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 counter-party 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 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 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 agency and non-agency mortgage-backed securities, corporate debt securities and over-the-counter derivative contracts.

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

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 include both long and short positions. Level 1 securities include highly liquid government bonds, money market funds, foreign covered bonds and exchange-traded equities.

If quoted market prices are not available, we estimate fair values 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 agency and non-agency mortgage-backed securities, state and political subdivisions, commercial mortgage-backed securities, sovereign debt, corporate bonds and foreign covered bonds.

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 comparison 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 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 securities of state and political subdivisions and distressed debt securities.

At Sept. 30, 2013, more than 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 and other income and interest of investment management fund note holders, respectively. Consolidated CLOs are generally classified within Level 2 of the valuation hierarchy.

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 risk is unobservable. The fair value of these derivatives compose approximately 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, if any, 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 that 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 Sept. 30, 2013 and Dec. 31, 2012, 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 material transfers between Level 1 and Level 2 during the third quarter of 2013.



Assets measured at fair value on a recurring basis at Sept. 30, 2013
(dollar amounts in millions)	Level 1			Level 2			Level 3			Netting (a)			Total carrying value
Available-for-sale securities:
U.S. Treasury	$	10,431		$	—		$	—		$	—		$	10,431
U.S. Government agencies	—			1,081			—			—			1,081
Sovereign debt	40			10,528			—			—			10,568
State and political subdivisions (b)	—			6,669			51			—			6,720
Agency RMBS	—			26,671			—			—			26,671
Alt-A RMBS	—			258			—			—			258
Prime RMBS	—			526			—			—			526
Subprime RMBS	—			408			—			—			408
Other RMBS	—			2,268			—			—			2,268
Commercial MBS	—			2,563			—			—			2,563
Agency commercial MBS	—			1,289			—			—			1,289
Asset-backed CLOs	—			1,528			—			—			1,528
Other asset-backed securities	—			2,496			—			—			2,496
Equity securities	23			—			—			—			23
Money market funds (b)	941			—			—			—			941
Corporate bonds	—			1,504			—			—			1,504
Other debt securities	—			2,200			—			—			2,200
Foreign covered bonds	2,193			662			—			—			2,855
Alt-A RMBS (c)	—			1,792			—			—			1,792
Prime RMBS (c)	—			850			—			—			850
Subprime RMBS (c)	—			127			—			—			127
Total available-for-sale securities	13,628			63,420			51			—			77,099
Trading assets:
Debt and equity instruments (b)	4,153			4,641			3			—			8,797
Derivative assets not designated as hedging:
Interest rate	5			15,661			9			(14,303		)	1,372
Foreign exchange	3,414			254			1			(2,005		)	1,664
Equity	165			247			16			(160		)	268
Total derivative assets not designated as hedging	3,584			16,162			26			(16,468		)	3,304
Total trading assets	7,737			20,803			29			(16,468		)	12,101
Other assets:
Derivative assets designated as hedging:
Interest rate	—			1,124			—			—			1,124
Foreign exchange	63			—			—			—			63
Total other assets - derivative assets	63			1,124			—			—			1,187
Other assets (d)	140			142			101			—			383
Total other assets	203			1,266			101			—			1,570
Subtotal assets of operations at fair value	21,568			85,489			181			(16,468		)	90,770
Percentage of assets prior to netting	20		%	80		%	—		%
Assets of consolidated investment management funds:
Trading assets	132			10,593			—			—			10,725
Other assets	829			137			—			—			966
Total assets of consolidated investment management funds	961			10,730			—			—			11,691
Total assets	$	22,529		$	96,219		$	181		$	(16,468	)	$	102,461
Percentage of assets prior to netting	19		%	81		%	—		%



