Fair value measurement

Fair value is defined 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. A three-level hierarchy for fair value measurements is utilized based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. BNY Mellon’s own creditworthiness is considered when valuing liabilities. See Note 20 of the Notes to Consolidated Financial Statements in our 2015 Annual Report for information on how we determine fair value and the fair value hierarchy.

The following tables present the financial instruments carried at fair value at March 31, 2016 and Dec. 31, 2015, by caption on the consolidated balance sheet and by 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 material transfers between Level 1 and Level 2 during the first quarter of 2016.



Assets measured at fair value on a recurring basis at March 31, 2016
(dollar amounts in millions)	Level 1			Level 2			Level 3			Netting (a)			Total carrying value
Available-for-sale securities:
U.S. Treasury	$	12,972		$	—		$	—		$	—		$	12,972
U.S. Government agencies	—			410			—			—			410
Sovereign debt/sovereign guaranteed	136			13,646			—			—			13,782
State and political subdivisions (b)	—			3,721			—			—			3,721
Agency RMBS	—			23,796			—			—			23,796
Non-agency RMBS	—			749			—			—			749
Other RMBS	—			980			—			—			980
Commercial MBS	—			1,265			—			—			1,265
Agency commercial MBS	—			4,295			—			—			4,295
CLOs	—			2,424			—			—			2,424
Other asset-backed securities	—			2,408			—			—			2,408
Equity securities	2			—			—			—			2
Money market funds (b)	862			—			—			—			862
Corporate bonds	—			1,737			—			—			1,737
Other debt securities	—			3,001			—			—			3,001
Foreign covered bonds	1,957			248			—			—			2,205
Non-agency RMBS (c)	—			1,685			—			—			1,685
Total available-for-sale securities	15,929			60,365			—			—			76,294
Trading assets:
Debt and equity instruments (b)	256			1,916			—			—			2,172
Derivative assets not designated as hedging:
Interest rate	21			12,376			—			(10,343		)	2,054
Foreign exchange	—			5,707			—			(3,484		)	2,223
Equity and other contracts	8			128			—			(59		)	77
Total derivative assets not designated as hedging	29			18,211			—			(13,886		)	4,354
Total trading assets	285			20,127			—			(13,886		)	6,526
Loans	—			353			69			—			422
Other assets:
Derivative assets designated as hedging:
Interest rate	—			756			—			—			756
Foreign exchange	—			193			—			—			193
Total derivative assets designated as hedging	—			949			—			—			949
Other assets (d)	198			81			—			—			279
Other assets measured at net asset value													109
Total other assets	198			1,030			—			—			1,337
Subtotal assets of operations at fair value	16,412			81,875			69			(13,886		)	84,579
Percentage of assets prior to netting	17		%	83		%	—		%
Assets of consolidated investment management funds:
Trading assets	481			705			—			—			1,186
Other assets	104			10			—			—			114
Total assets of consolidated investment management funds	585			715			—			—			1,300
Total assets	$	16,997		$	82,590		$	69		$	(13,886	)	$	85,879
Percentage of assets prior to netting	17		%	83		%	—		%



Liabilities measured at fair value on a recurring basis at March 31, 2016
(dollar amounts in millions)	Level 1			Level 2			Level 3			Netting (a)			Total carrying value
Trading liabilities:
Debt and equity instruments	$	316		$	163		$	—		$	—		$	479
Derivative liabilities not designated as hedging:
Interest rate	31			12,300			—			(10,468		)	1,863
Foreign exchange	—			5,829			—			(2,997		)	2,832
Equity and other contracts	—			133			—			(60		)	73
Total derivative liabilities not designated as hedging	31			18,262			—			(13,525		)	4,768
Total trading liabilities	347			18,425			—			(13,525		)	5,247
Long-term debt (b)	—			372			—			—			372
Other liabilities:
Derivative liabilities designated as hedging:
Interest rate	—			818			—			—			818
Foreign exchange	—			129			—			—			129
Total derivative liabilities designated as hedging	—			947			—			—			947
Other liabilities	—			3			—			—			3
Total other liabilities	—			950			—			—			950
Subtotal liabilities of operations at fair value	347			19,747			—			(13,525		)	6,569
Percentage of liabilities prior to netting	2		%	98		%	—		%
Liabilities of consolidated investment management funds:
Trading liabilities	—			245			—			—			245
Other liabilities	1			8			—			—			9
Total liabilities of consolidated investment management funds	1			253			—			—			254
Total liabilities	$	348		$	20,000		$	—		$	(13,525	)	$	6,823
Percentage of liabilities prior to netting	2		%	98		%	—		%

(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. Netting is applicable to derivatives not designated as hedging instruments included in trading assets or trading liabilities, and derivatives designated as hedging instruments included in other assets or other liabilities. Netting is allocated to the derivative products based on the net fair value of each product.


