Note 15 – Fair value measurement

The guidance related to “Fair Value Measurement” included in ASC 820 defines fair value as the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date and establishes a framework for measuring fair value. It establishes a three-level hierarchy for fair value measurements based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date and expands the disclosures about instruments measured at fair value. ASC 820 requires consideration of a company’s own creditworthiness when valuing liabilities.

The standard provides a consistent definition of fair value, which focuses on exit price in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation technique or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment. The objective is to determine from weighted indicators of fair value a reasonable point within the range that is most representative of fair value under current market conditions.

Determination of fair value

Following is a description of our valuation methodologies for assets and liabilities measured at fair value. We have established processes for determining fair values. Fair value is based upon quoted market prices in active markets, where available. For financial instruments where quotes from recent exchange transactions are not available, we determine fair value based on discounted cash flow analysis, comparison to similar instruments, and the use of financial models. Discounted cash flow analysis is dependent upon estimated future cash flows and the level of interest rates. Model-based pricing uses inputs of observable prices, where available, for interest rates, foreign exchange rates, option volatilities and other factors. Models are benchmarked and validated by an independent internal risk management function. Our valuation process takes into consideration factors such as counterparty credit quality, liquidity, concentration concerns, and observability of model parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value.

Most derivative contracts are valued using internally developed models which are calibrated to observable market data and employ standard market pricing theory for their valuations. An initial “risk-neutral” valuation is performed on each position assuming time-discounting based on a AA credit curve. Then, to arrive at a fair value that incorporates counterparty credit risk, a credit adjustment is made to these results by discounting each trade’s expected exposures to the counterparty using the counterparty’s credit spreads, as implied by the credit default swap market. We also adjust expected liabilities to the counterparty using BNY Mellon’s own credit spreads, as implied by the credit default swap market. Accordingly, the valuation of our derivative position is sensitive to the current changes in our own credit spreads as well as those of our counterparties.

In certain cases, recent prices may not be observable for instruments that trade in inactive or less active markets. Upon evaluating the uncertainty in valuing financial instruments subject to liquidity issues, we make an adjustment to their value. The determination of the liquidity adjustment includes the availability of external quotes, the time since the latest available quote and the price volatility of the instrument.

Certain parameters in some financial models are not directly observable and, therefore, are based on management’s estimates and judgments. These financial instruments are normally traded less actively. We apply valuation adjustments to mitigate the possibility of error and revision in the model-based estimate value. Examples include products where parameters such as correlation and recovery rates are unobservable.

The methods described above for instruments that trade in inactive or less active markets may produce a current fair value calculation that may not be indicative of net realizable value or reflective of future fair values. We believe our methods of determining fair value are appropriate and consistent with other market participants. However, the use of different methodologies or different assumptions to value certain financial instruments could result in a different estimate of fair value.

Valuation hierarchy

ASC 820 established a three-level valuation hierarchy for disclosure of fair value measurements based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are described below.

Level 1: Inputs to the valuation methodology are recent quoted prices (unadjusted) for identical assets or liabilities in active markets. Level 1 assets and liabilities include debt and equity securities and derivative financial instruments actively traded on exchanges, and U.S. Treasury securities and U.S. Government securities that are actively traded in highly liquid over-the-counter markets.

Level 2: Observable inputs other than Level 1 prices, for example, quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and inputs that are observable or can be corroborated, either directly or indirectly, for substantially the full term of the financial instrument. Level 2 assets and liabilities include debt instruments that are traded less frequently than exchange-traded securities and derivative instruments whose model inputs are observable in the market or can be corroborated by market observable data. Examples in this category are certain variable and fixed rate agency and non-agency securities, corporate debt securities and derivative contracts.

Level 3: Inputs to the valuation methodology are unobservable and significant to the fair value measurement. Examples in this category include interests in certain securitized financial assets, certain private equity investments, and derivative contracts that are highly structured or long-dated.

A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

Following is a description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy.

Securities

Where quoted prices are available in an active market, we classify the securities within Level 1 of the valuation hierarchy. Securities are defined as both long and short positions. Level 1 securities include highly liquid government bonds, money market mutual funds and exchange-traded equities.

