•

Swaps.

Contracts that require counterparties to exchange cash flows, such as currency or interest payment streams. The amounts exchanged are based on the specific terms of the contract with reference to specified rates, financial instruments, commodities, currencies or indices.

•

Options.

Contracts in which the option purchaser has the right, but not the obligation, to purchase from or sell to the option writer financial instruments, commodities or currencies within a defined time period for a specified price.

Derivatives are reported on a

net-by-counterparty

basis (i.e., the net payable or receivable for derivative assets and liabilities for a given counterparty) when a legal right of setoff exists under an enforceable netting agreement (counterparty netting). Derivatives are accounted for at fair value, net of cash collateral received or posted under enforceable credit support agreements (cash collateral netting). Derivative assets are included in trading assets and derivative liabilities are included in trading liabilities. Realized and unrealized gains and losses on derivatives not designated as hedges are included in market making (for derivatives included in the Global Markets segment), and other principal transactions (for derivatives included in the remaining business segments) in the consolidated statements of earnings. For both the years ended December 2020 and December 2019, substantially all of the firm’s derivatives were included in the Global Markets segment.

The tables below present the gross fair value and the notional amounts of derivative contracts by major product type, the amounts of counterparty and cash collateral netting in the consolidated balance sheets, as well as cash and securities collateral posted and received under enforceable credit support agreements that do not meet the criteria for netting under U.S. GAAP.



	As of December 2020					As of December 2019

$ in millions		Derivative Assets		Derivative Liabilities			Derivative Assets		Derivative Liabilities
Not accounted for as hedges
Exchange-traded		$ 665		$ 660			$ 476		$ 856
OTC-cleared		18,832		16,809			9,958		8,618
Bilateral OTC		337,998		304,370			266,387		242,046
Total interest rates		357,495		321,839			276,821		251,520
OTC-cleared		4,137		4,517			6,551		6,929
Bilateral OTC		12,418		11,551			14,178		13,860
Total credit		16,555		16,068			20,729		20,789
Exchange-traded		133		22			35		10
OTC-cleared		401		631			411		391
Bilateral OTC		101,830		102,676			79,887		81,613
Total currencies		102,364		103,329			80,333		82,014
Exchange-traded		4,476		4,177			2,390		2,272
OTC-cleared		195		187			180		243
Bilateral OTC		9,320		13,691			8,568		13,034
Total commodities		13,991		18,055			11,138		15,549
Exchange-traded		29,006		31,944			13,499		16,976
Bilateral OTC		47,867		49,072			36,162		39,531
Total equities		76,873		81,016			49,661		56,507
Subtotal		567,278		540,307			438,682		426,379
Accounted for as hedges
OTC-cleared		1		–			–		–
Bilateral OTC		1,346		–			3,182		1
Total interest rates		1,347		–			3,182		1
OTC-cleared		–		87			16		57
Bilateral OTC		4		372			16		153
Total currencies		4		459			32		210
Subtotal		1,351		459			3,214		211
Total gross fair value		$ 568,629		$ 540,766			$ 441,896		$ 426,590
Offset in the consolidated balance sheets
Exchange-traded		$ (29,549	)	$ (29,549	)		$ (14,159	)	$ (14,159	)
OTC-cleared		(21,315	)	(21,315	)		(15,565	)	(15,565	)
Bilateral OTC		(372,142	)	(372,142	)		(310,920	)	(310,920	)
Counterparty netting		(423,006	)	(423,006	)		(340,644	)	(340,644	)
OTC-cleared		(1,926	)	(720	)		(1,302	)	(526	)
Bilateral OTC		(74,116	)	(58,449	)		(54,698	)	(41,618	)
Cash collateral netting		(76,042	)	(59,169	)		(56,000	)	(42,144	)
Total amounts offset		$(499,048	)	$(482,175	)		$(396,644	)	$(382,788	)
Included in the consolidated balance sheets
Exchange-traded		$ 4,731		$ 7,254			$ 2,241		$ 5,955
OTC-cleared		325		196			249		147
Bilateral OTC		64,525		51,141			42,762		37,700
Total		$ 69,581		$ 58,591			$ 45,252		$ 43,802
Not offset in the consolidated balance sheets
Cash collateral		$ (979	)	$ (2,427	)		$ (604	)	$ (1,603	)
Securities collateral		(17,297	)	(9,943	)		(14,196	)	(9,252	)
Total		$ 51,305		$ 46,221			$ 30,452		$ 32,947



