Fair Value Option

9 Months Ended

Sep. 30, 2022

Other Financial Assets and Liabilities at Fair Value

In addition to trading assets and liabilities, and certain investments and loans, the firm accounts for certain of its other financial assets and liabilities at fair value, substantially all 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 assets 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 nonfinancial 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 liabilities accounted for at fair value under the fair value option include:

•Resale and repurchase agreements;

•Certain securities borrowed and loaned transactions;

•Certain customer and other receivables and certain other liabilities;

•Certain time deposits (deposits with no stated maturity are not eligible for a fair value option election), including structured certificates of deposit, which are hybrid financial instruments;

•Substantially all other secured financings, including transfers of assets accounted for as financings; and

•Certain unsecured short- and long-term borrowings, substantially all of which are hybrid financial instruments.

Fair Value of Other Financial Assets and Liabilities by Level

The table below presents, by level within the fair value hierarchy, other financial assets and liabilities at fair value, substantially all of which are accounted for at fair value under the fair value option.


$ in millions	Level 1		Level 2		Level 3		Total
As of September 2022
Assets
Resale agreements	$	—	$	182,502	$	—	$	182,502
Securities borrowed	—		42,506		—		42,506
Customer and other receivables	—		25		—		25
Total	$	—	$	225,033	$	—	$	225,033

Liabilities
Deposits	$	—	$	(20,858)	$	(2,729)	$	(23,587)
Repurchase agreements	—		(159,690)		—		(159,690)
Securities loaned	—		(7,444)		—		(7,444)
Other secured financings	—		(12,370)		(1,870)		(14,240)
Unsecured borrowings:
Short-term	—		(27,958)		(4,512)		(32,470)
Long-term	—		(55,685)		(9,673)		(65,358)
Other liabilities	—		(381)		(81)		(462)
Total	$	—	$	(284,386)	$	(18,865)	$	(303,251)

As of December 2021
Assets
Resale agreements	$	—	$	205,703	$	—	$	205,703
Securities borrowed	—		39,955		—		39,955
Customer and other receivables	—		42		—		42
Total	$	—	$	245,700	$	—	$	245,700

Liabilities
Deposits	$	—	$	(31,812)	$	(3,613)	$	(35,425)
Repurchase agreements	—		(165,883)		—		(165,883)
Securities loaned	—		(9,170)		—		(9,170)
Other secured financings	—		(14,508)		(2,566)		(17,074)
Unsecured borrowings:
Short-term	—		(22,003)		(7,829)		(29,832)
Long-term	—		(42,977)		(9,413)		(52,390)
Other liabilities	—		(213)		(146)		(359)
Total	$	—	$	(286,566)	$	(23,567)	$	(310,133)

In the table above, other financial assets are shown as positive amounts and other financial 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 other financial assets and liabilities.

Significant Unobservable Inputs

See below for information about the significant unobservable inputs used to value level 3 other financial liabilities at fair value as of both September 2022 and December 2021.

Other Secured Financings. The ranges and weighted averages of significant unobservable inputs used to value level 3 other secured financings are presented below. These ranges and weighted averages exclude unobservable inputs that are only relevant to a single instrument, and therefore are not meaningful.

As of September 2022:

•Yield: 3.5% to 8.3% (weighted average: 4.7%)

•Duration: 0.9 to 4.3 years (weighted average: 2.5 years)

As of December 2021:

•Yield: 1.3% to 6.4% (weighted average: 2.1%)

•Duration: 0.6 to 7.1 years (weighted average: 3.7 years)

Generally, increases in yield or duration, in isolation, would have resulted in a lower fair value measurement as of period-end. Due to the distinctive nature of each of level 3 other secured financings, the interrelationship of inputs is not necessarily uniform across such financings. See Note 11 for further information about other secured financings.

Deposits, Unsecured Borrowings and Other Liabilities. Substantially all of the firm’s deposits, unsecured short- and long-term borrowings, and other liabilities that are classified 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, unsecured borrowings and other liabilities, these unobservable inputs are incorporated in the firm’s derivative disclosures in Note 7. See Note 13 for further information about deposits, Note 14 for further information about unsecured borrowings and Note 15 for further information about other liabilities.

Level 3 Rollforward

The table below presents a summary of the changes in fair value for level 3 other financial liabilities accounted for at fair value.