If quoted market prices are not available, we estimate fair value using pricing models, quoted prices of securities with similar characteristics or discounted cash flows. Examples of such instruments, which would generally be classified within Level 2 of the valuation hierarchy, include certain agency and non-agency mortgage-backed securities, commercial mortgage-backed securities and European floating rate notes.

For securities where quotes from recent transactions are not available for identical securities, we determine fair value primarily based on pricing sources with reasonable levels of price transparency that employ financial models or obtain comparisons to similar instruments to arrive at “consensus” prices.

Specifically, the pricing sources obtain recent transactions for similar types of securities (e.g., vintage, position in the securitization structure) and ascertain variables such as discount rate and speed of prepayment for the types of transaction and apply such variables to similar types of bonds. We view these as observable transactions in the current marketplace and classify such securities as Level 2. Pricing sources discontinue pricing any specific security whenever they determine there is insufficient observable data to provide a good faith opinion on price.

In addition, we have significant investments in more actively traded agency RMBS and other types of securities such as FDIC-insured debt and sovereign debt. The pricing sources derive the prices for these securities largely from quotes they obtain from three major inter-dealer brokers. The pricing sources receive their daily observed trade price and other information feeds from the inter-dealer brokers.

For securities with bond insurance, the financial strength of the insurance provider is analyzed and that information is included in the fair value assessment for such securities.

In certain cases where there is limited activity or less transparency around inputs to the valuation, we classify those securities in Level 3 of the valuation hierarchy. Securities classified within Level 3 primarily include other debt securities and securities of state and political subdivisions.

At March 31, 2012, approximately 99% of our securities were valued by pricing sources with reasonable levels of price transparency. Less than 1% of our securities were priced based on economic models and non-binding dealer quotes, and are included in Level 3 of the ASC 820 hierarchy.

Consolidated collateralized loan obligations

BNY Mellon values assets in consolidated CLOs using observable market prices observed from the secondary loan market. The returns to the note holders are solely dependent on the assets and accordingly equal the value of those assets. Based on the structure of the CLOs, the valuation of the assets is attributable to the senior note holders. Changes in the values of assets and liabilities are reflected in the income statement as investment income and interest of investment management fund note holders, respectively.

Derivatives

We classify exchange-traded derivatives valued using quoted prices in Level 1 of the valuation hierarchy. Examples include exchanged-traded equity and foreign exchange options. Since few other classes of derivative contracts are listed on an exchange, most of our derivative positions are valued using internally developed models that use as their basis readily observable market parameters, and we classify them in Level 2 of the valuation hierarchy. Such derivatives include basic swaps and options and credit default swaps.

Derivatives valued using models with significant unobservable market parameters in markets that lack two-way flow are classified in Level 3 of the valuation hierarchy. Examples include long-dated interest rate or currency swaps and options, where parameters may be unobservable for longer maturities; and certain products, where correlation rates are unobservable. The fair value of these derivatives compose less than 1% of our derivative financial instruments. Additional disclosures of derivative instruments are provided in Note 17 of the Notes to Consolidated Financial Statements.

Loans and unfunded lending-related commitments

Where quoted market prices are not available, we generally base the fair value of loans and unfunded lending-related commitments on observable market prices of similar instruments, including bonds, credit derivatives and loans with similar characteristics. If observable market prices are not available, we base the fair value on estimated cash flows adjusted for credit risk which are discounted using an interest rate appropriate for the maturity of the applicable loans or the unfunded lending-related commitments.

Unrealized gains and losses on unfunded lending-related commitments carried at fair value are classified in Other assets and Other liabilities, respectively. Loans and unfunded lending-related commitments carried at fair value are generally classified within Level 2 of the valuation hierarchy.

Seed capital

In our Investment Management business we manage investment assets, including equities, fixed income, money market and alternative investment funds for institutions and other investors; as part of that activity we make seed capital investments in certain funds. Seed capital is included in other assets. When applicable, we value seed capital based on the published NAV of the fund. We include funds in which ownership interests in the fund are publicly traded in an active market and institutional funds in which investors trade in and out daily in Level 1 of the valuation hierarchy. We include open-end funds where investors are allowed to sell their ownership interest back to the fund less frequently than daily and where our interest in the fund contains no other rights or obligations in Level 2 of the valuation hierarchy. However, we generally include investments in funds that allow investors to sell their ownership interest back to the fund less frequently than monthly in Level 3, unless actual redemption prices are observable.

