Fair Value Of Financial Instruments

9 Months Ended

Sep. 30, 2019

Note 6: Fair Value of Financial Instruments

Fair Value Measurement

Financial Assets

Financial assets held by the Company primarily consist of investments in debt securities. Substantially all of the Company’s investments are priced by independent third parties, including pricing services and brokers. Typically, the Company receives one pricing service value or broker quote for each instrument, which represents a

non-binding

indication of value. The Company, along with its third-party portfolio manager, reviews the assumptions, inputs and methodologies used by pricing services and brokers to obtain reasonable assurance that the prices used in its valuations reflect fair value. When the Company and its third-party portfolio manager believe a third-party quotation differs significantly from its internally developed expectation of fair value, whether higher or lower, the Company reviews its data or assumptions with the provider. This review includes comparing significant assumptions such as prepayment speeds, default ratios, forward yield curves, credit spreads and other significant quantitative inputs to internal assumptions, and working with the price provider to reconcile the differences. The price provider may subsequently provide an updated price. In the event that the price provider does not update its price, and the Company still does not agree with the price provided, its third-party portfolio manager will obtain a price from another third-party provider or use an internally developed price which it believes represents the fair value of the investment. The fair values of investments for which internal prices were used were not significant to the aggregate fair value of the Company’s investment portfolio as of September 30, 2019 and December 31, 2018. All challenges to third-party prices are reviewed by staff of the Company as well as its third-party portfolio manager with relevant expertise to ensure reasonableness of assumptions. A pricing analysis is reviewed and approved by the Company’s valuation committee.

Financial Liabilities (excluding derivative liabilities)

Financial liabilities, excluding derivative liabilities, issued by the Company primarily consist of debt issued for general corporate purposes within its corporate segment, medium-term notes (“MTNs”), investment agreements and debt issued by consolidated VIEs. The majority of the financial liabilities that the Company has elected to fair value or that require fair value reporting or disclosures are valued based on the estimated value of the underlying collateral, the Company’s or a third-party’s estimate of discounted cash flow model estimates, or quoted market values for similar products. These valuations include adjustments for expected nonperformance risk of the Company.

Derivative Liabilities

The Company’s derivative liabilities are primarily interest rate swaps and an insured credit derivative. The Company’s insured credit derivative contract is a

non-traded

structured credit derivative transaction and since it is highly customized, there is generally no observable market for this derivative. The Company estimates its fair value based on an internal model that incorporates market or estimated prices for all collateral within the transaction, the present value of the market-implied potential loss and nonperformance risk. The Company reviews its valuation model results on a quarterly basis to assess the appropriateness of the assumptions and results in light of current market activity and conditions. This review is performed by internal staff with relevant expertise.

Internal Review Process

All significant financial assets and liabilities are reviewed by the valuation committee to ensure compliance with the Company’s policies and risk procedures in the development of fair values of financial assets and liabilities. The valuation committee reviews, among other things, key assumptions used for internally developed prices, significant changes in sources and uses of inputs, including changes in model approaches, and any adjustments from third-party inputs or prices to internally developed inputs or prices. The committee also reviews any significant impairment or improvements in fair values of the financial instruments from prior periods. The committee is comprised of senior finance and other team members with relevant experience in the financial instruments the committee is responsible for. The committee documents its agreement with the fair value measurements reported in the Company’s consolidated financial statements.

Valuation Techniques

Valuation techniques for financial instruments measured at fair value are described below.

Fixed-Maturity Securities Held as Available-For-Sale, Investments Carried at Fair Value, Investments Pledged as Collateral and Short-term Investments

These investments include investments in U.S. Treasury and government agencies, state and municipal bonds, foreign governments, corporate obligations, mortgage-backed securities (“MBS”), asset-backed securities, money market securities, and perpetual debt and equity securities.

These investments are generally valued based on recently executed transaction prices or quoted market prices. When quoted market prices are not available, fair value is generally determined using quoted prices of similar investments or a valuation model based on observable and unobservable inputs. Inputs vary depending on the type of investment. Observable inputs include contractual cash flows, interest rate yield curves, CDS spreads, prepayment and volatility scores, diversity scores, cross-currency basis index spreads, and credit spreads for structures similar to the financial instrument in terms of issuer, maturity and seniority. Unobservable inputs include cash flow projections and the value of any credit enhancement.