Liabilities measured at fair value on a recurring basis at Sept. 30, 2013
(dollar amounts in millions)	Level 1			Level 2			Level 3			Netting (a)			Total carrying value
Trading liabilities:
Debt and equity instruments	$	2,525		$	733		$	—		$	—		$	3,258
Derivative liabilities not designated as hedging:
Interest rate	—			16,200			53			(13,271		)	2,982
Foreign exchange	3,740			158			—			(1,544		)	2,354
Equity and other contracts	77			472			39			(160		)	428
Total derivative liabilities not designated as hedging	3,817			16,830			92			(14,975		)	5,764
Total trading liabilities	6,342			17,563			92			(14,975		)	9,022
Long-term debt (b)	—			326			—			—			326
Other liabilities - derivative liabilities designated as hedging:
Interest rate	—			183			—			—			183
Foreign exchange	260			—			—			—			260
Total other liabilities - derivative liabilities	260			183			—			—			443
Subtotal liabilities at fair value	6,602			18,072			92			(14,975		)	9,791
Percentage of liabilities prior to netting	27		%	73		%	—		%
Liabilities of consolidated investment management funds:
Trading liabilities	—			10,380			—			—			10,380
Other liabilities	—			78			—			—			78
Total liabilities of consolidated investment management funds	—			10,458			—			—			10,458
Total liabilities	$	6,602		$	28,530		$	92		$	(14,975	)	$	20,249
Percentage of liabilities prior to netting	19		%	81		%	—		%

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, seed capital and a brokerage account.



Assets measured at fair value on a recurring basis at Dec. 31, 2012
(dollar amounts in millions)	Level 1			Level 2			Level 3			Netting (a)			Total carrying value
Available-for-sale securities:
U.S. Treasury	$	18,003		$	—		$	—		$	—		$	18,003
U.S. Government agencies	—			1,074			—			—			1,074
Sovereign debt	41			9,383			—			—			9,424
State and political subdivisions (b)	—			6,077			45			—			6,122
Agency RMBS	—			34,193			—			—			34,193
Alt-A RMBS	—			279			—			—			279
Prime RMBS	—			728			—			—			728
Subprime RMBS	—			452			—			—			452
Other RMBS	—			2,794			—			—			2,794
Commercial MBS	—			3,139			—			—			3,139
Asset-backed CLOs	—			1,282			—			—			1,282
Other asset-backed securities	—			2,131			—			—			2,131
Equity securities	27			—			—			—			27
Money market funds (b)	2,190			—			—			—			2,190
Corporate bonds	—			1,585			—			—			1,585
Other debt securities	—			2,368			—			—			2,368
Foreign covered bonds	2,995			723			—			—			3,718
Alt-A RMBS (c)	—			1,970			—			—			1,970
Prime RMBS (c)	—			1,010			—			—			1,010
Subprime RMBS (c)	—			130			—			—			130
Total available-for-sale securities	23,256			69,318			45			—			92,619
Trading assets:
Debt and equity instruments (b)	912			4,116			48			—			5,076
Derivative assets not designated as hedging:
Interest rate	36			22,734			19			(20,042		)	2,747
Foreign exchange	3,364			148			1			(2,171		)	1,342
Equity	121			152			38			(98		)	213
Total derivative assets not designated as hedging	3,521			23,034			58			(22,311		)	4,302
Total trading assets	4,433			27,150			106			(22,311		)	9,378
Other assets:
Derivative assets designated as hedging:
Interest rate	—			928			—			—			928
Foreign exchange	61			—			—			—			61
Total derivative assets	61			928			—			—			989
Other assets (d)	96			116			120			—			332
Total other assets	157			1,044			120			—			1,321
Subtotal assets of operations at fair value	27,846			97,512			271			(22,311		)	103,318
Percentage of assets prior to netting	22		%	78		%	—		%
Assets of consolidated investment management funds:
Trading assets	182			10,735			44			—			10,961
Other assets	390			130			—			—			520
Total assets of consolidated investment management funds	572			10,865			44			—			11,481
Total assets	$	28,418		$	108,377		$	315		$	(22,311	)	$	114,799
Percentage of assets prior to netting	21		%	79		%	—		%