For other types of investments in funds, we consider all of the rights and obligations inherent in our ownership interest, including the reported NAV as well as other factors that affect the fair value of our interest in the fund. To the extent the NAV measurements reported for the investments are based on unobservable inputs or include other rights and obligations (e.g., obligation to meet cash calls), we generally classify them in Level 3 of the valuation hierarchy.

Certain interests in securitizations

For certain interests in securitizations which are classified in securities available-for-sale, trading assets and long-term debt, we use discounted cash flow models which generally include assumptions of projected finance charges related to the securitized assets, estimated net credit losses, prepayment assumptions and estimates of payments to third-party investors. When available, we compare our fair value estimates and assumptions to market activity and to the actual results of the securitized portfolio.

Private equity investments

Our Other segment includes holdings of nonpublic private equity investment through funds managed by third-party investment managers. We value private equity investments initially based upon the transaction price, which we subsequently adjust to reflect expected exit values as evidenced by financing and sale transactions with third parties or through ongoing reviews by the investment managers.

Private equity investments also include publicly held equity investments, generally obtained through the initial public offering of privately held equity investments. These equity investments are often held in a partnership structure. Publicly held investments are marked-to-market at the quoted public value less adjustments for regulatory or contractual sales restrictions or adjustments to reflect the difficulty in selling a partnership interest.

Discounts for restrictions are quantified by analyzing the length of the restriction period and the volatility of the equity security. Publicly held private equity investments are primarily classified in Level 2 of the valuation hierarchy.

The following tables present the financial instruments carried at fair value at March 31, 2012 and Dec. 31, 2011, by caption on the consolidated balance sheet and by ASC 820 valuation hierarchy (as described above). We have included credit ratings information in certain of the tables because the information indicates the degree of credit risk to which we are exposed, and significant changes in ratings classifications could result in increased risk for us. There were no transfers between Level 1 and Level 2 during the first quarter of 2012.


Assets and liabilities measured at fair value on a recurring basis at March 31, 2012
(dollar amounts in millions)	Level 1			Level 2			Level 3			Netting (a)			Total carrying value
Available-for-sale securities:
U.S. Treasury	$	14,251		$	-		$	-		$	-		$	14,251
U.S. Government agencies		-			1,108			-			-			1,108
Sovereign debt		41			12,167			-			-			12,208
State and political subdivisions (b)		-			3,930			43			-			3,973
Agency RMBS		-			32,497			-			-			32,497
Alt-A RMBS		-			284			-			-			284
Prime RMBS		-			811			-			-			811
Subprime RMBS		-			421			-			-			421
Other RMBS		-			1,347			-			-			1,347
Commercial MBS		-			3,482			-			-			3,482
Asset-backed CLOs		-			1,338			-			-			1,338
Other asset-backed securities		-			582			-			-			582
Equity securities		14			20			-			-			34
Money market funds (b)		957			-			-			-			957
Corporate bonds		-			1,696			-			-			1,696
Other debt securities		-			1,946			-			-			1,946
Foreign covered bonds		2,496			711			-			-			3,207
Alt-A RMBS (c)		-			1,962			-			-			1,962
Prime RMBS (c)		-			1,153			-			-			1,153
Subprime RMBS (c)		-			117			-			-			117
Total available-for-sale		17,759			65,572			43			-			83,374
Trading assets:
Debt and equity instruments (d)		614			1,770			58			-			2,442
Derivative assets:
Interest rate		63			22,151			35			N/A
Foreign exchange		3,939			181			-			N/A
Equity		83			378			37			N/A
Total derivative assets		4,085			22,710			72			(23,059	) (g)		3,808
Total trading assets		4,699			24,480			130			(23,059	)		6,250
Loans		-			9			-			-			9
Other assets (e)		68			981			151			-			1,200
Subtotal assets of operations at fair value		22,526			91,042			324			(23,059	)		90,833
Percentage of assets prior to netting		20	%		80	%		-	%
Assets of consolidated investment management funds:
Trading assets		332			10,747			-			-			11,079
Other assets		371			159			-			-			530
Total assets of consolidated investment management funds		703			10,906			-			-			11,609
Total assets	$	23,229		$	101,948		$	324		$	(23,059	)	$	102,442
Percentage of assets prior to netting		19	%		81	%		-	%
Trading liabilities:
Debt and equity instruments	$	686		$	505		$	-		$	-		$	1,191
Derivative liabilities:
Interest rate		-			23,037			178			N/A
Foreign exchange		3,734			119			-			N/A
Equity		45			348			68			N/A
Other		-			1			-			N/A
Total derivative liabilities		3,779			23,505			246			(22,085	) (g)		5,445
Total trading liabilities		4,465			24,010			246			(22,085	)		6,636
Long-term debt (b)		-			320			-			-			320
Other liabilities (f)		-			275			-			-			275
Subtotal liabilities at fair value		4,465			24,605			246			(22,085	)		7,231
Percentage of liabilities prior to netting		15	%		84	%		1	%
Liabilities of consolidated investment management funds:
Trading liabilities		-			10,290			-			-			10,290
Other liabilities		2			36			-			-			38
Total liabilities of consolidated investment management funds		2			10,326			-			-			10,328
Total liabilities	$	4,467		$	34,931		$	246		$	(22,085	)	$	17,559
Percentage of liabilities prior to netting		11	%		88	%		1	%