The investment in the fixed-income fund was measured at fair value by applying the net asset value per share practical expedient. The investment in the fixed-income fund may be redeemed on a quarterly basis with prior redemption notification of ninety days subject to withdrawal limitations. The investment is required to be held for a minimum of twelve months, and any subsequent quarterly redemption is limited to 25% of the investment or a complete redemption over four consecutive quarters in the amounts of 25%, 33%, 50%, and 100% of the remaining investment balance as of the first, second, third and fourth consecutive quarters, respectively.

As of December 31, 2018, the investment in money market securities was also measured at fair value by applying the net asset value per share practical expedient and was not required to be classified in the fair value hierarchy. These funds were backed by high quality, very liquid short-term instruments and the probability is remote that the funds would be sold for a value other than net asset value.

Investments based on quoted market prices of identical investments in active markets are classified as Level 1 of the fair value hierarchy. Level 1 investments generally consist of U.S. Treasury and government agency and perpetual debt and equity securities. Quoted market prices of investments in less active markets, as well as investments which are valued based on other than quoted prices for which the inputs are observable, such as interest rate yield curves, are categorized in Level 2 of the fair value hierarchy. Investments that contain significant inputs that are not observable are categorized as Level 3.

Cash and Cash Equivalents

The carrying amounts of cash and cash equivalents approximate fair value due to the short-term nature and credit worthiness of these instruments and are categorized in Level 1 of the fair value hierarchy.

Loans Receivable at Fair Value

Loans receivable at fair value are comprised of loans and other instruments held by consolidated VIEs consisting of residential mortgage loans are categorized in Level 3 of the fair value hierarchy. Fair values of residential mortgage loans are determined using quoted prices for MBS issued by the respective VIE and adjusted for the fair values of the financial guarantees provided by MBIA Corp. on the related MBS. The fair values of the financial guarantees consider expected claim payments, net of recoveries, under MBIA Corp.’s policies.

Loan Repurchase Commitments

Loan repurchase commitments are obligations owed by the sellers/servicers of mortgage loans to MBIA as reimbursement of paid claims. Loan repurchase commitments are assets of the consolidated VIEs. These assets represent the rights of MBIA against the sellers/servicers for breaches of representations and warranties that the securitized residential mortgage loans sold to the trust to comply with stated underwriting guidelines and for the sellers/servicers to cure, replace, or repurchase mortgage loans. Fair value measurements of loan repurchase commitments represent the amounts owed by the sellers/servicers to MBIA as reimbursement of paid claims

and contractual interest

. Loan repurchase commitments are not securities and no quoted prices or comparable market transaction information are observable or available. Fair values of loan repurchase commitments are determined using discounted cash flow techniques and are categorized in Level 3 of the fair value hierarchy.

Other Assets

A VIE consolidated by the Company has entered into a derivative instrument consisting of a cross currency swap. The cross currency swap is entered into to manage the variability in cash flows resulting from fluctuations in foreign currency rates. The fair value of the VIE derivative is determined based on inputs from unobservable cash flows projection of the derivative, discounted using observable discount rates. As the significant inputs are unobservable, the derivative contract is categorized in Level 3 of the fair value hierarchy.

Other assets also include receivables representing the right to receive reimbursement payments on claim payments expected to be made on certain insured VIE liabilities due to risk mitigating transactions with third parties executed to effectively defease, or,

in-substance

commute the Company’s exposure on its financial guarantee policies. The right to receive reimbursement payments is based on the value of the Company’s financial guarantee determined using the cash flow model. The fair value of the financial guarantee primarily contains unobservable inputs and is categorized in Level 3 of the fair value hierarchy.

Medium-term Notes at Fair Value

The Company has elected to measure certain MTNs at fair value on a recurring basis. The fair values of certain MTNs are based on quoted market prices provided by third-party sources, where available. When quoted market prices are not available, the Company applies a matrix pricing grid to determine fair value based on the quoted market prices received for similar instruments and considering the MTNs’ stated maturity and interest rate. Nonperformance risk is included in the quoted market prices and the matrix pricing grid. MTNs are categorized in Level 3 of the fair value hierarchy.