Liabilities measured at fair value on a recurring basis at Dec. 31, 2012
(dollar amounts in millions)	Level 1			Level 2			Level 3			Netting (a)			Total carrying value
Trading liabilities:
Debt and equity instruments	$	1,121		$	659		$	—		$	—		$	1,780
Derivative liabilities not designated as hedging:
Interest rate	—			23,173			168			(19,069		)	4,272
Foreign exchange	3,535			97			—			(1,823		)	1,809
Equity	91			266			56			(98		)	315
Total derivative liabilities not designated as hedging	3,626			23,536			224			(20,990		)	6,396
Total trading liabilities	4,747			24,195			224			(20,990		)	8,176
Long-term debt (b)	—			345			—			—			345
Other liabilities - derivative liabilities designated as hedging:
Interest rate	—			343			—			—			343
Foreign exchange	361			—			—			—			361
Total other liabilities - derivative liabilities	361			343			—			—			704
Subtotal liabilities at fair value	5,108			24,883			224			(20,990		)	9,225
Percentage of liabilities prior to netting	17		%	82		%	1		%
Liabilities of consolidated investment management funds:
Trading liabilities	—			10,152			—			—			10,152
Other liabilities	—			29			—			—			29
Total liabilities of consolidated investment management funds	—			10,181			—			—			10,181
Total liabilities	$	5,108		$	35,064		$	224		$	(20,990	)	$	19,406
Percentage of liabilities prior to netting	13		%	87		%	—		%

(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, seed capital and a brokerage account.



Details of certain items measured at fair value on a recurring basis	Sept. 30, 2013										Dec. 31, 2012
	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
Alt-A RMBS, originated in:
2006-2007	$	103	—	%	—	%	—	%	100	%	$	111	—	%	—	%	—	%	100	%
2005	100		—		—		—		100		107		—		—		—		100
2004 and earlier	55		1		3		30		66		61		4		9		25		62
Total Alt-A RMBS	$	258	—	%	1	%	6	%	93	%	$	279	1	%	2	%	6	%	91	%
Prime RMBS, originated in:
2007	$	93	—	%	—	%	41	%	59	%	$	106	—	%	—	%	45	%	55	%
2006	56		—		—		—		100		70		—		—		—		100
2005	134		—		44		—		56		215		—		33		7		60
2004 and earlier	243		5		6		52		37		337		16		42		7		35
Total prime RMBS	$	526	3	%	14	%	31	%	52	%	$	728	7	%	29	%	12	%	52	%
Subprime RMBS, originated in:
2005	$	110	—	%	22	%	49	%	29	%	$	108	4	%	8	%	34	%	54	%
2004 and earlier	298		2		6		3		89		344		3		4		6		87
Total subprime RMBS	$	408	1	%	11	%	15	%	73	%	$	452	3	%	5	%	13	%	79	%
Commercial MBS - Domestic, originated in:
2009-2012	$	417	83	%	17	%	—	%	—	%	$	283	97	%	3	%	—	%	—	%
2008	23		60		40		—		—		24		59		41		—		—
2007	492		72		19		9		—		707		78		16		6		—
2006	744		85		15		—		—		900		85		14		1		—
2005	519		99		—		1		—		640		98		1		1		—
2004 and earlier	203		95		5		—		—		285		100		—		—		—
Total commercial MBS - Domestic	$	2,398	86	%	12	%	2	%	—	%	$	2,839	89	%	9	%	2	%	—	%
Foreign covered bonds:
Canada	$	896	100	%	—	%	—	%	—	%	$	925	100	%	—	%	—	%	—	%
United Kingdom	763		100		—		—		—		756		100		—		—		—
Netherlands	293		100		—		—		—		360		100		—		—		—
Germany	194		100		—		—		—		866		98		2		—		—
Other	709		100		—		—		—		811		100		—		—		—
Total foreign covered bonds	$	2,855	100	%	—	%	—	%	—	%	$	3,718	100	%	—	%	—	%	—	%
European floating rate notes - available-for-sale:
United Kingdom	$	1,641	81	%	18	%	1	%	—	%	$	1,873	79	%	19	%	2	%	—	%
Netherlands	442		100		—		—		—		841		100		—		—		—
Ireland	167		14		—		—		86		161		15		—		—		85
Italy	108		—		100		—		—		125		—		100		—		—
Other	130		46		4		—		50		145		50		7		—		43
Total European floating rate notes - available-for-sale	$	2,488	74	%	17	%	—	%	9	%	$	3,145	77	%	15	%	2	%	6	%
Sovereign debt:
United Kingdom	$	4,668	100	%	—	%	—	%	—	%	$	4,771	100	%	—	%	—	%	—	%
Netherlands	2,079		100		—		—		—		2,054		100		—		—		—
Germany	1,983		100		—		—		—		1,646		100		—		—		—
France	1,481		100		—		—		—		897		100		—		—		—
Other	357		100		—		—		—		56		100		—		—		—
Total sovereign debt	$	10,568	100	%	—	%	—	%	—	%	$	9,424	100	%	—	%	—	%	—	%
Alt-A RMBS (b), originated in:
2006-2007	$	1,038	—	%	—	%	—	%	100	%	$	1,128	—	%	—	%	—	%	100	%
2005	557		—		4		1		95		622		4		—		1		95
2004 and earlier	197		—		—		13		87		220		—		2		12		86
Total Alt-A RMBS (b)	$	1,792	—	%	1	%	2	%	97	%	$	1,970	1	%	—	%	2	%	97	%
Prime RMBS (b), originated in:
2006-2007	$	507	—	%	—	%	—	%	100	%	$	601	—	%	—	%	—	%	100	%
2005	317		—		1		—		99		378		—		1		2		97
2004 and earlier	26		—		8		22		70		31		—		8		24		68
Total prime RMBS (b)	$	850	—	%	—	%	1	%	99	%	$	1,010	—	%	1	%	1	%	98	%
Subprime RMBS (b), originated in:
2005-2007	$	92	—	%	—	%	10	%	90	%	$	94	—	%	—	%	—	%	100	%
2004 and earlier	35		1		5		38		56		36		5		—		36		59
Total subprime RMBS (b)	$	127	—	%	1	%	18	%	81	%	$	130	2	%	—	%	10	%	88	%