	Notional Amounts as of December

$ in millions		2020	2019
Not accounted for as hedges
Exchange-traded		$ 3,722,558	$ 4,757,300
OTC-cleared		13,789,571	13,440,376
Bilateral OTC		11,076,460	11,668,171
Total interest rates		28,588,589	29,865,847
OTC-cleared		515,197	396,342
Bilateral OTC		558,813	707,935
Total credit		1,074,010	1,104,277
Exchange-traded		7,413	4,566
OTC-cleared		157,687	134,060
Bilateral OTC		6,041,663	5,926,602
Total currencies		6,206,763	6,065,228
Exchange-traded		242,193	230,018
OTC-cleared		2,315	2,639
Bilateral OTC		206,253	243,228
Total commodities		450,761	475,885
Exchange-traded		948,937	910,099
Bilateral OTC		1,126,572	1,182,335
Total equities		2,075,509	2,092,434
Subtotal		38,395,632	39,603,671
Accounted for as hedges
OTC-cleared		182,311	123,531
Bilateral OTC		6,641	9,714
Total interest rates		188,952	133,245
OTC-cleared		1,767	4,152
Bilateral OTC		14,055	9,247
Total currencies		15,822	13,399
Subtotal		204,774	146,644
Total notional amounts		$38,600,406	$39,750,315

In the tables above:

•

Gross fair values exclude the effects of both counterparty netting and collateral, and therefore are not representative of the firm’s exposure.

•

Where the firm has received or posted collateral under credit support agreements, but has not yet determined such agreements are enforceable, the related collateral has not been netted.

•

Notional amounts, which represent the sum of gross long and short derivative contracts, provide an indication of the volume of the firm’s derivative activity and do not represent anticipated losses.

•

Total gross fair value of derivatives included derivative assets of $20.60 billion as of December 2020 and $9.15 billion as of December 2019, and derivative liabilities of $22.98 billion as of December 2020 and $14.88 billion as of December 2019, which are not subject to an enforceable netting agreement or are subject to a netting agreement that the firm has not yet determined to be enforceable.

•

During the first quarter of 2020, consistent with the rules of a clearing organization, the firm elected to consider its transactions with that clearing organization as settled each day. The impact of this change would have been a reduction in gross credit derivative assets of $3.97 billion and liabilities of $4.15 billion as of December 2019, and a corresponding decrease in counterparty and cash collateral netting, with no impact to the consolidated balance sheets.

Fair Value of Derivatives by Level

The table below presents derivatives on a gross basis by level and product type, as well as the impact of netting.



$ in millions	Level 1		Level 2		Level 3		Total
As of December 2020
Assets
Interest rates	$ 297		$ 357,568		$ 977		$ 358,842
Credit	–		13,104		3,451		16,555
Currencies	–		102,221		147		102,368
Commodities	–		13,285		706		13,991
Equities	75		75,054		1,744		76,873
Gross fair value	372		561,232		7,025		568,629
Counterparty netting in levels	(135	)	(420,685	)	(1,058	)	(421,878	)
Subtotal	$ 237		$ 140,547		$ 5,967		$ 146,751
Cross-level counterparty netting							(1,128	)
Cash collateral netting							(76,042	)
Net fair value							$ 69,581
Liabilities
Interest rates	$(229	)	$(320,900	)	$ (710	)	$(321,839	)
Credit	–		(14,395	)	(1,673	)	(16,068	)
Currencies	–		(103,303	)	(485	)	(103,788	)
Commodities	–		(17,649	)	(406	)	(18,055	)
Equities	(318	)	(78,122	)	(2,576	)	(81,016	)
Gross fair value	(547	)	(534,369	)	(5,850	)	(540,766	)
Counterparty netting in levels	135		420,685		1,058		421,878
Subtotal	$(412	)	$(113,684	)	$(4,792	)	$(118,888	)
Cross-level counterparty netting							1,128
Cash collateral netting							59,169
Net fair value							$ (58,591	)
As of December 2019
Assets
Interest rates	$ 3		$ 279,443		$ 557		$ 280,003
Credit	–		17,204		3,525		20,729
Currencies	–		80,178		187		80,365
Commodities	–		10,648		490		11,138
Equities	21		48,953		687		49,661
Gross fair value	24		436,426		5,446		441,896
Counterparty netting in levels	–		(340,325	)	(792	)	(341,117	)
Subtotal	$ 24		$ 96,101		$ 4,654		$ 100,779
Cross-level counterparty netting							473
Cash collateral netting							(56,000	)
Net fair value							$ 45,252
Liabilities
Interest rates	$ (3	)	$ (251,050	)	$ (468	)	$ (251,521	)
Credit	–		(19,141	)	(1,648	)	(20,789	)
Currencies	–		(81,826	)	(398	)	(82,224	)
Commodities	–		(15,306	)	(243	)	(15,549	)
Equities	(26	)	(53,817	)	(2,664	)	(56,507	)
Gross fair value	(29	)	(421,140	)	(5,421	)	(426,590	)
Counterparty netting in levels	–		340,325		792		341,117
Subtotal	$ (29	)	$ (80,815	)	$ (4,629	)	$ (85,473	)
Cross-level counterparty netting							(473	)
Cash collateral netting							42,144
Net fair value							$ (43,802	)

In the table above:

•

Gross fair values exclude the effects of both counterparty netting and collateral netting, and therefore are not representative of the firm’s exposure.

