Fair Value Option

12 Months Ended

Dec. 31, 2015

Fair value option

The fair value option provides an option to elect fair value as an alternative measurement for selected financial assets, financial liabilities, unrecognized firm commitments, and written loan commitments.

The Firm has elected to measure certain instruments at fair value in order to:


•	Mitigate income statement volatility caused by the differences in the measurement basis of elected instruments (e.g. certain instruments elected were previously accounted for on an accrual basis) while the associated risk management arrangements are accounted for on a fair value basis;


•	Eliminate the complexities of applying certain accounting models (e.g., hedge accounting or bifurcation accounting for hybrid instruments); and/or


•	Better reflect those instruments that are managed on a fair value basis.

The Firm’s election of fair value includes the following instruments:


•	Loans purchased or originated as part of securitization warehousing activity, subject to bifurcation accounting, or managed on a fair value basis.


•	Certain securities financing arrangements with an embedded derivative and/or a maturity of greater than one year.


•	Owned beneficial interests in securitized financial assets that contain embedded credit derivatives, which would otherwise be required to be separately accounted for as a derivative instrument.


•	Certain investments that receive tax credits and other equity investments acquired as part of the Washington Mutual transaction.


•	Structured notes issued as part of CIB’s client-driven activities. (Structured notes are predominantly financial instruments that contain embedded derivatives.)


•	Certain long-term beneficial interests issued by CIB’s consolidated securitization trusts where the underlying assets are carried at fair value.

Changes in fair value under the fair value option election

The following table presents the changes in fair value included in the Consolidated statements of income for the years ended December 31, 2015, 2014 and 2013, for items for which the fair value option was elected. The profit and loss information presented below only includes the financial instruments that were elected to be measured at fair value; related risk management instruments, which are required to be measured at fair value, are not included in the table.



	2015										2014									2013
December 31, (in millions)	Principal transactions			All other income				Total changes in fair value recorded			Principal transactions			All other income			Total changes in fair value recorded			Principal transactions			All other income			Total changes in fair value recorded
Federal funds sold and securities purchased under resale agreements	$	(38	)	$	—			$	(38	)	$	(15	)	$	—		$	(15	)	$	(454	)	$	—		$	(454	)
Securities borrowed	(6		)	—				(6		)	(10		)	—			(10		)	10			—			10
Trading assets:
Debt and equity instruments, excluding loans	756			(10		)	^(d)	746			639			—			639			582			7		^(c)	589
Loans reported as trading assets:
Changes in instrument-specific credit risk	138			41			^(c)	179			885			29		^(c)	914			1,161			23		^(c)	1,184
Other changes in fair value	232			818			^(c)	1,050			352			1,353		^(c)	1,705			(133		)	1,833		^(c)	1,700
Loans:
Changes in instrument-specific credit risk	35			—				35			40			—			40			36			—			36
Other changes in fair value	4			—				4			34			—			34			17			—			17
Other assets	79			(1		)	^(d)	78			24			6		^(d)	30			32			86		^(d)	118
Deposits^(a)	93			—				93			(287		)	—			(287		)	260			—			260
Federal funds purchased and securities loaned or sold under repurchase agreements	8			—				8			(33		)	—			(33		)	73			—			73
Other borrowed funds^(a)	1,996			—				1,996			(891		)	—			(891		)	(399		)	—			(399		)
Trading liabilities	(20		)	—				(20		)	(17		)	—			(17		)	(46		)	—			(46		)
Beneficial interests issued by consolidated VIEs	49			—				49			(233		)	—			(233		)	(278		)	—			(278		)
Other liabilities	—			—				—			(27		)	—			(27		)	—			—			—
Long-term debt:
Changes in instrument-specific credit risk^(a)	300			—				300			101			—			101			(271		)	—			(271		)
Other changes in fair value^(b)	1,088			—				1,088			(615		)	—			(615		)	1,280			—			1,280


(a)	Total changes in instrument-specific credit risk (DVA) related to structured notes were $171 million, $20 million and $(337) million for the years ended December 31, 2015, 2014 and 2013, respectively. These totals include such changes for structured notes classified within deposits and other borrowed funds, as well as long-term debt.