Variable Interest Entity Notes

The fair values of VIE notes are determined based on recently executed transaction prices or quoted prices where observable. When position-specific quoted prices are not observable, fair values are based on quoted prices of similar securities. Fair values based on quoted prices of similar securities may be adjusted for factors unique to the securities, including any credit enhancement. Observable inputs include interest rate yield curves and bond spreads of similar securities. Unobservable inputs include the value of any credit enhancement. VIE notes are categorized in Level 2 or Level 3 of the fair value hierarchy based on the lowest level input that is significant to the fair value measurement in its entirety.

Derivatives

The corporate segment has entered into derivative transactions primarily consisting of interest rate swaps. Fair values of

over-the-counter

derivatives are determined using valuation models based on observable inputs, nonperformance risk of the Company and nonperformance risk of the counterparties. Observable and market-based inputs include interest rate yields, credit spreads and volatilities. These derivatives are categorized in Level 2 or Level 3 of the fair value hierarchy based on the lowest level input that is significant to the fair value measurement in its entirety.

Derivatives—Insurance

The derivative contracts insured by the Company cannot be legally traded and generally do not have observable market prices. The Company determines the fair values of insured credit derivatives using valuation models based on observable inputs and considering nonperformance risk of the Company. Negotiated settlements are also considered to validate the valuation models and to reflect assumptions the Company believes market participants would use. The Company uses an internally developed Direct Price Model to value its insured credit derivative that incorporates market prices or estimated prices for all collateral within the transaction, the present value of the market-implied potential losses, and nonperformance risk. The valuation of the insured credit derivative includes the impact of its credit standing. The insured credit derivative is categorized in Level 3 of the fair value hierarchy based on unobservable inputs that are significant to the fair value measurement in its entirety.

Derivatives—Other

The Company also has other derivative liabilities as a result of a commutation that occurred in 2014. The fair value of the derivative is determined using a discounted cash flow model. Key inputs include unobservable cash flows projected over the expected term of the derivative. As the significant inputs are unobservable, the derivative contract is categorized in Level 3 of the fair value hierarchy.

Other Liabilities

Other payable relates to certain contingent consideration. The fair value of the liability is based on the cash flow methodologies using observable and unobservable inputs. Unobservable inputs include invested asset balances and asset management fees that are significant to the fair value estimate and the liability is categorized in Level 3 of the fair value hierarchy.

Significant Unobservable Inputs

The following tables provide quantitative information regarding the significant unobservable inputs used by the Company for assets and liabilities measured at fair value on a recurring basis as of September 30, 2019 and December 31, 2018.

In millions

Fair Value as of
September 30, 2019

Valuation Techniques

Unobservable Input

Range
(Weighted Average)

Assets of consolidated VIEs:

Loans receivable at fair value

146

Market prices adjusted for
financial

guarantees

provided

to
VIE obligations

Impact of financial guarantee

(1)

-12% - 83% (21%)

Loan repurchase commitments

478

Discounted cash flow

Recovery rates

(2)

Breach rates

(2)

Liabilities

consolidated VIEs:

Variable interest entity notes

348

Market prices of VIE assets adjusted for financial guarantees provided

Impact of financial guarantee

34% - 72% (59%)

Credit

derivative liabilities:

CMBS

Direct Price Model

Nonperformance risk

54%

54% (54%)

Other derivative liabilities

Discounted cash flow

Cash flows

- $

($25)

(3)

(1) -

Negative percentage represents financial guarantee policies in a receivable position.

(2) -

Recovery rates and breach rates include estimates about potential variations in the outcome of litigation with a counterparty.

(3) -

Midpoint of cash flows are used for the weighted average.

