Fair Value Measurements

9 Months Ended

Sep. 30, 2016

Fair Value Disclosures [Abstract]

Fair Value Measurements

Fair Value Measurements

Accounting principles related to fair value measurements provide a framework for measuring fair value that focuses on the exit price that would be received to sell an asset or paid to transfer a liability in the principal market (or in the absence of the principal market, the most advantageous market) accessible in an orderly transaction between willing market participants (the "Fair Value Framework"). Where required by the applicable accounting standards, assets and liabilities are measured at fair value using the "highest and best use" valuation premise. Fair value measurement guidance clarifies that financial instruments do not have alternative use and, as such, the fair value of financial instruments should be determined using an “in-exchange” valuation premise. However, the fair value measurement literature provides a valuation exception and permits an entity to measure the fair value of a group of financial assets and financial liabilities with offsetting credit risks and/or market risks based on the exit price it would receive or pay to transfer the net risk exposure of a group of assets or liabilities if certain conditions are met. We elected to apply the measurement exception to a group of derivative instruments with offsetting credit risks and market risks, which primarily relate to interest rate, foreign currency, debt and equity price risk, and commodity price risk as of the reporting date.

Fair Value Adjustments  The best evidence of fair value is quoted market price in an actively traded market, where available. In the event listed price or market quotes are not available, valuation techniques that incorporate relevant transaction data and market parameters reflecting the attributes of the asset or liability under consideration are applied. Where applicable, fair value adjustments are made to ensure the financial instruments are appropriately recorded at fair value. The fair value adjustments reflect the risks associated with the products, contractual terms of the transactions, and the liquidity of the markets in which the transactions occur. The fair value adjustments are broadly categorized by the following major types:

Credit risk adjustment - The credit risk adjustment is an adjustment to a group of financial assets and financial liabilities, predominantly derivative assets and derivative liabilities, to reflect the credit quality of the parties to the transaction in arriving at fair value. A credit valuation adjustment to a financial asset is required to reflect the default risk of the counterparty. A debit valuation adjustment to a financial liability is recorded to reflect the default risk of HUSI. See "Valuation Techniques - Derivatives" below for additional details.

Liquidity risk adjustment - The liquidity risk adjustment (primarily in the form of bid-offer adjustment) reflects the cost that would be incurred to close out the market risks by hedging, disposing or unwinding the position. Valuation models generally produce mid-market values. The bid-offer adjustment is made in such a way that results in a measure that reflects the exit price that most represents the fair value of the financial asset or financial liability under consideration or, where applicable, the fair value of the net market risk exposure of a group of financial assets or financial liabilities. These adjustments relate primarily to Level 2 assets.

Model valuation adjustment - Where fair value measurements are determined using an internal valuation model based on observable and unobservable inputs, certain valuation inputs may be less readily determinable. There may be a range of possible valuation inputs that market participants may assume in determining the fair value measurement. The resultant fair value measurement has inherent measurement risk if one or more parameters are unobservable and must be estimated. An input valuation adjustment is necessary to reflect the likelihood that market participants may use different input parameters, and to mitigate the possibility of measurement error. In addition, the values derived from valuation techniques are affected by the choice of valuation model and model limitation. When different valuation techniques are available, the choice of valuation model can be subjective. Furthermore, the valuation model applied may have measurement limitations. In those cases, an additional valuation adjustment is also applied to mitigate the measurement risk. Model valuation adjustments are not material and relate primarily to Level 2 instruments.

We apply stress scenarios in determining appropriate liquidity risk and model risk adjustments for Level 3 fair values by reviewing the historical data for unobservable inputs (e.g., correlation, volatility). Some stress scenarios involve at least a 95 percent confidence interval (i.e., two standard deviations). We also utilize unobservable parameter adjustments when instruments are valued using internally developed models which reflects the uncertainty in the value estimates provided by the model.

Valuation of uncollateralized derivatives - During 2014, we adopted a funding fair value adjustment ("FFVA") to reflect the estimated present value of the future market funding cost or benefit associated with funding uncollateralized derivative exposure at rates other than the Overnight Indexed Swap ("OIS") rate. See "Valuation Techniques - Derivatives" below for additional details.

Fair Value Hierarchy  The Fair Value Framework establishes a three-tiered fair value hierarchy as follows:

Level 1 quoted market price - Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities.

Level 2 valuation technique using observable inputs - Level 2 inputs include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are inactive, and measurements determined using valuation models where all significant inputs are observable, such as interest rates and yield curves that are observable at commonly quoted intervals.

Level 3 valuation technique with significant unobservable inputs - Level 3 inputs are unobservable inputs for the asset or liability and include situations where fair values are measured using valuation techniques based on one or more significant unobservable inputs.

Classification within the fair value hierarchy is based on whether the lowest hierarchical level input that is significant to the fair value measurement is observable. As such, the classification within the fair value hierarchy is dynamic and can be transferred to other hierarchy levels in each reporting period. Transfers between leveling categories are assessed, determined and recognized at the end of each reporting period.

Valuation Control Framework We have established a control framework which is designed to ensure that fair values are either determined or validated by a function independent of the risk-taker. To that end, the ultimate responsibility for the determination of fair values rests with Finance. Finance has established an independent price validation process to ensure that the assets and liabilities measured at fair value are properly stated.

A valuation committee, chaired by the Head of Product Control, meets monthly to review, monitor and discuss significant valuation matters arising from credit and market risks. The committee is responsible for reviewing and approving valuation policies and procedures including any valuation adjustments pertaining to, among other things, independent price verification, market liquidity, unobservable inputs, model uncertainty and counterparty credit risk. All valuation models are reviewed by the valuation committee in terms of model development, enhancements and performance. All models are independently reviewed by the Markets Independent Model Review function and applicable valuation model recommendations are reported to and discussed with the valuation committee. Significant valuation risks identified in business activities are corroborated and addressed by the committee members and, where applicable, are escalated to the Chief Financial Officer of HUSI and the Audit Committee of the Board of Directors.

Where fair value measurements are determined based on information obtained from independent pricing services or brokers, Finance applies appropriate validation procedures to substantiate fair value. For price validation purposes, quotations from at least two independent pricing sources are obtained for each financial instrument, where possible.

The following factors are considered in determining fair values:

▪ similarities between the asset or the liability under consideration and the asset or liability for which quotation is received;

▪ collaboration of pricing by referencing to other independent market data such as market transactions and relevant benchmark indices;

▪ consistency among different pricing sources;

▪ the valuation approach and the methodologies used by the independent pricing sources in determining fair value;

▪ the elapsed time between the date to which the market data relates and the measurement date;

▪ the source of the fair value information; and

▪ whether the security is traded in an active or inactive market.