(b)	Structured notes are predominantly financial instruments containing embedded derivatives. Where present, the embedded derivative is the primary driver of risk. Although the risk associated with the structured notes is actively managed, the gains/(losses) reported in this table do not include the income statement impact of the risk management instruments used to manage such risk.


(c)	Reported in mortgage fees and related income.


(d)	Reported in other income.

Determination of instrument-specific credit risk for items for which a fair value election was made

The following describes how the gains and losses included in earnings that are attributable to changes in instrument-specific credit risk, were determined.

•

Loans and lending-related commitments: For floating-rate instruments, all changes in value are attributed to instrument-specific credit risk. For fixed-rate instruments, an allocation of the changes in value for the period is made between those changes in value that are interest rate-related and changes in value that are credit-related. Allocations are generally based on an analysis of borrower-specific credit spread and recovery information, where available, or benchmarking to similar entities or industries.


•	Long-term debt: Changes in value attributable to instrument-specific credit risk were derived principally from observable changes in the Firm’s credit spread.

•

Resale and repurchase agreements, securities borrowed agreements and securities lending agreements: Generally, for these types of agreements, there is a requirement that collateral be maintained with a market value equal to or in excess of the principal amount loaned; as a result, there would be no adjustment or an immaterial adjustment for instrument-specific credit risk related to these agreements.

Difference between aggregate fair value and aggregate remaining contractual principal balance outstanding

The following table reflects the difference between the aggregate fair value and the aggregate remaining contractual principal balance outstanding as of December 31, 2015 and 2014, for loans, long-term debt and long-term beneficial interests for which the fair value option has been elected.



	2015								2014
December 31, (in millions)	Contractual principal outstanding			Fair value		Fair value over/(under) contractual principal outstanding			Contractual principal outstanding			Fair value		Fair value over/(under) contractual principal outstanding
Loans^(a)
Nonaccrual loans
Loans reported as trading assets	$	3,484		$	631	$	(2,853	)	$	3,847		$	905	$	(2,942	)
Loans	7			7		—			7			7		—
Subtotal	3,491			638		(2,853		)	3,854			912		(2,942		)
All other performing loans
Loans reported as trading assets	30,780			28,184		(2,596		)	37,608			35,462		(2,146		)
Loans	2,771			2,752		(19		)	2,397			2,389		(8		)
Total loans	$	37,042		$	31,574	$	(5,468	)	$	43,859		$	38,763	$	(5,096	)
Long-term debt
Principal-protected debt	$	17,910	^(c)	$	16,611	$	(1,299	)	$	14,660	^(c)	$	15,484	$	824
Nonprincipal-protected debt^(b)	NA			16,454		NA			NA			14,742		NA
Total long-term debt	NA			$	33,065	NA			NA			$	30,226	NA
Long-term beneficial interests
Nonprincipal-protected debt	NA			$	787	NA			NA			$	2,162	NA
Total long-term beneficial interests	NA			$	787	NA			NA			$	2,162	NA


(a)	There were no performing loans that were ninety days or more past due as of December 31, 2015 and 2014, respectively.

(b)

Remaining contractual principal is not applicable to nonprincipal-protected notes. Unlike principal-protected structured notes, for which the Firm is obligated to return a stated amount of principal at the maturity of the note, nonprincipal-protected structured notes do not obligate the Firm to return a stated amount of principal at maturity, but to return an amount based on the performance of an underlying variable or derivative feature embedded in the note. However, investors are exposed to the credit risk of the Firm as issuer for both nonprincipal-protected and principal protected notes.


(c)	Where the Firm issues principal-protected zero-coupon or discount notes, the balance reflects the contractual principal payment at maturity or, if applicable, the contractual principal payment at the Firm’s next call date.

