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.

Funding Fair Value Adjustment ("FFVA") - The FFVA reflects 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.

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 June 30, 2018 and December 31, 2017, and indicates the fair value hierarchy of the valuation techniques utilized to determine such fair value. Unless otherwise noted below, assets and liabilities in the following table are recorded at fair value through net income.



	Fair Value Measurements on a Recurring Basis
June 30, 2018	Level 1		Level 2		Level 3		Gross Balance		Netting⁽⁸⁾			Net Balance
	(in millions)
Assets:
Securities purchased under agreements to resell⁽¹⁾	$	—	$	395	$	—	$	395	$	—		$	395
Trading assets, excluding derivatives:
U.S. Treasury, U.S. Government agencies and sponsored enterprises	4,732		142		—		4,874		—			4,874
Collateralized debt obligations	—		—		131		131		—			131
Asset-backed securities:
Residential mortgages	—		17		—		17		—			17
Student loans	—		92		—		92		—			92
Corporate and other domestic debt securities	—		—		1,803		1,803		—			1,803
Debt securities issued by foreign entities	5,674		210		—		5,884		—			5,884
Precious metals trading	—		9,212		—		9,212		—			9,212
Derivatives:⁽²⁾
Interest rate contracts	7		10,051		—		10,058		—			10,058
Foreign exchange contracts	1		18,274		1		18,276		—			18,276
Equity contracts	—		3,675		124		3,799		—			3,799
Precious metals contracts	104		732		—		836		—			836
Credit contracts	—		839		120		959		—			959
Other contracts⁽³⁾	—		—		8		8		—			8
Derivatives netting	—		—		—		—		(30,241		)	(30,241		)
Total derivatives	112		33,571		253		33,936		(30,241		)	3,695
Securities available-for-sale:⁽⁴⁾
U.S. Treasury, U.S. Government agencies and sponsored enterprises	17,154		11,331		—		28,485		—			28,485
Asset-backed securities:
Home equity	—		47		—		47		—			47
Other	—		—		107		107		—			107
Debt securities issued by foreign entities	2,132		257		—		2,389		—			2,389
Loans⁽¹⁾	—		90		—		90		—			90
Other assets:
Equity securities⁽⁵⁾	—		190		—		190		—			190
Equity Securities measured at net asset value⁽⁵⁾⁽⁶⁾	—		—		—		93		—			93
Other⁽⁷⁾	—		—		12		12		—			12
Total assets	$	29,804	$	55,554	$	2,306	$	87,757	$	(30,241	)	$	57,516
Liabilities:
Domestic deposits⁽¹⁾	$	—	$	6,825	$	876	$	7,701	$	—		$	7,701
Trading liabilities, excluding derivatives	975		7		—		982		—			982
Derivatives:⁽²⁾
Interest rate contracts	132		11,170		—		11,302		—			11,302
Foreign exchange contracts	—		17,566		2		17,568		—			17,568
Equity contracts	—		2,988		122		3,110		—			3,110
Precious metals contracts	28		674		—		702		—			702
Credit contracts	—		800		10		810		—			810
Other contracts⁽³⁾	—		—		59		59		—			59
Derivatives netting	—		—		—		—		(31,253		)	(31,253		)
Total derivatives	160		33,198		193		33,551		(31,253		)	2,298
Short-term borrowings⁽¹⁾	—		1,315		—		1,315		—			1,315
Long-term debt⁽¹⁾	—		11,825		557		12,382		—			12,382
Total liabilities	$	1,135	$	53,170	$	1,626	$	55,931	$	(31,253	)	$	24,678



