| Derivative Instruments and Hedging Activities | 10. Derivative Instruments and Hedging Activities. The Company trades and makes markets globally in listed futures, OTC swaps, forwards, options and other derivatives referencing, among other things, interest rates, currencies, investment grade and non-investment grade corporate credits, loans, bonds, U.S. and other sovereign securities, emerging market bonds and loans, credit indices, asset-backed security indices, property indices, mortgage-related and other asset-backed securities, and real es tate loan products. The Company uses these instruments for trading, foreign currency exposure management, and asset and liability management. The Company manages its trading positions by employing a variety of risk mitigation strategies. These strategies include diversification of risk exposures and hedging. Hedging activities consist of the purchase or sale of positions in related securities and financial instruments, including a variety of derivative products ( e.g. , futures, forwards, swaps and options) . The Company manages the market risk associated with its trading activities on a Company-wide basis, on a worldwide trading division level and on an individual product basis. In connection with its derivative activities, the Company generally enters int o master netting a greements and collateral a greements with its counterparties. For a further discussion of these agreements, see Note 12 to the consolidated financial statements in the 2014 Form 10-K. The following tables present information about the offs etting of derivative instruments and related collateral amounts. See information related to offsetting of certain collateralized transactions in Note 5 . At June 30, 2015 Gross Amounts(1) Amounts Offset in the Condensed Consolidated Statements of Financial Condition Net Amounts Presented in the Condensed Consolidated Statements of Financial Condition Amounts Not Offset in the Condensed Consolidated Statements of Financial Condition(2) Net Exposure Financial Instruments Collateral Other Cash Collateral (dollars in millions) Derivative assets Bilateral OTC $ 353,817 $ (326,043) $ 27,774 $ (9,244) $ (43) $ 18,487 Cleared OTC(3) 126,985 (126,119) 866 (6) — 860 Exchange traded 30,785 (26,886) 3,899 — — 3,899 Total derivative assets $ 511,587 $ (479,048) $ 32,539 $ (9,250) $ (43) $ 23,246 Derivative liabilities Bilateral OTC $ 343,921 $ (310,714) $ 33,207 $ (7,983) $ — $ 25,224 Cleared OTC(3) 125,263 (124,991) 272 — (1) 271 Exchange traded 31,379 (26,886) 4,493 (295) — 4,198 Total derivative liabilities $ 500,563 $ (462,591) $ 37,972 $ (8,278) $ (1) $ 29,693 At December 31, 2014 Gross Amounts(4) Amounts Offset in the Condensed Consolidated Statements of Financial Condition Net Amounts Presented in the Condensed Consolidated Statements of Financial Condition Amounts Not Offset in the Condensed Consolidated Statements of Financial Condition(2) Net Exposure Financial Instruments Collateral Other Cash Collateral (dollars in millions) Derivative assets Bilateral OTC $ 427,079 $ (396,582) $ 30,497 $ (9,844) $ (19) $ 20,634 Cleared OTC(3) 217,169 (215,576) 1,593 — — 1,593 Exchange traded 32,123 (27,819) 4,304 — — 4,304 Total derivative assets $ 676,371 $ (639,977) $ 36,394 $ (9,844) $ (19) $ 26,531 Derivative liabilities Bilateral OTC $ 410,003 $ (375,095) $ 34,908 $ (11,192) $ (179) $ 23,537 Cleared OTC(3) 211,695 (211,180) 515 — (6) 509 Exchange traded 32,608 (27,819) 4,789 (726) — 4,063 Total derivative liabilities $ 654,306 $ (614,094) $ 40,212 $ (11,918) $ (185) $ 28,109 (1) Amounts include $ 7.3 billion of derivative assets and $ 8.8 billion of derivative liabilities, which are either not subject to master netting agreements or collateral agreements or are subject to such agreements but the Company has not determined the agreements to be legally enforceable. See also “Fair Value and Notional of Derivative Instruments” herein, for additional disclosure about gross fair values and notionals for derivative instruments by risk type. (2 ) Amounts relate to master netting a greements and collateral a greements, which have been determined by the Company to be legally enforceable in the event of default but where certain other criteria are