022 Six Months Ended June 2022. The net realized and unrealized gains on level 3 derivatives of $3.55 billion (reflecting $329 million of net realized gains and $3.23 billion of net unrealized gains) for the six months ended June 2022 included gains of $3.55 billion reported in market making and gains of $8 million reported in other principal transactions. The net unrealized gains on level 3 derivatives for the six months ended June 2022 were primarily attributable to gains on certain commodity derivatives (primarily reflecting the impact of an increase in commodity prices), gains on certain equity derivatives (primarily reflecting the impact of a decrease in equity prices), and gains on certain interest rate derivatives and credit derivatives ( in each case, Transfers into level 3 derivatives during the six months ended June 2022 primarily reflected transfers of certain commodity derivative assets from level 2 (principally due to decreased transparency of certain electricity price inputs used to value these derivatives), partially offset by transfers of certain currency derivative liabilities from level 2 (principally due to decreased transparency of certain interest rate inputs used to value these derivatives). Transfers out of level 3 derivatives during the six months ended June 2022 primarily reflected transfers of certain commodity derivative assets to level 2 (principally due to certain correlation inputs no longer being significant to the valuation of these derivatives) and transfers of certain interest rate derivative assets to level 2 (principally due to increased transparency of certain unobservable volatility inputs used to value these derivatives), partially offset by transfers of certain equity derivative liabilities to level 2 (principally due to increased transparency of certain unobservable volatility inputs used to value these derivatives). Three Months Ended June 2021. The net realized and unrealized losses on level 3 derivatives of $289 million (reflecting $119 million of net realized gains and $408 million of net unrealized losses) for the three months ended June 2021 included gains/(losses) of $(307) million reported in market making and $18 million reported in other principal transactions. The net unrealized losses on level 3 derivatives for the three months ended June 2021 were primarily attributable to losses on certain equity derivatives (primarily reflecting the impact of an increase in equity prices) and losses on certain currency derivatives (primarily reflecting the impact of changes in foreign exchange rates), partially offset by 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 June 2021 primarily reflected transfers of certain equity derivative liabilities from level 2 (principally due to reduced transparency of certain volatility inputs used to value these derivatives) and transfers of certain credit derivative liabilities from level 2 (principally due to certain unobservable credit spread inputs becoming significant to the valuation of these derivatives). Transfers out of level 3 derivatives during the three months ended June 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). Six Months Ended June 2021. The net realized and unrealized losses on level 3 derivatives of $385 million (reflecting $73 million of net realized gains and $458 million of net unrealized losses) for the six months ended June 2021 included gains/(losses) of $(407) million reported in market making and $22 million reported in other principal transactions. The net unrealized losses on level 3 derivatives for the six months ended June 2021 were primarily attributable to losses on certain equity derivatives (primarily reflecting the impact of an increase in equity prices), partially offset by gains on certain commodity derivatives (primarily reflecting the impact of an increase in commodity prices). The drivers of transfers into level 3 derivatives during the six months ended June 2021 were not material. Transfers out of level 3 derivatives during the six months ended June 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 interest rate derivative assets to level 2 (principally due to certain unobservable inputs no longer being significant to the valuation of these derivatives). OTC Derivatives The table below presents OTC derivative assets and liabilities by tenor and major product type.
$ in millions Less than 1 Year 1 - 5 Greater than 5 Years Total
As of June 2022
Assets
Interest rates $ 8,677 $14,667 $49,972 $ 73,316
Credit 1,710 3,394 2,790 7,894
Currencies 19,818 8,265 6,708 34,791
Commodities 20,427 11,276 1,823 33,526
Equities 9,064 5,022 2,833 16,919
Counterparty netting in tenors (4,294 ) (3,927 ) (3,823 ) (12,044 )
Subtotal $55,402 $38,697 $60,303 $154,402
Cross-tenor counterparty netting (17,608 )
Cash collateral netting (66,682 )
Total OTC derivative assets $ 70,112
Liabilities
Interest rates $ 6,934 $17,809 $20,774 $ 45,517
Credit 1,891 3,255 1,256 6,402
Currencies 17,581 9,049 8,001 34,631
Commodities 12,209 9,345 1,042 22,596
Equities 11,569 8,318 2,763 22,650
Counterparty netting in tenors (4,294 ) (3,927 ) (3,823 ) (12,044 )
Subtotal $45,890 $43,849 $30,013 $119,752
Cross-tenor counterparty netting (17,608 )
Cash collateral netting (47,410 )
Total OTC derivative liabilities $ 54,734
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 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 June 2022, written credit derivatives had a total gross notional amount of $491.06 billion and purchased credit derivatives had a total gross notional amount of $541.22 billion, for total net notional purchased protection of $50.16 billion. 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. The firm’s written and purchased credit derivatives primarily consist of credit default swaps. The table below presents information about credit derivatives.
Credit Spread on Underlier (basis points)
$ in millions 0 – 250 251 – 500 501 – 1,000 Greater than 1,000 Total
As of June 2022
Maximum Payout/Notional Amount of Written Credit Derivatives by Tenor
Less than 1 year $100,879 $ 2,517 $12,006 $ 6,002 $121,404
1 – 5 years 256,472 33,827 20,131 15,650 326,080
Greater than 5 years 35,946 3,708 3,354 567 43,575
Total $393,297 $40,052 $35,491 $22,219 $491,059
Maximum Payout/Notional Amount of Purchased Credit Derivatives
Offsetting $318,748 $35,115 $23,404 $18,850 $396,117
Other $120,903 $ 8,142 $12,958 $ 3,102 $145,105
Fair Value of Written Credit Derivatives
Asset $ 3,435 $ 358 $ 235 $ 277 $ 4,305
Liability 2,437 1,269 2,339 6,151 12,196
Net asset/(liability) $ 998 $ ) $ ) $ ) $ (7,891 )
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 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 Ended June Six Months Ended June
$ in millions 2022 2021 2022 2021
CVA, net of hedges $ 217 $45 $ 300 $(63 )
FVA, net of hedges (122 ) 25 (391 ) 37
Total $ 95 $70 $ (91 ) $(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 June 2022 December 2021
Fair value of assets $ 319 $ 845
Fair value of liabilities (177 ) (124 )
Net asset/(liability) $ 142 $ 721
Notional amount $8,692 $10,743 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 June 2022 December 2021
Net derivative liabilities under bilateral agreements $32,136 $34,315
Collateral posted $25,973 $29,214
Additional collateral or termination payments:
One-notch $ 235 $ 345
Two-notch $ 843 $ 1,536 Hedge Accounting T he 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 |
