10-Q 1 d934020d10q.htm FORM 10-Q Form 10-Q
Table of Contents

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-Q

 

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2015

or

 

¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                                             to

  

Commission File Number: 001-14965

The Goldman Sachs Group, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware   13-4019460

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

200 West Street, New York, N.Y.   10282
(Address of principal executive offices)   (Zip Code)

(212) 902-1000

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes¨ No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x Yes ¨ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

  Large accelerated filer  x                     Accelerated filer  ¨
Non-accelerated filer  ¨ (Do not check if a smaller reporting company)        Smaller reporting company  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

¨ Yes x No

APPLICABLE ONLY TO CORPORATE ISSUERS

As of July 17, 2015, there were 432,870,999 shares of the registrant’s common stock outstanding.

 


Table of Contents

THE GOLDMAN SACHS GROUP, INC.

QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2015

 

INDEX

 

Form 10-Q Item Number    Page No.
 

PART I

 

FINANCIAL INFORMATION

   2
 

Item 1

 

Financial Statements (Unaudited)

   2
 
 

Condensed Consolidated Statements of Earnings for the three and six months ended June 30,  2015 and June 30, 2014

   2
 
 

Condensed Consolidated Statements of Comprehensive Income for the three and six months ended June  30, 2015 and June 30, 2014

   3
 
 

Condensed Consolidated Statements of Financial Condition as of June 30, 2015 and December  31, 2014

   4
 
 

Condensed Consolidated Statements of Changes in Shareholders’ Equity for the six months ended June  30, 2015 and year ended December 31, 2014

   5
 
 

Condensed Consolidated Statements of Cash Flows for the six months ended June 30,  2015 and June 30, 2014

   6
 
 

Notes to Condensed Consolidated Financial Statements

   7
 
 

Note 1.        Description of Business

   7
 
 

Note 2.        Basis of Presentation

   7
 
 

Note 3.        Significant Accounting Policies

   8
 
 

Note 4.         Financial Instruments Owned, at Fair Value and Financial Instruments Sold,

  
 

                     But Not Yet Purchased, at Fair Value

   13
 
 

Note 5.        Fair Value Measurements

   15
 
 

Note 6.        Cash Instruments

   16
 
 

Note 7.        Derivatives and Hedging Activities

   26
 
 

Note 8.        Fair Value Option

   40
 
 

Note 9.        Loans Receivable

   49
 
 

Note 10.      Collateralized Agreements and Financings

   51
 
 

Note 11.      Securitization Activities

   56
 
 

Note 12.      Variable Interest Entities

   59
 
 

Note 13.      Other Assets

   62
 
 

Note 14.      Deposits

   65
 
 

Note 15.      Short-Term Borrowings

   65
 
 

Note 16.      Long-Term Borrowings

   66
 
 

Note 17.      Other Liabilities and Accrued Expenses

   68
 
 

Note 18.      Commitments, Contingencies and Guarantees

   69
 
 

Note 19.      Shareholders’ Equity

   75
 
 

Note 20.      Regulation and Capital Adequacy

   77
 
 

Note 21.      Earnings Per Common Share

   85
 
 

Note 22.      Transactions with Affiliated Funds

   86
 
 

Note 23.      Interest Income and Interest Expense

   86
 
 

Note 24.      Income Taxes

   87
 
 

Note 25.      Business Segments

   88
 
 

Note 26.      Credit Concentrations

   90
 
 

Note 27.      Legal Proceedings

   91
 
 

Report of Independent Registered Public Accounting Firm

   100
 
 

Statistical Disclosures

   101
 

Item 2

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   103
 

Item 3

 

Quantitative and Qualitative Disclosures About Market Risk

   172
 

Item 4

 

Controls and Procedures

   172
 

PART II

 

OTHER INFORMATION

   172
 

Item 1

 

Legal Proceedings

   172
 

Item 2

 

Unregistered Sales of Equity Securities and Use of Proceeds

   172
 

Item 6

 

Exhibits

   173
 

SIGNATURES

   174

 

    Goldman Sachs June 2015 Form 10-Q   1


Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Earnings

(Unaudited)

 

   

Three Months

Ended June

       