(a)	At Sept. 30, 2013 and Dec. 31, 2012, 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)	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 quarter ended Sept. 30, 2013 and 2012 (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 three months ended Sept. 30, 2013
	Available-for-sale securities				Trading assets														Assets of consolidated investment management funds
(in millions)	State and political subdivisions				Debt and equity instruments			Derivative assets			(a)	Other assets				Total assets of operations			Assets of consolidated investment management funds
Fair value at June 30, 2013	$	52			$	2		$	42			$	113			$	209		44
Transfers out of Level 3	—				—			(14		)		—				(14		)	—
Total gains or (losses) for the period:
Included in earnings (or changes in net assets)	(1		)	(b)	1		(c)	(2		)	(c)	(2		)	(d)	(4		)	2			(e)
Sales	—				—			—				(10		)		(10		)	(46		)
Fair value at Sept. 30, 2013	$	51			$	3		$	26			$	101			$	181		$	—
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	)		$	—			$	(2	)	$	—


(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.


(e)	Reported in income from consolidated investment management funds.



Fair value measurements for liabilities using significant unobservable inputs for the three months ended Sept. 30, 2013
	Trading liabilities				Total liabilities
(in millions)	Derivative liabilities			(a)	Total liabilities
Fair value at June 30, 2013	$	117			$	117
Transfers out of Level 3	(13		)		(13		)
Total (gains) or losses for the period: Included in earnings (or changes in net liabilities)	(5		)	(b)	(5		)
Settlements	(7		)		(7		)
Fair value at Sept. 30, 2013	$	92			$	92
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	)		$	(1	)


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


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



Fair value measurements for assets using significant unobservable inputs for the three months ended Sept. 30, 2012
	Available-for-sale securities			Trading assets
(in millions)	State and political subdivisions			Debt and equity instruments				Derivative assets			(a)	Other assets				Total assets
Fair value at June 30, 2012	$	42		$	60			$	73			$	138			$	313
Total gains or (losses) for the period:
Included in earnings (or changes in net assets)	2		(b)	—			(c)	(6		)	(c)	3			(d)	(1		)
Purchases and sales:
Purchases	—			—				1				3				4
Sales	—			(10		)		—				(16		)		(26		)
Fair value at Sept. 30, 2012	$	44		$	50			$	68			$	128			$	290
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				$	—			$	(4	)		$	—			$	(4	)