•

Counterparty netting is reflected in each level to the extent that receivable and payable balances are netted within the same level and is included in counterparty netting in levels. Where the counterparty netting is across levels, the netting is included in cross-level counterparty netting.

•

Derivative assets are shown as positive amounts and derivative liabilities are shown as negative amounts.

See Note 4 for an overview of the firm’s fair value measurement policies and the valuation techniques and significant inputs used to determine the fair value of derivatives.

Significant Unobservable Inputs

The table below presents the amount of level 3 derivative assets (liabilities), and ranges, averages and medians of significant unobservable inputs used to value level 3 derivatives.

As of December 2020

As of December 2019

$ in millions, except inputs

Amount or

Range

Average/

Median

Amount or

Range

Average/

Median

Interest rates, net

$267

$89

Correlation

(8)% to 81%

56%/60%

(42)% to 81%

52%/60%

Volatility (bps)

31 to 150

65/53

31 to 150

70/61

Credit, net

$1,778

$1,877

Credit spreads (bps)

2 to 699

109/74

1 to 559

96/53

Upfront credit points

7 to 90

40/30

2 to 90

38/32

Recovery rates

25% to 90%

46%/40%

10% to 60%

31%/25%

Currencies, net

$(338)

$(211)

Correlation

20% to 70%

39%/41%

20% to 70%

37%/36%

Volatility

18% to 18%

18%/18%

N/A

Commodities, net

$300

$247

Volatility

15% to 87%

32%/30%

9% to 57%

26%/25%

Natural gas spread

$(1.00) to

$2.13

$(0.13)/

$(0.09)

$(1.93) to

$1.69

$(0.16)/

$(0.17)

Oil spread

$8.30 to

$11.20

$9.73/

$9.55

$(4.86) to

$19.77

$9.82/

$11.15

Equities, net

$(832)

$(1,977)

Correlation

(70)% to 100%

52%/55%

(70)% to 99%

42%/45%

Volatility

3% to 129%

14%/7%

2% to 72%

14%/7%

In the table above:

•

Derivative assets are shown as positive amounts and derivative liabilities are shown as negative amounts.

•

Ranges represent the significant unobservable inputs that were used in the valuation of each type of derivative.

•

Averages represent the arithmetic average of the inputs and are not weighted by the relative fair value or notional of the respective financial instruments. An average greater than the median indicates that the majority of inputs are below the average. For example, the difference between the average and the median for credit spreads indicates that the majority of the inputs fall in the lower end of the range.

•

The ranges, averages and medians of these inputs are not representative of the appropriate inputs to use when calculating the fair value of any one derivative. For example, the highest correlation for interest rate derivatives is appropriate for valuing a specific interest rate derivative but may not be appropriate for valuing any other interest rate derivative. Accordingly, the ranges of inputs do not represent uncertainty in, or possible ranges of, fair value measurements of level 3 derivatives.

•

Interest rates, currencies and equities derivatives are valued using option pricing models, credit derivatives are valued using option pricing, correlation and discounted cash flow models, and commodities derivatives are valued using option pricing and discounted cash flow models.

•

The fair value of any one instrument may be determined using multiple valuation techniques. For example, option pricing models and discounted cash flows models are typically used together to determine fair value. Therefore, the level 3 balance encompasses both of these techniques.

•

Correlation within currencies and equities includes cross-product type correlation.

•

Volatility was not significant to the valuation of level 3 currency derivatives as of December 2019.

•

Natural gas spread represents the spread per million British thermal units of natural gas.

•

Oil spread represents the spread per barrel of oil and refined products.

Range of Significant Unobservable Inputs

The following provides information about the ranges of significant unobservable inputs used to value the firm’s level 3 derivative instruments:

•

Correlation.

Ranges for correlation cover a variety of underliers both within one product type (e.g., equity index and equity single stock names) and across product types (e.g., correlation of an interest rate and a currency), as well as across regions. Generally, cross-product type correlation inputs are used to value more complex instruments and are lower than correlation inputs on assets within the same derivative product type.

•

Volatility.

Ranges for volatility cover numerous underliers across a variety of markets, maturities and strike prices. For example, volatility of equity indices is generally lower than volatility of single stocks.

•

Credit spreads, upfront credit points and recovery rates.

The ranges for credit spreads, upfront credit points and recovery rates cover a variety of underliers (index and single names), regions, sectors, maturities and credit qualities (high-yield and investment-grade). The broad range of this population gives rise to the width of the ranges of significant unobservable inputs.

•

Commodity prices and spreads.