Six Months

Ended June

 
in millions, except per share amounts     2015         2014            2015         2014   

Revenues

           

Investment banking

    $2,019         $1,781          $  3,924         $  3,560   
   

Investment management

    1,566         1,378          3,069         2,876   
   

Commissions and fees

    805         786          1,658         1,658   
   

Market making

    2,309         2,185          6,234         4,824   
   

Other principal transactions

    1,707         1,995            3,279         3,498   

Total non-interest revenues

    8,406         8,125          18,164         16,416   
   

 

Interest income

    2,150         2,579          4,185         5,173   
   

Interest expense

    1,487         1,579            2,663         3,136   

Net interest income

    663         1,000            1,522         2,037   

Net revenues, including net interest income

    9,069         9,125            19,686         18,453   

 

Operating expenses

           

Compensation and benefits

    3,809         3,924          8,268         7,935   
   

 

Brokerage, clearing, exchange and distribution fees

    647         613          1,285         1,208   
   

Market development

    147         141          286         279   
   

Communications and technology

    203         186          401         386   
   

Depreciation and amortization

    265         294          484         684   
   

Occupancy

    186         205          390         415   
   

Professional fees

    250         224          461         436   
   

Other expenses

    1,836         717            2,451         1,268   

Total non-compensation expenses

    3,534         2,380            5,758         4,676   

Total operating expenses

    7,343         6,304            14,026         12,611   

 

Pre-tax earnings

    1,726         2,821          5,660         5,842   
   

Provision for taxes

    678         784            1,768         1,772   

Net earnings

    1,048         2,037          3,892         4,070   
   

Preferred stock dividends

    132         84            228         168   

Net earnings applicable to common shareholders

    $   916         $1,953            $  3,664         $  3,902   

 

Earnings per common share

           

Basic

    $  2.01         $  4.21          $    8.07         $    8.36   
   

Diluted

    1.98         4.10          7.93         8.13   
   

 

Dividends declared per common share

    $  0.65         $  0.55          $    1.25         $    1.10   
   

 

Average common shares outstanding

           

Basic

    451.4         461.7          452.3         465.1   
   

Diluted

    461.6         475.9            462.1         480.1   

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

2   Goldman Sachs June 2015 Form 10-Q    


Table of Contents

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income

(Unaudited)

 

   

Three Months

Ended June

       

Six Months

Ended June

 
$ in millions     2015         2014            2015         2014   

Net earnings

    $1,048         $2,037          $3,892         $4,070   
   

Other comprehensive income/(loss) adjustments, net of tax:

           

Currency translation

    (30      (30       (55      (59
   

Pension and postretirement liabilities

    (107      (6       (110      (14
   

Cash flow hedges

            1                    2   

Other comprehensive loss

    (137      (35         (165      (71

Comprehensive income

    $   911         $2,002            $3,727         $3,999   

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

    Goldman Sachs June 2015 Form 10-Q   3


Table of Contents

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Financial Condition

(Unaudited)

 

    As of  
$ in millions, except per share amounts    

 

June

2015

  

  

    
 
December
2014
  
  

Assets

    

Cash and cash equivalents

    $  60,845         $  57,600   
   

Cash and securities segregated for regulatory and other purposes (includes $17,395 and $34,291 at fair value as of June 2015 and December 2014, respectively)

    35,340         51,716   
   

Collateralized agreements:

    

Securities purchased under agreements to resell and federal funds sold (includes $122,354 and $126,036 at fair value as of June 2015 and December 2014, respectively)

    123,619         127,938   
   

Securities borrowed (includes $69,369 and $66,769 at fair value as of June 2015 and December 2014, respectively)

    177,978         160,722   
   

Receivables:

    

Brokers, dealers and clearing organizations

    38,336         30,671   
   

Customers and counterparties (includes $5,714 and $6,944 at fair value as of June 2015 and December 2014, respectively)

    56,349         63,808   
   

Loans receivable

    38,397         28,938   
   

Financial instruments owned, at fair value (includes $57,529 and $64,473 pledged as collateral as of June 2015 and December 2014, respectively)

    303,463         312,248   
   

Other assets

    25,552         22,599   

Total assets

    $859,879         $856,240   

 