Greater weight is given to quotations of instruments with recent market transactions, pricing quotes from dealers who stand ready to transact, quotations provided by market-makers who structured such instrument and market consensus pricing based on inputs from a large number of survey participants. Any significant discrepancies among the external quotations are reviewed and adjustments to fair values are recorded where appropriate. Where the transaction volume of a specific instrument has been reduced and the fair value measurement becomes less transparent, Finance will apply more detailed procedures to understand and challenge the appropriateness of the unobservable inputs and the valuation techniques used by the independent pricing service. Where applicable, Finance will develop a fair value estimate using its own pricing model inputs to test reasonableness. Where fair value measurements are determined using internal valuation models, Finance will validate the fair value measurement by either developing unobservable inputs based on the industry consensus pricing surveys in which we participate or back testing by observing the actual settlements occurring soon after the measurement date. Any significant valuation adjustments are reported to and discussed with the valuation committee.

Fair Value of Financial Instruments  The fair value estimates, methods and assumptions set forth below for our financial instruments, including those financial instruments carried at cost, are made solely to comply with disclosures required by generally accepted accounting principles in the United States and should be read in conjunction with the financial statements and notes included in this report.

The following table summarizes the carrying value and estimated fair value of our financial instruments at September 30, 2016 and December 31, 2015:

September 30, 2016	Carrying Value		Fair Value		Level 1		Level 2		Level 3
	(in millions)
Financial assets:
Short-term financial assets	$	18,062	$	18,062	$	903	$	17,139	$	20
Federal funds sold and securities purchased under agreements to resell	29,945		29,945		—		29,945		—
Federal funds sold and securities purchased under agreements to resell designated under fair value option	769		769		—		769		—
Non-derivative trading assets	15,912		15,912		4,374		8,463		3,075
Derivatives	3,927		3,927		5		3,904		18
Securities	54,231		54,562		26,435		28,127		—
Commercial loans, net of allowance for credit losses	57,061		58,676		—		—		58,676
Commercial loans designated under fair value option and held for sale	649		649		—		649		—
Commercial loans held for sale	92		92		—		92		—
Consumer loans, net of allowance for credit losses	19,504		18,753		—		—		18,753
Consumer loans held for sale:
Residential mortgages and home equity mortgages	971		972		—		18		954
Other consumer	75		75		—		—		75
Financial liabilities:
Short-term financial liabilities	$	3,407	$	3,469	$	—	$	3,449	$	20
Deposits:
Without fixed maturities	112,211		112,211		—		112,211		—
Fixed maturities	11,399		11,434		—		11,434		—
Deposits designated under fair value option	7,472		7,472		—		6,068		1,404
Non-derivative trading liabilities	1,079		1,079		1,030		49		—
Derivatives	6,897		6,897		8		6,877		12
Short-term borrowings designated under fair value option	2,675		2,675		—		2,675		—
Long-term debt	29,501		30,442		—		30,442		—
Long-term debt designated under fair value option	9,999		9,999		—		9,486		513

December 31, 2015	Carrying Value		Fair Value		Level 1		Level 2		Level 3
	(in millions)
Financial assets:
Short-term financial assets	$	8,494	$	8,494	$	968	$	7,478	$	48
Federal funds sold and securities purchased under agreements to resell	19,847		19,847		—		19,847		—
Non-derivative trading assets	11,935		11,935		3,088		5,756		3,091
Derivatives	5,614		5,614		5		5,579		30
Securities	49,797		49,938		21,924		28,014		—
Commercial loans, net of allowance for credit losses	61,674		62,417		—		—		62,417
Commercial loans designated under fair value option and held for sale	151		151		—		151		—
Commercial loans held for sale	1,944		1,958		—		55		1,903
Consumer loans, net of allowance for credit losses	20,331		19,185		—		—		19,185
Consumer loans held for sale:
Residential mortgages	11		11		—		7		4
Other consumer	79		79		—		—		79
Financial liabilities:
Short-term financial liabilities	$	3,082	$	3,124	$	—	$	3,076	$	48
Deposits:
Without fixed maturities	101,146		101,146		—		101,146		—
Fixed maturities	10,514		10,508		—		10,508		—
Deposits designated under fair value option	6,919		6,919		—		5,052		1,867
Non-derivative trading liabilities	1,049		1,049		363		686		—
Derivatives	6,993		6,993		9		6,957		27
Short-term borrowings designated under fair value option	1,976		1,976		—		1,976		—
Long-term debt	24,338		24,874		—		24,874		—
Long-term debt designated under fair value option	9,171		9,171		—		8,425		746

Loan values presented in the table above were determined using the Fair Value Framework for measuring fair value, which is based on our best estimate of the amount within a range of value we believe would be received in a sale as of the balance sheet date (i.e. exit price). The secondary market demand and estimated value for our residential mortgage loans has been heavily influenced by economic conditions, including house price depreciation, elevated unemployment, changes in consumer behavior, changes in discount rates and the lack of financing options available to support the purchase of loans. For certain consumer loans which were transferred to held for sale during the third quarter of 2016, investors incorporate numerous assumptions in predicting cash flows, such as future interest rates, higher charge-off levels, slower voluntary prepayment speeds, different default and loss curves and estimated collateral values than we, as the servicer of these loans, believe will ultimately be the case. The investor's valuation process reflects this difference in overall cost of capital assumptions as well as the potential volatility in the underlying cash flow assumptions, the combination of which may yield a significant pricing discount from our intrinsic value. The estimated fair values at September 30, 2016 and December 31, 2015 reflect these market conditions. The increase in the relative fair value of our residential mortgage loans since December 31, 2015 reflects the conditions in the housing industry which have continued to show improvement in 2016 due to improvements in property values as well as lower required market yields and increased investor demand for these types of loans.

Assets and Liabilities Recorded at Fair Value on a Recurring Basis  The following table presents information about our assets and liabilities measured at fair value on a recurring basis at September 30, 2016 and December 31, 2015, and indicates the fair value hierarchy of the valuation techniques utilized to determine such fair value:

