Note 8.

Fair Value Option


Other Financial Assets and Financial Liabilities at Fair Value

In addition to all cash and derivative instruments included in “Financial instruments owned, at fair value” and “Financial instruments sold, but not yet purchased, at fair value,” the firm accounts for certain of its other financial assets and financial liabilities at fair value primarily under the fair value option.

The primary reasons for electing the fair value option are to:

reflect economic events in earnings on a timely basis;

mitigate volatility in earnings from using different measurement attributes (e.g., transfers of financial instruments owned accounted for as financings are recorded at fair value whereas the related secured financing would be recorded on an accrual basis absent electing the fair value option); and

address simplification and cost-benefit considerations (e.g., accounting for hybrid financial instruments at fair value in their entirety versus bifurcation of embedded derivatives and hedge accounting for debt hosts).

Hybrid financial instruments are instruments that contain bifurcatable embedded derivatives and do not require settlement by physical delivery of non-financial assets (e.g., physical commodities). If the firm elects to bifurcate the embedded derivative from the associated debt, the derivative is accounted for at fair value and the host contract is accounted for at amortized cost, adjusted for the effective portion of any fair value hedges. If the firm does not elect to bifurcate, the entire hybrid financial instrument is accounted for at fair value under the fair value option.

Other financial assets and financial liabilities accounted for at fair value under the fair value option include:

repurchase agreements and substantially all resale agreements;

securities borrowed and loaned within Fixed Income, Currency and Commodities Client Execution;

substantially all other secured financings, including transfers of assets accounted for as financings rather than sales;

certain unsecured short-term borrowings, consisting of all promissory notes and commercial paper and certain hybrid financial instruments;

certain unsecured long-term borrowings, including certain prepaid commodity transactions and certain hybrid financial instruments;

certain receivables from customers and counterparties, including transfers of assets accounted for as secured loans rather than purchases and certain margin loans;

certain time deposits issued by the firm’s bank subsidiaries (deposits with no stated maturity are not eligible for a fair value option election), including structured certificates of deposit, which are hybrid financial instruments; and

certain subordinated liabilities issued by consolidated VIEs.

These financial assets and financial liabilities at fair value are generally valued based on discounted cash flow techniques, which incorporate inputs with reasonable levels of price transparency, and are generally classified as level 2 because the inputs are observable. Valuation adjustments may be made for liquidity and for counterparty and the firm’s credit quality.

See below for information about the significant inputs used to value other financial assets and financial liabilities at fair value, including the ranges of significant unobservable inputs used to value the level 3 instruments within these categories. These ranges represent the significant unobservable inputs that were used in the valuation of each type of other financial assets and financial liabilities at fair value. The ranges and weighted averages of these inputs are not representative of the appropriate inputs to use when calculating the fair value of any one instrument. For example, the highest yield presented below for resale and repurchase agreements is appropriate for valuing a specific agreement in that category but may not be appropriate for valuing any other agreements in that category. Accordingly, the ranges of inputs presented below do not represent uncertainty in, or possible ranges of, fair value measurements of the firm’s level 3 other financial assets and financial liabilities.

Resale and Repurchase Agreements and Securities Borrowed and Loaned. The significant inputs to the valuation of resale and repurchase agreements and securities borrowed and loaned are funding spreads, the amount and timing of expected future cash flows and interest rates. As of both March 2014 and December 2013, there were no level 3 securities borrowed or securities loaned. The ranges of significant unobservable inputs used to value level 3 resale and repurchase agreements are as follows:

As of March 2014:

Yield: 1.2% to 3.9% (weighted average: 1.3%)

Duration: 0.4 to 2.5 years (weighted average: 2.3 years)

As of December 2013:

Yield: 1.3% to 3.9% (weighted average: 1.4%)

Duration: 0.2 to 2.7 years (weighted average: 2.5 years)

Generally, increases in yield or duration, in isolation, would result in a lower fair value measurement. Due to the distinctive nature of each of the firm’s level 3 resale and repurchase agreements, the interrelationship of inputs is not necessarily uniform across such agreements. See Note 9 for further information about collateralized agreements and financings.