Liabilities and shareholders’ equity

    

Deposits (includes $15,309 and $13,523 at fair value as of June 2015 and December 2014, respectively)

    $  89,064         $  83,008   
   

Collateralized financings:

    

Securities sold under agreements to repurchase, at fair value

    87,642         88,215   
   

Securities loaned (includes $1,091 and $765 at fair value as of June 2015 and December 2014, respectively)

    7,262         5,570   
   

Other secured financings (includes $22,537 and $21,450 at fair value as of June 2015 and December 2014, respectively)

    23,952         22,809   
   

Payables:

    

Brokers, dealers and clearing organizations

    8,007         6,636   
   

Customers and counterparties

    198,105         206,936   
   

Financial instruments sold, but not yet purchased, at fair value

    124,304         132,083   
   

Unsecured short-term borrowings, including the current portion of unsecured long-term borrowings (includes $18,865 and $18,826 at fair value as of June 2015 and December 2014, respectively)

    46,378         44,540   
   

Unsecured long-term borrowings (includes $20,000 and $16,005 at fair value as of June 2015 and December 2014, respectively)

    170,259         167,571   
   

Other liabilities and accrued expenses (includes $1,185 and $831 at fair value as of June 2015 and December 2014, respectively)

    17,252         16,075   

Total liabilities

    772,225         773,443   
   

 

Commitments, contingencies and guarantees

    

 

Shareholders’ equity

    

Preferred stock, par value $0.01 per share; aggregate liquidation preference of $11,200 and $9,200 as of June 2015 and December 2014, respectively

    11,200         9,200   
   

Common stock, par value $0.01 per share; 4,000,000,000 shares authorized, 863,046,524 and 852,784,764 shares issued as of June 2015 and December 2014, respectively, and 432,768,039 and 430,259,102 shares outstanding as of June 2015 and December 2014, respectively

    9         9   
   

Share-based awards

    4,011         3,766   
   

Nonvoting common stock, par value $0.01 per share; 200,000,000 shares authorized, no shares issued and outstanding

              
   

Additional paid-in capital

    51,210         50,049   
   

Retained earnings

    82,072         78,984   
   

Accumulated other comprehensive loss

    (908      (743
   

Stock held in treasury, at cost, par value $0.01 per share; 430,278,487 and 422,525,664 shares as of June 2015 and December 2014, respectively

    (59,940      (58,468

Total shareholders’ equity

    87,654         82,797   

Total liabilities and shareholders’ equity

    $859,879         $856,240   

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

4   Goldman Sachs June 2015 Form 10-Q    


Table of Contents

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Changes in Shareholders’ Equity

(Unaudited)

 

$ in millions    
 
Six Months Ended
June 2015
  
  
       
 
Year Ended
December 2014
  
  

Preferred stock

     

Balance, beginning of year

    $   9,200          $   7,200   
   

Issued

    2,000            2,000   

Balance, end of period

    11,200          9,200   
   

Common stock

     

Balance, beginning of year

    9          8   
   

Issued

               1   

Balance, end of period

    9          9   
   

Share-based awards

     

Balance, beginning of year

    3,766          3,839   
   

Issuance and amortization of share-based awards

    1,997          2,079   
   

Delivery of common stock underlying share-based awards

    (1,615       (1,725
   

Forfeiture of share-based awards

    (49       (92
   

Exercise of share-based awards

    (88         (335

Balance, end of period

    4,011          3,766   
   

Additional paid-in capital

     

Balance, beginning of year

    50,049          48,998   
   

Delivery of common stock underlying share-based awards

    1,904          2,206   
   

Cancellation of share-based awards in satisfaction of withholding tax requirements

    (1,101       (1,922
   

Preferred stock issuance costs

    (7       (20
   

Excess net tax benefit related to share-based awards

    366          788   
   

Cash settlement of share-based awards

    (1         (1

Balance, end of period

    51,210          50,049   
   

Retained earnings

     

Balance, beginning of year

    78,984          71,961   
   

Net earnings

    3,892          8,477   
   

Dividends and dividend equivalents declared on common stock and share-based awards

    (576       (1,054
   

Dividends declared on preferred stock

    (228         (400

Balance, end of period

    82,072          78,984   
   

Accumulated other comprehensive loss

     