	Fair Value Measurements on a Recurring Basis
December 31, 2017	Level 1		Level 2		Level 3		Gross Balance		Netting⁽⁸⁾			Net Balance
	(in millions)
Assets:
Securities purchased under agreements to resell⁽¹⁾	$	—	$	80	$	—	$	80	$	—		$	80
Trading assets, excluding derivatives:
U.S. Treasury, U.S. Government agencies and sponsored enterprises	3,391		332		—		3,723		—			3,723
Collateralized debt obligations	—		—		129		129		—			129
Asset-backed securities:
Residential mortgages	—		16		—		16		—			16
Student loans	—		91		—		91		—			91
Corporate and other domestic debt securities	—		—		1,803		1,803		—			1,803
Debt securities issued by foreign entities	4,167		210		—		4,377		—			4,377
Equity securities⁽⁵⁾	—		12		—		12		—			12
Precious metals trading	—		2,274		—		2,274		—			2,274
Derivatives:⁽²⁾
Interest rate contracts	6		24,231		—		24,237		—			24,237
Foreign exchange contracts	4		15,754		2		15,760		—			15,760
Equity contracts	—		3,911		173		4,084		—			4,084
Precious metals contracts	52		502		—		554		—			554
Credit contracts	—		536		120		656		—			656
Other contracts⁽³⁾	—		—		6		6		—			6
Derivatives netting	—		—		—		—		(40,874		)	(40,874		)
Total derivatives	62		44,934		301		45,297		(40,874		)	4,423
Securities available-for-sale:⁽⁴⁾
U.S. Treasury, U.S. Government agencies and sponsored enterprises	19,056		10,004		—		29,060		—			29,060
Asset-backed securities:
Home equity	—		51		—		51		—			51
Other	—		399		111		510		—			510
Debt securities issued by foreign entities	850		52		—		902		—			902
Equity securities⁽⁵⁾	—		177		—		177		—			177
Loans⁽¹⁾	—		471		—		471		—			471
Other assets⁽⁷⁾	—		—		15		15		—			15
Total assets	$	27,526	$	59,103	$	2,359	$	88,988	$	(40,874	)	$	48,114
Liabilities:
Domestic deposits⁽¹⁾	$	—	$	6,796	$	897	$	7,693	$	—		$	7,693
Trading liabilities, excluding derivatives	1,722		524		—		2,246		—			2,246
Derivatives:⁽²⁾
Interest rate contracts	59		24,379		—		24,438		—			24,438
Foreign exchange contracts	—		14,664		2		14,666		—			14,666
Equity contracts	—		2,859		92		2,951		—			2,951
Precious metals contracts	108		614		—		722		—			722
Credit contracts	—		578		6		584		—			584
Other contracts⁽³⁾	—		—		52		52		—			52
Derivatives netting	—		—		—		—		(40,217		)	(40,217		)
Total derivatives	167		43,094		152		43,413		(40,217		)	3,196
Short-term borrowings⁽¹⁾	—		2,032		—		2,032		—			2,032
Long-term debt⁽¹⁾	—		12,245		641		12,886		—			12,886
Total liabilities	$	1,889	$	64,691	$	1,690	$	68,270	$	(40,217	)	$	28,053


⁽¹⁾	See Note 10, "Fair Value Option," for additional information. Excluding the fair value movement on fair value option liabilities attributable to our own credit spread, which is recorded in other comprehensive income (loss), fair value option assets and liabilities are recorded at fair value through net income.

⁽²⁾

Includes trading derivative assets of $3,546 million and $3,725 million and trading derivative liabilities of $2,295 million and $2,633 million at June 30, 2018 and December 31, 2017, respectively, as well as derivatives held for hedging and commitments accounted for as derivatives. See Note 9, "Derivatives," for additional information. Excluding changes in fair value of a derivative instrument associated with the effective portion of a qualifying cash flow hedge, which is recognized initially in other comprehensive income (loss), derivative assets and liabilities are recorded at fair value through net income.


⁽³⁾	Consists of swap agreements entered into in conjunction with the sales of certain Visa Class B Shares.


⁽⁴⁾	Securities available-for-sale are recorded at fair value through other comprehensive income (loss).


⁽⁵⁾	See Note 3, "Securities," and Note 21, "New Accounting Pronouncements," for additional information. Beginning January 1, 2018, all equity investments are being recorded together as a component of other assets.


⁽⁶⁾	Investments that are measured at fair value using the net asset value per share practical expedient have not been classified in the fair value hierarchy.


⁽⁷⁾	Represents contingent consideration receivable associated with the sale of a portion of our Private Banking business.


⁽⁸⁾	Represents counterparty and cash collateral netting which allow the offsetting of amounts relating to certain contracts if certain conditions are met.

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 six months ended June 30, 2018 and 2017.

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 six months ended June 30, 2018 and 2017. 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.