	Fair Value Measurements on a Recurring Basis
September 30, 2016	Level 1		Level 2		Level 3		Gross Balance		Netting(1)			Net Balance
	(in millions)
Assets:
Securities purchased under agreements to resell(2)	$	—	$	769	$	—	$	769	$	—		$	769
Trading Securities, excluding derivatives:
U.S. Treasury, U.S. Government agencies and sponsored enterprises	4,374		180		—		4,554		—			4,554
Collateralized debt obligations	—		—		191		191		—			191
Asset-backed securities:
Residential mortgages	—		99		—		99		—			99
Student Loans	—		84		—		84		—			84
Corporate and other domestic debt securities	—		—		2,884		2,884		—			2,884
Debt Securities issued by foreign entities	—		5,416		—		5,416		—			5,416
Equity securities	—		15		—		15		—			15
Precious metals trading	—		2,669		—		2,669		—			2,669
Derivatives(3):
Interest rate contracts	55		47,841		3		47,899		—			47,899
Foreign exchange contracts	—		19,459		14		19,473		—			19,473
Equity contracts	—		1,883		98		1,981		—			1,981
Precious metals contracts	38		740		—		778		—			778
Credit contracts	—		1,460		220		1,680		—			1,680
Derivatives netting	—		—		—		—		(67,884		)	(67,884		)
Total derivatives	93		71,383		335		71,811		(67,884		)	3,927
Securities available-for-sale:
U.S. Treasury, U.S. Government agencies and sponsored enterprises	26,435		13,187		—		39,622		—			39,622
Asset-backed securities:
Commercial mortgages	—		4		—		4		—			4
Home equity	—		65		—		65		—			65
Other	—		494		—		494		—			494
Debt Securities issued by foreign entities	—		457		—		457		—			457
Equity securities	—		158		—		158		—			158
Loans(4)	—		649		—		649		—			649
Mortgage servicing rights(5)	—		95		—		95		—			95
Total assets	$	30,902	$	95,724	$	3,410	$	130,036	$	(67,884	)	$	62,152
Liabilities:
Domestic deposits(2)	$	—	$	6,068	$	1,404	$	7,472	$	—		$	7,472
Trading liabilities, excluding derivatives	1,030		49		—		1,079		—			1,079
Derivatives(3):
Interest rate contracts	60		48,942		2		49,004		—			49,004
Foreign exchange contracts	6		17,684		14		17,704		—			17,704
Equity contracts	—		1,614		93		1,707		—			1,707
Precious metals contracts	21		653		—		674		—			674
Credit contracts	—		1,511		13		1,524		—			1,524
Derivatives netting	—		—		—		—		(63,716		)	(63,716		)
Total derivatives	87		70,404		122		70,613		(63,716		)	6,897
Short-term borrowings(2)	—		2,675		—		2,675		—			2,675
Long-term debt(2)	—		9,486		513		9,999		—			9,999
Total liabilities	$	1,117	$	88,682	$	2,039	$	91,838	$	(63,716	)	$	28,122

	Fair Value Measurements on a Recurring Basis
December 31, 2015	Level 1		Level 2		Level 3		Gross Balance		Netting(1)			Net Balance
	(in millions)
Assets:
Trading Securities, excluding derivatives:
U.S. Treasury, U.S. Government agencies and sponsored enterprises	$	3,088	$	167	$	—	$	3,255	$	—		$	3,255
Obligations of U. S. States and political subdivisions	—		559		—		559		—			559
Collateralized debt obligations	—		—		221		221		—			221
Asset-backed securities:
Residential mortgages	—		114		—		114		—			114
Student loans	—		89		—		89		—			89
Corporate and other domestic debt securities	—		—		2,870		2,870		—			2,870
Debt Securities issued by foreign entities:
Corporate	—		55		—		55		—			55
Government-backed	—		3,974		—		3,974		—			3,974
Equity securities	—		18		—		18		—			18
Precious metals trading	—		780		—		780		—			780
Derivatives(3):
Interest rate contracts	26		35,241		2		35,269		—			35,269
Foreign exchange contracts	—		24,161		16		24,177		—			24,177
Equity contracts	—		1,687		119		1,806		—			1,806
Precious metals contracts	38		891		—		929		—			929
Credit contracts	—		3,676		209		3,885		—			3,885
Derivatives netting	—		—		—		—		(60,452		)	(60,452		)
Total derivatives	64		65,656		346		66,066		(60,452		)	5,614
Securities available-for-sale:
U.S. Treasury, U.S. Government agencies and sponsored enterprises	21,924		12,621		—		34,545		—			34,545
Obligations of U.S. states and political subdivisions	—		348		—		348		—			348
Asset-backed securities:
Commercial mortgages	—		9		—		9		—			9
Home equity	—		75		—		75		—			75
Other	—		89		—		89		—			89
Debt Securities issued by foreign entities	—		546		—		546		—			546
Equity securities	—		161		—		161		—			161
Loans(4)	—		151		—		151		—			151
Mortgage servicing rights(5)	—		—		140		140		—			140
Total assets	$	25,076	$	85,412	$	3,577	$	114,065	$	(60,452	)	$	53,613
Liabilities:
Domestic deposits(2)	$	—	$	5,052	$	1,867	$	6,919	$	—		$	6,919
Trading liabilities, excluding derivatives	363		686		—		1,049		—			1,049
Derivatives(3):
Interest rate contracts	28		35,432		1		35,461		—			35,461
Foreign exchange contracts	15		22,405		16		22,436		—			22,436
Equity contracts	—		1,560		202		1,762		—			1,762
Precious metals contracts	39		552		—		591		—			591
Credit contracts	—		3,753		30		3,783		—			3,783
Derivatives netting	—		—		—		—		(57,040		)	(57,040		)
Total derivatives	82		63,702		249		64,033		(57,040		)	6,993
Short-term borrowings(2)	—		1,976		—		1,976		—			1,976
Long-term debt(2)	—		8,425		746		9,171		—			9,171
Total liabilities	$	445	$	79,841	$	2,862	$	83,148	$	(57,040	)	$	26,108

⁽¹⁾  Represents counterparty and cash collateral netting which allow the offsetting of amounts relating to certain contracts if certain conditions are met.

⁽²⁾  See Note 11, "Fair Value Option," for additional information.

⁽³⁾  Includes trading derivative assets of $3,674 million and $5,150 million and trading derivative liabilities of $6,458 million and $6,406 million at September 30, 2016 and December 31, 2015, respectively, as well as derivatives held for hedging and commitments accounted for as derivatives.

⁽⁴⁾  Includes certain commercial loans held for sale which we have elected to apply the fair value option. See Note 6, "Loans Held for Sale," for further information.

⁽⁵⁾  See Note 7, "Intangible Assets," and Note 9, "Other Assets Held for Sale," for additional information.

Transfers between levels of the fair value hierarchy are recognized at the end of each reporting period.

Transfers between Level 1 and Level 2 measurements  There were no transfers between Levels 1 and 2 during the three and nine months ended September 30, 2016 and 2015.

Information on Level 3 assets and liabilities  The following table summarizes additional information about changes in the fair value of Level 3 assets and liabilities during the three and nine months ended September 30, 2016 and 2015. As a risk management practice, we may risk manage the Level 3 assets and liabilities, in whole or in part, using securities and derivative positions that are classified as Level 1 or Level 2 measurements within the fair value hierarchy. Since those Level 1 and Level 2 risk management positions are not included in the table below, the information provided does not reflect the effect of such risk management activities related to the Level 3 assets and liabilities.