The ranges for commodity prices and spreads cover variability in products, maturities and delivery locations.

Sensitivity of Fair Value Measurement to Changes in Significant Unobservable Inputs

The following is a description of the directional sensitivity of the firm’s level 3 fair value measurements to changes in significant unobservable inputs, in isolation, as of each

period-end:

•

Correlation.

In general, for contracts where the holder benefits from the convergence of the underlying asset or index prices (e.g., interest rates, credit spreads, foreign exchange rates, inflation rates and equity prices), an increase in correlation results in a higher fair value measurement.

•

Volatility.

In general, for purchased options, an increase in volatility results in a higher fair value measurement.

•

Credit spreads, upfront credit points and recovery rates.

In general, the fair value of purchased credit protection increases as credit spreads or upfront credit points increase or recovery rates decrease. Credit spreads, upfront credit points and recovery rates are strongly related to distinctive risk factors of the underlying reference obligations, which include reference entity-specific factors, such as leverage, volatility and industry, market-based risk factors, such as borrowing costs or liquidity of the underlying reference obligation, and macroeconomic conditions.

•

Commodity prices and spreads.

In general, for contracts where the holder is receiving a commodity, an increase in the spread (price difference from a benchmark index due to differences in quality or delivery location) or price results in a higher fair value measurement.

Due to the distinctive nature of each of the firm’s level 3 derivatives, the interrelationship of inputs is not necessarily uniform within each product type.

Level 3 Rollforward

The table below presents a summary of the changes in fair value for level 3 derivatives.



	Year Ended December

$ in millions		2020		2019
Total level 3 derivatives, net
Beginning balance		$ 25		$ 590
Net realized gains/(losses)		226		118
Net unrealized gains/(losses)		612		(454	)
Purchases		319		444
Sales		(724	)	(668	)
Settlements		750		236
Transfers into level 3		(40	)	7
Transfers out of level 3		7		(248	)
Ending balance		$1,175		$ 25

In the table above:

•

Changes in fair value are presented for all derivative assets and liabilities that are classified in level 3 as of the end of the period.

•

Net unrealized gains/(losses) relates to instruments that were still held at

period-end.

•

Transfers between levels of the fair value hierarchy are reported at the beginning of the reporting period in which they occur. If a derivative was transferred into level 3 during a reporting period, its entire gain or loss for the period is classified in level 3.

•

Positive amounts for transfers into level 3 and negative amounts for transfers out of level 3 represent net transfers of derivative assets. Negative amounts for transfers into level 3 and positive amounts for transfers out of level 3 represent net transfers of derivative liabilities.

•

A derivative with level 1 and/or level 2 inputs is classified in level 3 in its entirety if it has at least one significant level 3 input.

•

If there is one significant level 3 input, the entire gain or loss from adjusting only observable inputs (i.e., level 1 and level 2 inputs) is classified in level 3.

•

Gains or losses that have been classified in level 3 resulting from changes in level 1 or level 2 inputs are frequently offset by gains or losses attributable to level 1 or level 2 derivatives and/or level 1, level 2 and level 3 trading cash instruments. As a result, gains/(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.

The table below presents information, by product type, for derivatives included in the summary table above.



	Year Ended December

$ in millions		2020		2019
Interest rates, net
Beginning balance		$ 89		$ (109	)
Net realized gains/(losses)		12		(24	)
Net unrealized gains/(losses)		226		199
Purchases		12		8
Sales		(28	)	(13	)
Settlements		(34	)	40
Transfers into level 3		(13	)	–
Transfers out of level 3		3		(12	)
Ending balance		$ 267		$ 89
Credit, net
Beginning balance		$ 1,877		$ 1,672
Net realized gains/(losses)		28		42
Net unrealized gains/(losses)		110		273
Purchases		39		146
Sales		(50	)	(114	)
Settlements		(229	)	(251	)
Transfers into level 3		47		108
Transfers out of level 3		(44	)	1
Ending balance		$ 1,778		$ 1,877
Currencies, net
Beginning balance		$ (211	)	$ 461
Net realized gains/(losses)		(8	)	(32	)
Net unrealized gains/(losses)		(210	)	(327	)
Purchases		1		11
Sales		(20	)	(1	)
Settlements		117		(306	)
Transfers into level 3		(2	)	(14	)
Transfers out of level 3		(5	)	(3	)
Ending balance		$ (338	)	$ (211	)
Commodities, net
Beginning balance		$ 247		$ 112
Net realized gains/(losses)		(12	)	(34	)
Net unrealized gains/(losses)		159		219
Purchases		37		25
Sales		(22	)	(81	)
Settlements		(60	)	(6	)
Transfers into level 3		(27	)	8
Transfers out of level 3		(22	)	4
Ending balance		$ 300		$ 247
Equities, net
Beginning balance		$(1,977	)	$(1,546	)
Net realized gains/(losses)		206		166
Net unrealized gains/(losses)		327		(818	)
Purchases		230		254
Sales		(604	)	(459	)
Settlements		956		759
Transfers into level 3		(45	)	(95	)
Transfers out of level 3		75		(238	)
Ending balance		$ (832	)	$(1,977	)

Level 3 Rollforward Commentary

Year Ended December 2020.