In millions

Fair Value as of
December 31, 2018

Valuation Techniques

Unobservable Input

Range
(Weighted Average)

Assets of consolidated
VIEs:

Loans

receivable

fair
value

172

Market prices adjusted for financial guarantees provided to
VIE obligations

Impact of financial guarantee

(1)

-17% - 75% (7%)

Loan repurchase commitments

418

Discounted cash flow

Recovery rates

(2)

Breach rates

(2)

Liabilities of consolidated VIEs:

Variable interest entity notes

366

Market prices of VIE assets
adjusted

for

financial

guarantees
provided

Impact of financial guarantee

0% - 63% (39%)

Credit

derivative
liabilities:

CMBS

Direct Price Model

Nonperformance risk

54%

54% (54%)

Other derivative liabilities

Discounted cash flow

Cash flows

($25)

(3)

(1) -

Negative percentage represents financial guarantee policies in a receivable position.

(2) -

Recovery rates and breach rates include estimates about potential variations in the outcome of litigation with a counterparty.

(3) -

Midpoint of cash flows are used for the weighted average.

Sensitivity of Significant Unobservable Inputs

The significant unobservable input used in the fair value measurement of the Company’s residential loans receivable at fair value of consolidated VIEs is the impact of the financial guarantee. The fair value of residential loans receivable is calculated by subtracting the value of the financial guarantee from the market value of VIE liabilities. The value of a financial guarantee is estimated by the Company as the present value of expected cash payments, net of recoveries, under the policy. If there is a lower expected cash flow on the underlying loans receivable of the VIE, the value of the financial guarantee provided by the Company under the insurance policy increases. This results in a lower fair value of the residential loans receivable in relation to the obligations of the VIE.

The significant unobservable inputs used in the fair value measurement of the Company’s loan repurchase commitments of consolidated VIEs are the recovery rates and breach rates. Recovery rates reflect the estimates of future cash flows reduced for litigation delays and risks and/or potential financial distress of the sellers/servicers. The estimated recoveries of the loan repurchase commitments may differ from the actual recoveries that may be received in the future. Breach rates represent the rate at which mortgages fail to comply with stated representations and warranties of the sellers/servicers. Significant increases or decreases in the recovery rates and the breach rates would result in significantly higher or lower fair values of the loan repurchase commitments, respectively. Additionally, changes in the legal environment and the ability of the counterparties to pay would impact the recovery rate assumptions, which could significantly impact the fair value measurement. Any significant challenges by the counterparties to the Company’s determination of breaches of representations and warranties could have a material adverse impact on the fair value measurement. Recovery rates and breach rates are determined independently. Changes in one input will not necessarily have any impact on the other input.

The significant unobservable input used in the fair value measurement of the Company’s VIE notes of consolidated VIEs is the impact of the financial guarantee. The fair value of VIE notes is calculated by adding the value of the financial guarantee to the market value of VIE assets. The value of a financial guarantee is estimated by the Company as the present value of expected cash payments under the policy. As the value of the guarantee provided by the Company to the obligations issued by the VIE increases, the credit support adds value to the liabilities of the VIE. This results in an increase in the fair value of the liabilities of the VIE.

The significant unobservable input used in the fair value measurement of MBIA Corp.’s commercial mortgage-backed securities (“CMBS”) credit derivative, which is valued using the Direct Price Model, is nonperformance risk. The nonperformance risk is an assumption of MBIA Corp.’s own ability to pay and whether MBIA Corp. will have the necessary resources to pay the obligations as they come due. Any significant increase or decrease in MBIA Corp.’s nonperformance risk would result in a decrease or increase in the fair value of the derivative liabilities, respectively.

The significant unobservable input used in the fair value measurement of MBIA Corp.’s other derivatives, which are valued using a discounted cash flow model, is the estimates of future cash flows discounted using market rates and CDS spreads. Any significant increase or decrease in future cash flows would result in an increase or decrease in the fair value of the derivative liability, respectively.