	Apr. 1, 2018			Total Realized / Unrealized Gains (Losses) Included in					Purch- ases		Issu- ances			Settle- ments			Transfers Into Level 3			Transfers Out of Level 3		Jun. 30, 2018			Current Period Unrealized Gains (Losses)
	Apr. 1, 2018			Earnings			Other Compre-hensive Income (Loss)		Purch- ases		Issu- ances			Settle- ments			Transfers Into Level 3			Transfers Out of Level 3		Jun. 30, 2018			Current Period Unrealized Gains (Losses)
	(in millions)
Assets:
Trading assets, excluding derivatives:⁽¹⁾
Collateralized debt obligations	$	131		$	1		$	—	$	—	$	—		$	(1	)	$	—		$	—	$	131		$	1
Corporate and other domestic debt securities	1,803			—			—		—		—			—			—			—		1,803			—
Derivatives, net:⁽²⁾
Foreign exchange contracts	—			(1		)	—		—		—			—			—			—		(1		)	(1		)
Equity contracts	27			(10		)	—		—		—			(16		)	(1		)	2		2			(7		)
Credit contracts	113			1			—		—		—			(4		)	—			—		110			(3		)
Other contracts⁽³⁾	(44		)	(12		)	—		—		—			5			—			—		(51		)	—
Other asset-backed securities available-for-sale⁽⁴⁾	107			—			—		—		—			—			—			—		107			—
Other assets⁽⁵⁾	15			(3		)	—		—		—			—			—			—		12			—
Total assets	$	2,152		$	(24	)	$	—	$	—	$	—		$	(16	)	$	(1	)	$	2	$	2,113		$	(10	)
Liabilities:
Domestic deposits⁽⁶⁾	$	(916	)	$	2		$	5	$	—	$	(88	)	$	38		$	(10	)	$	93	$	(876	)	$	8
Long-term debt⁽⁶⁾	(630		)	(5		)	1		—		(28		)	74			—			31		(557		)	1
Total liabilities	$	(1,546	)	$	(3	)	$	6	$	—	$	(116	)	$	112		$	(10	)	$	124	$	(1,433	)	$	9



	Jan. 1, 2018			Total Realized / Unrealized Gains (Losses) Included in						Purch- ases		Issu- ances			Settle- ments			Transfers Into Level 3			Transfers Out of Level 3		Jun. 30, 2018			Current Period Unrealized Gains (Losses)
	Jan. 1, 2018			Earnings			Other Compre-hensive Income (Loss)			Purch- ases		Issu- ances			Settle- ments			Transfers Into Level 3			Transfers Out of Level 3		Jun. 30, 2018			Current Period Unrealized Gains (Losses)
	(in millions)
Assets:
Trading assets, excluding derivatives:⁽¹⁾
Collateralized debt obligations	$	129		$	8		$	—		$	—	$	—		$	(6	)	$	—		$	—	$	131		$	8
Corporate and other domestic debt securities	1,803			—			—			—		—			—			—			—		1,803			—
Derivatives, net:⁽²⁾
Foreign exchange contracts	—			(1		)	—			—		—			—			—			—		(1		)	(1		)
Equity contracts	81			(50		)	—			—		—			(30		)	(1		)	2		2			(45		)
Credit contracts	114			2			—			—		—			(6		)	—			—		110			(4		)
Other contracts⁽³⁾	(46		)	(14		)	—			—		—			9			—			—		(51		)	—
Other asset-backed securities available-for-sale⁽⁴⁾	111			—			(4		)	—		—			—			—			—		107			(4		)
Other assets⁽⁵⁾	15			(3		)	—			—		—			—			—			—		12			—
Total assets	$	2,207		$	(58	)	$	(4	)	$	—	$	—		$	(33	)	$	(1	)	$	2	$	2,113		$	(46	)
Liabilities:
Domestic deposits⁽⁶⁾	$	(897	)	$	23		$	3		$	—	$	(179	)	$	60		$	(13	)	$	127	$	(876	)	$	25
Long-term debt⁽⁶⁾	(641		)	6			5			—		(143		)	141			—			75		(557		)	18
Total liabilities	$	(1,538	)	$	29		$	8		$	—	$	(322	)	$	201		$	(13	)	$	202	$	(1,433	)	$	43



