FAIR VALUE

3 Months Ended

Dec. 31, 2020

Our “Financial instruments” and “Financial instrument liabilities” on our Condensed Consolidated Statements of Financial Condition are recorded at fair value under GAAP. For further information about such instruments and our significant accounting policies related to fair value, see Notes 2 and 3 of our 2020 Form 10-K. The following tables present assets and liabilities measured at fair value on a recurring basis. Netting adjustments represent the impact of counterparty and collateral netting on our derivative balances included on our Condensed Consolidated Statements of Financial Condition. See Note 6 for additional information.


$ in millions	Level 1		Level 2		Level 3		Netting adjustments		Balance as of December 31, 2020
Assets at fair value on a recurring basis:
Assets segregated pursuant to regulations	$	2,749	$	—	$	—	$	—	$	2,749
Trading assets
Municipal and provincial obligations	—		32		—		—		32
Corporate obligations	11		31		—		—		42
Government and agency obligations	16		91		—		—		107
Agency MBS and agency CMOs	—		146		—		—		146

Total debt securities	27		300		—		—		327
Equity securities	14		5		—		—		19
Brokered certificates of deposit	—		37		—		—		37
Other	—		—		3		—		3
Total trading assets	41		342		3		—		386
Available-for-sale securities (1)	16		7,984		—		—		8,000
Derivative assets
Interest rate - matched book	—		273		—		—		273
Interest rate - other	34		189		—		(128)		95

Total derivative assets	34		462		—		(128)		368
Other investments - private equity - not measured at net asset value (“NAV”)	—		—		52		—		52
All other investments:
Government and agency obligations (2)	603		—		—		—		603
Other	100		1		22		—		123
Total all other investments	703		1		22		—		726
Subtotal	3,543		8,789		77		(128)		12,281
Other investments - private equity - measured at NAV									85
Total assets at fair value on a recurring basis	$	3,543	$	8,789	$	77	$	(128)	$	12,366

Liabilities at fair value on a recurring basis:
Trading liabilities
Municipal and provincial obligations	$	1	$	—	$	—	$	—	$	1
Corporate obligations	1		3		—		—		4
Government and agency obligations	61		—		—		—		61

Total debt securities	63		3		—		—		66
Equity securities	79		7		—		—		86

Total trading liabilities	142		10		—		—		152
Derivative liabilities
Interest rate - matched book	—		273		—		—		273
Interest rate - other	37		124		—		(138)		23
Foreign exchange	—		11		—		—		11
Other	—		2		1		—		3
Total derivative liabilities	37		410		1		(138)		310
Total liabilities at fair value on a recurring basis	$	179	$	420	$	1	$	(138)	$	462

(1) Substantially all of our available-for-sale securities consist of agency MBS and agency CMOs. See Note 5 for further information.

(2) These assets are comprised of U.S. Treasuries purchased to meet future customer reserve requirements or to meet certain deposit requirements with clearing organizations.


$ in millions	Level 1		Level 2		Level 3		Netting adjustments		Balance as of September 30, 2020
Assets at fair value on a recurring basis:

Trading assets
Municipal and provincial obligations	$	5	$	120	$	—	$	—	$	125
Corporate obligations	11		45		—		—		56
Government and agency obligations	13		131		—		—		144
Agency MBS and agency CMOs	—		130		—		—		130
Non-agency CMOs and asset-backed securities (“ABS”)	—		13		—		—		13
Total debt securities	29		439		—		—		468
Equity securities	11		5		—		—		16
Brokered certificates of deposit	—		17		—		—		17
Other	—		—		12		—		12
Total trading assets	40		461		12		—		513
Available-for-sale securities (1)	16		7,634		—		—		7,650
Derivative assets
Interest rate - matched book	—		333		—		—		333
Interest rate - other	16		224		—		(135)		105

Total derivative assets	16		557		—		(135)		438
Other investments - private equity - not measured at NAV	—		—		37		—		37
All other investments:
Government and agency obligations (2)	103		—		—		—		103
Other	92		1		22		—		115
Total all other investments	195		1		22		—		218
Subtotal	267		8,653		71		(135)		8,856
Other investments - private equity - measured at NAV									79
Total assets at fair value on a recurring basis	$	267	$	8,653	$	71	$	(135)	$	8,935

Liabilities at fair value on a recurring basis:
Trading liabilities
Municipal and provincial obligations	$	1	$	—	$	—	$	—	$	1
Corporate obligations	—		5		—		—		5
Government and agency obligations	136		—		—		—		136
Non-agency CMOs and ABS	—		2		—		—		2
Total debt securities	137		7		—		—		144
Equity securities	96		—		—		—		96

Total trading liabilities	233		7		—		—		240
Derivative liabilities
Interest rate - matched book	—		333		—		—		333
Interest rate - other	16		145		—		(112)		49
Foreign exchange	—		5		—		—		5
Other	—		1		5		—		6
Total derivative liabilities	16		484		5		(112)		393
Total liabilities at fair value on a recurring basis	$	249	$	491	$	5	$	(112)	$	633

(1) Substantially all of our available-for-sale securities consist of agency MBS and agency CMOs. See Note 5 for further information.