(a)

ASC 815 permits the netting of derivative receivables and derivative payables under legally enforceable master netting agreements and permits the netting of cash collateral.

(b)

Includes certain interests in securitizations.

(c)

Previously included in the Grantor Trust.

(d)

Includes loans classified as trading assets and certain interests in securitizations.

(e)

Includes private equity investments, seed capital, a brokerage account, and derivatives in designated hedging relationships.

(f)

Includes the fair value adjustment for certain unfunded lending-related commitments and derivatives in designated hedging relationships and support agreements.

(g)

Netting cannot be disaggregated by product.


Assets and liabilities measured at fair value on a recurring basis at Dec. 31, 2011
(dollar amounts in millions)	Level 1			Level 2			Level 3			Netting (a)			Total carrying value
Available-for-sale securities:
U.S. Treasury	$	17,326		$	-		$	-		$	-		$	17,326
U.S. Government agencies		-			958			-			-			958
Sovereign debt		44			11,910			-			-			11,954
State and political subdivisions (b)		-			2,694			45			-			2,739
Agency RMBS		-			26,796			-			-			26,796
Alt-A RMBS		-			273			-			-			273
Prime RMBS		-			815			-			-			815
Subprime RMBS		-			418			-			-			418
Other RMBS		-			903			-			-			903
Commercial MBS		-			3,339			-			-			3,339
Asset-backed CLOs		-			1,444			-			-			1,444
Other asset-backed securities		-			532			-			-			532
Equity securities		9			21			-			-			30
Money market funds (b)		973			-			-			-			973
Corporate bonds		-			1,738			-			-			1,738
Other debt securities		-			2,622			3			-			2,625
Foreign covered bonds		1,820			605			-			-			2,425
Alt-A RMBS (c)		-			1,879			-			-			1,879
Prime RMBS (c)		-			1,175			-			-			1,175
Subprime RMBS (c)		-			125			-			-			125
Total available-for-sale		20,172			58,247			48			-			78,467
Trading assets:
Debt and equity instruments (d)		485			1,655			63			-			2,203
Derivative assets:
Interest rate		164			26,434			54			N/A
Foreign exchange		4,519			113			-			N/A
Equity		91			284			43			N/A
Other		-			3			-			N/A
Total derivative assets		4,774			26,834			97			(26,047	) (g)		5,658
Total trading assets		5,259			28,489			160			(26,047	)		7,861
Loans		-			10			-			-			10
Other assets (e)		672			1,019			157			-			1,848
Subtotal assets of operations at fair value		26,103			87,765			365			(26,047	)		88,186
Percentage of assets prior to netting		23	%		77	%		-	%
Assets of consolidated investment management funds:
Trading assets		323			10,428			-			-			10,751
Other assets		453			143			-			-			596
Total assets of consolidated investment management funds		776			10,571			-			-			11,347
Total assets	$	26,879		$	98,336		$	365		$	(26,047	)	$	99,533
Percentage of assets prior to netting		22	%		78	%		-	%
Trading liabilities:
Debt and equity instruments	$	418		$	537		$	-		$	-		$	955
Derivative liabilities:
Interest rate		-			27,201			239			N/A
Foreign exchange		4,311			44			-			N/A
Equity		55			200			75			N/A
Total derivative liabilities		4,366			27,445			314			(25,009	) (g)		7,116
Total trading liabilities		4,784			27,982			314			(25,009	)		8,071
Long-term debt (b)		-			326			-			-			326
Other liabilities (f)		14			368			-			-			382
Subtotal liabilities at fair value		4,798			28,676			314			(25,009	)		8,779
Percentage of liabilities prior to netting		14	%		85	%		1	%
Liabilities of consolidated investment management funds:
Trading liabilities		-			10,053			-			-			10,053
Other liabilities		2			30			-			-			32
Total liabilities of consolidated investment management funds		2			10,083			-			-			10,085
Total liabilities	$	4,800		$	38,759		$	314		$	(25,009	)	$	18,864
Percentage of liabilities prior to netting		11	%		88	%		1	%