Fair Value Measurements

The following tables present the fair value of the Company’s assets (including short-term investments) and liabilities measured and reported at fair value on a recurring basis as of September 30, 2019 and December 31, 2018:


	Fair Value Measurements at Reporting Date Using
In millions	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Counterparty and Cash Collateral Netting		Balance as of September 30, 2019
Assets:
Fixed-maturity investments:
U.S. Treasury and government agency	$	775	$	99	$	-	$	-	$	874
State and municipal bonds		-		230		-		-		230
Foreign governments		-		9		-		-		9
Corporate obligations		-		1,333		-		-		1,333
Mortgage-backed securities:
Residential mortgage-backed agency		-		310		-		-		310
Residential mortgage-backed non-agency		-		21		-		-		21
Commercial mortgage-backed		-		26		-		-		26
Asset-backed securities:
Collateralized debt obligations		-		130		-		-		130
Other asset-backed		-		280		1		-		281
Total fixed-maturity investments		775		2,438		1		-		3,214
Money market securities		164		-		-		-		164
Perpetual debt and equity securities		28		37		-		-		65
Fixed-income fund		-		-		-		-		52	(1)
Cash and cash equivalents		76		-		-		-		76
Derivative assets:
Non-insured derivative assets:
Interest rate derivatives		-		2		-		-		2


	Fair Value Measurements at Reporting Date Using
In millions	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Counterparty and Cash Collateral Netting		Balance as of September 30, 2019
Assets of consolidated VIEs:
Corporate obligations		-		8		-		-		8
Mortgage-backed securities:
Residential mortgage-backed non-agency		-		47		-		-		47
Commercial mortgage-backed		-		16		-		-		16
Asset-backed securities:
Collateralized debt obligations		-		6		-		-		6
Other asset-backed		-		11		-		-		11
Cash		5		-		-		-		5
Loans receivable at fair value:
Residenti al loan s receivable		-		-		146		-		146
Loan repurchase commitments		-		-		478		-		478
Other assets:
Currency derivative s		-		-		8		-		8
Other		-		-		17		-		17
Total assets	$	1,048	$	2,565	$	650	$	-	$	4,315
Liabilities:
Medium-term notes	$	-	$	-	$	106	$	-	$	106
Derivative liabilities:
Insured derivatives:
Credit derivatives		-		2		10		-		12
Non-insured derivatives:
Interest rate derivatives		-		152		-		-		152
Other		-		-		30		-		30
Other liabilities:
Other payable		-		-		4		-		4
Liabilities of consolidated VIEs:
Variable interest entity notes		-		124		348		-		472
Total liabilities	$	-	$	278	$	498	$	-	$	776

(1) -

Investment that was measured at fair value by applying the net asset value per share practical expedient, and was required not to be classified in the fair value hierarchy.


	Fair Value Measurements at Reporting Date Using
In millions	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Balance as of December 31, 2018
Assets:
Fixed-maturity investments:
U.S. Treasury and government agency	$	1,028	$	90	$	-	$	1,118
State and municipal bonds		-		728		-		728
Foreign governments		-		9		-		9
Corporate obligations		-		1,410		-		1,410
Mortgage-backed securities:
Residential mortgage-backed agency		-		219		-		219
Residential mortgage-backed non-agency		-		28		-		28
Commercial mortgage-backed		-		47		7		54
Asset-backed securities:
Collateralized debt obligations		-		121		-		121
Other asset-backed		-		181		3		184

Total fixed-maturity investments		1,028		2,833		10		3,871
Money market securities		-		-		-		67	(1)
Perpetual debt and equity securities		23		35		-		58
Fixed-income fund		-		-		-		75	(1)
Cash and cash equivalents		222		-		-		222
Derivative assets:
Non-insured derivative assets:
Interest rate derivatives		-		2		-		2


	Fair Value Measurements at Reporting Date Using
In millions	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Balance as of December 31, 2018
Assets of consolidated VIEs:
Corporate obligations		-		9		5		14
Mortgage-backed securities:
Residential mortgage-backed non-agency		-		92		-		92
Commercial mortgage-backed		-		34		-		34
Asset-backed securities:
Collateralized debt obligations		-		6		1		7
Other asset-backed		-		10		-		10
Cash		58		-		-		58
Loans receivable at fair value:
Residential loans receivable		-		-		172		172
Loan repurchase commitments		-		-		418		418
Other assets:
Currency derivatives		-		-		17		17
Other		-		-		14		14
Total assets	$	1,331	$	3,021	$	637	$	5,131
Liabilities:
Medium-term notes	$	-	$	-	$	102	$	102
Derivative liabilities:
Insured derivatives:
Credit derivatives		-		2		33		35
Non-insured derivatives:
Interest rate derivatives		-		157		-		157
Other		-		-		7		7
Other liabilities:
Other payable		-		-		5		5
Liabilities of consolidated VIEs:
Variable interest entity notes		-		114		366		480
Total liabilities	$	-	$	273	$	513	$	786

(1)	- Investment that was measured at fair value by applying the net asset value per share practical expedient, and was required not to be classified in the fair value hierarchy.