The net realized and unrealized gains on level 3 derivatives of $838 million (reflecting $226 million of net realized gains and $612 million of net unrealized gains) for 2020 included gains of $900 million reported in market making and losses of $62 million reported in other principal transactions.

The net unrealized gains on level 3 derivatives for 2020 were primarily attributable to gains on certain equity derivatives (primarily reflecting the impact of an increase in equity prices), gains on certain interest rate derivatives (primarily reflecting the impact of a decrease in interest rates and changes in foreign exchange rates), gains on certain commodity derivatives (primarily reflecting the impact of changes in commodity prices), and gains on certain credit derivatives (primarily reflecting the impact of a decrease in interest rates), partially offset by losses on certain currency derivatives (primarily reflecting the impact of changes in foreign exchange rates and a decrease in interest rates).

The drivers of both transfers into level 3 derivatives and transfers out of level 3 derivatives during 2020 were not material.

Year Ended December 2019.

The net realized and unrealized losses on level 3 derivatives of $336 million (reflecting $118 million of net realized gains and $454 million of net unrealized losses) for 2019 included losses of $305 million reported in market making and $31 million reported in other principal transactions.

The net unrealized losses on level 3 derivatives for 2019 were primarily attributable to losses on certain equity derivatives (primarily reflecting the impact of an increase in equity prices), and losses on certain currency derivatives (primarily reflecting the impact of a decrease in interest rates and changes in foreign exchange rates), partially offset by gains on certain credit derivatives (primarily reflecting the impact of a decrease in interest rates), gains on certain commodity derivatives (primarily reflecting the impact of changes in commodity prices), and gains on certain interest rate derivatives (primarily reflecting the impact of a decrease in interest rates).

The drivers of transfers into level 3 derivatives during 2019 were not material.

Transfers out of level 3 derivatives during 2019 primarily reflected transfers of certain equity derivative assets to level 2, principally due to certain unobservable inputs no longer being significant to the valuation of these derivatives.

OTC Derivatives

The table below presents OTC derivative assets and liabilities by tenor and major product type.



$ in millions	Less than 1 Year		1 - 5 Years		Greater than 5 Years		Total
As of December 2020
Assets
Interest rates	$ 8,913		$20,145		$74,893		$103,951
Credit	822		3,270		3,302		7,394
Currencies	13,887		7,400		9,303		30,590
Commodities	2,998		1,466		488		4,952
Equities	12,182		12,590		1,807		26,579
Counterparty netting in tenors	(3,963	)	(4,458	)	(3,182	)	(11,603	)
Subtotal	$34,839		$40,413		$86,611		$161,863
Cross-tenor counterparty netting							(20,971	)
Cash collateral netting							(76,042	)
Total OTC derivative assets							$ 64,850
Liabilities
Interest rates	$ 5,687		$11,967		$49,301		$ 66,955
Credit	1,268		3,462		2,177		6,907
Currencies	18,770		7,575		5,775		32,120
Commodities	3,455		1,545		4,315		9,315
Equities	9,702		14,095		3,986		27,783
Counterparty netting in tenors	(3,963	)	(4,458	)	(3,182	)	(11,603	)
Subtotal	$34,919		$34,186		$62,372		$131,477
Cross-tenor counterparty netting							(20,971	)
Cash collateral netting							(59,169	)
Total OTC derivative liabilities							$ 51,337
As of December 2019
Assets
Interest rates	$ 5,521		$15,183		$57,394		$ 78,098
Credit	678		3,259		3,183		7,120
Currencies	10,236		5,063		6,245		21,544
Commodities	2,507		1,212		302		4,021
Equities	7,332		4,509		1,294		13,135
Counterparty netting in tenors	(3,263	)	(3,673	)	(2,332	)	(9,268	)
Subtotal	$23,011		$25,553		$66,086		$114,650
Cross-tenor counterparty netting							(15,639	)
Cash collateral netting							(56,000	)
Total OTC derivative assets							$ 43,011
Liabilities
Interest rates	$ 3,654		$ 9,113		$36,470		$ 49,237
Credit	1,368		4,052		1,760		7,180
Currencies	12,486		6,906		4,036		23,428
Commodities	2,796		1,950		3,804		8,550
Equities	5,755		7,381		3,367		16,503
Counterparty netting in tenors	(3,263	)	(3,673	)	(2,332	)	(9,268	)
Subtotal	$22,796		$25,729		$47,105		$ 95,630
Cross-tenor counterparty netting							(15,639	)
Cash collateral netting							(42,144	)
Total OTC derivative liabilities							$ 37,847

In the table above:

•

Tenor is based on remaining contractual maturity.