not met in accordance with applicable offse tting accounting guidance. (3 ) Amounts include OTC derivatives that are centrally cleared in accordance with certain regulatory requirements. (4 ) Amounts include $ 6.5 billion of derivative assets and $ 6.9 billion of derivative liabilities, which are either not subject to master netting agreements or collateral agreements or are subject to such agreements but the Company has not determined the agreements to be legally enforceable. See also “ Fair Value and Notional of Derivative Instruments ” herein, for addit ional disclosure about gross fair values and notionals for derivative instruments by risk type. The Company incurs credit risk as a dealer in OTC derivatives. Credit risk with respect to derivative instruments arises from the failure of a counterparty to perform according to the terms of the contract. The Company’s exposure to credit risk at any point in time is represented by the fair value of the derivative contracts reported as assets. The fair value of a derivative represents the amount at which the d erivative could be exchanged in an orderly transaction between market participants and is further described in Note 2 to the consolidated financial statements in the 2014 Form 10-K and Note 3. The tables below present a summary by counterparty credit r ating and remaining contract maturity of the fair value of OTC derivatives in a gain position at June 30, 2015 and December 31, 2014 . Fair value is presented in the final column, net of collateral received (principally cash and U.S. government and agency securities): OTC Derivative Products—Trading Assets at June 30, 2015 (1) Years to Maturity Cross-Maturity and Cash Collateral Netting(3) Net Exposure Post-cash Collateral Net Exposure Post-collateral Credit Rating(2) Less than 1 1 - 3 3 - 5 Over 5 (dollars in millions) AAA $ 188 $ 672 $ 913 $ 3,591 $ (4,509) $ 855 $ 743 AA 2,436 2,810 1,949 12,265 (12,966) 6,494 3,502 A 8,706 9,049 5,545 19,087 (33,257) 9,130 6,299 BBB 3,934 3,845 1,967 12,668 (14,733) 7,681 5,696 Non-investment grade 3,898 2,388 1,781 2,990 (6,620) 4,437 3,107 Total $ 19,162 $ 18,764 $ 12,155 $ 50,601 $ (72,085) $ 28,597 $ 19,347 OTC Derivative Products—Trading Assets at December 31, 2014 (1) Years to Maturity Cross-Maturity and Cash Collateral Netting(3) Net Exposure Post-cash Collateral Net Exposure Post-collateral Credit Rating(2) Less than 1 1-3 3-5 Over 5 (dollars in millions) AAA $ 499 $ 246 $ 1,313 $ 4,281 $ (5,009) $ 1,330 $ 1,035 AA 2,679 2,811 2,704 14,137 (15,415) 6,916 4,719 A 11,733 10,833 7,585 23,968 (43,644) 10,475 6,520 BBB 5,119 3,753 2,592 13,132 (15,844) 8,752 6,035 Non-investment grade 3,196 3,089 1,541 2,499 (5,727) 4,598 3,918 Total $ 23,226 $ 20,732 $ 15,735 $ 58,017 $ (85,639) $ 32,071 $ 22,227 _____________ (1) Fair values shown represent the Company’s net exposure to counterparties related to the Company’s OTC derivative products. Amounts include centrally cleared OTC derivatives. The tables do not include exchange-traded derivatives and the effect of any related hedges utilized by the Company. (2) Obligor credit ratings are determined by the Company’s Credit Risk Management Department. (3) Amounts represent the netting of receivable balances with payable balances for th e same counterparty across maturity categories. Receivable and payable balances with the same counterparty in the same maturity category are netted within such maturity category, where appropriate. Cash collateral received is netted on a counterparty basis , provided legal right of offset exists. For a discussion of hedge accounting, fair value hedges—interest rate risk and net investment hedges, see Note 12 to the consolidated financial statements in the 2014 Form 10-K. Fair Value and Notional of Deri vative Instruments. The following tables summarize the fair value of derivative instruments designated as accounting hedges and the fair value of derivative instruments not designated as accounting hedges by type of derivative contract and the platform on which these instruments are traded or cleared on a gross basis. Fair values of derivative contracts in an asset position are included in Trading assets, and fair values of derivative contracts in a liability