	Apr. 1, 2017			Total Realized / Unrealized Gains (Losses) Included in						Purch- ases		Issu- ances			Settle- ments			Transfers Into Level 3			Transfers Out of Level 3		Jun. 30, 2017			Current Period Unrealized Gains (Losses)
	Apr. 1, 2017			Earnings			Other Compre-hensive Income (Loss)			Purch- ases		Issu- ances			Settle- ments			Transfers Into Level 3			Transfers Out of Level 3		Jun. 30, 2017			Current Period Unrealized Gains (Losses)
	(in millions)
Assets:
Trading assets, excluding derivatives:⁽¹⁾
Collateralized debt obligations	$	184		$	15		$	—		$	—	$	—		$	(68	)	$	—		$	—	$	131		$	4
Corporate and other domestic debt securities	2,884			—			—			—		—			(1,081		)	—			—		1,803			—
Derivatives, net:⁽²⁾
Interest rate contracts	—			—			—			—		—			—			—			—		—			—
Foreign exchange contracts	—			—			—			—		—			—			—			—		—			—
Equity contracts	21			12			—			—		—			(4		)	—			3		32			11
Credit contracts	181			1			—			—		—			(39		)	—			—		143			(4		)
Other contracts⁽³⁾	(26		)	—			—			—		(18		)	—			—			—		(44		)	—
Other asset-backed securities available-for-sale⁽⁴⁾	107			—			—			—		—			—			—			—		107			1
Total assets	$	3,351		$	28		$	—		$	—	$	(18	)	$	(1,192	)	$	—		$	3	$	2,172		$	12
Liabilities:
Domestic deposits⁽⁶⁾	$	(1,216	)	$	(9	)	$	7		$	—	$	(48	)	$	86		$	(18	)	$	56	$	(1,142	)	$	—
Long-term debt⁽⁶⁾	(558		)	(14		)	(1		)	—		(37		)	62			—			7		(541		)	(12		)
Total liabilities	$	(1,774	)	$	(23	)	$	6		$	—	$	(85	)	$	148		$	(18	)	$	63	$	(1,683	)	$	(12	)



	Jan. 1, 2017			Total Realized / Unrealized Gains (Losses) Included in						Purch- ases		Issu- ances			Settle- ments			Transfers Into Level 3			Transfers Out of Level 3		Jun. 30, 2017			Current Period Unrealized Gains (Losses)
	Jan. 1, 2017			Earnings			Other Compre-hensive Income (Loss)			Purch- ases		Issu- ances			Settle- ments			Transfers Into Level 3			Transfers Out of Level 3		Jun. 30, 2017			Current Period Unrealized Gains (Losses)
	(in millions)
Assets:
Trading assets, excluding derivatives:⁽¹⁾
Collateralized debt obligations	$	184		$	18		$	—		$	—	$	—		$	(71	)	$	—		$	—	$	131		$	5
Corporate and other domestic debt securities	2,884			—			—			—		—			(1,081		)	—			—		1,803			—
Derivatives, net:⁽²⁾
Interest rate contracts	1			(1		)	—			—		—			—			—			—		—			(1		)
Foreign exchange contracts	—			—			—			—		—			—			—			—		—			—
Equity contracts	(2		)	39			—			—		—			(8		)	—			3		32			32
Credit contracts	193			(4		)	—			—		—			(46		)	—			—		143			(14		)
Other contracts⁽³⁾	(9		)	—			—			—		(35		)	—			—			—		(44		)	—
Other asset-backed securities available-for-sale⁽⁴⁾	105			2			—			—		—			—			—			—		107			2
Total assets	$	3,356		$	54		$	—		$	—	$	(35	)	$	(1,206	)	$	—		$	3	$	2,172		$	24
Liabilities:
Domestic deposits⁽⁶⁾	$	(1,407	)	$	(14	)	$	12		$	—	$	(91	)	$	277		$	(21	)	$	102	$	(1,142	)	$	(4	)
Long-term debt⁽⁶⁾	(499		)	(40		)	(6		)	—		(122		)	78			(2		)	50		(541		)	(37		)
Total liabilities	$	(1,906	)	$	(54	)	$	6		$	—	$	(213	)	$	355		$	(23	)	$	152	$	(1,683	)	$	(41	)


⁽¹⁾	Gains (losses) on trading assets, excluding derivatives are included in trading revenue in the consolidated statement of income.


⁽²⁾	Level 3 net derivatives included derivative assets of $253 million and derivative liabilities of $193 million at June 30, 2018 and derivative assets of $301 million and derivative liabilities of $170 million at June 30, 2017. Gains (losses) on derivatives, net are predominantly included in trading revenue in the consolidated statement of income.