(a)

ASC 815 permits the netting of derivative receivables and derivative payables under legally enforceable master netting agreements and permits the netting of cash collateral.

(b)

Includes certain interests in securitizations.

(c)

Previously included in the Grantor Trust.

(d)

Includes loans classified as trading assets and certain interests in securitizations.

(e)

Includes private equity investments, seed capital, a brokerage account, and derivatives in designated hedging relationships.

(f)

Includes the fair value adjustment for certain unfunded lending-related commitments and derivatives in designated hedging relationships and support agreements.

(g)

Netting cannot be disaggregated by product.


Details of certain items measured at fair value on a recurring basis
	March 31, 2012														Dec. 31, 2011
			Ratings														Ratings
(dollar amounts in millions)	Total carrying value (a)		AAA/ AA-			A+/ A-			BBB+/ BBB-			BB+ and lower			Total carrying value (a)		AAA/ AA-			A+/ A-			BBB+/ BBB-			BB+ and lower
Alt-A RMBS, originated in:
2006-2007	$	110		-	%		-	%		-	%		100	%	$	99		-	%		-	%		-	%		100	%
2005		110		-			-			-			100			113		-			-			-			100
2004 and earlier		64		26			13			48			13			61		27			13			47			13
Total Alt-A RMBS	$	284		6	%		3	%		11	%		80	%	$	273		6	%		3	%		11	%		80	%
Prime RMBS, originated in:
2007	$	115		42	%		4	%		-	%		54	%	$	121		38	%		4	%		-	%		58	%
2006		74		-			-			-			100			75		-			-			-			100
2005		237		32			-			-			68			230		32			-			-			68
2004 and earlier		385		27			39			12			22			389		29			38			11			22
Total prime RMBS	$	811		28	%		19	%		6	%		47	%	$	815		28	%		19	%		5	%		48	%
Subprime RMBS, originated in:
2007	$	2		-	%		-	%		100	%		-	%	$	2		-	%		2	%		98	%		-	%
2005		89		23			12			27			38			82		23			12			29			36
2004 and earlier		330		4			15			19			62			334		5			15			18			62
Total subprime RMBS	$	421		8	%		14	%		21	%		57	%	$	418		8	%		14	%		21	%		57	%
Commercial MBS - Domestic, originated in:
2009-2012	$	238		100	%		-	%		-	%		-	%	$	200		100	%		-	%		-	%		-	%
2008		25		16			84			-			-			25		16			84			-			-
2007		832		60			32			8			-			789		66			26			8			-
2006		937		83			17			-			-			892		85			15			-			-
2005		721		94			6			-			-			696		94			6			-			-
2004 and earlier		409		96			3			1			-			403		97			2			1			-
Total commercial MBS - Domestic	$	3,162		82	%		16	%		2	%		-	%	$	3,005		84	%		14	%		2	%		-	%
Foreign covered bonds:
Germany	$	1,515		99	%		1	%		-	%		-	%	$	1,461		99	%		1	%		-	%		-	%
Canada		955		100			-			-			-			795		100			-			-			-
Other		737		100			-			-			-			169		100			-			-			-
Total foreign covered bonds	$	3,207		100	%		-	%		-	%		-	%	$	2,425		100	%		-	%		-	%		-	%
European floating rate notes – available-for-sale:
United Kingdom	$	855		64	%		36	%		-	%		-	%	$	686		72	%		28	%		-	%		-	%
Netherlands		335		90			10			-			-			47		35			65			-			-
Ireland		208		12			-			46			42			203		-			50			47			3
Italy		148		100			-			-			-			150		100			-			-			-
Luxembourg		146		-			100			-			-			140		-			100			-			-