	Three Months Ended September				Nine Months Ended September
$ in millions	2022		2021		2022		2021
Beginning balance	$	(19,114)	$	(28,136)	$	(23,567)	$	(28,058)
Net realized gains/(losses)	(90)		(181)		(222)		(388)
Net unrealized gains/(losses)	1,538		819		5,977		822
Issuances	(3,296)		(4,856)		(9,486)		(11,797)
Settlements	2,691		6,742		8,548		13,325
Transfers into level 3	(1,494)		(570)		(2,562)		(745)
Transfers out of level 3	900		1,845		2,447		2,504
Ending balance	$	(18,865)	$	(24,337)	$	(18,865)	$	(24,337)

In the table above:

•Changes in fair value are presented for all other financial liabilities that are classified in level 3 as of the end of the period.

•Net unrealized gains/(losses) relates to other financial liabilities 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 financial liability was transferred to level 3 during a reporting period, its entire gain or loss for the period is classified in level 3.

•For level 3 other financial liabilities, increases are shown as negative amounts, while decreases are shown as positive amounts.

•Level 3 other financial liabilities are frequently economically hedged with trading assets and liabilities. Accordingly, gains or losses that are classified in level 3 can be partially offset by gains or losses attributable to level 1, 2 or 3 trading assets and liabilities. 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.

The table below presents information, by the consolidated balance sheet line items, for liabilities included in the summary table above.


	Three Months Ended September				Nine Months Ended September
$ in millions	2022		2021		2022		2021
Deposits
Beginning balance	$	(2,789)	$	(3,908)	$	(3,613)	$	(4,221)
Net realized gains/(losses)	—		(8)		(7)		(23)
Net unrealized gains/(losses)	135		74		466		(28)
Issuances	(261)		(144)		(735)		(341)
Settlements	259		307		1,041		904
Transfers into level 3	(89)		—		(20)		(23)
Transfers out of level 3	16		42		139		95
Ending balance	$	(2,729)	$	(3,637)	$	(2,729)	$	(3,637)

Repurchase agreements
Beginning balance	$	—	$	—	$	—	$	(2)
Settlements	—		—		—		2
Ending balance	$	—	$	—	$	—	$	—

Other secured financings
Beginning balance	$	(1,412)	$	(2,891)	$	(2,566)	$	(3,474)
Net realized gains/(losses)	(13)		3		(18)		(1)
Net unrealized gains/(losses)	86		30		177		71
Issuances	(406)		(43)		(545)		(101)
Settlements	22		414		527		657
Transfers into level 3	(147)		(233)		(110)		(243)
Transfers out of level 3	—		80		665		451
Ending balance	$	(1,870)	$	(2,640)	$	(1,870)	$	(2,640)

Unsecured short-term borrowings
Beginning balance	$	(5,209)	$	(11,461)	$	(7,829)	$	(7,523)
Net realized gains/(losses)	(54)		(112)		(126)		(168)
Net unrealized gains/(losses)	286		429		1,241		334
Issuances	(1,165)		(3,453)		(3,582)		(8,042)
Settlements	1,747		4,846		5,443		6,399
Transfers into level 3	(528)		(200)		(470)		(183)
Transfers out of level 3	411		1,282		811		514
Ending balance	$	(4,512)	$	(8,669)	$	(4,512)	$	(8,669)

Unsecured long-term borrowings
Beginning balance	$	(9,626)	$	(9,714)	$	(9,413)	$	(12,576)
Net realized gains/(losses)	(23)		(64)		(71)		(196)
Net unrealized gains/(losses)	1,034		289		4,028		348
Issuances	(1,464)		(1,216)		(4,624)		(3,313)
Settlements	663		1,175		1,537		5,363
Transfers into level 3	(730)		(137)		(1,962)		(296)
Transfers out of level 3	473		441		832		1,444
Ending balance	$	(9,673)	$	(9,226)	$	(9,673)	$	(9,226)

Other liabilities
Beginning balance	$	(78)	$	(162)	$	(146)	$	(262)
Net unrealized gains/(losses)	(3)		(3)		65		97
Ending balance	$	(81)	$	(165)	$	(81)	$	(165)

Level 3 Rollforward Commentary

Three Months Ended September 2022. The net realized and unrealized gains on level 3 other financial liabilities of $1.45 billion (reflecting $90 million of net realized losses and $1.54 billion of net unrealized gains) for the three months ended September 2022 included gains/(losses) of $1.13 billion reported in market making, $69 million reported in other principal transactions and $(7) million reported in interest expense in the consolidated statements of earnings, and $262 million reported in debt valuation adjustment in the consolidated statements of comprehensive income.

The net unrealized gains on level 3 other financial liabilities for the three months ended September 2022 primarily reflected gains on certain hybrid financial instruments included in unsecured long- and short-term borrowings (principally due to a decrease in global equity prices and an increase in interest rates).