	Jul. 1, 2016			Total Gains and  (Losses) Included in(1)					Purch- ases		Issu- ances			Settle- ments			Transfers Into Level 3			Transfers Out of Level 3			Sep. 30, 2016			Current Period Unrealized Gains (Losses)
				Trading Revenue (Loss)		Other Revenue
	(in millions)
Assets:
Trading assets, excluding derivatives:
Collateralized debt obligations	$	201		$	4	$	—		$	—	$	—		$	(14	)	$	—		$	—		$	191		$	2
Corporate and other domestic debt securities	2,879			1		—			4		—			—			—			—			2,884			1
Derivatives, net(2):
Interest rate contracts	1			—		—			—		—			—			—			—			1			—
Foreign exchange contracts	—			—		—			—		—			—			—			—			—			—
Equity contracts	(15		)	20		—			—		—			(2		)	(1		)	3			5			—
Credit contracts	188			11		—			—		—			8			—			—			207			(3		)
Mortgage servicing rights(3)	104			—		(4		)	—		—			(5		)	—			(95		)	—			(4		)
Total assets	$	3,358		$	36	$	(4	)	$	4	$	—		$	(13	)	$	(1	)	$	(92	)	$	3,288		$	(4	)
Liabilities:
Domestic deposits(4)	$	(1,677	)	$	—	$	(3	)	$	—	$	(42	)	$	300		$	(39	)	$	57		$	(1,404	)	$	(26	)
Long-term debt(4)	(573		)	—		(31		)	—		(86		)	110			—			67			(513		)	(42		)
Total liabilities	$	(2,250	)	$	—	$	(34	)	$	—	$	(128	)	$	410		$	(39	)	$	124		$	(1,917	)	$	(68	)

	Jan. 1, 2016			Total Gains and  (Losses) Included in(1)						Purch- ases		Issu- ances			Settle- ments			Transfers Into Level 3			Transfers Out of Level 3			Sep. 30, 2016			Current Period Unrealized Gains (Losses)
				Trading Revenue (Loss)			Other Revenue
	(in millions)
Assets:
Trading assets, excluding derivatives:
Collateralized debt obligations	$	221		$	(4	)	$	—		$	—	$	—		$	(26	)	$	—		$	—		$	191		$	(9	)
Corporate and other domestic debt securities	2,870			—			—			14		—			—			—			—			2,884			—
Derivatives, net(2):
Interest rate contracts	1			—			—			—		—			—			—			—			1			—
Foreign exchange contracts	—			—			—			—		—			—			—			—			—			—
Equity contracts	(83		)	75			—			—		—			10			—			3			5			50
Credit contracts	179			27			—			—		—			1			—			—			207			18
Mortgage servicing rights(3)	140			—			(28		)	—		—			(17		)	—			(95		)	—			(28		)
Total assets	$	3,328		$	98		$	(28	)	$	14	$	—		$	(32	)	$	—		$	(92	)	$	3,288		$	31
Liabilities:
Domestic deposits(4)	$	(1,867	)	$	—		$	(74	)	$	—	$	(206	)	$	599		$	(54	)	$	198		$	(1,404	)	$	(46	)
Long-term debt(4)	(746		)	—			(23		)	—		(216		)	259			—			213			(513		)	(23		)
Total liabilities	$	(2,613	)	$	—		$	(97	)	$	—	$	(422	)	$	858		$	(54	)	$	411		$	(1,917	)	$	(69	)

	Jul. 1, 2015			Total Gains and  (Losses) Included in(1)						Purch- ases		Issu- ances			Settle- ments			Transfers Into Level 3			Transfers Out of Level 3		Sep. 30, 2015			Current Period Unrealized Gains (Losses)
				Trading Revenue (Loss)			Other Revenue
	(in millions)
Assets:
Trading assets, excluding derivatives:
Collateralized debt obligations	$	240		$	3		$	—		$	—	$	—		$	(10	)	$	—		$	—	$	233		$	—
Corporate and other domestic debt securities	2,855			—			—			7		—			—			—			—		2,862			—
Derivatives, net(2):
Interest rate contracts	1			—			(1		)	—		—			—			—			—		—			(1		)
Foreign exchange contracts	—			—			—			—		—			—			—			—		—			—
Equity contracts	(10		)	(70		)	—			—		—			(17		)	—			2		(95		)	(79		)
Credit contracts	179			(8		)	—			—		—			—			—			—		171			(7		)
Mortgage servicing rights(3)	158			—			(21		)	—		—			(7		)	—			—		130			(21		)
Total assets	$	3,423		$	(75	)	$	(22	)	$	7	$	—		$	(34	)	$	—		$	2	$	3,301		$	(108	)
Liabilities:
Domestic deposits(4)	$	(1,817	)	$	—		$	9		$	—	$	(86	)	$	130		$	(44	)	$	54	$	(1,754	)	$	15
Long-term debt(4)	(662		)	—			73			—		(186		)	13			(1		)	18		(745		)	71
Total liabilities	$	(2,479	)	$	—		$	82		$	—	$	(272	)	$	143		$	(45	)	$	72	$	(2,499	)	$	86

	Jan. 1, 2015			Total Gains and  (Losses) Included in(1)						Purch- ases		Issu- ances			Settle- ments			Transfers Into Level 3			Transfers Out of Level 3		Sep. 30, 2015			Current Period Unrealized Gains (Losses)
				Trading Revenue (Loss)			Other Revenue
	(in millions)
Assets:
Trading assets, excluding derivatives:
Collateralized debt obligations	$	253		$	15		$	—		$	—	$	—		$	(35	)	$	—		$	—	$	233		$	7
Corporate and other domestic debt securities	2,840			—			—			22		—			—			—			—		2,862			—
Derivatives, net(2):
Interest rate contracts	—			—			—			—		—			—			—			—		—			—
Foreign exchange contracts	—			—			—			—		—			—			—			—		—			—
Equity contracts	42			(74		)	—			—		—			(65		)	—			2		(95		)	(101		)
Credit contracts	210			(30		)	—			—		—			(9		)	—			—		171			(60		)
Mortgage servicing rights(3)	159			—			(13		)	—		—			(16		)	—			—		130			(13		)
Total assets	$	3,504		$	(89	)	$	(13	)	$	22	$	—		$	(125	)	$	—		$	2	$	3,301		$	(167	)
Liabilities:
Domestic deposits(4)	$	(1,968	)	$	—		$	4		$	—	$	(270	)	$	313		$	(66	)	$	233	$	(1,754	)	$	21
Long-term debt(4)	(647		)	—			79			—		(423		)	197			(1		)	50		(745		)	81
Total liabilities	$	(2,615	)	$	—		$	83		$	—	$	(693	)	$	510		$	(67	)	$	283	$	(2,499	)	$	102

⁽¹⁾  Includes realized and unrealized gains and losses.

⁽²⁾  Level 3 net derivatives included derivative assets of $335 million and derivative liabilities of $122 million at September 30, 2016 and derivative assets of $304 million and derivative liabilities of $228 million at September 30, 2015.

⁽³⁾  See Note 7, "Intangible Assets," and Note 9, "Other Assets Held for Sale," for additional information.

⁽⁴⁾  See Note 11, "Fair Value Option," for additional information.