Australia		95		92			8			-			-			101		91			9			-			-
Germany		71		-			8			91			1			93		21			6			73			-
France		10		100			-			-			-			9		100			-			-			-
Total European floating rate notes – available-for-sale	$	1,868		60	%		27	%		8	%		5	%	$	1,429		55	%		34	%		11	%		-	%
Sovereign debt:
United Kingdom	$	4,743		100	%		-	%		-	%		-	%	$	4,526		100	%		-	%		-	%		-	%
Netherlands		3,590		100			-			-			-			2,230		100			-			-			-
France		2,194		100			-			-			-			2,790		100			-			-			-
Germany		1,625		100			-			-			-			2,347		100			-			-			-
Other		56		98			2			-			-			61		97			3			-			-
Total sovereign debt	$	12,208		100	%		-	%		-	%		-	%	$	11,954		100	%		-	%		-	%		-	%
Alt-A RMBS (b), originated in:
2007	$	584		-	%		-	%		-	%		100	%	$	554		-	%		-	%		-	%		100	%
2006		521		-			-			-			100			488		-			-			-			100
2005		643		4			-			1			95			628		5			-			1			94
2004 and earlier		214		-			4			26			70			209		-			4			27			69
Total Alt-A RMBS (b)	$	1,962		2	%		-	%		3	%		95	%	$	1,879		2	%		-	%		3	%		95	%
Prime RMBS (b), originated in:
2007	$	361		-	%		-	%		-	%		100	%	$	370		-	%		-	%		-	%		100	%
2006		306		-			-			-			100			308		-			-			-			100
2005		452		1			3			-			96			465		-			4			-			96
2004 and earlier		34		8			-			22			70			32		9			-			22			69
Total prime RMBS (b)	$	1,153		-	%		1	%		1	%		98	%	$	1,175		-	%		2	%		1	%		97	%
Subprime RMBS (b), originated in:
2007	$	4		-	%		-	%		-	%		100	%	$	3		-	%		-	%		-	%		100	%
2006		66		-			-			-			100			74		-			-			-			100
2005		11		-			-			-			100			11		-			-			-			100
2004 and earlier		36		5			34			-			61			37		5			34			-			61
Total subprime RMBS (b)	$	117		2	%		10	%		-	%		88	%	$	125		2	%		10	%		-	%		88	%

(a)

At March 31, 2012 and Dec. 31, 2011, the German foreign covered bonds were considered Level 1 in the valuation hierarchy. All other assets in the table above are primarily Level 2 assets in the valuation hierarchy.

(b)

Previously included in the Grantor Trust.

Changes in Level 3 fair value measurements

The tables below include a roll forward of the balance sheet amounts (including the change in fair value) for financial instruments classified in Level 3 of the valuation hierarchy.

Our classification of a financial instrument in Level 3 of the valuation hierarchy is based on the significance of the unobservable factors to the overall fair value measurement. However, these instruments generally include other observable

components that are actively quoted or validated to third-party sources; accordingly, the gains and losses in the table below include changes in fair value due to observable parameters as well as the unobservable parameters in our valuation methodologies. We also frequently manage the risks of Level 3 financial instruments using securities and derivatives positions that are Level 1 or 2 instruments which are not included in the table; accordingly, the gains or losses below do not reflect the effect of our risk management activities related to the Level 3 instruments.


