FAIR VALUE

3 Months Ended

Dec. 31, 2021

Our “Financial instruments” and “Financial instrument liabilities” on our Condensed Consolidated Statements of Financial Condition are recorded at fair value. For further information about such instruments and our significant accounting policies related to fair value, see Notes 2 and 4 of our 2021 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, 2021
Assets at fair value on a recurring basis:
Assets segregated for regulatory purposes (1)	$	9,599	$	—	$	—	$	—	$	9,599
Trading assets:
Municipal and provincial obligations	—		91		—		—		91
Corporate obligations	11		40		—		—		51
Government and agency obligations	23		71		—		—		94
Agency mortgage-backed securities (“MBS”), collateralized mortgage obligations (“CMOs”) and asset-backed securities (“ABS”)	—		89		—		—		89
Non-agency CMOs and ABS	—		27		—		—		27
Total debt securities	34		318		—		—		352
Equity securities	10		1		—		—		11
Brokered certificates of deposit	—		5		—		—		5
Other	—		—		2		—		2
Total trading assets	44		324		2		—		370
Available-for-sale securities (2)	15		8,532		—		—		8,547
Derivative assets:
Interest rate - matched book	—		171		—		—		171
Interest rate - other	3		111		—		(72)		42

Other	—		—		1		—		1
Total derivative assets	3		282		1		(72)		214
Other investments - private equity - not measured at net asset value (“NAV”)	—		—		75		—		75
All other investments:
Government and agency obligations (3)	436		—		—		—		436
Other	93		2		23		—		118
Total all other investments	529		2		23		—		554
Subtotal	10,190		9,140		101		(72)		19,359
Other investments - private equity - measured at NAV									82
Total assets at fair value on a recurring basis	$	10,190	$	9,140	$	101	$	(72)	$	19,441

Liabilities at fair value on a recurring basis:
Trading liabilities:

Corporate obligations	$	—	$	11	$	—	$	—	$	11
Government and agency obligations	128		—		—		—		128


Total debt securities	128		11		—		—		139
Equity securities	32		—		—		—		32

Total trading liabilities	160		11		—		—		171
Derivative liabilities:
Interest rate - matched book	—		171		—		—		171
Interest rate - other	2		101		—		(74)		29
Foreign exchange	—		32		—		—		32

Total derivative liabilities	2		304		—		(74)		232
Total liabilities at fair value on a recurring basis	$	162	$	315	$	—	$	(74)	$	403


$ in millions	Level 1		Level 2		Level 3		Netting adjustments		Balance as of September 30, 2021
Assets at fair value on a recurring basis:
Assets segregated for regulatory purposes (1)	$	2,100	$	—	$	—	$	—	$	2,100
Trading assets:
Municipal and provincial obligations	—		155		—		—		155
Corporate obligations	16		63		—		—		79
Government and agency obligations	15		94		—		—		109
Agency MBS, CMOs and ABS	—		211		—		—		211
Non-agency CMOs and ABS	—		14		—		—		14
Total debt securities	31		537		—		—		568
Equity securities	8		4		—		—		12
Brokered certificates of deposit	—		16		—		—		16
Other	—		—		14		—		14
Total trading assets	39		557		14		—		610
Available-for-sale securities (2)	15		8,300		—		—		8,315
Derivative assets:
Interest rate - matched book	—		193		—		—		193
Interest rate - other	16		128		—		(87)		57
Foreign exchange	—		5		—		—		5
Total derivative assets	16		326		—		(87)		255
Other investments - private equity - not measured at NAV	—		—		75		—		75
All other investments:
Government and agency obligations (3)	86		—		—		—		86
Other	77		2		23		—		102
Total all other investments	163		2		23		—		188
Subtotal	2,333		9,185		112		(87)		11,543
Other investments - private equity - measured at NAV									94
Total assets at fair value on a recurring basis	$	2,333	$	9,185	$	112	$	(87)	$	11,637

Liabilities at fair value on a recurring basis:
Trading liabilities:
Municipal and provincial obligations	$	2	$	—	$	—	$	—	$	2
Corporate obligations	—		6		—		—		6
Government and agency obligations	137		—		—		—		137

Total debt securities	139		6		—		—		145
Equity securities	28		3		—		—		31

Total trading liabilities	167		9		—		—		176
Derivative liabilities:
Interest rate - matched book	—		193		—		—		193
Interest rate - other	16		106		—		(88)		34

Other	—		—		1		—		1
Total derivative liabilities	16		299		1		(88)		228
Total liabilities at fair value on a recurring basis	$	183	$	308	$	1	$	(88)	$	404

(1) These assets consist of U.S. Treasury securities (“U.S. Treasuries”) with maturities greater than 3 months as of our date of purchase.