The following table presents quantitative information about the unobservable inputs used to determine the recurring fair value measurement of assets and liabilities classified as Level 3 fair value measurements at September 30, 2016 and December 31, 2015:

September 30, 2016
Financial Instrument Type	Fair Value (in millions)		Valuation Technique(s)	Significant Unobservable Inputs	Range of Inputs
Collateralized debt obligations	191		Broker quotes or consensus pricing and, where applicable, discounted cash flows	Prepayment rates	2% - 5%
				Conditional default rates	6% - 7%
				Loss severity rates	90% - 95%
Corporate and other domestic debt securities	2,884		Discounted cash flows	Spread volatility on collateral assets	2% - 4%
				Correlation between insurance claim shortfall and collateral value	80%
Interest rate derivative contracts	1		Market comparable adjusted for probability to fund	Probability to fund for rate lock commitments	38% - 100%
Foreign exchange derivative contracts(1)	—		Option pricing model	Implied volatility of currency pairs	15% - 21%
Equity derivative contracts(1)	5		Option pricing model	Equity / Equity Index volatility	10% - 50%
				Equity / Equity and Equity / Index correlation	47% - 58%
				Equity dividend yields	0% - 15%
Credit derivative contracts	207		Option pricing model	Issuer by issuer correlation of defaults	82% - 83%
Domestic deposits (structured deposits)(1)(2)	(1,404	)	Option adjusted discounted cash flows	Implied volatility of currency pairs	15% - 21%
				Equity / Equity Index volatility	10% - 50%
				Equity / Equity and Equity / Index correlation	47% - 58%
Long-term debt (structured notes)(1)(2)	(513	)	Option adjusted discounted cash flows	Implied volatility of currency pairs	15% - 21%
				Equity / Equity Index volatility	10% - 50%
				Equity / Equity and Equity / Index correlation	47% - 58%

December 31, 2015
Financial Instrument Type	Fair Value (in millions)		Valuation Technique(s)	Significant Unobservable Inputs	Range of Inputs
Collateralized debt obligations	221		Broker quotes or consensus pricing and, where applicable, discounted cash flows	Prepayment rates	1% - 6%
				Conditional default rates	3% - 7%
				Loss severity rates	90% - 99%
Corporate and other domestic debt securities	2,870		Discounted cash flows	Spread volatility on collateral assets	2% - 4%
				Correlation between insurance claim shortfall and collateral value	80%
Interest rate derivative contracts	1		Market comparable adjusted for probability to fund	Probability to fund for rate lock commitments	18% - 100%
Foreign exchange derivative contracts(1)	—		Option pricing model	Implied volatility of currency pairs	18% - 22%
Equity derivative contracts(1)	(83	)	Option pricing model	Equity / Equity Index volatility	14% - 72%
				Equity / Equity and Equity / Index correlation	48% - 59%
				Equity dividend yields	0% - 18%
Credit derivative contracts	179		Option pricing model	Correlation of defaults of a portfolio of reference credit names	44% - 47%
				Issuer by issuer correlation of defaults	82% - 83%
Mortgage servicing rights	140		Option adjusted discounted cash flows	Constant prepayment rates	11% - 50%
				Option adjusted spread	8% - 14%
				Estimated annualized costs to service	$87 - $329 per account
Domestic deposits (structured deposits)(1)(2)	(1,867	)	Option adjusted discounted cash flows	Implied volatility of currency pairs	18% - 22%
				Equity / Equity Index volatility	14% - 72%
				Equity / Equity and Equity / Index correlation	48% - 59%
Long-term debt (structured notes)(1)(2)	(746	)	Option adjusted discounted cash flows	Implied volatility of currency pairs	18% - 22%
				Equity / Equity Index volatility	14% - 72%
				Equity / Equity and Equity / Index correlation	48% - 59%

⁽¹⁾  We are the client-facing entity and we enter into identical but opposite derivatives to transfer the resultant risks to our affiliates. With the exception of counterparty credit risks, we are market neutral. The corresponding intra-group derivatives are presented as equity derivatives and foreign exchange derivatives in the table.

⁽²⁾  Structured deposits and structured notes contain embedded derivative features whose fair value measurements contain significant Level 3 inputs.

Significant Unobservable Inputs for Recurring Fair Value Measurements

Collateralized Debt Obligations ("CDOs")

▪ Prepayment rate - The rate at which borrowers pay off the mortgage loans early. The prepayment rate is affected by a number of factors including the location of the mortgage collateral, the interest rate type of the mortgage loans, borrowers' credit and sensitivity to interest rate movement. The prepayment rate of our CDOs portfolio is tilted towards the low end of the range.

▪ Default rate - Annualized percentage of default rate over a group of collateral such as residential or commercial mortgage loans. The default rate and loss severity rate are positively correlated. The default rate of our portfolio is close to the mid-point of the range.

▪ Loss severity rate - Included in our Level 3 CDOs portfolio are collateralized loan obligations (CLOs) and trust preferred securities which are about equally distributed. The loss severity rate for trust preferred securities at September 30, 2016 is about 1.8 times that of CLOs.

Derivatives

▪ Correlation of default - The default correlation of a group of credit exposures measures the likelihood that the credit references within a group will default together. The default correlation is a significant input to structured credit products such as nth-to-default swaps. In addition, the correlation between the currency and the default risk of the reference credits is a critical input to a foreign currency denominated credit default swap where the correlation is not observable.

▪ Implied volatility - The implied volatility is a significant pricing input for freestanding or embedded options including equity, foreign currency and interest rate options. The level of volatility is a function of the nature of the underlying risk, the level of strike price and the years to maturity of the option. Depending on the underlying risk and tenure, we determine the implied volatility based on observable input where information is available. However, substantially all of the implied volatilities are derived based on historical information. The implied volatility for different foreign currency pairs is between 15 percent and 21 percent while the implied volatility for equity/equity or equity/equity index is between 10 percent and 50 percent, respectively, at September 30, 2016. Although implied foreign currency volatility and equity volatility appear to be widely distributed at the portfolio level, the deviation of implied volatility on a trade-by-trade basis is narrower. The average deviation of implied volatility for the foreign currency pair and at-the-money equity option are 4 percent and 5 percent, respectively, at September 30, 2016.

▪ Correlations of a group of foreign currency or equity - Correlation measures the relative change in values among two or more variables (i.e., equity or foreign currency pair). Variables can be positively or negatively correlated. Correlation is a key input in determining the fair value of a derivative referenced to a basket of variables such as equities or foreign currencies. A majority of the correlations are not observable, but are derived based on historical data. The correlation between equity/equity and equity/equity index was between 47 percent and 58 percent at September 30, 2016.

Sensitivity of Level 3 Inputs to Fair Value Measurements

Collateralized debt obligations - Probability of default, prepayment speed and loss severity rate are significant unobservable inputs. Significant increase (decrease) in these inputs will result in a lower (higher) fair value measurement of a collateralized debt obligation. A change in assumption for default probability is often accompanied by a directionally similar change in loss severity, and a directionally opposite change in prepayment speed.

Corporate and domestic debt securities - The fair value measurements of certain corporate debt securities are affected by the fair value of the underlying portfolios of investments used as collateral and the make-whole guarantee provided by third party guarantors. The probability that the collateral fair value declines below the collateral call threshold concurrent with the guarantors' failure to perform its make whole obligation is unobservable. The increase (decrease) in the probability the collateral value falls below the collateral call threshold is often accompanied by a directionally similar change in default probability of the guarantor.

Credit derivatives - Correlation of default among a basket of reference credit names is a significant unobservable input if the credit attributes of the portfolio are not within the parameters of relevant standardized CDS indices. Significant increase (decrease) in the unobservable input will result in a lower (higher) fair value measurement of the credit derivative. A change in assumption for default correlation is often accompanied by a directionally similar change in default probability and loss rates of other credit names in the basket.