⁽³⁾	Consists of swap agreements entered into in conjunction with the sales of certain Visa Class B Shares.


⁽⁴⁾	Realized gains (losses) on securities available-for-sale are included in other securities gains, net in the consolidated statement of income. Unrealized gains (losses) on securities available-for-sale are included in other comprehensive income (loss).


⁽⁵⁾	Represents contingent consideration receivable associated with the sale of a portion of our Private Banking business. Gains (losses) associated with this transaction are included in other income in the consolidated statement of income.


⁽⁶⁾	Excluding unrealized gains (losses) on fair value option liabilities attributable to our own credit spread, which are recorded in other comprehensive income (loss), gains (losses) on fair value option liabilities are included in gain (loss) on instruments designated at fair value and related derivatives in the consolidated statement of income.

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 June 30, 2018 and December 31, 2017:



June 30, 2018
Financial Instrument Type	Fair Value (in millions)			Valuation Technique(s)	Significant Unobservable Inputs	Range of Inputs
Collateralized debt obligations	$	131		Broker quotes or consensus pricing and, where applicable, discounted cash flows	Prepayment rates	0%
					Conditional default rates	0% - 1%
					Loss severity rates	90% - 95%
Corporate and other domestic debt securities	$	1,803		Discounted cash flows	Spread volatility on collateral assets	2% - 4%
					Correlation between insurance claim shortfall and collateral value	80%
Foreign exchange derivative contracts⁽¹⁾	$	(1	)	Option pricing model	Implied volatility of currency pairs	9% - 11%
Equity derivative contracts⁽¹⁾	$	2		Option pricing model	Equity / Equity Index volatility	7% - 35%
					Equity / Equity and Equity / Index correlation	44% - 79%
					Equity dividend yields	0% - 14%
Credit derivative contracts	110			Option pricing model and, where applicable, discounted cash flows	Credit default swap spreads	95bps - 115bps
Other derivative contracts	$	(51	)	Discounted cash flows	Conversion rate	1.6 times
					Expected duration	2 - 4 years
Other asset-backed securities available-for-sale	$	107		Discounted cash flows	Market assumptions related to yields for comparable instruments	1% - 3%
Other assets	$	12		Discounted cash flows	Client transfer rates based on rating	50% - 95%
Domestic deposits (structured deposits)⁽¹⁾⁽²⁾	$	(876	)	Option adjusted discounted cash flows	Implied volatility of currency pairs	9% - 11%
					Equity / Equity Index volatility	7% - 30%
					Equity / Equity and Equity / Index correlation	44% - 51%
Long-term debt (structured notes)⁽¹⁾⁽²⁾	$	(557	)	Option adjusted discounted cash flows	Implied volatility of currency pairs	9% - 11%
					Equity / Equity Index volatility	7% - 30%
					Equity / Equity and Equity / Index correlation	44% - 79%



December 31, 2017
Financial Instrument Type	Fair Value (in millions)			Valuation Technique(s)	Significant Unobservable Inputs	Range of Inputs
Collateralized debt obligations	$	129		Broker quotes or consensus pricing and, where applicable, discounted cash flows	Prepayment rates	0% - 6%
					Conditional default rates	4% - 6%
					Loss severity rates	55% - 60%
Corporate and other domestic debt securities	$	1,803		Discounted cash flows	Spread volatility on collateral assets	2% - 4%
					Correlation between insurance claim shortfall and collateral value	80%
Interest rate derivative contracts	$	—		Market comparable adjusted for probability to fund	Probability to fund for rate lock commitments	41% - 100%
Foreign exchange derivative contracts⁽¹⁾	$	—		Option pricing model	Implied volatility of currency pairs	6% - 9%
Equity derivative contracts⁽¹⁾	$	81		Option pricing model	Equity / Equity Index volatility	7% - 42%
					Equity / Equity and Equity / Index correlation	42% - 80%
					Equity dividend yields	0% - 8%
Credit derivative contracts	$	114		Option pricing model and, where applicable, discounted cash flows	Issuer by issuer correlation of defaults	82% - 83%
					Credit default swap spreads	154bps - 174bps
Other derivative contracts	$	(46	)	Discounted cash flows	Conversion rate	1.6 times
					Expected duration	2 - 4 years
Other asset-backed securities available-for-sale	$	111		Discounted cash flows	Market assumptions related to yields for comparable instruments	1% - 3%
Other assets	$	15		Discounted cash flows	Client transfer rates based on rating	50% - 95%
Domestic deposits (structured deposits)⁽¹⁾⁽²⁾	$	(897	)	Option adjusted discounted cash flows	Implied volatility of currency pairs	6% - 9%
					Equity / Equity Index volatility	7% - 42%
					Equity / Equity and Equity / Index correlation	42% - 80%
Long-term debt (structured notes)⁽¹⁾⁽²⁾	$	(641	)	Option adjusted discounted cash flows	Implied volatility of currency pairs	6% - 9%
					Equity / Equity Index volatility	7% - 42%
					Equity / Equity and Equity / Index correlation	42% - 80%