•

Counterparty netting within the same product type and tenor category is included within such product type and tenor category.

•

Counterparty netting across product types within the same tenor category is included in counterparty netting in tenors. Where the counterparty netting is across tenor categories, the netting is included in cross-tenor counterparty netting.

Credit Derivatives

The firm enters into a broad array of credit derivatives to facilitate client transactions and to manage the credit risk associated with market-making and investing and financing activities. Credit derivatives are actively managed based on the firm’s net risk position. Credit derivatives are generally individually negotiated contracts and can have various settlement and payment conventions. Credit events include failure to pay, bankruptcy, acceleration of indebtedness, restructuring, repudiation and dissolution of the reference entity.

The firm enters into the following types of credit derivatives:

•

Credit Default Swaps.

Single-name credit default swaps protect the buyer against the loss of principal on one or more bonds, loans or mortgages (reference obligations) in the event the issuer of the reference obligations suffers a credit event. The buyer of protection pays an initial or periodic premium to the seller and receives protection for the period of the contract. If there is no credit event, as defined in the contract, the seller of protection makes no payments to the buyer. If a credit event occurs, the seller of protection is required to make a payment to the buyer, calculated according to the terms of the contract.

•

Credit Options.

In a credit option, the option writer assumes the obligation to purchase or sell a reference obligation at a specified price or credit spread. The option purchaser buys the right, but does not assume the obligation, to sell the reference obligation to, or purchase it from, the option writer. The payments on credit options depend either on a particular credit spread or the price of the reference obligation.

•

Credit Indices, Baskets and Tranches.

Credit derivatives may reference a basket of single-name credit default swaps or a broad-based index. If a credit event occurs in one of the underlying reference obligations, the protection seller pays the protection buyer. The payment is typically a

pro-rata

portion of the transaction’s total notional amount based on the underlying defaulted reference obligation. In certain transactions, the credit risk of a basket or index is separated into various portions (tranches), each having different levels of subordination. The most junior tranches cover initial defaults and once losses exceed the notional amount of these junior tranches, any excess loss is covered by the next most senior tranche.

•

Total Return Swaps.

A total return swap transfers the risks relating to economic performance of a reference obligation from the protection buyer to the protection seller. Typically, the protection buyer receives a floating rate of interest and protection against any reduction in fair value of the reference obligation, and the protection seller receives the cash flows associated with the reference obligation, plus any increase in the fair value of the reference obligation.

The firm economically hedges its exposure to written credit derivatives primarily by entering into offsetting purchased credit derivatives with identical underliers. Substantially all of the firm’s purchased credit derivative transactions are with financial institutions and are subject to stringent collateral thresholds. In addition, upon the occurrence of a specified trigger event, the firm may take possession of the reference obligations underlying a particular written credit derivative, and consequently may, upon liquidation of the reference obligations, recover amounts on the underlying reference obligations in the event of default.

As of December 2020, written credit derivatives had a total gross notional amount of $515.85 billion and purchased credit derivatives had a total gross notional amount of $558.18 billion, for total net notional purchased protection of $42.33 billion. As of December 2019, written credit derivatives had a total gross notional amount of $522.57 billion and purchased credit derivatives had a total gross notional amount of $581.76 billion, for total net notional purchased protection of $59.19 billion. The firm’s written and purchased credit derivatives primarily consist of credit default swaps.

The table below presents information about credit derivatives.



	Credit Spread on Underlier (basis points)

$ in millions		0 - 250	251 - 500		501 - 1,000		Greater than 1,000		Total
As of December 2020
Maximum Payout/Notional Amount of Written Credit Derivatives by Tenor
Less than 1 year		$ 96,049	$ 5,826		$ 450		$ 2,403		$104,728
1 – 5 years		331,145	17,913		8,801		4,932		362,791
Greater than 5 years		44,132	3,839		272		88		48,331
Total		$471,326	$27,578		$9,523		$ 7,423		$515,850
Maximum Payout/Notional Amount of Purchased Credit Derivatives
Offsetting		$407,315	$19,822		$8,679		$ 7,091		$442,907
Other		$103,604	$ 7,272		$3,619		$ 776		$115,271
Fair Value of Written Credit Derivatives
Asset		$ 10,302	$ 638		$ 256		$ 118		$ 11,314
Liability		1,112	1,119		387		2,001		4,619
Net asset/(liability)		$ 9,190	$ (481	)	$ (131	)	$ (1,883	)	$ 6,695
As of December 2019
Maximum Payout/Notional Amount of Written Credit Derivatives by Tenor
Less than 1 year		$143,566	$ 7,155		$ 759		$ 2,953		$154,433
1 – 5 years		292,444	10,125		5,482		8,735		316,786
Greater than 5 years		48,109	2,260		427		554		51,350
Total		$484,119	$19,540		$6,668		$12,242		$522,569
Maximum Payout/Notional Amount of Purchased Credit Derivatives
Offsetting		$395,127	$14,492		$5,938		$10,543		$426,100
Other		$149,092	$ 2,617		$1,599		$ 2,354		$155,662
Fair Value of Written Credit Derivatives
Asset		$ 13,103	$ 446		$ 160		$ 202		$ 13,911
Liability		1,239	448		372		3,490		5,549
Net asset/(liability)		$ 11,864	$ (2	)	$ (212	)	$ (3,288	)	$ 8,362