(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 three months ended Sept. 30, 2012
	Trading liabilities				Total liabilities
(in millions)	Derivative liabilities			(a)	Total liabilities
Fair value at June 30, 2012	$	302			$	302
Total (gains) or losses for the period:
Included in earnings (or changes in net liabilities)	(2		)	(b)	(2		)
Fair value at Sept. 30, 2012	$	300			$	300
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	$	12			$	12


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


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



Fair value measurements for assets using significant unobservable inputs for the nine months ended Sept. 30, 2013
	Available-for-sale securities			Trading assets												Total assets of operations			Assets of consolidated investment management funds
(in millions)	State and political subdivisions			Debt and equity instruments				Derivative assets			(a)	Other assets				Total assets of operations			Assets of consolidated investment management funds
Fair value at Dec. 31, 2012	$	45		$	48			$	58			$	120			$	271		$	44
Transfers out of Level 3	—			—				(19		)		—				(19		)	—
Total gains or (losses) for the period:
Included in earnings (or changes in net assets)	6		(b)	4			(c)	(13		)	(c)	(2		)	(d)	(5		)	2			(e)
Purchases and sales:
Purchases	—			—				—				3				3			—
Sales	—			(49		)		—				(20		)		(69		)	(46		)
Fair value at Sept. 30, 2013	$	51		$	3			$	26			$	101			$	181		$	—
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				$	—			$	(13	)		$	—			$	(13	)	$	—


(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.


(e)	Reported in income from consolidated investment management funds.



Fair value measurements for liabilities using significant unobservable inputs for the nine months ended Sept. 30, 2013
	Trading liabilities				Total liabilities
(in millions)	Derivative liabilities			(a)	Total liabilities
Fair value at Dec. 31, 2012	$	224			$	224
Transfers out of Level 3	(17		)		(17		)
Total (gains) or losses for the period:
Included in earnings (or changes in net liabilities)	(110		)	(b)	(110		)
Settlements	(5		)		(5		)
Fair value at Sept. 30, 2013	$	92			$	92
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	$	27			$	27


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


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



Fair value measurements for assets using significant unobservable inputs for the nine months ended Sept. 30, 2012
	Available-for-sale securities								Trading assets
(in millions)	State and political subdivisions				Other debt securities				Debt and equity instruments				Derivative assets			(a)	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)	2			(b)	(3		)	(b)	—			(c)	(30		)	(c)	4			(d)	(27		)
Purchases, sales and settlements:
Purchases	—				—				—				1				8				9
Sales	—				—				(13		)		—				(33		)		(46		)
Settlements	(3		)		—				—				—				(8		)		(11		)
Fair value at Sept. 30, 2012	$	44			$	—			$	50			$	68			$	128			$	290
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					—				$	—			$	(13	)		$	—			$	(13	)


(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 nine months ended Sept. 30, 2012
	Trading liabilities				Total liabilities
(in millions)	Derivative liabilities			(a)	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)	(14		)	(b)	(14		)
Fair value at Sept. 30, 2012	$	300			$	300
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	$	33			$	33


(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 Sept. 30, 2013 and Dec. 31, 2012, for which a nonrecurring change in fair value has been recorded during the quarters ended Sept. 30, 2013 and Dec. 31, 2012.



Assets measured at fair value on a nonrecurring basis at Sept. 30, 2013							Total carrying value
(in millions)	Level 1		Level 2		Level 3		Total carrying value
Loans (a)	$	—	$	131	$	8	$	139
Other assets (b)	—		35		—		35
Total assets at fair value on a nonrecurring basis	$	—	$	166	$	8	$	174



Assets measured at fair value on a nonrecurring basis at Dec. 31, 2012							Total carrying value
(in millions)	Level 1		Level 2		Level 3		Total carrying value
Loans (a)	$	—	$	183	$	23	$	206
Other assets (b)	—		79		—		79
Total assets at fair value on a nonrecurring basis	$	—	$	262	$	23	$	285


(a)	During the quarters ended Sept. 30, 2013 and Dec. 31, 2012, the fair value of these loans increased $2 million and decreased $2 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.