Level 3 assets at fair value as of September 30, 2019 and December 31, 2018 represented approximately 15% and 12%, respectively, of total assets measured at fair value. Level 3 liabilities at fair value as of September 30, 2019 and December 31, 2018 represented approximately 64% and 65%, respectively, of total liabilities measured at fair value.

The following tables present the fair values and carrying values of the Company’s assets and liabilities that are disclosed at fair value but not reported at fair value on the Company’s consolidated balance sheets as of September 30, 2019 and December 31, 2018:


	Fair Value Measurements at Reporting Date Using
In millions	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Fair Value Balance as of September 30, 2019		Carry Value Balance as of September 30, 2019
Assets:
Other investments	$	-	$	-	$	-	$	-	$	-
Assets of consolidated VIEs:
Investments held-to-maturity		-		-		977		977		890
Total assets	$	-	$	-	$	977	$	977	$	890
Liabilities:
Long-term debt	$	-	$	1,092	$	-	$	1,092	$	2,199
Medium-term notes		-		-		400		400		564
Investment agreements		-		-		414		414		310
Liabilities of consolidated VIEs:
Variable interest entity notes		-		290		977		1,267		1,160
Total liabilities	$	-	$	1,382	$	1,791	$	3,173	$	4,233
Financial Guarantees:
Gross liability (recoverable)	$	-	$	-	$	1,236	$	1,236	$	(485	)
Ceded		-		-		78		78		21

	Fair Value Measurements at Reporting Date Using
In millions	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Fair Value Balance as of December 31, 2018		Carry Value Balance as of December 31, 2018
Assets:
Other investments	$	-	$	1	$	-	$	1	$	1
Assets of consolidated VIEs:
Investments held-to-maturity		-		-		925		925		890

Total assets	$	-	$	1	$	925	$	926	$	891
Liabilities:
Long-term debt	$	-	$	1,101	$	-	$	1,101	$	2,249
Medium-term notes		-		-		422		422		620
Investment agreements		-		-		388		388		311
Liabilities of consolidated VIEs:
Variable interest entity notes		-		378		925		1,303		1,264

Total liabilities	$	-	$	1,479	$	1,735	$	3,214	$	4,444
Financial Guarantees:
Gross liability (recoverable)	$	-	$	-	$	993	$	993	$	(43	)
Ceded		-		-		65		65		35

The following tables present information about changes in Level 3 assets (including short-term investments) and liabilities measured at fair value on a recurring basis for the three months ended September 30, 2019 and 2018:

Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis for the Three Months Ended September 30, 2019


In millions	Balance, Beginning of Period		Realized Gains / (Losses)		Unrealized Gains / (Losses) Included in Earnings			Unrealized Gains / (Losses) Included in OCI		Foreign Exchange Recognized in OCI or Earnings		Purchases		Issuances		Settlements			Sales		Transfers into Level 3 (1)		Transfers out of Level 3 (1)			Ending Balance		Change in Unrealized Gains (Losses) for the Period Included in Earnings for Assets still held as of September 30, 2019
Assets:
Commercial mortgage-backed	$	4	$	-	$	-		$	-	$	-	$	-	$	-	$	(1	)	$	-	$	-	$	(3	)	$	-	$	-
Other asset-backed		1		-		-			-		-		-		-		-			-		-		-			1		-
Assets of consolidated VIEs:
Loans receivable- residential		154		-		(3	)		-		-		-		-		(5	)		-		-		-			146		(3	)
Loan repurchase commitments		428		-		50			-		-		-		-		-			-		-		-			478		50
Currency derivatives		11		-		(4	)		-		1		-		-		-			-		-		-			8		(4	)
Other		15		-		2			-		-		-		-		-			-		-		-			17		2