(2) These assets are comprised of U.S. Treasuries purchased to meet certain deposit requirements with clearing organizations.

Level 3 recurring fair value measurements

The following tables present the changes in fair value for Level 3 assets and liabilities measured at fair value on a recurring basis. The realized and unrealized gains and losses in the tables may include changes in fair value that were attributable to both observable and unobservable inputs. In the following tables, gains/(losses) on trading instruments are reported in “Principal transactions” and gains/(losses) on other investments are reported in “Other” revenues.


Three months ended December 31, 2020 Level 3 instruments at fair value
	Financial assets						Financial liabilities
	Trading assets		Other investments				Derivative liabilities
$ in millions	Other		Private equity investments		All other		Other
Fair value beginning of period	$	12	$	37	$	22	$	(5)
Total gains/(losses) included in earnings	2		15		—		4
Purchases and contributions	6		—		—		—
Sales and distributions	(17)		—		—		—
Transfers:
Into Level 3	—		—		—		—
Out of Level 3	—		—		—		—
Fair value end of period	$	3	$	52	$	22	$	(1)
Unrealized gains/(losses) for the period included in earnings for instruments held at the end of the reporting period	$	3	$	15	$	—	$	3


Three months ended December 31, 2019 Level 3 instruments at fair value
	Financial assets						Financial liabilities
	Trading assets		Other investments				Trading liabilities
$ in millions	Other		Private equity investments		All other		Other
Fair value beginning of period	$	3	$	63	$	24	$	(1)
Total gains/(losses) included in earnings	(1)		—		—		—
Purchases and contributions	31		—		—		1
Sales and distributions	(14)		(1)		—		(1)
Transfers:
Into Level 3	—		—		—		—
Out of Level 3	—		—		—		—
Fair value end of period	$	19	$	62	$	24	$	(1)
Unrealized gains/(losses) for the period included in earnings for instruments held at the end of the reporting period	$	—	$	—	$	—	$	—

As of December 31, 2020, 23% of our assets and 1% of our liabilities were measured at fair value on a recurring basis. In comparison, as of September 30, 2020, 19% of our assets and 2% of our liabilities were measured at fair value on a recurring basis. The increase in assets measured at fair value on a recurring basis as a percentage of total assets was primarily due to a significant increase in assets segregated pursuant to regulations at fair value during fiscal 2021, driven by a significant increase in client cash balances. As of both December 31, 2020 and September 30, 2020, Level 3 assets represented less than 1% of our assets measured at fair value on a recurring basis.

Quantitative information about level 3 fair value measurements

The following table presents the valuation techniques and significant unobservable inputs used in the valuation of certain of our private equity investments classified as level 3. These inputs represent those that a market participant would take into account when pricing these instruments. Weighted averages are calculated by weighting each input by the relative fair value of the related financial instrument. Certain investments are valued initially at transaction price and updated as other investment-specific events take place which indicate that a change in the carrying values of these investments is appropriate. Other investment-specific events include such events as our periodic review, significant transactions occur or new developments become known.

Recurring measurements

$ in millions

Fair value at December 31, 2020

Valuation technique(s)

Unobservable input

Range
(weighted-average)

Other investments - private equity investments (not measured at NAV)

Discounted cash flow, transaction price or other investment-specific events

Discount rate

25%

Terminal earnings before interest, tax, depreciation and amortization (“EBITDA”) multiple

9.0x

Terminal year

2021 - 2042 (2022)

Fair value at September 30, 2020

Other investments - private equity investments (not measured at NAV)

Discounted cash flow, transaction price or other investment-specific events

Discount rate

25%

Terminal EBITDA multiple

9.0x

Terminal year

2021 - 2042 (2023)

Qualitative information about unobservable inputs

For our recurring fair value measurements categorized within Level 3 of the fair value hierarchy, the sensitivity of the fair value measurement to changes in significant unobservable inputs and interrelationships between those unobservable inputs are described in the following section.

Private equity investments

The significant unobservable inputs used in the fair value measurement of private equity investments generally relate to the financial performance of the investment entity and the market’s required return on investments from entities in industries in which we hold investments. Increases in the discount rate would have resulted in a lower fair value measurement. Increases in the terminal EBITDA multiple would have resulted in a higher fair value measurement. Increases in the terminal year are dependent upon each investment’s strategy, but generally result in a lower fair value measurement.