Other Secured Financings. The significant inputs to the valuation of other secured financings at fair value are the amount and timing of expected future cash flows, interest rates, funding spreads, the fair value of the collateral delivered by the firm (which is determined using the amount and timing of expected future cash flows, market prices, market yields and recovery assumptions) and the frequency of additional collateral calls. The ranges of significant unobservable inputs used to value level 3 other secured financings are as follows:

As of March 2014:

Funding spreads: 120 bps to 325 bps (weighted average: 255 bps)

Yield: 1.1% to 14.3% (weighted average: 5.2%)

Duration: 0.5 to 16.8 years (weighted average: 4. 5 years)

As of December 2013:

Funding spreads: 40 bps to 250 bps (weighted average: 162 bps)

Yield: 0.9% to 14.3% (weighted average: 5.0%)

Duration: 0.8 to 16.1 years (weighted average: 3.7 years)

Generally, increases in funding spreads, yield or duration, in isolation, would result in a lower fair value measurement. Due to the distinctive nature of each of the firm’s level 3 other secured financings, the interrelationship of inputs is not necessarily uniform across such financings. See Note 9 for further information about collateralized agreements and financings.

Unsecured Short-term and Long-term Borrowings. The significant inputs to the valuation of unsecured short-term and long-term borrowings at fair value are the amount and timing of expected future cash flows, interest rates, the credit spreads of the firm, as well as commodity prices in the case of prepaid commodity transactions. The inputs used to value the embedded derivative component of hybrid financial instruments are consistent with the inputs used to value the firm’s other derivative instruments. See Note 7 for further information about derivatives. See Notes 15 and 16 for further information about unsecured short-term and long-term borrowings, respectively.

Certain of the firm’s unsecured short-term and long-term instruments are included in level 3, substantially all of which are hybrid financial instruments. As the significant unobservable inputs used to value hybrid financial instruments primarily relate to the embedded derivative component of these borrowings, these inputs are incorporated in the firm’s derivative disclosures related to unobservable inputs in Note 7.

Receivables from Customers and Counterparties. Receivables from customers and counterparties at fair value are primarily comprised of transfers of assets accounted for as secured loans rather than purchases. The significant inputs to the valuation of such receivables are commodity prices, interest rates, the amount and timing of expected future cash flows and funding spreads. As of March 2014, the firm’s level 3 receivables from customers and counterparties were not material. The range of significant unobservable inputs used to value level 3 secured loans as of December 2013 is as follows:

Funding spreads: 40 bps to 477 bps (weighted average: 142 bps)

Generally, an increase in funding spreads would result in a lower fair value measurement.

Receivables from customers and counterparties not accounted for at fair value are accounted for at amortized cost net of estimated uncollectible amounts, which generally approximates fair value. Such receivables are primarily comprised of customer margin loans and collateral posted in connection with certain derivative transactions. While these items are carried at amounts that approximate fair value, they are not accounted for at fair value under the fair value option or at fair value in accordance with other U.S. GAAP and therefore are not included in the firm’s fair value hierarchy in Notes 6, 7 and 8. Had these items been included in the firm’s fair value hierarchy, substantially all would have been classified in level 2 as of March 2014.

Receivables from customers and counterparties not accounted for at fair value also includes loans held for investment, which are primarily comprised of collateralized loans to private wealth management clients and corporate loans. As of March 2014 and December 2013, the carrying value of such loans was $17.94 billion and $14.90 billion, respectively, which generally approximated fair value. As of March 2014, had these loans been carried at fair value and included in the fair value hierarchy, $7.55 billion and $10.43 billion would have been classified in level 2 and level 3, respectively. As of December 2013, had these loans been carried at fair value and included in the fair value hierarchy, $6.16 billion and $8.75 billion would have been classified in level 2 and level 3, respectively.