Transfers into level 3 other financial liabilities during the three months ended September 2022 primarily reflected transfers of certain hybrid financial instruments included in unsecured long- and short-term borrowings from level 2 (principally due to reduced price transparency of certain volatility and correlation inputs used to value these instruments) and transfers of certain other secured financings from level 2 (principally due to reduced price transparency of certain yield and duration inputs used to value these instruments).

Transfers out of level 3 other financial liabilities during the three months ended September 2022 primarily reflected transfers of certain hybrid financial instruments included in unsecured long- and short-term borrowings to level 2 (principally due to increased price transparency of certain volatility and correlation inputs used to value these instruments).

Nine Months Ended September 2022. The net realized and unrealized gains on level 3 other financial liabilities of $5.76 billion (reflecting $222 million of net realized losses and $5.98 billion of net unrealized gains) for the nine months ended September 2022 included gains/(losses) of $4.69 billion reported in market making, $155 million reported in other principal transactions and $(14) million reported in interest expense in the consolidated statements of earnings, and $924 million reported in debt valuation adjustment in the consolidated statements of comprehensive income.

The net unrealized gains on level 3 other financial liabilities for the nine months ended September 2022 primarily reflected gains on certain hybrid financial instruments included in unsecured long- and short-term borrowings and deposits (in each case, principally due to a decrease in global equity prices and an increase in interest rates).

Transfers into level 3 other financial liabilities during the nine months ended September 2022 primarily reflected transfers of certain hybrid financial instruments included in unsecured long- and short-term borrowings from level 2 (principally due to reduced price transparency of certain volatility and correlation inputs used to value these instruments).

Transfers out of level 3 other financial liabilities during the nine months ended September 2022 primarily reflected transfers of certain hybrid financial instruments included in unsecured short- and long-term borrowings to level 2 (principally due to increased price transparency of certain volatility and correlation inputs used to value these instruments) and transfers of certain other secured financings to level 2 (principally due to certain unobservable yield inputs no longer being significant to the valuation of these instruments).

Three Months Ended September 2021. The net realized and unrealized gains on level 3 other financial liabilities of $638 million (reflecting $181 million of net realized losses and $819 million of net unrealized gains) for the three months ended September 2021 included gains/(losses) of $599 million reported in market making, $19 million reported in other principal transactions and $(5) million reported in interest expense in the consolidated statements of earnings, and $25 million reported in debt valuation adjustment in the consolidated statements of comprehensive income.

The net unrealized gains on level 3 other financial liabilities for the three months ended September 2021 primarily reflected gains on certain hybrid financial instruments included in unsecured short- and long-term borrowings (principally due to higher levels of volatility and decreases in the market value of certain underlying equities).

Transfers into level 3 other financial liabilities during the three months ended September 2021 primarily reflected transfers of certain other secured financings from level 2 (principally due to reduced price transparency of certain yield and duration inputs used to value these instruments) and certain hybrid financial instruments included in unsecured short- and long-term borrowings from level 2 (principally due to reduced price transparency of certain volatility and correlation inputs used to value these instruments).

Transfers out of level 3 other financial liabilities during the three months ended September 2021 primarily reflected transfers of certain hybrid financial instruments included in unsecured short- and long-term borrowings to level 2 (principally due to increased price transparency of certain volatility and correlation inputs used to value these instruments).

Nine Months Ended September 2021. The net realized and unrealized gains on level 3 other financial liabilities of $434 million (reflecting $388 million of net realized losses and $822 million of net unrealized gains) for the nine months ended September 2021 included gains/(losses) of $366 million reported in market making, $49 million reported in other principal transactions and $(14) million reported in interest expense in the consolidated statements of earnings, and $33 million reported in debt valuation adjustment in the consolidated statements of comprehensive income.

The net unrealized gains on level 3 other financial liabilities for the nine months ended September 2021 primarily reflected gains on certain hybrid financial instruments included in unsecured long- and short-term borrowings (principally due to higher levels of volatility in certain underlying equities and an increase in interest rates, partially offset by an increase in global equity prices).

Transfers into level 3 other financial liabilities during the nine months ended September 2021 primarily reflected transfers of certain hybrid financial instruments included in unsecured long- and short-term borrowings from level 2 (principally due to reduced price transparency of certain volatility and correlation inputs used to value these instruments) and certain other secured financings from level 2 (principally due to reduced price transparency of certain yield and duration inputs used to value these instruments).

Transfers out of level 3 other financial liabilities during the nine months ended September 2021 primarily reflected transfers of certain hybrid financial instruments included in unsecured long- and short-term borrowings to level 2 (principally due to increased price transparency of certain volatility and correlation inputs used to value these instruments, and certain unobservable volatility inputs no longer being significant to the valuation of these instruments) and certain other secured financings to level 2 (principally due to increased price transparency of certain yield and duration inputs used to value these instruments).