(b)	Includes certain interests in securitizations.


(c)	Previously included in the Grantor Trust. The Grantor Trust was dissolved in 2011.


(d)	Includes private equity investments and seed capital.



Assets measured at fair value on a recurring basis at Dec. 31, 2015
(dollar amounts in millions)	Level 1			Level 2			Level 3			Netting (a)			Total carrying value
Available-for-sale securities:
U.S. Treasury	$	12,832		$	—		$	—		$	—		$	12,832
U.S. Government agencies	—			387			—			—			387
Sovereign debt/sovereign guaranteed	35			13,182			—			—			13,217
State and political subdivisions (b)	—			4,046			—			—			4,046
Agency RMBS	—			23,501			—			—			23,501
Non-agency RMBS	—			793			—			—			793
Other RMBS	—			1,061			—			—			1,061
Commercial MBS	—			1,392			—			—			1,392
Agency commercial MBS	—			4,020			—			—			4,020
CLOs	—			2,351			—			—			2,351
Other asset-backed securities	—			2,893			—			—			2,893
Equity securities	4			—			—			—			4
Money market funds (b)	886			—			—			—			886
Corporate bonds	—			1,752			—			—			1,752
Other debt securities	—			2,775			—			—			2,775
Foreign covered bonds	1,966			202			—			—			2,168
Non-agency RMBS (c)	—			1,789			—			—			1,789
Total available-for-sale securities	15,723			60,144			—			—			75,867
Trading assets:
Debt and equity instruments (b)	1,232			2,167			—			—			3,399
Derivative assets not designated as hedging:
Interest rate	10			10,034			—			(8,071		)	1,973
Foreign exchange	—			4,905			—			(2,981		)	1,924
Equity and other contracts	15			120			—			(63		)	72
Total derivative assets not designated as hedging	25			15,059			—			(11,115		)	3,969
Total trading assets	1,257			17,226			—			(11,115		)	7,368
Loans	—			422			—			—			422
Other assets:
Derivative assets designated as hedging:
Interest rate	—			497			—			—			497
Foreign exchange	—			219			—			—			219
Total derivative assets designated as hedging	—			716			—			—			716
Other assets (d)	192			62			—			—			254
Other assets measured at net asset value													117
Total other assets	192			778			—			—			1,087
Subtotal assets of operations at fair value	17,172			78,570			—			(11,115		)	84,744
Percentage of assets prior to netting	18		%	82		%	—		%
Assets of consolidated investment management funds:
Trading assets	455			773			—			—			1,228
Other assets	157			16			—			—			173
Total assets of consolidated investment management funds	612			789			—			—			1,401
Total assets	$	17,784		$	79,359		$	—		$	(11,115	)	$	86,145
Percentage of assets prior to netting	18		%	82		%	—		%



Liabilities measured at fair value on a recurring basis at Dec. 31, 2015
(dollar amounts in millions)	Level 1			Level 2			Level 3			Netting (a)			Total carrying value
Trading liabilities:
Debt and equity instruments	$	422		$	152		$	—		$	—		$	574
Derivative liabilities not designated as hedging:
Interest rate	5			9,957			—			(8,235		)	1,727
Foreign exchange	—			4,682			—			(2,567		)	2,115
Equity and other contracts	5			147			—			(67		)	85
Total derivative liabilities not designated as hedging	10			14,786			—			(10,869		)	3,927
Total trading liabilities	432			14,938			—			(10,869		)	4,501
Long-term debt (b)	—			359			—			—			359
Other liabilities - derivative liabilities designated as hedging:
Interest rate	—			372			—			—			372
Foreign exchange	—			20			—			—			20
Total other liabilities - derivative liabilities designated as hedging	—			392			—			—			392
Subtotal liabilities of operations at fair value	432			15,689			—			(10,869		)	5,252
Percentage of liabilities prior to netting	3		%	97		%	—		%
Liabilities of consolidated investment management funds:
Trading liabilities	—			229			—			—			229
Other liabilities	1			16			—			—			17
Total liabilities of consolidated investment management funds	1			245			—			—			246
Total liabilities	$	433		$	15,934		$	—		$	(10,869	)	$	5,498
Percentage of liabilities prior to netting	3		%	97		%	—		%

(a)


(b)	Includes certain interests in securitizations.