position are reflected in Trading liabilities in the Company’s condensed consolidated statements of financial condition (see Note 3): Derivative Assets at June 30, 2015 Fair Value Notional Bilateral OTC Cleared OTC(1) Exchange Traded Total Bilateral OTC Cleared OTC(1) Exchange Traded Total (dollars in millions) Derivatives designated as accounting hedges: Interest rate contracts $ 3,392 $ 918 $ — $ 4,310 $ 37,244 $ 29,394 $ — $ 66,638 Foreign exchange contracts 159 1 — 160 4,405 129 — 4,534 Total derivatives designated as accounting hedges 3,551 919 — 4,470 41,649 29,523 — 71,172 Derivatives not designated as accounting hedges(2): Interest rate contracts 228,535 122,135 515 351,185 4,672,995 7,086,992 1,474,052 13,234,039 Credit contracts 21,160 3,779 — 24,939 716,408 162,629 — 879,037 Foreign exchange contracts 63,185 152 60 63,397 1,959,862 11,722 8,184 1,979,768 Equity contracts 23,779 — 25,720 49,499 350,378 — 296,080 646,458 Commodity contracts 13,462 — 4,490 17,952 99,117 — 110,067 209,184 Other 145 — — 145 5,485 — — 5,485 Total derivatives not designated as accounting hedges 350,266 126,066 30,785 507,117 7,804,245 7,261,343 1,888,383 16,953,971 Total derivatives $ 353,817 $ 126,985 $ 30,785 $ 511,587 $ 7,845,894 $ 7,290,866 $ 1,888,383 $ 17,025,143 Cash collateral netting (46,085) (3,239) — (49,324) — — — — Counterparty netting (279,958) (122,880) (26,886) (429,724) — — — — Total derivative assets $ 27,774 $ 866 $ 3,899 $ 32,539 $ 7,845,894 $ 7,290,866 $ 1,888,383 $ 17,025,143 Derivative Liabilities at June 30, 2015 Fair Value Notional Bilateral OTC Cleared OTC(1) Exchange Traded Total Bilateral OTC Cleared OTC(1) Exchange Traded Total (dollars in millions) Derivatives designated as accounting hedges: Interest rate contracts $ 206 $ 524 $ — $ 730 $ 3,524 $ 15,389 $ — $ 18,913 Foreign exchange contracts 99 3 — 102 6,001 277 — 6,278 Total derivatives designated as . accounting hedges 305 527 — 832 9,525 15,666 — 25,191 Derivatives not designated as accounting hedges(2): Interest rate contracts 211,241 121,130 455 332,826 4,332,481 6,836,336 1,152,490 12,321,307 Credit contracts 21,584 3,469 — 25,053 610,523 142,542 — 753,065 Foreign exchange contracts 66,054 137 12 66,203 2,018,091 11,332 3,613 2,033,036 Equity contracts 32,171 — 26,110 58,281 389,209 — 291,951 681,160 Commodity contracts 12,397 — 4,802 17,199 84,479 — 91,586 176,065 Other 169 — — 169 9,182 — — 9,182 Total derivatives not designated as accounting hedges 343,616 124,736 31,379 499,731 7,443,965 6,990,210 1,539,640 15,973,815 Total derivatives $ 343,921 $ 125,263 $ 31,379 $ 500,563 $ 7,453,490 $ 7,005,876 $ 1,539,640 $ 15,999,006 Cash collateral netting (30,756) (2,111) — (32,867) — — — — Counterparty netting (279,958) (122,880) (26,886) (429,724) — — — — Total derivative liabilities $ 33,207 $ 272 $ 4,493 $ 37,972 $ 7,453,490 $ 7,005,876 $ 1,539,640 $ 15,999,006 Derivative Assets at December 31, 2014 Fair Value Notional Bilateral OTC Cleared OTC(1) Exchange Traded Total Bilateral OTC Cleared OTC(1) Exchange Traded Total (dollars in millions) Derivatives designated as accounting hedges: Interest rate contracts $ 3,947 $ 1,053 $ — $ 5,000 $ 44,324 $ 27,692 $ — $ 72,016 Foreign exchange contracts 498 6 — 504 9,362 261 — 9,623 Total derivatives designated as accounting hedges 4,445 1,059 — 5,504 53,686 27,953 — 81,639 Derivatives not designated as accounting hedges(3): Interest rate contracts 281,214 211,552 407 493,173 4,854,953 9,187,454 1,467,056 15,509,463 Credit contracts 27,776 4,406 — 32,182 806,441 167,390 — 973,831 Foreign exchange contracts 72,362 152 83 72,597 1,955,343 11,538 9,663 1,976,544 Equity contracts 23,208 — 24,916 48,124 299,363 — 271,164 570,527 Commodity contracts 17,698 — 6,717 24,415 115,792 — 156,440 272,232 Other 376 — — 376 5,179 — — 5,179 Total derivatives not designated as accounting hedges 422,634 216,110 32,123 670,867 8,037,071 9,366,382 1,904,323 19,307,776 Total derivatives $ 427,079 $ 217,169 $ 32,123 $ 676,371 $ 8,090,757 $ 9,394,335 $ 1,904,323 $ 19,389,415 Cash collateral netting (58,541) (4,654) — (63,195) — — — — Counterparty netting (338,041) (210,922) (27,819) (576,782) — — — — Total derivative assets $ 30,497 $ 1,593 $ 4,304 $ 36,394 $ 8,090,757 $ 9,394,335 $ 1,904,323 $ 19,389,415 Derivative Liabilities at December 31, 2014 Fair Value Notional Bilateral OTC Cleared OTC(1) Exchange Traded Total Bilateral OTC Cleared OTC(1) Exchange Traded Total (dollars in millions) Derivatives designated as accounting hedges: Interest rate contracts $ 125 $ 99 $ — $ 224 $ 2,024 $ 7,588 $ — $ 9,612 Foreign exchange contracts 5 1 — 6 1,491 121 — 1,612 Total derivatives designated as accounting hedges 130 100 — 230 3,515 7,709 — 11,224 Derivatives not designated as accounting hedges(3): Interest rate contracts 264,579 207,482 293 472,354 4,615,886 9,138,417 1,714,021 15,468,324 Credit contracts 28,165 3,944 — 32,109 714,181 154,054 — 868,235 Foreign exchange contracts 72,156 169 21 72,346 1,947,178 11,477 1,761 1,960,416 Equity contracts 30,061 — 25,511 55,572 339,884 — 302,205 642,089 Commodity contracts 14,740 — 6,783 21,523 93,019 — 132,136 225,155 Other 172 — — 172 5,478 — — 5,478 Total derivatives not designated as accounting hedges 409,873 211,595 32,608 654,076 7,715,626 9,303,948 2,150,123 19,169,697 Total derivatives $ 410,003 $ 211,695 $ 32,608 $ 654,306 $ 7,719,141 $ 9,311,657 $ 2,150,123 $ 19,180,921 Cash collateral netting (37,054) (258) — (37,312) — — — — Counterparty netting (338,041) (210,922) (27,819) (576,782) — — — — Total derivative liabilities $ 34,908 $ 515 $ 4,789 $ 40,212 $ 7,719,141 $ 9,311,657 $ 2,150,123 $ 19,180,921 _____________ (1) Amounts include OTC derivatives that are centrally cleared in accordance with certain regulatory requirements. (2) Notional amounts include gross notionals related to open long and short futures contracts of $ 1,029 billion and $ 876 billion, respectively. The unsettled fair value on these futures contracts (excluded from the table above) of $ 336 million and $ 103 million is included in Customer and other receivables and Custom er and other payables, respectively, in the Company’s condensed consolidated statements of financial condition. (3) Notional amounts include gross notionals related to open long and short futures contracts of $ 685 billion and $ 1,122 billion, respectively. The unsettled fair value on these futures contracts (excluded from the table above) of $ 472 million and $ 21 million is included in Customer and other receivables and Customer and other payables, respectively, in the Company’s condensed consolidated statem ents of financial condition. At June 30, 2015 and December 31, 2014 , the amount of payables associated with cash collateral received that was netted against derivative assets was $ 49.3 billion and $ 63.2 billion, respectively, and the amount of receivables in respect of cash collateral paid that was netted against derivative liabilities was $ 32.9 billion and $ 37.3 billion, respectively. A t June 30, 2015 , c ash collateral payables of $ 3 million and at December 31, 2014 , cash collateral receivables and payables of $ 21 million and $ 30 million, respectively, were not offset against certain contracts that did not meet the definition of a derivative. The Company had no cash collateral re ceivable at June 30, 2015 that was not offset against certain contracts that did not meet the definition of a derivative. Derivatives Designated as Fair Value Hedges. The following table presents gains (losses) reported on interest rate derivative inst ruments designated and qualifying as accounting hedges and the related hedged item as well as the hedge ineffectiveness included in Interest expense in the Company’s condensed consolidated statements of income: Gains (Losses) Recognized Three Months Ended Six Months Ended June 30, June 30, Product Type 2015 2014 2015 2014 (dollars in millions) Derivatives $ (1,899) $ 621 $ (1,141) $ 931 Borrowings 2,213 (320) 1,720 (328) Total $ 314 $ 301 $ 579 $ 603 Derivatives Designated as Net Investment Hedges The following table presents gains (losses) reported on derivative instruments designated and qualifying as accounting hedges: Gains (Losses) Recognized in OCI (effective portion) Three Months Ended Six Months Ended June 30, June 30, Product Type 2015 2014 2015 2014 (dollars in millions) Foreign exchange contracts(1) $ (81) $ (109) $ 181 $ (176) Total $ (81) $ (109) $ 181 $ (176) ____________ (1) Losses of $ 36 million and $ 80 million