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

The table below presents the gains and losses recognized in earnings as a result of the election to apply the fair value option to certain financial assets and liabilities.


	Three Months Ended September				Nine Months Ended September
$ in millions	2022		2021		2022		2021
Unsecured short-term borrowings	$	1,114	$	875	$	5,379	$	(935)
Unsecured long-term borrowings	2,445		(128)		8,316		(1,830)
Other	434		54		1,255		(17)
Total	$	3,993	$	801	$	14,950	$	(2,782)

In the table above:

•Gains/(losses) were substantially all included in market making.

•Gains/(losses) 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) included in unsecured short- and long-term borrowings were substantially all related to the embedded derivative component of hybrid financial instruments for each of the three and nine months ended September 2022 and September 2021. 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.

•Other primarily consists of gains/(losses) on deposits, other secured financings and other liabilities.

•Other financial assets and liabilities at fair value are frequently economically hedged with trading assets and liabilities. Accordingly, gains or losses on such other financial assets and liabilities can be partially offset by gains or losses on trading assets and liabilities. As a result, gains or losses on other financial assets and liabilities do not necessarily represent the overall impact on the firm’s results of operations, liquidity or capital resources.

See Note 8 for information about gains/(losses) on equity securities and Note 9 for information about gains/(losses) on loans which are accounted for at fair value under the fair value option. Gains/(losses) on trading assets and liabilities accounted for at fair value under the fair value option are included in market making. See Note 5 for further information about gains/(losses) from market making.

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 $201 million as of September 2022. The related amount was not material as of December 2021.

The aggregate contractual principal amount of unsecured long-term borrowings, for which the fair value option was elected, exceeded the related fair value by $6.26 billion as of September 2022. The related amount was not material as of December 2021.

These debt instruments include both principal-protected and non-principal-protected long-term borrowings.

Debt Valuation Adjustment

The firm calculates the fair value of financial liabilities for which the fair value option is elected by discounting future cash flows at a rate which incorporates the firm’s credit spreads.

The table below presents information about the net debt valuation adjustment (DVA) gains/(losses) on financial liabilities for which the fair value option was elected.


	Three Months Ended September				Nine Months Ended September
$ in millions	2022		2021		2022		2021
Pre-tax DVA	$	907	$	92	$	3,488	$	222
After tax DVA	$	673	$	67	$	2,601	$	165

In the table above:

•After tax DVA is included in debt valuation adjustment in the consolidated statements of comprehensive income.

•The gains/(losses) reclassified to market making in the consolidated statements of earnings from accumulated other comprehensive income/(loss) upon extinguishment of such financial liabilities were not material for each of the three and nine months ended September 2022 and September 2021.

Loans and Lending Commitments

The table below presents the difference between the aggregate fair value and the aggregate contractual principal amount for loans (included in trading assets and loans in the consolidated balance sheets) for which the fair value option was elected.


	As of
	September		December
$ in millions	2022		2021
Performing loans
Aggregate contractual principal in excess of fair value	$	3,208	$	1,373

Loans on nonaccrual status and/or more than 90 days past due
Aggregate contractual principal in excess of fair value	$	6,319	$	8,600
Aggregate fair value	$	2,555	$	3,559

In the table above, the aggregate contractual principal amount of loans on nonaccrual status and/or more than 90 days past due (which excludes loans carried at zero fair value and considered uncollectible) exceeds the related fair value primarily because the firm regularly purchases loans, such as distressed loans, at values significantly below the contractual principal amounts.

The fair value of unfunded lending commitments for which the fair value option was elected was a liability of $17 million as of September 2022 and $20 million as of December 2021, and the related total contractual amount of these lending commitments was $574 million as of September 2022 and $611 million as of December 2021. See Note 18 for further information about lending commitments.

Impact of Credit Spreads on Loans and Lending Commitments

The estimated net gain/(loss) attributable to changes in instrument-specific credit spreads on loans and lending commitments for which the fair value option was elected was $(75) million for the three months ended September 2022, $87 million for the three months ended September 2021, $(182) million for the nine months ended September 2022 and $290 million for the nine months ended September 2021. The firm generally calculates the fair value of loans and lending commitments for which the fair value option is elected by discounting future cash flows at a rate which incorporates the instrument-specific credit spreads. For floating-rate loans and lending commitments, substantially all changes in fair value are attributable to changes in instrument-specific credit spreads, whereas for fixed-rate loans and lending commitments, changes in fair value are also attributable to changes in interest rates.

- 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.

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