(c)	Previously included in the Grantor Trust. The Grantor Trust was dissolved in 2011.


(d)	Includes private equity investments and seed capital.



Details of certain items measured at fair value on a recurring basis	March 31, 2016										Dec. 31, 2015
	Total carrying value (a)		Ratings								Total carrying value (a)		Ratings
			AAA/ AA-		A+/ A-		BBB+/ BBB-		BB+ and lower					AAA/ AA-		A+/ A-		BBB+/ BBB-		BB+ and lower
(dollar amounts in millions)			AAA/ AA-		A+/ A-		BBB+/ BBB-		BB+ and lower					AAA/ AA-		A+/ A-		BBB+/ BBB-		BB+ and lower
Non-agency RMBS, originated in:
2007	$	65	—	%	—	%	—	%	100	%	$	66	—	%	—	%	—	%	100	%
2006	109		—		—		—		100		115		—		—		—		100
2005	219		21		7		12		60		234		19		9		13		59
2004 and earlier	356		4		3		26		67		378		4		4		26		66
Total non-agency RMBS	$	749	8	%	4	%	16	%	72	%	$	793	8	%	4	%	16	%	72	%
Commercial MBS - Domestic, originated in:
2009-2015	$	636	84	%	16	%	—	%	—	%	$	626	83	%	17	%	—	%	—	%
2008	15		100		—		—		—		16		100		—		—		—
2007	298		65		19		16		—		304		62		22		16		—
2006	258		77		23		—		—		384		76		24		—		—
Total commercial MBS - Domestic	$	1,207	78	%	18	%	4	%	—	%	$	1,330	76	%	20	%	4	%	—	%
Foreign covered bonds:
Canada	$	1,223	100	%	—	%	—	%	—	%	$	1,014	100	%	—	%	—	%	—	%
United Kingdom	378		100		—		—		—		363		100		—		—		—
Norway	199		100		—		—		—		191		100		—		—		—
Netherlands	176		100		—		—		—		214		100		—		—		—
Other	229		100		—		—		—		386		100		—		—		—
Total foreign covered bonds	$	2,205	100	%	—	%	—	%	—	%	$	2,168	100	%	—	%	—	%	—	%
European floating rate notes - available-for-sale:
United Kingdom	$	693	84	%	16	%	—	%	—	%	$	780	85	%	15	%	—	%	—	%
Netherlands	223		100		—		—		—		222		100		—		—		—
Ireland	121		—		46		54		—		121		—		45		55		—
Total European floating rate notes - available-for-sale	$	1,037	78	%	16	%	6	%	—	%	$	1,123	79	%	15	%	6	%	—	%
Sovereign debt/sovereign guaranteed:
United Kingdom	$	3,068	100	%	—	%	—	%	—	%	$	2,941	100	%	—	%	—	%	—	%
France	2,177		100		—		—		—		2,008		100		—		—		—
Spain	2,054		—		—		100		—		1,955		—		—		100		—
Germany	1,823		100		—		—		—		1,683		100		—		—		—
Italy	1,492		—		—		100		—		1,398		—		—		100		—
Netherlands	1,064		100		—		—		—		1,055		100		—		—		—
Belgium	1,002		100		—		—		—		1,108		100		—		—		—
Ireland	808		—		—		100		—		772		—		—		100		—
Other (b)	294		66		—		—		34		297		68		—		32		—
Total sovereign debt/sovereign guaranteed	$	13,782	68	%	—	%	31	%	1	%	$	13,217	68	%	—	%	32	%	—	%
Non-agency RMBS (c), originated in:
2007	$	474	—	%	—	%	—	%	100	%	$	502	—	%	—	%	—	%	100	%
2006	499		—		—		—		100		530		—		1		—		99
2005	543		—		2		1		97		580		—		2		1		97
2004 and earlier	169		—		3		9		88		177		—		3		9		88
Total non-agency RMBS (c)	$	1,685	—	%	1	%	1	%	98	%	$	1,789	—	%	1	%	1	%	98	%


(a)	At March 31, 2016 and Dec. 31, 2015, foreign covered bonds and sovereign debt were included in Level 1 and Level 2 in the valuation hierarchy. All other assets in the table are Level 2 assets in the valuation hierarchy.