In the table above:

•

Fair values exclude the effects of both netting of receivable balances with payable balances under enforceable netting agreements, and netting of cash received or posted under enforceable credit support agreements, and therefore are not representative of the firm’s credit exposure.

•

Tenor is based on remaining contractual maturity.

•

The credit spread on the underlier, together with the tenor of the contract, are indicators of payment/performance risk. The firm is less likely to pay or otherwise be required to perform where the credit spread and the tenor are lower.

•

Offsetting purchased credit derivatives represent the notional amount of purchased credit derivatives that economically hedge written credit derivatives with identical underliers.

•

Other purchased credit derivatives represent the notional amount of all other purchased credit derivatives not included in offsetting.

Impact of Credit and Funding Spreads on Derivatives

The firm realizes gains or losses on its derivative contracts. These gains or losses include credit valuation adjustments (CVA) relating to uncollateralized derivative assets and liabilities, which represents the gains or losses (including hedges) attributable to the impact of changes in credit exposure, counterparty credit spreads, liability funding spreads (which includes the firm’s own credit), probability of default and assumed recovery. These gains or losses also include funding valuation adjustments (FVA) relating to uncollateralized derivative assets, which represents the gains or losses (including hedges) attributable to the impact of changes in expected funding exposures and funding spreads.

The table below presents information about CVA and FVA.



	Year Ended December

$ in millions		2020		2019		2018
CVA, net of hedges		$(143	)	$(289	)	$ 371
FVA, net of hedges		173		485		(194	)
Total		$ 30		$ 196		$ 177

Bifurcated Embedded Derivatives

The table below presents the fair value and the notional amount of derivatives that have been bifurcated from their related borrowings.



	As of December

$ in millions		2020		2019
Fair value of assets		$ 1,450		$ 1,148
Fair value of liabilities		(1,220	)	(1,717	)
Net asset/(liability)		$ 230		$ (569	)
Notional amount		$12,548		$11,003

In the table above, derivatives that have been bifurcated from their related borrowings are recorded at fair value and primarily consist of interest rate, equity and commodity products. These derivatives are included in unsecured short- and long-term borrowings, as well as other secured financings, with the related borrowings.

Derivatives with Credit-Related Contingent Features

Certain of the firm’s derivatives have been transacted under bilateral agreements with counterparties who may require the firm to post collateral or terminate the transactions based on changes in the firm’s credit ratings. The firm assesses the impact of these bilateral agreements by determining the collateral or termination payments that would occur assuming a downgrade by all rating agencies. A downgrade by any one rating agency, depending on the agency’s relative ratings of the firm at the time of the downgrade, may have an impact which is comparable to the impact of a downgrade by all rating agencies.

The table below presents information about net derivative liabilities under bilateral agreements (excluding collateral posted), the fair value of collateral posted and additional collateral or termination payments that could have been called by counterparties in the event of a

one-

two-notch

downgrade in the firm’s credit ratings.



	As of December

$ in millions		2020	2019
Net derivative liabilities under bilateral agreements		$43,368	$32,800
Collateral posted		$35,296	$28,510
Additional collateral or termination payments:
One-notch downgrade		$ 481	$ 358
Two-notch downgrade		$ 1,388	$ 1,268

Hedge Accounting

The firm applies hedge accounting for (i) certain interest rate swaps used to manage the interest rate exposure of certain fixed-rate unsecured long- and short-term borrowings and certain fixed-rate certificates of deposit, (ii) foreign exchange forward contracts used to manage the foreign exchange risk of certain

available-for-sale

securities and (iii) certain foreign currency forward contracts and foreign currency-denominated debt used to manage foreign currency exposures on the firm’s net investment in certain

non-U.S.

operations.

To qualify for hedge accounting, the hedging instrument must be highly effective at reducing the risk from the exposure being hedged. Additionally, the firm must formally document the hedging relationship at inception and assess the hedging relationship at least on a quarterly basis to ensure the hedging instrument continues to be highly effective over the life of the hedging relationship.