Balance, beginning of year

    (743       (524
   

Other comprehensive loss

    (165         (219

Balance, end of period

    (908       (743
   

Stock held in treasury, at cost

     

Balance, beginning of year

    (58,468       (53,015
   

Repurchased

    (1,495       (5,469
   

Reissued

    29          49   
   

Other

    (6         (33

Balance, end of period

    (59,940         (58,468

Total shareholders’ equity

    $ 87,654            $ 82,797   

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

    Goldman Sachs June 2015 Form 10-Q   5


Table of Contents

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

   

Six Months

Ended June

 
$ in millions     2015         2014   

Cash flows from operating activities

    

Net earnings

    $   3,892         $   4,070   
   

Adjustments to reconcile net earnings to net cash provided by/(used for) operating activities

    

Depreciation and amortization

    484         684   
   

Share-based compensation

    1,972         1,775   
   

Gain related to extinguishment of junior subordinated debt

    (34        
   

Changes in operating assets and liabilities

    

Cash and securities segregated for regulatory and other purposes

    16,376         9,003   
   

Receivables and payables (excluding loans receivable), net

    (7,825      6,772   
   

Collateralized transactions (excluding other secured financings), net

    (11,818      (14,645
   

Financial instruments owned, at fair value

    7,140         (4,531
   

Financial instruments sold, but not yet purchased, at fair value

    (7,779      (3,279
   

Other, net

    (3,540      (3,541

Net cash used for operating activities

    (1,132      (3,692
   

Cash flows from investing activities

    

Purchase of property, leasehold improvements and equipment

    (698      (353
   

Proceeds from sales of property, leasehold improvements and equipment

    49         10   
   

Business acquisitions, net of cash acquired

    (1,583      (449
   

Proceeds from sales of investments

    275         469   
   

Loans receivable, net

    (9,459      (6,490

Net cash used for investing activities

    (11,416      (6,813
   

Cash flows from financing activities

    

Unsecured short-term borrowings, net

    (1,276      1,077   
   

Other secured financings (short-term), net

    (1,117      1,141   
   

Proceeds from issuance of other secured financings (long-term)

    7,376         3,413   
   

Repayment of other secured financings (long-term), including the current portion

    (5,247      (4,840
   

Proceeds from issuance of unsecured long-term borrowings

    27,077         19,804   
   

Repayment of unsecured long-term borrowings, including the current portion

    (17,256      (15,320
   

Purchase of trust preferred securities

    (1      (1,362
   

Derivative contracts with a financing element, net

    (96      574   
   

Deposits, net

    6,056         2,943   
   

Common stock repurchased

    (1,495      (2,969
   

Dividends and dividend equivalents paid on common stock, preferred stock and share-based awards

    (804      (691
   

Proceeds from issuance of preferred stock, net of issuance costs

    1,993         1,980   
   

Proceeds from issuance of common stock, including exercise of share-based awards

    218         56   
   

Excess tax benefit related to share-based awards

    366         550   
   

Cash settlement of share-based awards

    (1      (1

Net cash provided by financing activities

    15,793         6,355   

Net increase/(decrease) in cash and cash equivalents

    3,245         (4,150
   

Cash and cash equivalents, beginning of year

    57,600         61,133   

Cash and cash equivalents, end of period

    $ 60,845         $ 56,983   

SUPPLEMENTAL DISCLOSURES:

Cash payments for interest, net of capitalized interest, were $2.51 billion and $3.26 billion during the six months ended June 2015 and June 2014, respectively.

Cash payments for income taxes, net of refunds, were $1.91 billion and $2.06 billion during the six months ended June 2015 and June 2014, respectively.

Non-cash activities:

The firm exchanged $262 million of Trust Preferred Securities and common beneficial interests held by the firm for $296 million of the firm’s junior subordinated debt held by the issuing trust during the six months ended June 2015. Following the exchange, this junior subordinated debt was extinguished.

The firm exchanged $175 million of senior guaranteed trust securities held by the firm for $175 million of the firm’s junior subordinated debt securities held by the issuing trust during the six months ended June 2014. Following the exchange, this junior subordinated debt was extinguished.