related to the forward points on the hedging instruments were excluded from hedge effectiveness testing and recognized in interest income during the quarter and six months ended June 30, 2015 , respectively. Losses of $ 52 million and $ 97 million related to the forward points on the hedging instruments were excluded from hedge effectiveness testing and recognized in interest income during the quarter and six months ended June 30, 2014 , res pectively. The following table summarizes gains (losses) on derivative instruments not designated as accounting hedges: Gains (Losses) Recognized in Income(1) Three Months Ended Six Months Ended June 30, June 30, Product Type 2015 2014 2015 2014 (dollars in millions) Interest rate contracts $ 2,194 $ (679) $ 477 $ (2,033) Credit contracts 36 (354) (209) (197) Foreign exchange contracts (5,895) 567 (4,795) 1,591 Equity contracts (953) (1,918) (2,020) (2,077) Commodity contracts 51 (53) 649 472 Other contracts 17 49 (65) 145 Total derivative instruments $ (4,550) $ (2,388) $ (5,963) $ (2,099) ____________ (1) Gains (losses) on derivative contracts not designated as hedges are primarily included in Trading revenues in the Company’s condensed consolidated statements of income. Gains (losses) associated with certain derivative contracts that have physically settled are excluded from the table above. Gains (losses) on these contracts are reflected with the associated cash instruments, which are also included in Trading revenues in the Company’s condensed consolidated statements of income. The Company also has certain embedded derivatives that have been bifurcated from the related structured borrowings. Such derivatives are classified in Long-term borrowings and had a net fair value of $ 25 million and $ 10 million at June 30, 2015 and December 31, 2014 , respectively, and a notional value of $ 2,069 million at both June 30, 2015 and December 31, 2014 . The Company recognized gains of $ 21 million and $ 16 million related to changes in the fair value of its bifurcated embedded derivatives for the quarter and six months ended June 30, 2015 , respectively. The Company recognized losses of $ 18 million and $ 28 million related to changes in the fair value of its bifurcated embedded derivatives for the quarter and six months ended June 30, 2014 , respectively. Credit Risk-Related Contingencies. In connection with certain OTC trading agreements, the Company may be required to provide additional collateral or immediately settle any outstanding liability bala nces with certain counterparties in the event of a credit rating downgrade of the Company. The following table presents the aggregate fair value of certain derivative contracts that contain credit risk-related contingent features that are in a net liabilit y position for which the Company has posted collateral in the normal course of business. At June 30, 2015 (dollars in millions) Net derivative liabilities $ 28,962 Collateral posted 24,288 The additional collateral or termination payments which may be called in the event of a future credit rating downgrade vary by contract and can be based on ratings by either or both of Moody’s Investors Service, Inc. (“ Moody’s”) and Standard & Poor’s Ratings Services (“ S&P”) . At June 30, 2015 , for such OTC trading agreements, the future potential collateral amounts and termination payments that could be called or required by counterparties or exchange and clearing organizations in the event of on e-notch or two-notch downgrade scenarios based on the relevant contractual downgrade triggers were as follows: At June 30, 2015 (dollars in millions) Incremental collateral or terminating payments upon future rating downgrade(1): One-notch downgrade $ 1,269 Two-notch downgrade 1,232 ________ (1) Amounts include $ 2,027 million related to bilateral arrangements between the Company and other parties where upon the downgrade of one party, the downgraded party must deliver collateral to the other party. These bilateral downgrade arrangements are a risk management tool used extensively by the Company as credit exposures are reduced if counterparties are downgraded. Credit Derivatives and Other Credit Contracts. The Company enters into credit derivatives, pri ncipally