Deposits. The significant inputs to the valuation of time deposits are interest rates and the amount and timing of future cash flows. The inputs used to value the embedded derivative component of hybrid financial instruments are consistent with the inputs used to value the firm’s other derivative instruments. See Note 7 for further information about derivatives. See Note 14 for further information about deposits.

The firm’s deposits that are included in level 3 are hybrid financial instruments. As the significant unobservable inputs used to value hybrid financial instruments primarily relate to the embedded derivative component of these deposits, these inputs are incorporated in the firm’s derivative disclosures related to unobservable inputs in Note 7.


Fair Value of Other Financial Assets and Financial Liabilities by Level

The tables below present, by level within the fair value hierarchy, other financial assets and financial liabilities accounted for at fair value primarily under the fair value option.


	Other Financial Assets at Fair Value as of March 2014
in millions		Level 1	Level 2	Level 3	Total
Securities segregated for regulatory and other purposes ¹		$25,753	$ 14,725	$ —	$ 40,478

Securities purchased under agreements to resell		—	134,484	63	134,547

Securities borrowed		—	71,243	—	71,243

Receivables from customers and counterparties		—	7,026	34	7,060
Total		$25,753	$227,478	$ 97	$253,328

	Other Financial Liabilities at Fair Value as of March 2014
in millions		Level 1	Level 2	Level 3	Total
Deposits		$ —	$ 7,261	$ 435	$ 7,696

Securities sold under agreements to repurchase		—	137,959	785	138,744

Securities loaned		—	596	—	596

Other secured financings		—	22,621	1,132	23,753

Unsecured short-term borrowings		—	16,201	3,392	19,593

Unsecured long-term borrowings		—	10,655	1,789	12,444

Other liabilities and accrued expenses		—	49	333	382
Total		$ —	$195,342	$7,866	$203,208

	Other Financial Assets at Fair Value as of December 2013
in millions		Level 1	Level 2	Level 3	Total
Securities segregated for regulatory and other purposes ¹		$19,502	$ 12,435	$ —	$ 31,937

Securities purchased under agreements to resell		—	161,234	63	161,297

Securities borrowed		—	60,384	—	60,384

Receivables from customers and counterparties		—	7,181	235	7,416

Other assets		—	18	—	18
Total		$19,502	$241,252	$ 298	$261,052

	Other Financial Liabilities at Fair Value as of December 2013
in millions		Level 1	Level 2	Level 3	Total
Deposits		$ —	$ 6,870	$ 385	$ 7,255

Securities sold under agreements to repurchase		—	163,772	1,010	164,782

Securities loaned		—	973	—	973

Other secured financings		—	22,572	1,019	23,591

Unsecured short-term borrowings		—	15,680	3,387	19,067

Unsecured long-term borrowings		—	9,854	1,837	11,691

Other liabilities and accrued expenses		—	362	26	388
Total		$ —	$220,083	$7,664	$227,747

Includes securities segregated for regulatory and other purposes accounted for at fair value under the fair value option, which consists of securities borrowed and resale agreements. In addition, level 1 consists of securities segregated for regulatory and other purposes accounted for at fair value under other U.S. GAAP, consisting of U.S. Treasury securities and money market instruments.

Transfers Between Levels of the Fair Value Hierarchy

Transfers between levels of the fair value hierarchy are reported at the beginning of the reporting period in which they occur. There were no transfers of other financial assets and financial liabilities between level 1 and level 2 during the three months ended March 2014 and March 2013. The tables below present information about transfers between level 2 and level 3.

Level 3 Rollforward

If a financial asset or financial liability was transferred to level 3 during a reporting period, its entire gain or loss for the period is included in level 3.