⁽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.


•	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 tilted towards the high end of the range.


•	Loss severity rate - Included in our Level 3 CDOs portfolio are trust preferred securities. The loss severity rate of the trust preferred securities is close to the mid-point of the range.

Derivatives

•

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 9 percent and 11 percent while the implied volatility for equity/equity or equity/equity index is between 7 percent and 35 percent, respectively, at June 30, 2018. 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 7 percent, respectively, at June 30, 2018.

•

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 44 percent and 79 percent at June 30, 2018.

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 measurement of certain corporate debt securities is 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 default correlation 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. For certain credit derivatives, the credit spreads of credit default swap contracts insuring asset backed securities is a significant unobservable input. Significant increase (decrease) in the credit spreads will result in a lower (higher) fair value measurement of the credit derivative.

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.

Other derivatives - The fair value of the swap agreements we entered into in conjunction with the sales of certain Visa Class B Shares is dependent upon the final resolution of the related litigation. Significant unobservable inputs used in the fair value measurement include estimated changes in the conversion rate of Visa Class B Shares into Visa Class A Shares and the expected timing of the final resolution. An increase (decrease) in the loss estimate or in the timing of the resolution of the related litigation would result in a higher (lower) fair value measurement of the derivative.

Other asset-backed securities available-for-sale - The fair value measurement of certain asset-backed securities is primarily affected by estimated yields which are determined based on current market yields of comparable instruments adjusted for market liquidity. An increase (decrease) in the yields would result in a decrease (increase) in the fair value measurement of the securities.

Other assets - The fair value of the contingent consideration receivable associated with the sale of a portion of our Private Banking business is dependent upon the clients’ decisions to transfer their accounts to UBS, the timing and amounts of client assets transferred and the acceptance of the client assets by UBS which are significant unobservable inputs. An increase (decrease) in the client transfer rate would result in a higher (lower) fair value measurement of the receivable.

Significant Transfers Into and Out of Level 3 Measurements During the three and six months ended June 30, 2018, we transferred $93 million and $127 million, respectively, of domestic deposits and $31 million and $75 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. Additionally, during the three and six months ended June 30, 2018, we transferred $10 million and $13 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 six months ended June 30, 2017, we transferred $56 million and $102 million, respectively, of domestic deposits and $7 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 six months ended June 30, 2017, we transferred $18 million and $21 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 June 30, 2018 and December 31, 2017. The gains (losses) during the three and six months ended June 30, 2018 and 2017 are also included.



	Non-Recurring Fair Value Measurements at June 30, 2018								Total Gains (Losses) For the Three Months Ended June 30, 2018			Total Gains (Losses) For the Six Months Ended June 30, 2018
	Level 1		Level 2		Level 3		Total					Total Gains (Losses) For the Six Months Ended June 30, 2018
	(in millions)
Residential mortgage loans held for sale⁽¹⁾	$	—	$	—	$	2	$	2	$	—		$	—
Consumer loans⁽²⁾	—		9		—		9		(1		)	(2		)
Commercial loans held for sale⁽³⁾	—		35		—		35		—			3
Impaired commercial loans⁽⁴⁾	—		—		155		155		46			101
Real estate owned⁽⁵⁾	—		8		—		8		1			2
Total assets at fair value on a non-recurring basis	$	—	$	52	$	157	$	209	$	46		$	104