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

6   Goldman Sachs June 2015 Form 10-Q    


Table of Contents

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Note 1.

Description of Business

The Goldman Sachs Group, Inc. (Group Inc. or parent company), a Delaware corporation, together with its consolidated subsidiaries (collectively, the firm), is a leading global investment banking, securities and investment management firm that provides a wide range of financial services to a substantial and diversified client base that includes corporations, financial institutions, governments and high-net-worth individuals. Founded in 1869, the firm is headquartered in New York and maintains offices in all major financial centers around the world.

The firm reports its activities in the following four business segments:

Investment Banking

The firm provides a broad range of investment banking services to a diverse group of corporations, financial institutions, investment funds and governments. Services include strategic advisory assignments with respect to mergers and acquisitions, divestitures, corporate defense activities, restructurings, spin-offs and risk management, and debt and equity underwriting of public offerings and private placements, including local and cross-border transactions, as well as derivative transactions directly related to these activities.

Institutional Client Services

The firm facilitates client transactions and makes markets in fixed income, equity, currency and commodity products, primarily with institutional clients such as corporations, financial institutions, investment funds and governments. The firm also makes markets in and clears client transactions on major stock, options and futures exchanges worldwide and provides financing, securities lending and other prime brokerage services to institutional clients.

Investing & Lending

The firm invests in and originates loans to provide financing to clients. These investments and loans are typically longer-term in nature. The firm makes investments, some of which are consolidated, directly and indirectly through funds that the firm manages, in debt securities and loans, public and private equity securities, and real estate entities.

Investment Management

The firm provides investment management services and offers investment products (primarily through separately managed accounts and commingled vehicles, such as mutual funds and private investment funds) across all major asset classes to a diverse set of institutional and individual clients. The firm also offers wealth advisory services, including portfolio management and financial counseling, and brokerage and other transaction services to high-net-worth individuals and families.

Note 2.

Basis of Presentation

These condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP) and include the accounts of Group Inc. and all other entities in which the firm has a controlling financial interest. Intercompany transactions and balances have been eliminated.

These condensed consolidated financial statements are unaudited and should be read in conjunction with the audited consolidated financial statements included in the firm’s Annual Report on Form 10-K for the year ended December 31, 2014. References to “the 2014 Form 10-K” are to the firm’s Annual Report on Form 10-K for the year ended December 31, 2014. The condensed consolidated financial information as of December 31, 2014 has been derived from audited consolidated financial statements not included herein.

These unaudited condensed consolidated financial statements reflect all adjustments that are, in the opinion of management, necessary for a fair statement of the results for the interim periods presented. These adjustments are of a normal, recurring nature. Interim period operating results may not be indicative of the operating results for a full year.

All references to June 2015, March 2015 and June 2014 refer to the firm’s periods ended, or the dates, as the context requires, June 30, 2015, March 31, 2015 and June 30, 2014, respectively. All references to December 2014 refer to the date December 31, 2014. Any reference to a future year refers to a year ending on December 31 of that year. Certain reclassifications have been made to previously reported amounts to conform to the current presentation.

 

 

    Goldman Sachs June 2015 Form 10-Q   7


Table of Contents

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Note 3.

Significant Accounting Policies

 

The firm’s significant accounting policies include when and how to measure the fair value of assets and liabilities, accounting for goodwill and identifiable intangible assets, and when to consolidate an entity. See Notes 5 through 8 for policies on fair value measurements, Note 13 for policies on goodwill and identifiable intangible assets, and below and Note 12 for policies on consolidation accounting. All other significant accounting policies are either discussed below or included in the following footnotes:

 