The tables below present changes in fair value for other financial assets and financial liabilities accounted for at fair value categorized as level 3 as of the end of the period. Level 3 other financial assets and liabilities are frequently economically hedged with cash instruments and derivatives. Accordingly, gains or losses that are reported in level 3 can be partially offset by gains or losses attributable to level 1, 2 or 3 cash instruments or derivatives. As a result, gains or losses included in the level 3 rollforward below do not necessarily represent the overall impact on the firm’s results of operations, liquidity or capital resources.


	Level 3 Other Financial Assets at Fair Value for the Three Months Ended March 2014
in millions		Balance, beginning of period	Net realized gains/ (losses)		Net unrealized gains/(losses) relating to instruments still held at period-end		Purchases	Sales	Issuances	Settlements		Transfers into level 3	Transfers out of level 3		Balance, end of period
Securities purchased under agreements to resell		$ 63	$1		$—		$—	$—	$—	$ (1	)	$—	$ —		$63

Receivables from customers and counterparties		235	1		2		—	—	—	(24	)	—	(180	)	34
Total		$298	$2	¹	$ 2	¹	$—	$—	$—	$(25	)	$—	$(180	)	$97

1.	The aggregate amounts include gains of approximately $4 million reported in “Market making.”


	Level 3 Other Financial Liabilities at Fair Value for the Three Months Ended March 2014
in millions		Balance, beginning of period	Net realized (gains)/ losses		Net unrealized (gains)/losses relating to instruments still held at period-end		Purchases	Sales	Issuances	Settlements		Transfers into level 3	Transfers out of level 3		Balance, end of period
Deposits		$ 385	$—		$ 6		$—	$—	$ 45	$ (1	)	$ —	$ —		$ 435

Securities sold under agreements to repurchase		1,010	—		—		—	—	—	(225	)	—	—		785

Other secured financings		1,019	5		—		—	—	433	(174	)	29	(180	)	1,132

Unsecured short-term borrowings		3,387	5		(38	)	—	—	1,042	(809	)	104	(299	)	3,392

Unsecured long-term borrowings		1,837	14		42		—	—	124	(128	)	687	(787	)	1,789

Other liabilities and accrued expenses		26	—		6		—	—	—	—		301	—		333
Total		$7,664	$24	¹	$16	¹	$—	$—	$1,644	$(1,337	)	$1,121	$(1,266	)	$7,866

1.	The aggregate amounts include losses of approximately $28 million, $6 million and $6 million reported in “Market making,” “Other principal transactions” and “Interest expense,” respectively.

The net unrealized loss on level 3 other financial assets and liabilities of $14 million (reflecting $2 million of gains on other financial assets and $16 million of losses on other financial liabilities) for the three months ended March 2014 primarily reflected losses on certain hybrid financial instruments included in unsecured long-term borrowings, principally due to changes in interest rates, partially offset by gains on certain hybrid financial instruments included in unsecured short-term borrowings, principally due to changes in foreign exchange rates.

Transfers out of level 3 of other financial assets during the three months ended March 2014 primarily reflected transfers of certain secured loans included in receivables from customers and counterparties to level 2, principally due to unobservable inputs not being significant to the net risk of the portfolio.

Transfers into level 3 of other financial liabilities during the three months ended March 2014 primarily reflected transfers of certain hybrid financial instruments included in unsecured long-term borrowings from level 2, principally due to unobservable inputs being significant to the valuation of these instruments, and transfers of certain subordinated liabilities included in other liabilities and accrued expenses from level 2, principally due to decreased market transactions in the related underlying investment.

Transfers out of level 3 of other financial liabilities during the three months ended March 2014 primarily reflected transfers of certain hybrid financial instruments included in unsecured short-term and long-term borrowings to level 2, principally due to increased transparency of certain correlation and volatility inputs used to value these instruments and transfers of certain other secured financings to level 2, principally due to unobservable inputs not being significant to the net risk of the portfolio.