Total assets	$	613	$	-	$	45		$	-	$	1	$	-	$	-	$	(6	)	$	-	$	-	$	(3	)	$	650	$	45


In millions	Balance, Beginning of Period		Realized (Gains) / Losses		Unrealized (Gains) / Losses Included in Earnings			Unrealized (Gains) / Losses Included in Credit Risk in OCI		Foreign Exchange Recognized in OCI or Earnings			Purchases		Issuances		Settlements			Sales		Transfers into Level 3 (1)		Transfers out of Level 3 (1)		Ending Balance		Change in Unrealized (Gains) Losses for the Period Included in Earnings for Liabilities still held as of September 30, 2019
Liabilities:
Medium-term notes	$	110	$	-	$	3		$	(5)	$	(2	)	$	-	$	-	$	-		$	-	$	-	$	-	$	106	$	1
Credit derivatives		18		10		(9	)		-		-			-		-		(9	)		-		-		-		10		(9	)
Other derivatives		16		-		14			-		-			-		-		-			-		-		-		30		14
Other payable		3		-		1			-		-			-		-		-			-		-		-		4		1
Liabilities of consolidated VIEs:
VIE notes		342		14		(9	)		10		(2	)		-		3		(10	)		-		-		-		348		(11	)

Total liabilities	$	489	$	24	$	-		$	5	$	(4	)	$	-	$	3	$	(19	)	$	-	$	-	$	-	$	498	$	(4	)

(1) -

Transferred in and out at the end of the period.

Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis for the Three Months

Ended
September 30, 2018


In millions	Balance, Beginning of Period		Realized Gains / (Losses)		Unrealized Gains / (Losses) Included in Earnings		Unrealized Gains / (Losses) Included in OCI		Foreign Exchange Recognized in OCI or Earnings			Purchases		Issuances		Settlements			Sales			Transfers into Level 3 (1)		Transfers out of Level 3 (1)			Ending Balance		Change in Unrealized Gains (Losses) for the Period Included in Earnings for Assets still held as of September 30, 2018
Assets:
Commercial mortgage-backed	$	-	$	-	$	-	$	-	$	-		$	-	$	-	$	-		$	-		$	7	$	-		$	7	$	-
Other asset-backed		6		-		-		-		-			-		-		-			-			-		(2	)		4		-
Assets of consolidated VIEs:
Corporate obligations		5		-		-		-		-			-		-		-			-			-		-			5		-
Collateralized debt obligations		1		-		-		-		-			-		-		-			-			-		-			1		-
Loans receivable-residential		683		-		20		-		-			-		-		(24	)		(251	)		-		-			428		21
Loan repurchase commitments		415		-		-		-		-			-		-		-			-			-		-			415		-
Currency derivatives		14		-		2		-		(2	)		-		-		-			-			-		-			14		-
Other		14		-		1		-		-			-		-		-			-			-		-			15		1

Total assets	$	1,138	$	-	$	23	$	-	$	(2	)	$	-	$	-	$	(24	)	$	(251	)	$	7	$	(2	)	$	889	$	22


In millions	Balance, Beginning of Period		Realized (Gains) / Losses		Unrealized (Gains) / Losses Included in Earnings			Unrealized (Gains) / Losses Included in OCI			Foreign Exchange Recognized in OCI or Earnings			Purchases		Issuances		Settlements			Sales		Transfers into Level 3 (1)		Transfers out of Level 3 (1)		Ending Balance		Change in Unrealized (Gains) Losses for the Period Included in Earnings for Liabilities still held as of September 30, 2018
Liabilities:
Medium-term notes	$	149	$	(5)	$	(1	)	$	11		$	(1	)	$	-	$	-	$	(30	)	$	-	$	-	$	-	$	123	$	(2	)
Credit derivatives		31		6		(4	)		-			-			-		-		(6	)		-		-		-		27		(4	)
Other derivatives		4		-		3			-			-			-		-		-			-		-		-		7		3
Other payable		5		-		-			-			-			-		-		-			-		-		-		5		-
Liabilities of consolidated VIEs:
VIE notes		389		10		3			(11	)		5			-		1		(15	)		-		-		-		382		8

Total liabilities	$	578	$	11	$	1		$	-		$	4		$	-	$	1	$	(51	)	$	-	$	-	$	-	$	544	$	5

(1) -

Transferred in and out at the end of the period.