Fair Value Hedges

The firm designates certain interest rate swaps as fair value hedges of certain fixed-rate unsecured long- and short-term debt and fixed-rate certificates of deposit. These interest rate swaps hedge changes in fair value attributable to the designated benchmark interest rate (e.g., London Interbank Offered Rate (LIBOR), Secured Overnight Financing Rate or Overnight Index Swap Rate), effectively converting a substantial portion of fixed-rate obligations into floating-rate obligations.

The firm applies a statistical method that utilizes regression analysis when assessing the effectiveness of these hedging relationships in achieving offsetting changes in the fair values of the hedging instrument and the risk being hedged (i.e., interest rate risk). An interest rate swap is considered highly effective in offsetting changes in fair value attributable to changes in the hedged risk when the regression analysis results in a coefficient of determination of 80% or greater and a slope between 80% and 125%.

For qualifying fair value hedges, gains or losses on derivatives are included in interest expense. The change in fair value of the hedged item attributable to the risk being hedged is reported as an adjustment to its carrying value (hedging adjustment) and is also included in interest expense. When a derivative is no longer designated as a hedge, any remaining difference between the carrying value and par value of the hedged item is amortized to interest expense over the remaining life of the hedged item using the effective interest method. See Note 23 for further information about interest income and interest expense.

The table below presents the gains/(losses) from interest rate derivatives accounted for as hedges and the related hedged borrowings and deposits, and total interest expense.



	Year Ended December

$ in millions		2020		2019		2018
Interest rate hedges		$ 3,862		$ 3,196		$ (1,854	)
Hedged borrowings and deposits		$(4,557	)	$ (3,657	)	$ 1,295
Interest expense		$ 8,938		$17,376		$15,912

The table below presents the carrying value of deposits and unsecured borrowings that are designated in a hedging relationship and the related cumulative hedging adjustment (increase/(decrease)) from current and prior hedging relationships included in such carrying values.



$ in millions	Carrying Value	Cumulative Hedging Adjustment
As of December 2020
Deposits	$ 17,303	$ 649
Unsecured short-term borrowings	$ 5,976	$ 53
Unsecured long-term borrowings	$115,242	$11,624
As of December 2019
Deposits	$ 19,634	$ 200
Unsecured short-term borrowings	$ 6,008	$ 28
Unsecured long-term borrowings	$ 87,874	$ 7,292

In the table above, cumulative hedging adjustment included $6.34 billion as of December 2020 and $3.48 billion as of December 2019 of hedging adjustments from prior hedging relationships that were

de-designated

and substantially all were related to unsecured long-term borrowings.

In addition,

cumulative hedging adjustments for items no longer designated in a hedging relationship were $489 million as of December 2020 and $425 million as of December 2019 and substantially all were related to unsecured long-term borrowings.

During 2020, the firm designated certain foreign exchange forward contracts as fair value hedges of the foreign exchange risk of certain

available-for-sale

securities included in investments. The carrying value of such securities was $2.09 billion as of December 2020. The effectiveness of such hedges is assessed based on changes in spot rates. The losses on the hedges (relating to both spot and forward points) were $112 million and the gains on the related available-for-sale securities were $110 million, and were included in market making for 2020.

Net Investment Hedges

The firm seeks to reduce the impact of fluctuations in foreign exchange rates on its net investments in certain

non-U.S.

operations through the use of foreign currency forward contracts and foreign currency-denominated debt. For foreign currency forward contracts designated as hedges, the effectiveness of the hedge is assessed based on the overall changes in the fair value of the forward contracts (i.e., based on changes in forward rates). For foreign currency-denominated debt designated as a hedge, the effectiveness of the hedge is assessed based on changes in spot rates. For qualifying net investment hedges, all gains or losses on the hedging instruments are included in currency translation.

The table below presents the gains/(losses) from net investment hedging.



	Year Ended December

$ in millions		2020		2019		2018
Hedges:
Foreign currency forward contract		$(126	)	$ 6		$577
Foreign currency-denominated debt		$(297	)	$(19	)	$ (50	)

Gains or losses on individual net investments in

non-U.S.

operations are reclassified to earnings from accumulated other comprehensive income/(loss) when such net investments are sold or substantially liquidated. The gross and net gains and losses on hedges and the related net investments in

non-U.S.

operations reclassified to earnings from accumulated other comprehensive income for 2020 was $61 million (reflecting a gain of $214 million related to hedges and a loss of $153 million on the related net investments in

non-U.S.

operations). The gross and net gains and losses reclassified to earnings from accumulated other comprehensive income were not material for both 2019 and 2018.

The firm had designated $4.97 billion as of December 2020 and $3.05 billion as of December 2019 of foreign currency-denominated debt, included in unsecured long- and short-term borrowings, as hedges of net investments in

non-U.S.

subsidiaries.