	Level 3 Other Financial Assets at Fair Value for the Three Months Ended March 2013
in millions		Balance, beginning of period	Net realized gains/ (losses)		Net unrealized gains/(losses) relating to instruments still held at period-end		Purchases		Sales	Issuances	Settlements		Transfers into level 3	Transfers out of level 3		Balance, end of period
Securities purchased under agreements to resell		$ 278	$ 1		$ —		$ —		$—	$ —	$ (16	)	$ —	$(159	)	$ 104

Receivables from customers and counterparties		641	—		(8	)	—		—	—	—		—	—		633

Other assets		507	—		4		7		—	—	—		47	—		565
Total		$ 1,426	$ 1	¹	$ (4	)¹	$ 7		$—	$ —	$ (16	)	$ 47	$(159	)	$ 1,302
1. The aggregate amounts include gains/(losses) of approximately $(4) million and $1 million reported in “Market making” and “Interest income,” respectively.

	Level 3 Other Financial Liabilities at Fair Value for the Three Months Ended March 2013
in millions		Balance, beginning of period	Net realized (gains)/ losses		Net unrealized (gains)/losses relating to instruments still held at period-end		Purchases		Sales	Issuances	Settlements		Transfers into level 3	Transfers out of level 3		Balance, end of period
Deposits		$ 359	$ —		$ 4		$ —		$—	$ 36	$ (1	)	$ —	$ —		$ 398

Securities sold under agreements to repurchase		1,927	—		—		—		—	—	(150	)	—	—		1,777

Other secured financings		1,412	1		(19	)	—		—	394	(750	)	127	—		1,165

Unsecured short-term borrowings		2,584	3		(11	)	—		—	453	(491	)	290	(93	)	2,735

Unsecured long-term borrowings		1,917	9		(42	)	(3	)	—	175	(214	)	59	(93	)	1,808

Other liabilities and accrued expenses		11,274	(13	)	(191	)	304		—	—	(97	)	—	—		11,277
Total		$19,473	$ —		$(259	)¹	$301		$—	$1,058	$(1,703	)	$476	$(186	)	$19,160

1.	The aggregate amounts include gains/(losses) of approximately $337 million, $(77) million and $(1) million reported in “Market making,” “Other principal transactions” and “Interest expense,” respectively.

The net unrealized gain on level 3 other financial assets and liabilities of $255 million (reflecting $4 million of losses on other financial assets and $259 million of gains on other financial liabilities) for the three months ended March 2013 primarily reflected a net gain on certain insurance liabilities, principally due to changes in foreign exchange rates, partially offset by the impact of changes in inflation and tighter funding spreads.

Transfers out of level 3 of other financial assets during the three months ended March 2013 reflected transfers of certain resale agreements to level 2, principally due to increased price transparency as a result of market transactions in similar instruments.

Transfers into level 3 of other financial liabilities during the three months ended March 2013 primarily reflected transfers of certain hybrid financial instruments from level 2, principally due to reduced transparency of certain correlation and volatility inputs used to value these instruments.

Transfers out of level 3 of other financial liabilities during the three months ended March 2013 primarily reflected transfers of certain hybrid financial instruments to level 2, principally due to increased transparency of certain correlation and volatility inputs used to value certain instruments, and unobservable inputs no longer being significant to the valuation of other instruments.

Gains and Losses on Financial Assets and Financial Liabilities Accounted for at Fair Value Under the Fair Value Option

The table below presents the gains and losses recognized as a result of the firm electing to apply the fair value option to certain financial assets and financial liabilities. These gains and losses are included in “Market making” and “Other principal transactions.” The table below also includes gains and losses on the embedded derivative component of hybrid financial instruments included in unsecured short-term borrowings, unsecured long-term borrowings and deposits. These gains and losses would have been recognized under other U.S. GAAP even if the firm had not elected to account for the entire hybrid financial instrument at fair value.

The amounts in the table exclude contractual interest, which is included in “Interest income” and “Interest expense,” for all instruments other than hybrid financial instruments. See Note 23 for further information about interest income and interest expense.