Equity and foreign exchange derivatives - The fair value measurement of a structured equity or foreign exchange derivative is primarily affected by the implied volatility of the underlying equity price or exchange rate of the paired foreign currencies. The implied volatility is not observable. Significant increase (decrease) in the implied volatility will result in a higher (lower) fair value of a long position in the derivative contract.

Significant Transfers Into and Out of Level 3 Measurements During the three and nine months ended September 30, 2016, we transferred $57 million and $198 million, respectively, of domestic deposits and $67 million and $213 million, respectively, of long-term debt, which we have elected to carry at fair value, from Level 3 to Level 2 as a result of the embedded derivative no longer being unobservable as the derivative option is closer to maturity and there is more observability in short term volatility. During the third quarter of 2016, we transferred $95 million of mortgage servicing rights from Level 3 to Level 2 upon execution of the sale agreement with a third party. Additionally, during the three and nine months ended September 30, 2016, we transferred $39 million and $54 million, respectively, of domestic deposits, which we have elected to carry at fair value, from Level 2 to Level 3 as a result of a change in the observability of underlying instruments that resulted in the embedded derivative being unobservable.

During the three and nine months ended September 30, 2015, we transferred $54 million and $233 million, respectively, of domestic deposits and $18 million and $50 million, respectively, of long-term debt, which we have elected to carry at fair value, from Level 3 to Level 2 as a result of the embedded derivative no longer being unobservable as the derivative option is closer in maturity and there is more observability in short term volatility. Additionally, during the three and nine months ended September 30, 2015, we transferred $44 million and $66 million, respectively, of domestic deposits, which we have elected to carry at fair value, from Level 2 to Level 3 as a result of a change in the observability of underlying instruments that resulted in the embedded derivative being unobservable.

Assets and Liabilities Recorded at Fair Value on a Non-recurring Basis  Certain financial and non-financial assets are measured at fair value on a non-recurring basis and therefore, are not included in the tables above. These assets include (a) mortgage and commercial loans classified as held for sale reported at the lower of amortized cost or fair value and (b) impaired loans or assets that are written down to fair value based on the valuation of underlying collateral during the period. These instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustment in certain circumstances (e.g., impairment). The following table presents the fair value hierarchy level within which the fair value of the financial and non-financial assets has been recorded at September 30, 2016 and December 31, 2015. The gains (losses) during the three and nine months ended September 30, 2016 and 2015 are also included.

	Non-Recurring Fair Value Measurements at September 30, 2016								Total Gains (Losses) For the Three Months Ended September 30, 2016			Total Gains (Losses) For the Nine Months Ended September 30, 2016
	Level 1		Level 2		Level 3		Total
	(in millions)
Residential mortgage and home equity mortgage loans held for sale(1)	$	—	$	—	$	958	$	958	$	(17	)	$	(61	)
Consumer loans(2)	—		32		—		32		(10		)	(19		)
Commercial loans held for sale(3)	—		19		—		19		(7		)	(37		)
Impaired commercial loans(4)	—		—		420		420		7			(295		)
Real estate owned(5)	—		27		—		27		2			6
Total assets at fair value on a non-recurring basis	$	—	$	78	$	1,378	$	1,456	$	(25	)	$	(406	)

	Non-Recurring Fair Value Measurements at December 31, 2015								Total Gains (Losses) For the Three Months Ended September 30, 2015			Total Gains (Losses) For the Nine Months Ended September 30, 2015
	Level 1		Level 2		Level 3		Total
	(in millions)
Residential mortgage loans held for sale(1)	$	—	$	2	$	3	$	5	$	—		$	—
Consumer loans(2)	—		133		—		133		(6		)	(24		)
Commercial loans held for sale(3)	—		55		—		55		(2		)	(16		)
Impaired commercial loans(4)	—		—		116		116		(16		)	(31		)
Real estate owned(5)	—		22		—		22		1			3
Total assets at fair value on a non-recurring basis	$	—	$	212	$	119	$	331	$	(23	)	$	(68	)

⁽¹⁾  At September 30, 2016 and December 31, 2015, the fair value of the loans held for sale was below cost. Certain residential mortgage and home equity mortgage loans held for sale have been classified as Level 3 fair value measurements within the fair value hierarchy, including certain residential mortgage and home equity mortgage loans which were transferred to held for sale during the nine months ended September 30, 2016 for which significant inputs in estimating fair value were unobservable and, to a lesser extent, certain residential mortgage loans held for sale for which the underlying real estate properties used to determine fair value are illiquid assets as a result of market conditions. Additionally, the fair value of these properties is affected by, among other things, the location, the payment history and the completeness of the loan documentation.

⁽²⁾  Represents residential mortgage loans held for investment whose carrying amount was reduced during the periods presented based on the fair value of the underlying collateral. Total gains (losses) for the three and nine months ended September 30, 2016 include amounts recorded on loans that were subsequently transferred to held for sale.

⁽³⁾  At September 30, 2016 and December 31, 2015, the fair value of the loans held for sale was below cost.

⁽⁴⁾  Certain commercial loans have undergone troubled debt restructurings and are considered impaired. As a matter of practical expedient, we measure the credit impairment of a collateral-dependent loan based on the fair value of the collateral asset. The collateral often involves real estate properties that are illiquid due to market conditions. As a result, these loans are classified as a Level 3 fair value measurement within the fair value hierarchy.

⁽⁵⁾  Real estate owned is required to be reported on the balance sheet net of transactions costs. The real estate owned amounts in the table above reflect the fair value unadjusted for transaction costs.

The following tables present quantitative information about non-recurring fair value measurements of assets and liabilities classified with Level 3 of the fair value hierarchy at September 30, 2016 and December 31, 2015:

At September 30, 2016
Financial Instrument Type	Fair Value (in millions)		Valuation Technique(s)	Significant Unobservable Inputs	Range of Inputs
Residential mortgage and home equity mortgage loans held for sale	$	958	Third party appraisal valuation based on estimated loss severities,	Loss severity rates	0% - 100%
			including collateral values and market discount rate	Market discount rate	8% - 14%
Impaired commercial loans	420		Valuation of third party appraisal on underlying collateral	Loss severity rates	0% - 100%

At December 31, 2015
Financial Instrument Type	Fair Value (in millions)		Valuation Technique(s)	Significant Unobservable Inputs	Range of Inputs
Residential mortgage loans held for sale	$	3	Valuation of third party appraisal on underlying collateral	Loss severity rates	0% - 100%
Impaired commercial loans	116		Valuation of third party appraisal on underlying collateral	Loss severity rates	0% - 70%

Significant Unobservable Inputs for Non-Recurring Fair Value Measurements

Residential mortgage and home equity mortgage loans held for sale represent residential mortgage and home equity mortgage loans which were transferred to held for sale during the nine months ended September 30, 2016 and, to a lesser extent, subprime residential mortgage loans which were previously acquired with the intent of securitizing or selling them to third parties. The weighted average loss severity rate for residential mortgage and home equity mortgage loans held for sale was approximately 52 percent at September 30, 2016. These severity rates are primarily impacted by the value of the underlying collateral securing the loans.