through credit default swaps, under which it receives or provides protection against the risk of default on a set of debt obligations issued by a specified reference entity or entities. A majority of the Company’s counterparties are banks, broker- dealers, insurance and other financial institutions, and monoline insurers. The tables below summarize the notional and fair value of protection sold and protection purchased through credit default swaps at June 30, 2015 and December 31, 2014 : At June 30, 2015 Maximum Potential Payout/Notional Protection Sold Protection Purchased Notional Fair Value (Asset)/Liability Notional Fair Value (Asset)/Liability (dollars in millions) Single name credit default swaps $ 477,216 $ (2,449) $ 453,603 $ 1,910 Index and basket credit default swaps 243,574 (1,074) 210,171 710 Tranched index and basket credit default swaps 73,570 (2,039) 173,968 3,056 Total $ 794,360 $ (5,562) $ 837,742 $ 5,676 At December 31, 2014 Maximum Potential Payout/Notional Protection Sold Protection Purchased Notional Fair Value (Asset)/Liability Notional Fair Value (Asset)/Liability (dollars in millions) Single name credit default swaps $ 535,415 $ (2,479) $ 509,872 $ 1,641 Index and basket credit default swaps 276,465 (1,777) 229,789 1,563 Tranched index and basket credit default swaps 96,182 (2,355) 194,343 3,334 Total $ 908,062 $ (6,611) $ 934,004 $ 6,538 The table s below summarize the credit ratings of the reference obligation and maturities of protection sold through credit default swaps and other credit contracts at June 30, 2015 and December 31, 2014 : At June 30, 2015 Maximum Potential Payout/Notional Fair Value (Asset)/ Liability(1)(2) Years to Maturity Credit Ratings of the Reference Obligation Less than 1 1-3 3-5 Over 5 Total (dollars in millions) Single name credit default swaps: AAA $ 3,675 $ 13,347 $ 6,408 $ 1,673 $ 25,103 $ (266) AA 8,146 18,305 9,425 1,717 37,593 (437) A 18,796 42,445 14,333 2,081 77,655 (1,184) BBB 41,406 101,019 46,196 11,627 200,248 (1,636) Non-investment grade 33,044 69,325 29,777 4,471 136,617 1,074 Total 105,067 244,441 106,139 21,569 477,216 (2,449) Index and basket credit default swaps: AAA 13,998 41,873 1,521 — 57,392 (1,145) A 4,207 5,513 6,219 12 15,951 (207) BBB 7,591 22,028 27,477 4,167 61,263 (866) Non-investment grade 27,268 88,883 49,553 16,834 182,538 (895) Total 53,064 158,297 84,770 21,013 317,144 (3,113) Total credit default swaps sold $ 158,131 $ 402,738 $ 190,909 $ 42,582 $ 794,360 $ (5,562) Other credit contracts(3) $ — $ 501 $ 346 $ 67 $ 914 $ (761) Total credit derivatives and other credit contracts $ 158,131 $ 403,239 $ 191,255 $ 42,649 $ 795,274 $ (6,323) At December 31, 2014 Maximum Potential Payout/Notional Fair Value (Asset)/ Liability(1)(2) Years to Maturity Credit Ratings of the Reference Obligation Less than 1 1-3 3-5 Over 5 Total (dollars in millions) Single name credit default swaps: AAA $ 2,385 $ 9,400 $ 6,147 $ 692 $ 18,624 $ (113) AA 9,080 23,701 14,769 3,318 50,868 (688) A 22,861 52,291 22,083 2,944 100,179 (1,962) BBB 48,547 114,384 60,629 13,536 237,096 (1,489) Non-investment grade 29,857 66,066 29,011 3,714 128,648 1,773 Total 112,730 265,842 132,639 24,204 535,415 (2,479) Index and basket credit default swaps: AAA 17,625 31,124 7,265 1,883 57,897 (985) AA 704 6,512 716 2,864 10,796 (270) A 1,283 6,841 10,154 30 18,308 (465) BBB 30,265 40,575 60,141 7,730 138,711 (2,904) Non-investment grade 25,750 88,105 22,971 10,109 146,935 492 Total 75,627 173,157 101,247 22,616 372,647 (4,132) Total credit default swaps sold $ 188,357 $ 438,999 $ 233,886 $ 46,820 $ 908,062 $ (6,611) Other credit contracts(3) $ 51 $ 539 $ 1 $ 620 $ 1,211 $ (500) Total credit derivatives and other credit contracts $ 188,408 $ 439,538 $ 233,887 $ 47,440 $ 909,273 $ (7,111) _____________ (1) Fair value amounts are shown on a gross basis prior to cash collateral or counterparty netting. (2) Fair value amounts of certain credit default swaps where the Company sold protection have an asset carrying value because credit spreads of the underlying reference entity or entities tightened during the term of the contracts. (3) Other credit contracts include CLNs, CDOs and credit default swaps that are considered hybrid instruments. Fair