	Non-Recurring Fair Value Measurements at December 31, 2017								Total Gains (Losses) For the Three Months Ended June 30, 2017			Total Gains (Losses) For the Six Months Ended June 30, 2017
	Level 1		Level 2		Level 3		Total					Total Gains (Losses) For the Six Months Ended June 30, 2017
	(in millions)
Residential mortgage loans held for sale⁽¹⁾	$	—	$	—	$	2	$	2	$	3		$	7
Consumer loans⁽²⁾	—		21		—		21		(4		)	(8		)
Commercial loans held for sale⁽³⁾	—		62		—		62		1			—
Impaired commercial loans⁽⁴⁾	—		—		289		289		(15		)	49
Real estate owned⁽⁵⁾	—		6		—		6		2			4
Total assets at fair value on a non-recurring basis	$	—	$	89	$	291	$	380	$	(13	)	$	52

⁽¹⁾

At June 30, 2018 and December 31, 2017, the fair value of the loans held for sale was below cost. Certain residential mortgage loans held for sale have been classified as Level 3 fair value measurements within the fair value hierarchy as 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.


⁽³⁾	At June 30, 2018 and December 31, 2017, 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 June 30, 2018 and December 31, 2017:



At June 30, 2018
Financial Instrument Type	Fair Value (in millions)		Valuation Technique(s)	Significant Unobservable Inputs	Range of Inputs
Residential mortgage loans held for sale	$	2	Third party appraisal valuation based on estimated loss severities, including collateral values	Loss severity rates	30% - 100%
Impaired commercial loans	155		Valuation of third party appraisal on underlying collateral	Loss severity rates	0% - 57%



At December 31, 2017
Financial Instrument Type	Fair Value (in millions)		Valuation Technique(s)	Significant Unobservable Inputs	Range of Inputs
Residential mortgage loans held for sale	$	2	Third party appraisal valuation based on estimated loss severities, including collateral values	Loss severity rates	30% - 100%
Impaired commercial loans	289		Valuation of third party appraisal on underlying collateral	Loss severity rates	9% - 61%

Significant Unobservable Inputs for Non-Recurring Fair Value Measurements

Residential mortgage loans held for sale includes 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 these was approximately 70 percent at June 30, 2018. These severity rates are primarily impacted by the value of the underlying collateral securing the loans.

The weighted average severity rate for impaired commercial loans was approximately 22 percent at June 30, 2018. 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.

Securities purchased and sold under resale and repurchase agreements designated under FVO - We elected to apply FVO accounting to 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.

Consumer loans held for sale – Consumer loans held for sale are recorded at the lower of amortized cost or fair value. The fair value estimates of consumer loans held for sale are determined primarily using observed market prices of instruments with similar characteristics. Adjustments are made to reflect differences in collateral location, loan-to-value ratio, FICO scores, vintage year, default rates, the completeness of the loan documentation and other risk characteristics. Where observable market parameters are not available, fair value is determined using the discounted cash flow method using assumptions consistent with those which would be used by market participants in valuing such loans, including estimates of prepayment rates, default rates, loss severities and market rates of return. We also may hold discussions on value directly with potential investors.

Commercial loans held for sale - 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 commercial loans held for sale are determined primarily using observable market consensus pricing obtained from independent sources, relevant broker quotes or observed market prices of instruments with similar characteristics. We also may hold discussions on value directly with potential investors.

Commercial loans held for sale designated under FVO – We elected to apply FVO accounting to 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 impaired loans – Generally represents collateral dependent commercial loans with fair value determined based on pricing quotes obtained from an independent third party appraisal.

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 – Fair value measurements are determined based on quoted prices for the identical security. Certain equity securities represent investments in private equity funds that help us comply with the Community Reinvestment Act. The fair value of these investments are estimated using the net asset value per share as calculated by the fund managers. Distributions will be received from the funds as the underlying assets are liquidated. While the funds do not allow us to redeem our investments, we are permitted to sell or transfer our investments subject to the approval of the fund manager. Unfunded commitments associated with these investments totaled $40 million and $43 million at June 30, 2018 and December 31, 2017, respectively.