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

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

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 on our Condensed Consolidated Statements of Income and Comprehensive Income.


Three months ended December 31, 2021 Level 3 instruments at fair value
	Financial assets								Financial liabilities
	Trading assets		Derivative assets		Other investments				Derivative liabilities
$ in millions	Other		Other		Private equity investments		All other		Other
Fair value beginning of period	$	14	$	—	$	75	$	23	$	(1)
Total gains included in earnings	2		1		—		—		1
Purchases and contributions	25		—		—		—		—
Sales and distributions	(39)		—		—		—		—
Transfers:
Into Level 3	—		—		—		—		—
Out of Level 3	—		—		—		—		—
Fair value end of period	$	2	$	1	$	75	$	23	$	—
Unrealized gains/(losses) for the period included in earnings for instruments held at the end of the reporting period	$	(1)	$	2	$	—	$	—	$	—


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

As of December 31, 2021, 28% of our assets and less than 1% of our liabilities were measured at fair value on a recurring basis. In comparison, as of September 30, 2021, 19% of our assets and less than 1% 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 for regulatory purposes, driven by a significant increase in client cash balances. As of both December 31, 2021 and September 30, 2021, 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, 2021

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, taxes, depreciation and amortization (“EBITDA”) multiple

10.0x

Terminal year

2023 - 2035 (2024)

Fair value at September 30, 2021

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

10.0x

Terminal year

2023 - 2035 (2024)

Qualitative information about unobservable inputs

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 2021 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, 2021 included various direct investments, as well as investments in third-party private equity funds. 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, 2021
Private equity investments measured at NAV	$	82	$	8
Private equity investments not measured at NAV	75
Total private equity investments	$	157

September 30, 2021
Private equity investments measured at NAV	$	94	$	8
Private equity investments not measured at NAV	75
Total private equity investments	$	169

Of the total private equity investments, the portions we owned were $115 million and $120 million as of December 31, 2021 and September 30, 2021, respectively. The portions of the private equity investments we did not own were $42 million and $49 million as of December 31, 2021 and September 30, 2021, 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. 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 (“Dodd-Frank Act”). We have received approval from the Board of Governors of the Federal Reserve System (“the Fed”) to continue to hold the majority of our covered fund investments until July 2022. As a result of our holding period limitations, we have continued to exit or restructure certain of our private equity investments and will continue to do so during the remainder of fiscal 2022 in accordance with our regulatory deadlines.

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, 2021
Bank loans:
Residential mortgage loans	$	3	$	10	$	13	Collateral or discounted cash flow (1)	Prepayment rate	7 yrs. - 12 yrs. (10.5 yrs.)
Corporate loans	$	—	$	41	$	41	Collateral or discounted cash flow (1)	Not meaningful (1)	Not meaningful (1)
Loans held for sale	$	161	$	—	$	161	N/A	N/A	N/A


September 30, 2021
Bank loans:
Residential mortgage loans	$	3	$	11	$	14	Collateral or discounted cash flow (1)	Prepayment rate	7 yrs. - 12 yrs. (10.5 yrs.)
Corporate loans	$	—	$	49	$	49	Collateral or discounted cash flow (1)	Not meaningful (1)	Not meaningful (1)
Loans held for sale	$	29	$	—	$	29	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 on the Condensed Consolidated Statements of Financial Condition at December 31, 2021 and September 30, 2021. This table excludes financial instruments that are carried at amounts which approximate fair value. Refer to Note 4 of our 2021 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, 2021
Financial assets:
Bank loans, net	$	69	$	25,840	$	25,909	$	25,917
Financial liabilities:
Bank deposits - certificates of deposit	$	—	$	802	$	802	$	789
Senior notes payable	$	2,434	$	—	$	2,434	$	2,037

September 30, 2021
Financial assets:
Bank loans, net	$	116	$	24,839	$	24,955	$	24,902
Financial liabilities:
Bank deposits - certificates of deposit	$	—	$	898	$	898	$	878
Senior notes payable	$	2,459	$	—	$	2,459	$	2,037

- 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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