		Gains/(Losses) on Financial Assets and Financial Liabilities at Fair Value Under the Fair Value Option
	Three Months Ended March
in millions		2014		2013
Receivables from customers and counterparties ¹		$ 217		$ (12	)

Other secured financings		(145	)	(110	)

Unsecured short-term borrowings ²		157		(148	)

Unsecured long-term borrowings ³		(276	)	198

Other liabilities and accrued expenses ⁴		19		192

Other ⁵		(71	)	(15	)
Total		$ (99	)	$ 105

1.	Includes gains/(losses) on certain transfers accounted for as receivables rather than purchases. Gains/(losses) for the three months ended March 2013 also includes losses on certain insurance contracts.

2.	Includes gains/(losses) on the embedded derivative component of hybrid financial instruments of $166 million and $(130) million for the three months ended March 2014 and March 2013, respectively.

3.	Includes gains/(losses) on the embedded derivative component of hybrid financial instruments of $(285) million and $284 million for the three months ended March 2014 and March 2013, respectively.

4.	Includes gains/(losses) on certain subordinated liabilities issued by consolidated VIEs. Gains/(losses) for the three months ended March 2013 also includes gains on certain insurance contracts.

5.	Primarily consists of gains/(losses) on deposits, resale and repurchase agreements and securities borrowed and loaned.

Excluding the gains and losses on the instruments accounted for under the fair value option described above, “Market making” and “Other principal transactions” primarily represent gains and losses on “Financial instruments owned, at fair value” and “Financial instruments sold, but not yet purchased, at fair value.”

Loans and Lending Commitments

The table below presents the difference between the aggregate fair value and the aggregate contractual principal amount for loans and long-term receivables for which the fair value option was elected.


	As of
in millions		March 2014	December 2013
Performing loans and long-term receivables
Aggregate contractual principal in excess of the related fair value		$ 3,205	$ 3,106

Loans on nonaccrual status and/or more than 90 days past due ¹
Aggregate contractual principal in excess of the related fair value (excluding loans carried at zero fair value and considered uncollectible)		11,530	11,041

Aggregate fair value of loans on nonaccrual status and/or more than 90 days past due		2,424	2,781

1.	The aggregate contractual principal amount of these loans exceeds the related fair value primarily because the firm regularly purchases loans, such as distressed loans, at values significantly below contractual principal amounts.

As of March 2014 and December 2013, the fair value of unfunded lending commitments for which the fair value option was elected was a liability of $975 million and $1.22 billion, respectively, and the related total contractual amount of these lending commitments was $51.93 billion and $51.54 billion, respectively. See Note 18 for further information about lending commitments.

Long-Term Debt Instruments

The aggregate contractual principal amount of long-term other secured financings for which the fair value option was elected exceeded the related fair value by $83 million and $154 million as of March 2014 and December 2013, respectively. The aggregate contractual principal amount of unsecured long-term borrowings for which the fair value option was elected exceeded the related fair value by $224 million and $92 million as of March 2014 and December 2013, respectively. The amounts above include both principal and non-principal-protected long-term borrowings.

Impact of Credit Spreads on Loans and Lending Commitments

The estimated net gain attributable to changes in instrument-specific credit spreads on loans and lending commitments for which the fair value option was elected was $616 million and $794 million for the three months ended March 2014 and March 2013, respectively. Changes in the fair value of loans and lending commitments are primarily attributable to changes in instrument-specific credit spreads. Substantially all of the firm’s performing loans and lending commitments are floating-rate.

Impact of Credit Spreads on Borrowings

The table below presents the net gains/(losses) attributable to the impact of changes in the firm’s own credit spreads on borrowings for which the fair value option was elected. The firm calculates the fair value of borrowings by discounting future cash flows at a rate which incorporates the firm’s credit spreads.


	Three Months Ended March
in millions		2014	2013
Net gains/(losses) including hedges		$15	$ (77	)

Net gains/(losses) excluding hedges		14	(109	)