Investments in private equity measured at net asset value per share

As more fully described in Note 2 of our 2020 Form 10-K, as a practical expedient, we utilize NAV or its equivalent to determine the recorded value of a portion of our private equity investments portfolio. We utilize NAV when the fund investment does not have a readily determinable fair value and the NAV of the fund is calculated in a manner consistent with the measurement principles of investment company accounting, including measurement of the investments at fair value.

Our private equity portfolio as of December 31, 2020 includes various direct investments, as well as investments in third-party private equity funds and various legacy private equity funds which we sponsor. The portfolio is primarily invested in a broad range of strategies including leveraged buyouts, growth capital, distressed capital, venture capital and mezzanine capital. Due to the closed-end nature of certain of our fund investments, such investments cannot be redeemed directly with the funds. Our investment is monetized by distributions received through the liquidation of the underlying assets of those funds, the timing of which is uncertain.

The following table presents the recorded value and unfunded commitments related to our private equity investments portfolio.


$ in millions	Recorded value		Unfunded commitment
December 31, 2020
Private equity investments measured at NAV	$	85	$	9
Private equity investments not measured at NAV	52
Total private equity investments	$	137

September 30, 2020
Private equity investments measured at NAV	$	79	$	9
Private equity investments not measured at NAV	37
Total private equity investments	$	116

Of the total private equity investments, the portions we owned were $102 million and $90 million as of December 31, 2020 and September 30, 2020, respectively. The portions of the private equity investments we did not own were $35 million and $26 million as of December 31, 2020 and September 30, 2020, respectively, and were included as a component of noncontrolling interests on our Condensed Consolidated Statements of Financial Condition.

As a financial holding company, we are subject to holding period limitations for our merchant banking activities. As a result, we will be required to exit certain of our private equity investments by February 2022. Additionally, many of our private equity fund investments meet the definition of prohibited covered funds as defined by the Volcker Rule enacted pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. We have received approval from the Board of Governors of the Federal Reserve System (“Fed”) to continue to hold the majority of our covered fund investments until July 2022.

Financial instruments measured at fair value on a nonrecurring basis

The following table presents assets measured at fair value on a nonrecurring basis along with the valuation techniques and significant unobservable inputs used in the valuation of the assets classified as level 3. These inputs represent those that a market participant would take into account when pricing these instruments. Weighted averages are calculated by weighting each input by the relative fair value of the related financial instrument.


$ in millions	Level 2		Level 3		Total fair value		Valuation technique(s)	Unobservable input	Range (weighted-average)
December 31, 2020
Bank loans:
Residential mortgage loans	$	4	$	12	$	16	Collateral or discounted cash flow (1)	Prepayment rate	7 yrs. - 12 yrs. (10.6 yrs.)
Corporate loans	$	—	$	14	$	14	Collateral or discounted cash flow (1)	Not meaningful (1)	Not meaningful (1)
Loans held for sale	$	104	$	—	$	104	N/A	N/A	N/A


September 30, 2020
Bank loans:
Residential mortgage loans	$	4	$	13	$	17	Collateral or discounted cash flow (1)	Prepayment rate	7 yrs. - 12 yrs. (10.6 yrs.)
Corporate loans	$	—	$	15	$	15	Collateral or discounted cash flow (1)	Not meaningful (1)	Not meaningful (1)
Loans held for sale	$	38	$	—	$	38	N/A	N/A	N/A
Other assets: other real estate owned	$	1	$	—	$	1	N/A	N/A	N/A

(1) The valuation techniques used to estimate the fair values are based on collateral value less selling costs for the collateral-dependent loans and discounted cash flows for loans that are not collateral-dependent.

Financial instruments not recorded at fair value

Many, but not all, of the financial instruments we hold were recorded at fair value on the Condensed Consolidated Statements of Financial Condition. The following table presents the estimated fair value and fair value hierarchy of financial assets and liabilities that are not recorded at fair value in accordance with GAAP on the Condensed Consolidated Statements of Financial Condition at December 31, 2020 and September 30, 2020. This table excludes financial instruments that are carried at amounts which approximate fair value. Refer to Note 3 of our 2020 Form 10-K for a discussion of the fair value hierarchy classifications of our financial instruments that are not recorded at fair value.


$ in millions	Level 2		Level 3		Total estimated fair value		Carrying amount
December 31, 2020
Financial assets:
Bank loans, net	$	105	$	21,737	$	21,842	$	21,823
Financial liabilities:
Bank deposits - certificates of deposit	$	—	$	946	$	946	$	912
Senior notes payable	$	2,572	$	—	$	2,572	$	2,045

September 30, 2020
Financial assets:
Bank loans, net	$	72	$	21,119	$	21,191	$	21,125
Financial liabilities:
Bank deposits - certificates of deposit	$	—	$	1,056	$	1,056	$	1,017
Senior notes payable	$	2,504	$	—	$	2,504	$	2,045

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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