Financial Instruments Owned, at Fair Value and

Financial Instruments Sold, But Not Yet Purchased,

at Fair Value

    Note 4   

Fair Value Measurements

    Note 5   

Cash Instruments

    Note 6   

Derivatives and Hedging Activities

    Note 7   

Fair Value Option

    Note 8   

Loans Receivable

    Note 9   

Collateralized Agreements and Financings

    Note 10   

Securitization Activities

    Note 11   

Variable Interest Entities

    Note 12   

Other Assets, including Goodwill and

Identifiable Intangible Assets

    Note 13   

Deposits

    Note 14   

Short-Term Borrowings

    Note 15   

Long-Term Borrowings

    Note 16   

Other Liabilities and Accrued Expenses

    Note 17   

Commitments, Contingencies and Guarantees

    Note 18   

Shareholders’ Equity

    Note 19   

Regulation and Capital Adequacy

    Note 20   

Earnings Per Common Share

    Note 21   

Transactions with Affiliated Funds

    Note 22   

Interest Income and Interest Expense

    Note 23   

Income Taxes

    Note 24   

Business Segments

    Note 25   

Credit Concentrations

    Note 26   

Legal Proceedings

    Note 27   

Consolidation

The firm consolidates entities in which the firm has a controlling financial interest. The firm determines whether it has a controlling financial interest in an entity by first evaluating whether the entity is a voting interest entity or a variable interest entity (VIE).

Voting Interest Entities. Voting interest entities are entities in which (i) the total equity investment at risk is sufficient to enable the entity to finance its activities independently and (ii) the equity holders have the power to direct the activities of the entity that most significantly impact its economic performance, the obligation to absorb the losses of the entity and the right to receive the residual returns of the entity. The usual condition for a controlling financial interest in a voting interest entity is ownership of a majority voting interest. If the firm has a majority voting interest in a voting interest entity, the entity is consolidated.

Variable Interest Entities. A VIE is an entity that lacks one or more of the characteristics of a voting interest entity. The firm has a controlling financial interest in a VIE when the firm has a variable interest or interests that provide it with (i) the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and (ii) the obligation to absorb losses of the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE. See Note 12 for further information about VIEs.

Equity-Method Investments. When the firm does not have a controlling financial interest in an entity but can exert significant influence over the entity’s operating and financial policies, the investment is accounted for either (i) under the equity method of accounting or (ii) at fair value by electing the fair value option available under U.S. GAAP. Significant influence generally exists when the firm owns 20% to 50% of the entity’s common stock or in-substance common stock.

In general, the firm accounts for investments acquired after the fair value option became available, at fair value. In certain cases, the firm applies the equity method of accounting to new investments that are strategic in nature or closely related to the firm’s principal business activities, when the firm has a significant degree of involvement in the cash flows or operations of the investee or when cost-benefit considerations are less significant. See Note 13 for further information about equity-method investments.

 

 

8   Goldman Sachs June 2015 Form 10-Q    


Table of Contents

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Investment Funds. The firm has formed numerous investment funds with third-party investors. These funds are typically organized as limited partnerships or limited liability companies for which the firm acts as general partner or manager. Generally, the firm does not hold a majority of the economic interests in these funds. These funds are usually voting interest entities and generally are not consolidated because third-party investors typically have rights to terminate the funds or to remove the firm as general partner or manager. Investments in these funds are included in “Financial instruments owned, at fair value.” See Notes 6, 18 and 22 for further information about investments in funds.

Use of Estimates

Preparation of these condensed consolidated financial statements requires management to make certain estimates and assumptions, the most important of which relate to fair value measurements, accounting for goodwill and identifiable intangible assets, discretionary compensation accruals and the provisions for losses that may arise from litigation, regulatory proceedings and tax audits. These estimates and assumptions are based on the best available information but actual results could be materially different.

Revenue Recognition

Financial Assets and Financial Liabilities at Fair Value. Financial instruments owned, at fair value and Financial instruments sold, but not yet purchased, at fair value are recorded at fair value either under the fair value option or in accordance with other U.S. GAAP. In addition, the firm has elected to account for certain of its other financial assets and financial liabilities at fair value by electing the fair value option. The fair value of a financial instrument is the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Financial assets are marked to bid prices and financial liabilities are marked to offer prices. Fair value measurements do not include transaction costs. Fair value gains or losses are generally included in “Market making” for positions in Institutional Client Services and “Other principal transactions” for positions in Investing & Lending. See Notes 5 through 8 for further information about fair value measurements.

Investment Banking. Fees from financial advisory assignments and underwriting revenues are recognized in earnings when the services related to the underlying transaction are completed under the terms of the assignment. Expenses associated with such transactions are deferred until the related revenue is recognized or the assignment is otherwise concluded. Expenses associated with financial advisory assignments are recorded as non-compensation expenses, net of client reimbursements. Underwriting revenues are presented net of related expenses.