Impaired loans represent commercial loans. The weighted average severity rate for these loans was approximately 34 percent at September 30, 2016. These severity rates are primarily impacted by the value of the underlying collateral securing the loans.

Valuation Techniques  Following is a description of valuation methodologies used for assets and liabilities recorded at fair value and for estimating fair value for those financial instruments not recorded at fair value for which fair value disclosure is required.

Short-term financial assets and liabilities - The carrying amount of certain financial assets and liabilities recorded at cost is considered to approximate fair value because they are short-term in nature, bear interest rates that approximate market rates, and generally have negligible credit risk. These items include cash and due from banks, interest bearing deposits with banks, customer acceptance assets and liabilities, short-term borrowings and dividends payable.

Federal funds sold and purchased and securities purchased and sold under resale and repurchase agreements - We record certain securities purchased and sold under resale and repurchase agreements at fair value. The fair value of these resale and repurchase agreements is determined using market rates currently offered on comparable transactions with similar underlying collateral and maturities.

The remaining federal funds sold and purchased and securities purchased and sold under resale and repurchase agreements are recorded at cost. A majority of these transactions are short-term in nature and, as such, the recorded amounts approximate fair value. For transactions with long-dated maturities, fair value is based on dealer quotes for instruments with similar terms and collateral.

Loans - Except for certain commercial loans held for sale for which the fair value option has been elected, we do not record loans at fair value on a recurring basis. From time to time, we record impairments to loans. The write-downs can be based on observable market price of the loan, the underlying collateral value or a discounted cash flow analysis. In addition, fair value estimates are determined based on the product type, financial characteristics, pricing features and maturity.

• Loans held for sale – Consumer and commercial loans held for sale (that are not designated under FVO as discussed below) are recorded at the lower of amortized cost or fair value. The fair value estimates of consumer and commercial loans held for sale are determined primarily using the discounted cash flow method using assumptions consistent with those which would be used by market participants in valuing such loans. Valuation inputs include estimates of prepayment rates, default rates, loss severities, collateral values and market rates of return. Where available, such inputs are derived from or corroborated by observable market data. Since some loan pools may have features which are unique, the fair value measurement processes use significant unobservable inputs which are specific to the performance characteristics of the various loan portfolios. Where available, we measure residential mortgage whole loans held for sale based on transaction prices of loan portfolios of similar characteristics observed in the whole loan market. Adjustments are made to reflect differences in collateral location, loan-to-value ratio, FICO scores, vintage year, default rates, the completeness of the loan documentationand other risk characteristics.

• Commercial loans held for sale designated under FVO – We record certain commercial loans held for sale at fair value. Where available, fair value is based on observable market consensus pricing obtained from independent sources, relevant broker quotes or observed market prices of instruments with similar characteristics. Where observable market parameters are not available, fair value is determined based on contractual cash flows adjusted for estimates of prepayment rates, expected default rates and loss severity discounted at management's estimate of the expected rate of return required by market participants. We also consider loan specific risk mitigating factors such as collateral arrangements in determining the fair value estimate.

• Commercial loans – Commercial loans and commercial real estate loans are valued by discounting the contractual cash flows, adjusted for prepayments and the borrower’s credit risk, using a discount rate that reflects the current rates offered to borrowers of similar credit standing for the remaining term to maturity and, when applicable, our own estimate of liquidity premium.

• Commercial impaired loans – Generally represents collateral dependent commercial loans with fair value determined based on pricing quotes obtained from an independent third party appraisal.

• Consumer loans – The estimated fair value of our consumer loans were determined by developing an approximate range of value from a mix of various sources as appropriate for the respective pool of assets. These sources included estimates from an HSBC affiliate which reflect over-the-counter trading activity; trading input from other market participants which includes observed primary and secondary trades; where appropriate, the impact of current estimated rating agency credit tranching levels with the associated benchmark credit spreads; general discussions held directly with potential investors; and, at December 31, 2015, forward looking discounted cash flow models using assumptions consistent with those which would be used by market participants in valuing such loans. Since some loan pools may have features which are unique, the fair value measurement processes use significant unobservable inputs which are specific to the performance characteristics of the various loan portfolios. For revolving products, the estimated fair value excludes future draws on the available credit line as well as other items and, therefore, does not include the fair value of the entire relationship.

We perform analytical reviews of fair value changes on a quarterly basis and periodically validate our valuation methodologies and assumptions based on the results of actual sales of loans with similar characteristics. In addition, from time to time, we may engage a third party valuation specialist to measure the fair value of a pool of loans. Portfolio risk management personnel provide further validation through discussions with third party brokers and other market participants.

Lending-related commitments - The fair value of commitments to extend credit, standby letters of credit and financial guarantees are not included in the table. The majority of the lending related commitments are not carried at fair value on a recurring basis nor are they actively traded. These instruments generate fees, which approximate those currently charged to originate similar commitments, which are recognized over the term of the commitment period. Deferred fees on commitments and standby letters of credit totaled $49 million and $54 million at September 30, 2016 and December 31, 2015, respectively.

Precious metals trading - Precious metals trading primarily includes physical inventory which is valued using spot prices.

Securities - Where available, debt and equity securities are valued based on quoted market prices. If a quoted market price for the identical security is not available, the security is valued based on quotes from similar securities, where possible. For certain securities, internally developed valuation models are used to determine fair values or validate quotes obtained from pricing services. The following summarizes the valuation methodology used for our major security classes:

• U.S. Treasury, U.S. Government agency issued or guaranteed and obligations of U.S. state and political subdivisions – As these securities transact in an active market, fair value measurements are based on quoted prices for the identical security or quoted prices for similar securities with adjustments as necessary made using observable inputs which are market corroborated.

• U.S. Government sponsored enterprises – For government sponsored mortgage-backed securities which transact in an active market, fair value measurements are based on quoted prices for the identical security or quoted prices for similar securities with adjustments as necessary made using observable inputs which are market corroborated. For government sponsored mortgage-backed securities which do not transact in an active market, fair value is determined primarily based on pricing information obtained from pricing services and is verified by internal review processes.

• Asset-backed securities, including collateralized debt obligations – Fair value is primarily determined based on pricing information obtained from independent pricing services adjusted for the characteristics and the performance of the underlying collateral.

• Other domestic debt and foreign debt securities (corporate and government) - For non-callable corporate securities, a credit spread scale is created for each issuer. These spreads are then added to the equivalent maturity U.S. Treasury yield to determine current pricing. Credit spreads are obtained from the new market, secondary trading levels and dealer quotes. For securities with early redemption features, an option adjusted spread model is incorporated to adjust the spreads determined above. Additionally, we survey the broker/dealer community to obtain relevant trade data including benchmark quotes and updated spreads.

• Equity securities – Except for certain legacy investments in hedge funds, fair value measurements are determined based on quoted prices for the identical security. For hedge fund investments, we receive monthly statements from the investment manager with the estimated fair value.