value amount s shown represent the fair value of the hybrid instruments. Single Name Credit Default Swaps. A credit default swap protects the buyer against the los s of principal on a bond or loan in case of a default by the issuer. The protection buyer pays a periodic premium (generally quarterly) over the life of the contract and is protected for the period. The Company in turn will have to perform under a credit d efault swap if a credit event as defined under the contract occurs. Typical credit events include bankruptcy, dissolution or insolvency of the referenced entity, failure to pay and restructuring of the obligations of the referenced entity. In order to prov ide an indication of the current payment status or performance risk of the credit default swaps, a breakdown by credit ratings is provided. Agency ratings, if available, are used for this purpose; otherwise the Company’s internal ratings are used . Index and Basket Credit Default Swaps. Index and basket credit default swaps are products where credit protection is provided on a portfolio of single name credit default swaps. Generally, in the event of a default on one of the underlying names, the Company will have to pay a pro rata portion of the total notional amount of the credit default swap. The Company also enters into tranched index and basket credit default swaps where credit protection is provided on a particular portion of the portfolio loss dis tribution. The most junior tranches cover initial defaults, and once losses exceed the notional of the tranche, they are passed on to the next most senior tranche in the capital structure. In order to provide an indication of the current payment status o r performance risk of the credit default swaps, a breakdown by the Company’s internal credit ratings is provided. Effective January 1, 2015, the Company utilized its internal credit ratings as compared with December 31, 2014 where external agency ratings, if available, were utilized. The change in the rating methodology did not have a significant impact on investment grade versus non-investment grade classifications or the fair values of tranched and non- tranched index and basket products in the above table . Credit Protection Sold through CLNs and CDOs. The Company has invested in CLNs and CDOs, which are hybrid instruments containing embedded derivatives, in which credit protection has been sold to the issuer of the note. If there is a credit event of a reference entity underlying the instrument, the principal balance of the note may not be repaid in full to the Company. Purchased Credit Protection with Identical Underlying Reference Obligations . For single name credit default swaps and non- tranched index and basket credit default swaps, the Company has purchased protection with a not ional amount of approximately $ 661 billion and $ 731 billion at June 30, 2015 and December 31, 2014 , respectively, compared with a not ional amount of approximately $ 719 billion and $ 805 billion at June 30, 2015 and December 31, 2014 , respectively, of credit protection sold with identical un derlying reference obligations. In order to identify purchased protection with the same underlying reference obligations, the notional amount for individual reference obligations within non- tranched indices and baskets was determined on a pro rata basis and matched off against single name and non- tranched index and basket credit default swaps where credit protection was sold with identical underlying reference obligations. The purchase of credit protection does not represent the sole manner in which the Company risk manages its exposure to credit derivatives. The Company manages its exposure to these derivative contracts through a variety of risk mitigation strategies, which include managing the credit and correlation risk across single name, non- tranched indices and baskets, tranched indices and baskets, and cash positions. Aggr egate market risk limits have been established for credit derivatives, and market risk measures are routinely monitored against these limits. The Company may also recover amounts on the underlying reference obligation delivered to the Company under credit default swaps where credit protection was sold. |