For the three months ended September 30, 2018, sales included the impact of the deconsolidation of VIEs. Refer to “Note 4: Variable Interest Entities” for additional information about the deconsolidation of VIEs.

For the three months ended September 30, 2019, there were no transfers into Level 3 and out of Level 2. CMBS comprised the instruments transferred out of Level 3 where inputs, which are significant to their valuation, became observable during the quarter. These inputs included spreads, prepayment speeds, default speeds, default severities, yield curves observable at commonly quoted intervals, and market corroborated inputs.

For the three months ended September 30, 2018, transfers into Level 3 and out of Level 2 were related to CMBS, where inputs, which are significant to their valuation, became unobservable during the quarter. Other asset-backed comprised the instruments transferred out of Level 3 where inputs, which are significant to their valuation, became observable during the quarter. These inputs included spreads, prepayment speeds, default speeds, default severities, yield curves observable at commonly quoted intervals, and market corroborated inputs.

There were no transfers into or out of Level 1 for the three months ended September 30, 2019 and 2018.

All Level 1, 2 and 3 designations are made at the end of each accounting period.

Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis for the Nine Months Ended

September 30, 2019


In millions	Balance, Beginning of Year		Realized Gains / (Losses)			Unrealized Gains / (Losses) Included in Earnings			Unrealized Gains / (Losses) Included in OCI		Foreign Exchange Recognized in OCI or Earnings		Purchases		Issuances		Settlements			Sales			Transfers into Level 3 (1)		Transfers out of Level 3 (1)			Ending Balance		Change in Unrealized Gains (Losses) for the Period Included in Earnings for Assets still held as of September 30, 2019
Assets:
Commercial mortgage-backed	$	7	$	-		$	-		$	-	$	-	$	-	$	-	$	(4	)	$	-		$	-	$	(3	)	$	-	$	-
Other asset-backed		3		(1	)		-			-		-		-		-		(1	)		-			-		-			1		-
Assets of consolidated VIEs:
Corporate obligations		5		-			-			-		-		-		-		(2	)		-			-		(3	)		-		-
Collateralized debt obligations		1		-			-			-		-		-		-		-			(1	)		-		-			-		-
Loans receivable-residential		172		-			40			-		-		-		-		(18	)		(48	)		-		-			146		35
Loan repurchase commitments		418		-			60			-		-		-		-		-			-			-		-			478		60
Currency derivatives		17		-			(9	)		-		-		-		-		-			-			-		-			8		(9	)
Other		14		-			3			-		-		-		-		-			-			-		-			17		3

Total assets	$	637	$	(1	)	$	94		$	-	$	-	$	-	$	-	$	(25	)	$	(49	)	$	-	$	(6	)	$	650	$	89

In millions	Balance, Beginning of Year		Realized (Gains) / Losses		Unrealized (Gains) / Losses Included in Earnings			Unrealized (Gains) / Losses Included in Credit Risk in OCI		Foreign Exchange Recognized in OCI or Earnings			Purchases		Issuances		Settlements			Sales			Transfers into Level 3 (1)		Transfers out of Level 3 (1)		Ending Balance		Change in Unrealized (Gains) Losses for the Period Included in Earnings for Liabilities still held as of September 30, 2019
Liabilities:
Medium-term notes	$	102	$	-	$	8		$	1	$	(2	)	$	-	$	-	$	(3	)	$	-		$	-	$	-	$	106	$	1
Credit derivatives		33		11		(23	)		-		-			-		-		(11	)		-			-		-		10		(23	)
Other derivatives		7		-		23			-		-			-		-		-			-			-		-		30		23
Other payable		5		-		2			-		-			-		-		(3	)		-			-		-		4		2
Liabilities of consolidated VIEs:
VIE notes		366		21		33			3		(1	)		-		7		(21	)		(60	)		-		-		348		32
Total liabilities	$	513	$	32	$	43		$	4	$	(3	)	$	-	$	7	$	(38	)	$	(60	)	$	-	$	-	$	498	$	35

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

+ References + Details