At December 31, 2015 and 2014, the contractual amount of letters of credit for which the fair value option was elected was $4.6 billion and $4.5 billion, respectively, with a corresponding fair value of $(94) million and $(147) million, respectively. For further information regarding off-balance sheet lending-related financial instruments, see Note 29.

Structured note products by balance sheet classification and risk component

The table below presents the fair value of the structured notes issued by the Firm, by balance sheet classification and the primary risk to which the structured notes’ embedded derivative relates.



	December 31, 2015								December 31, 2014
(in millions)	Long-term debt		Other borrowed funds		Deposits		Total		Long-term debt		Other borrowed funds		Deposits		Total
Risk exposure
Interest rate	$	12,531	$	58	$	3,340	$	15,929	$	10,858	$	460	$	2,119	$	13,437
Credit	3,195		547		—		3,742		4,023		450		—		4,473
Foreign exchange	1,765		77		11		1,853		2,150		211		17		2,378
Equity	14,293		8,447		4,993		27,733		12,348		12,412		4,415		29,175
Commodity	640		50		1,981		2,671		710		644		2,012		3,366
Total structured notes	$	32,424	$	9,179	$	10,325	$	51,928	$	30,089	$	14,177	$	8,563	$	52,829

- Definition

The entire disclosure for a company's election to apply the fair value option for measurement and reporting of eligible financial assets and liabilities (as defined), as well as certain other eligible items (as defined) included in the statement of financial position, whether such option is elected for a single eligible item or a group of similar eligible items and is in addition to other disclosures concerning fair value which the company may be required to provide. Such disclosure might be expected to include: (1) for items included in the statement of financial position: (a) the reasons for electing a fair value option for each eligible item or group of similar eligible items; (b) if the fair value option is elected for some but not all eligible items within a group of similar eligible items: (i) a description of those similar items and the reasons for partial election and (ii) information of how the group of similar items relates to individual balance sheet line items; (c) for each line item in the statement of financial position that includes an item or items for which the fair value option has been elected: (i) information of how each line item in the statement of financial position relates to major categories of assets and liabilities presented in accordance with other fair value disclosures and (ii) the aggregate carrying amount of ineligible items included in each line item in the balance sheet, if any; (d) the difference between the aggregate fair value and the aggregate unpaid principal balance (assuming contractual principal amounts and fair value option elected) of: (i) loans and long-term receivables (other than securities otherwise reported at fair value) and (ii) long-term debt instruments; (e) for loans held as assets for which the fair value option has been elected: (i) the aggregate fair value of loans that are 90 days or more past due, (ii) if the policy is to recognize interest income separately from other changes in fair value, the aggregate fair value of loans in nonaccrual status, and (iii) the difference between the aggregate fair value and the aggregate unpaid principal balance for loans that are 90 days or more past due, in nonaccrual status, or both; (f) for investments that would have been accounted for under the equity method if the entity had not chosen to apply the fair value option, the information required for such investments, if material either individually or in the aggregate; (2) for items included in the income statement: (a) the amounts of gains and losses from fair value changes included in earnings and in which line in the income statement those gains and losses are reported whether or not combined with gains and losses from items required to be accounted for at fair value; (b) a description of how interest and dividends are measured and where they are reported in the income statement; (c) for loans and other receivables held as assets: (i) the estimated amount of gains or losses included in earnings attributable to changes in instrument-specific credit risk and (ii) how the gains or losses attributable to changes in instrument-specific credit risk were determined; (d) for liabilities with fair values that have been significantly affected during the reporting period by changes in the instrument-specific credit risk: (i) the estimated amount of gains and losses from fair value changes included in earnings that are attributable to changes in the instrument-specific credit risk, (ii) qualitative information about the reasons for those changes, and (iii) how the gains and losses attributable to changes in instrument-specific credit risk were determined; and (3) certain other disclosures as required or determined to be provided.

+ References + Details