The following tables provide additional information relating to asset-backed securities as well as certain collateralized debt obligations held at June 30, 2018:

Trading asset-backed securities:



Rating of Securities:⁽¹⁾	Collateral Type:	Level 2		Level 3		Total
		(in millions)
AAA - A	Student loans	$	92	$	—	$	92
BBB - B	Collateralized debt obligations	—		131		131
CCC - Unrated	Residential mortgages - Subprime	17		—		17
		$	109	$	131	$	240

Available-for-sale securities backed by collateral:



Rating of Securities:⁽¹⁾	Collateral Type:	Level 2		Level 3		Total
		(in millions)
AAA - A	Home equity - Alt A	$	47	$	—	$	47
	Other	—		49		49
	Total AAA -A	$	47	$	49	$	96
BBB -B	Other	—		58		58
		$	47	$	107	$	154


⁽¹⁾	We utilize Standard and Poor's ("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 the base discounting curve for measuring the fair value of all derivatives, both collateralized and uncollateralized, and apply 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. The FFVA is calculated by applying future market funding spreads to the expected future funding exposure of any uncollateralized component of the OTC derivative portfolio. The expected future funding exposure is calculated by a simulation methodology, where available, and is adjusted for events that may terminate the exposure, such as the default of HUSI or the counterparty.

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.


•	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 our 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) or a proxy based on credit default swaps referencing to credit names of similar credit standing.

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 90 days to reflect observable local market data, including local area sales data.

Structured notes and deposits designated under FVO – Structured notes and deposits are hybrid instruments containing embedded derivatives and are elected to be measured at fair value in their entirety under FVO accounting principles. The valuation of hybrid instruments is predominantly driven by the derivative features embedded within the instruments and our 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 designated under FVO – We elected to apply FVO accounting 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.

Additional Disclosures About the Fair Value of Financial Instruments that are Not Carried at Fair Value on the Consolidated Balance Sheet The fair value estimates set forth below 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 carrying amount of certain financial instruments recorded at cost on the consolidated balance sheet 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, federal funds sold and purchased, certain securities purchased and sold under resale and repurchase agreements, deposits with no stated maturity (e.g. demand, savings and certain money market deposits), short-term borrowings and dividends payable.

The following table summarizes the carrying value and estimated fair value of our financial instruments, excluding financial instruments that are carried at fair value on a recurring basis, at June 30, 2018 and December 31, 2017 and their classification within the fair value hierarchy:



June 30, 2018	Carrying Value		Fair Value		Level 1		Level 2		Level 3
	(in millions)
Financial assets:
Short-term financial assets	$	23,444	$	23,444	$	1,340	$	22,078	$	26
Federal funds sold and securities purchased under agreements to resell	9,781		9,781		—		9,781		—
Securities held-to-maturity	15,152		14,805		—		14,805		—
Commercial loans, net of allowance for credit losses	46,386		48,041		—		—		48,041
Commercial loans held for sale	36		36		—		36		—
Consumer loans, net of allowance for credit losses	19,482		18,661		—		—		18,661
Consumer loans held for sale:
Residential mortgages	31		31		—		30		1
Other consumer	56		56		—		—		56
Financial liabilities:
Short-term financial liabilities	$	5,101	$	5,103	$	—	$	5,077	$	26
Deposits:
Without fixed maturities	95,321		95,321		—		95,321		—
Fixed maturities	11,202		11,153		—		11,153		—
Deposits held for sale	130		130		—		130		—
Long-term debt	19,367		19,676		—		19,676		—



December 31, 2017	Carrying Value		Fair Value		Level 1		Level 2		Level 3
	(in millions)
Financial assets:
Short-term financial assets	$	12,304	$	12,304	$	1,115	$	11,157	$	32
Federal funds sold and securities purchased under agreements to resell	32,538		32,538		—		32,538		—
Securities held-to-maturity	13,977		13,902		—		13,902		—
Commercial loans, net of allowance for credit losses	52,427		54,210		—		—		54,210
Commercial loans held for sale	177		177		—		177		—
Consumer loans, net of allowance for credit losses	19,455		18,598		—		—		18,598
Consumer loans held for sale:
Residential mortgages	6		6		—		5		1
Other consumer	61		61		—		—		61
Financial liabilities:
Short-term financial liabilities	$	2,650	$	2,667	$	—	$	2,635	$	32
Deposits:
Without fixed maturities	100,502		100,502		—		100,502		—
Fixed maturities	9,834		9,782		—		9,782		—
Deposits held for sale	673		673		—		673		—
Long-term debt	22,080		22,717		—		22,717		—

Lending-related commitments - The fair value of loan commitments, revolving credit facilities and standby letters of credit 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 loan commitments, revolving credit facilities and standby letters of credit totaled $168 million and $158 million at June 30, 2018 and December 31, 2017, respectively.