Fair value measurements for assets using significant unobservable inputs for three months ended March 31, 2012
	Available-for-sale securities						Trading assets
(in millions)	State and political subdivisions			Other debt securities			Debt and equity instruments			Derivative assets			Other assets			Total assets
Fair value at Dec. 31, 2011	$	45		$	3		$	63		$	97		$	157		$	365
Total gains or (losses) for the period:
Included in earnings (or changes in net assets)		-	(a)		(3	) (a)		(3	) (b)		(25	) (b)		3	(c)		(28	)
Purchases, sales and settlements:
Purchases		-			-			-			-			3			3
Sales		-			-			(2	)		-			(4	)		(6	)
Settlements		(2	)		-			-			-			(8	)		(10	)
Fair value at March 31, 2012	$	43		$	-		$	58		$	72		$	151		$	324
Change in unrealized gains or (losses) for the period included in earnings (or changes in net assets) for assets held at the end of the reporting period							$	(3	)	$	(25	)	$	-		$	(28	)

(a)

Realized gains (losses) are reported in securities gains (losses). Unrealized gains (losses) are reported in accumulated other comprehensive income (loss) except for the credit portion of OTTI losses which are recorded in securities gains (losses).

(b)

Reported in foreign exchange and other trading revenue.

(c)

Reported in investment income.


Fair value measurements for liabilities using significant unobservable inputs for three months ended March 31, 2012
	Trading liabilities
	Derivative liabilities			Total liabilities
(in millions)	Derivative liabilities			Total liabilities
Fair value at Dec. 31, 2011	$	314		$	314
Total (gains) or losses for the period:
Included in earnings (or changes in net liabilities)		(68	) (a)		(68	)
Fair value at March 31, 2012	$	246		$	246
Change in unrealized (gains) or losses for the period included in earnings (or changes in net assets) for liabilities held at the end of the reporting period	$	(51	)	$	(51	)

(a)

Reported in foreign exchange and other trading revenue.


Fair value measurements for assets using significant unobservable inputs for three months ended March 31, 2011
	Available-for-sale securities						Trading assets
(in millions)	State and political subdivisions			Other debt securities			Debt and equity instruments			Derivative assets			Loans		Other assets			Total assets
Fair value at Dec. 31, 2010	$	10		$	58		$	32		$	119		$	6	$	113		$	338
Transfers into Level 3		-			6			-			1			-		-			7
Transfers out of Level 3		-			-			-			14			2		-			16
Total gains or (losses) for the period:
Included in earnings (or changes in net assets)		-	(a)		-	(a)		-	(b)		25	(b)		-		6	(c)		31
Purchases, issues, sales and settlements:
Purchases		-			-			-			-			-		1			1
Fair value at March 31, 2011	$	10		$	64		$	32		$	131		$	4	$	120		$	361
Change in unrealized gains or (losses) for the period included in earnings (or changes in net assets) for assets held at the end of the reporting period							$	-		$	38		$	-	$	-		$	38

(a)

(b)

Reported in foreign exchange and other trading revenue.

(c)

Reported in investment income.


Fair value measurements for liabilities using significant unobservable inputs for three months ended March 31, 2011
	Trading liabilities
(in millions)	Debt and equity instruments			Derivative liabilities			Other liabilities		Total liabilities
Fair value at Dec. 31, 2010	$	6		$	171		$	2	$	179
Total (gains) or losses for the period:
Included in earnings (or changes in net assets)		-			(49	) (a)		-		(49	)
Purchases, issues, sales and settlements:
Settlements		(6	)		4			-		(2	)
Fair value at March 31, 2011	$	-		$	126		$	2	$	128
Change in unrealized (gains) or losses for the period included in earnings (or changes in net assets) for liabilities held at the end of the reporting period	$	-		$	(19	)	$	-	$	(19	)

(a)

Reported in foreign exchange and other trading revenue.

Level 3 unobservable inputs

The following tables present the unobservable inputs used in valuation of assets and liabilities classified as Level 3 within the fair value hierarchy.

Quantitative information about Level 3 fair value measurements of assets

(dollars in millions)

Fair value at
March 31, 2012

Valuation

techniques

Unobservable

input

Range

Measured on a recurring basis:

Available-for-sale securities:
State and political

subdivisions

Discounted cash flow

Expected credit loss

9 - 41%

Trading assets:

Debt and equity instruments:

Structured debt

Option pricing model

Correlation risk

15%

Long-term foreign exchange volatility

13-18%

Distressed debt

Discounted cash flows

Expected maturity

3-10 years

Credit spreads

200-900 bps

Derivative assets:

Interest rate:

Structured foreign
exchange swaptions

Option pricing model

Correlation risk

0-25%

Long-term foreign exchange volatility

13-18%

Equity:

Equity options

Option pricing model

Long-term equity volatility

23-32%

Measured on a nonrecurring basis:

Loans

Discounted cash flows

Timing of sale

0-21 months

Cap rate

5.5 – 8.0%

Cost to complete/sell

0-29%

Quantitative information about Level 3 fair value measurements of liabilities

(dollars in millions)

Fair value at
March 31, 2012

Valuation

techniques

Unobservable

input

Range

Measured on a recurring basis:

Trading liabilities:

Derivative liabilities:

Interest rate:

Structured foreign
exchange swaptions

178

Option pricing model

Correlation risk

0-25

Long-term foreign exchange volatility

13-18

Equity:

Equity options

Option pricing model

Long-term equity volatility

23-32

(a) The option pricing model uses market inputs such as foreign currency exchange rates, interest rates and volatility to calculate the fair value of the option.

bps — basis points

At March 31, 2012, the available-for-sale securities categorized as Level 3 within the fair value hierarchy primarily consist of a security issued by a municipality that has filed for bankruptcy. The fair value of this security was determined based on expected credit losses. A significant deviation from the expected credit losses would result in a significantly higher or lower fair value.

At March 31, 2012, debt and equity instruments reported as trading assets on the balance sheet include structured debt and distressed debt. For our structured debt, changes in foreign exchange volatility generally results in a higher or lower fair value, while changes in the correlation of interest and foreign exchange factors generally increases or decreases the fair value of the instrument. The principal unobservable inputs for distressed debt include credit spreads and expected maturity. Changes in credit spreads or the expected period until maturity would result in an increase or decrease in the fair value of these instruments.

At March 31, 2012, our trading assets and trading liabilities included interest rate derivative assets and liabilities, respectively, and equity derivative assets and liabilities, respectively, classified as Level 3 within the fair value hierarchy. For our structured foreign exchange swaptions, changes in foreign exchange volatility generally results in an increased or decreased liability while changes in the correlation of interest and foreign exchange factors generally results in a favorable or unfavorable movement in the fair value of the instrument. The Company purchases and sells certain long-term equity options based on changes in volatility, which in turn offset option values.

At March 31, 2012, loans measured at fair value on a nonrecurring basis that are included in Level 3 of the fair value hierarchy include collateral dependent loans. Principal unobservable inputs may include forecast timing of sales, cap rates and costs to complete/sell. An increase in holding period, cap rate or costs to complete/sell would generally result in a decrease of the fair value of loans. A decrease in holding period, cap rate or costs to complete/sell would generally result in an increase in fair value of the loans.

Assets and liabilities measured at fair value on a nonrecurring basis

Under certain circumstances, we make adjustments to fair values of our assets, liabilities and unfunded lending-related commitments although they are not measured at fair value on an ongoing basis. An example would be the recording of an impairment of an asset.

The following tables present the financial instruments carried on the consolidated balance sheet by caption and by level in the fair value hierarchy as of March 31, 2012 and Dec. 31, 2011, for which a nonrecurring change in fair value has been recorded during the quarters ended March 31, 2012 and Dec. 31, 2011.


Assets measured at fair value on a nonrecurring basis at March 31, 2012							Total
(in millions)	Level 1		Level 2		Level 3		carrying value
Loans (a)	$	-	$	213	$	44	$	257
Other assets (b)		-		111		-		111
Total assets at fair value on a nonrecurring basis	$	-	$	324	$	44	$	368


Assets measured at fair value on a nonrecurring basis at Dec. 31, 2011							Total
(in millions)	Level 1		Level 2		Level 3		carrying value
Loans (a)	$	-	$	178	$	43	$	221
Other assets (b)		-		126		-		126
Total assets at fair value on a nonrecurring basis	$	-	$	304	$	43	$	347

(a)

During the quarters ended March 31, 2012 and Dec. 31, 2011, the fair value of these loans was reduced $13 million and $32 million, respectively, based on the fair value of the underlying collateral as allowed by ASC 310, Accounting by Creditors for Impairment of a Loan, with an offset to the allowance for credit losses.

(b)

Includes other assets received in satisfaction of debt and loans held for sale. Loans held for sale are carried on the balance sheet at the lower of cost or market value.