(b)	Includes $99 million of noninvestment grade sovereign debt at March 31, 2016 and $95 million of investment grade sovereign debt at Dec. 31, 2015 related to Brazil.


(c)	Previously included in the Grantor Trust. The Grantor Trust was dissolved in 2011.

Changes in Level 3 fair value measurements

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.

The Company has a Level 3 Pricing Committee which evaluates the valuation techniques used in determining the fair value of Level 3 assets and liabilities.

The tables below include a roll forward of the balance sheet amounts for the quarters ended March 31, 2016 and 2015 (including the change in fair value), for financial instruments classified in Level 3 of the valuation hierarchy.



Fair value measurements for assets using significant unobservable inputs for the quarter ended March 31, 2016
(in millions)	Loans
Fair value at Dec. 31, 2015	$	—
Transfers into Level 3	19
Total gains or (losses) for the period:
Included in earnings (or changes in net assets)	2		(a)
Purchases	48
Fair value at March 31, 2016	$	69
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	$	2


(a)	Reported in investment and other income.



Fair value measurements for assets using significant unobservable inputs for the quarter ended March 31, 2015
	Available-for-sale securities				Trading assets
(in millions)	State and political subdivisions				Derivative assets			(a)	Other assets				Total assets
Fair value at Dec. 31, 2014		$	11		$	9			$	70			$	90
Total gains or (losses) for the period:
Included in earnings (or changes in net assets)		—		(b)	(1		)	(c)	(2		)	(d)	(3		)
Purchases, sales and settlements:
Purchases		—			—				7				7
Sales		—			—				(21		)		(21		)
Settlements		—			(2		)		—				(2		)
Fair value at March 31, 2015		$	11		$	6			$	54			$	71
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					$	(1	)		$	—			$	(1	)


(a)	Derivative assets are reported on a gross basis.


(b)	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).


(c)	Reported in foreign exchange and other trading revenue.


(d)	Reported in investment and other income.



Fair value measurements for liabilities using significant unobservable inputs for the quarter ended March 31, 2015
	Trading liabilities
(in millions)	Derivative liabilities			(a)
Fair value at Dec. 31, 2014	$	9
Total (gains) or losses for the period:
Included in earnings (or changes in net liabilities)	(1		)	(b)
Settlements	(2		)
Fair value at March 31, 2015	$	6
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	$	1


(a)	Derivative liabilities are reported on a gross basis.


(b)	Reported in foreign exchange and other trading revenue.

Assets and liabilities measured at fair value on a nonrecurring basis

Under certain circumstances, we make adjustments to fair value 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, 2016 and Dec. 31, 2015, for which a nonrecurring change in fair value has been recorded during the quarters ended March 31, 2016 and Dec. 31, 2015.



Assets measured at fair value on a nonrecurring basis at March 31, 2016							Total carrying value
(in millions)	Level 1		Level 2		Level 3		Total carrying value
Loans (a)	$	—	$	94	$	178	$	272
Other assets (b)	—		4		—		4
Total assets at fair value on a nonrecurring basis	$	—	$	98	$	178	$	276



Assets measured at fair value on a nonrecurring basis at Dec. 31, 2015							Total carrying value
(in millions)	Level 1		Level 2		Level 3		Total carrying value
Loans (a)	$	—	$	97	$	174	$	271
Other assets (b)	—		6		—		6
Total assets at fair value on a nonrecurring basis	$	—	$	103	$	174	$	277


(a)	During the quarters ended March 31, 2016 and Dec. 31, 2015, the fair value of these loans decreased less than $1 million and $1 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.

Level 3 unobservable inputs

The following tables present the unobservable inputs used in the 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, 2016			Valuation techniques	Unobservable input	Range
Measured on a recurring basis:
Loans:
Home Equity Conversion Mortgages		$	69	Discounted cash flow	Discount Spreads	80-150 bps
					Prepayment Rates	7-100 CPR
					Line of Credit Draw Rates	0%-20%

CPR - Conditional prepayment rate