The following tables provide additional information relating to asset-backed securities as well as certain collateralized debt obligations held at September 30, 2016:

Trading asset-backed securities:

Rating of Securities:(1)	Collateral Type:	Level 2		Level 3		Total
AAA -A	Residential mortgages - Alt A	$	48	$	—	$	48
	Residential mortgages - Subprime	40		—		40
	Student loans	84		—		84
	Total AAA -A	172		—		172
BBB -B	Collateralized debt obligations	—		191		191
CCC-Unrated	Residential mortgages - Subprime	11		—		11
		$	183	$	191	$	374

Available-for-sale securities backed by collateral:

Rating of Securities:(1)	Collateral Type:	Level 2		Level 3		Total
		(in millions)
AAA -A	Commercial mortgages	$	4	$	—	$	4
	Home equity - Alt A	65		—		65
	Other	494		—		494
	Total AAA -A	$	563	$	—	$	563

⁽¹⁾   We utilize S&P as the primary source of credit ratings in the tables above. If S&P ratings are not available, ratings by Moody's and Fitch are used in that order. Ratings for collateralized debt obligations represent the ratings associated with the underlying collateral.

Derivatives – Derivatives are recorded at fair value. Asset and liability positions in individual derivatives that are covered by legally enforceable master netting agreements, including receivables (payables) for cash collateral posted (received), are offset and presented net in accordance with accounting principles which allow the offsetting of amounts.

Derivatives traded on an exchange are valued using quoted prices. OTC derivatives, which comprise a majority of derivative contract positions, are valued using valuation techniques. The fair value for the majority of our derivative instruments are determined based on internally developed models that utilize independently corroborated market parameters, including interest rate yield curves, option volatilities, and currency rates. For complex or long-dated derivative products where market data is not available, fair value may be affected by the underlying assumptions about, among other things, the timing of cash flows, expected exposure, probability of default and recovery rates. The fair values of certain structured derivative products are sensitive to unobservable inputs such as default correlations of the referenced credit and volatilities of embedded options. These estimates are susceptible to significant change in future periods as market conditions change.

We use the OIS curves as inputs to measure the fair value of collateralized derivatives. Historically, we valued uncollateralized derivatives by discounting expected future cash flows at a benchmark interest rate, typically LIBOR or its equivalent. In line with evolving industry practice, we changed this approach during 2014. We now view the OIS curve as the base discounting curve for all derivatives, both collateralized and uncollateralized, and have adopted a FFVA to reflect the estimated present value of the future market funding cost or benefit associated with funding uncollateralized derivative exposure at rates other than the OIS rate. This is an area in which a full industry consensus has not yet emerged. We will continue to monitor industry evolution and refine the calculation methodology as necessary.

Significant inputs related to derivative classes are broken down as follows:

• Credit Derivatives – Use credit default curves and recovery rates which are generally provided by broker quotes and various pricing services. Certain credit derivatives may also use correlation inputs in their model valuation. Correlation is derived using market quotes from brokers and various pricing services.

• Interest Rate Derivatives – Swaps use interest rate curves based on currency that are actively quoted by brokers and other pricing services. Options will also use volatility inputs which are also quoted in the broker market.

• Foreign Exchange ("FX") Derivatives – FX transactions, to the extent possible, use spot and forward FX rates which are quoted in the broker market. Where applicable, we also use implied volatility of currency pairs as inputs.

• Equity Derivatives – Use listed equity security pricing and implied volatilities from equity traded options position.

• Precious Metal Derivatives – Use spot and forward metal rates which are quoted in the broker market.

As discussed earlier, we make fair value adjustments to model valuations in order to ensure that those values represent appropriate estimates of fair value. These adjustments, which are applied consistently over time, are generally required to reflect factors such as bid-ask spreads and counterparty credit risk that can affect prices in arms-length transactions with unrelated third parties. Such adjustments are based on management judgment and may not be observable.

We estimate the counterparty credit risk for financial assets and own credit standing for financial liabilities (the "credit risk adjustments") in determining the fair value measurement. For derivative instruments, we calculate the credit risk adjustment by applying the probability of default of the counterparty to the expected exposure, and multiplying the result by the expected loss given default. We also take into consideration the risk mitigating factors including collateral agreements and master netting agreements in determining credit risk adjustments. We estimate the implied probability of default based on the credit spread of the specific counterparty observed in the credit default swap market. Where credit default spread of the counterparty is not available, we use the credit default spread of a specific proxy (e.g. the credit default swap spread of the counterparty's parent). Where specific proxy credit default swap is not available, we apply a blended approach based on a combination of credit default swaps referencing to credit names of similar credit standing and the historical rating-based probability of default.

Real estate owned - Fair value is determined based on third party appraisals obtained at the time we take title to the property and, if less than the carrying amount of the loan, the carrying amount of the loan is adjusted to the fair value. The carrying amount of the property is further reduced, if necessary, at least every 45 days to reflect observable local market data, including local area sales data.

Mortgage servicing rights - We elected to measure residential mortgage servicing rights at fair value and, prior to March 2016, classified them as intangible assets. In March 2016, we initiated an active program to sell our remaining MSRs portfolio and reclassified them to held for sale within other assets. At September 30, 2016, fair value for the residential mortgage servicing rights is determined based upon the sales price formula as defined in the executed sales agreement. Previously, fair value for the residential mortgage servicing rights was determined based on an option adjusted approach which involves discounting servicing cash flows under various interest rate projections at risk-adjusted rates. The valuation model also incorporated our best estimate of the prepayment speed of the mortgage loans, cost to service and discount rates which are unobservable.

Structured notesand deposits – Structured notes and deposits are hybrid instruments containing embedded derivatives and are elected to be measured at fair value in their entirety under fair value option accounting principles. The valuation of hybrid instruments is predominantly driven by the derivative features embedded within the instruments and own credit risk. The valuation of embedded derivatives may include significant unobservable inputs such as correlation of the referenced credit names or volatility of the embedded option. Cash flows of the funded notes and deposits in their entirety, including the embedded derivatives, are discounted at the relevant interest rates for the duration of the instrument adjusted for our own credit spreads. The credit spreads so applied are determined with reference to our own debt issuance rates observed in primary and secondary markets, internal funding rates, and the structured note rates in recent executions.

Long-term debt – We elected to apply fair value option to certain own debt issuances for which fair value hedge accounting otherwise would have been applied. These own debt issuances elected under FVO are traded in secondary markets and, as such, the fair value is determined based on observed prices for the specific instrument. The observed market price of these instruments reflects the effect of our own credit spreads. The credit spreads applied to these instruments were derived from the spreads at the measurement date.

For long-term debt recorded at cost, fair value is determined based on quoted market prices where available. If quoted market prices are not available, fair value is based on dealer quotes, quoted prices of similar instruments, or internally developed valuation models adjusted for own credit risks.

Deposits – For fair value disclosure purposes, the carrying amount of deposits with no stated maturity (e.g., demand, savings, and certain money market deposits), which represents the amount payable upon demand, is considered to generally approximate fair value. For deposits with stated maturities, fair value is estimated by discounting cash flows using market interest rates currently offered on deposits with similar characteristics and maturities.