Investment Management. The firm earns management fees and incentive fees for investment management services. Management fees for mutual funds are calculated as a percentage of daily net asset value and are received monthly. Management fees for hedge funds and separately managed accounts are calculated as a percentage of month-end net asset value and are generally received quarterly. Management fees for private equity funds are calculated as a percentage of monthly invested capital or commitments and are received quarterly, semi-annually or annually, depending on the fund. All management fees are recognized over the period that the related service is provided. Incentive fees are calculated as a percentage of a fund’s or separately managed account’s return, or excess return above a specified benchmark or other performance target. Incentive fees are generally based on investment performance over a 12-month period or over the life of a fund. Fees that are based on performance over a 12-month period are subject to adjustment prior to the end of the measurement period. For fees that are based on investment performance over the life of the fund, future investment underperformance may require fees previously distributed to the firm to be returned to the fund. Incentive fees are recognized only when all material contingencies have been resolved. Management and incentive fee revenues are included in “Investment management” revenues.

The firm makes payments to brokers and advisors related to the placement of the firm’s investment funds. These payments are computed based on either a percentage of the management fee or the investment fund’s net asset value. Where the firm is principal to the arrangement, such costs are recorded on a gross basis and included in “Brokerage, clearing, exchange and distribution fees,” and where the firm is agent to the arrangement, such costs are recorded on a net basis in “Investment management” revenues.

 

 

    Goldman Sachs June 2015 Form 10-Q   9


Table of Contents

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Commissions and Fees. The firm earns “Commissions and fees” from executing and clearing client transactions on stock, options and futures markets, as well as over-the-counter (OTC) transactions. Commissions and fees are recognized on the day the trade is executed.

Transfers of Assets

Transfers of assets are accounted for as sales when the firm has relinquished control over the assets transferred. For transfers of assets accounted for as sales, any related gains or losses are recognized in net revenues. Assets or liabilities that arise from the firm’s continuing involvement with transferred assets are recognized at fair value. For transfers of assets that are not accounted for as sales, the assets remain in “Financial instruments owned, at fair value” and the transfer is accounted for as a collateralized financing, with the related interest expense recognized over the life of the transaction. See Note 10 for further information about transfers of assets accounted for as collateralized financings and Note 11 for further information about transfers of assets accounted for as sales.

Cash and Cash Equivalents

The firm defines cash equivalents as highly liquid overnight deposits held in the ordinary course of business. As of June 2015 and December 2014, “Cash and cash equivalents” included $6.78 billion and $5.79 billion, respectively, of cash and due from banks, and $54.07 billion and $51.81 billion, respectively, of interest-bearing deposits with banks.

Receivables from Customers and Counterparties

Receivables from customers and counterparties generally relate to collateralized transactions. Such receivables are primarily comprised of customer margin loans, certain transfers of assets accounted for as secured loans rather than purchases at fair value and collateral posted in connection with certain derivative transactions. Substantially all of these receivables are accounted for at amortized cost net of estimated uncollectible amounts. Certain of the firm’s receivables from customers and counterparties are accounted for at fair value under the fair value option, with changes in fair value generally included in “Market making” revenues. See Note 8 for further information about receivables from customers and counterparties accounted for at fair value under the fair value option. In addition, as of June 2015 and December 2014, the firm’s receivables from customers and counterparties included $2.39 billion and $400 million, respectively, of loans held for sale, accounted for at the lower of cost or fair value. See Note 5 for an overview of the firm’s fair value measurement policies.

As of June 2015 and December 2014, the carrying value of receivables not accounted for at fair value generally approximated fair value. While these items are carried at amounts that approximate fair value, they are not accounted for at fair value under the fair value option or at fair value in accordance with other U.S. GAAP and therefore are not included in the firm’s fair value hierarchy in Notes 6 through 8. Had these items been included in the firm’s fair value hierarchy, substantially all would have been classified in level 2 as of June 2015 and December 2014. Interest on receivables from customers and counterparties is recognized over the life of the transaction and included in “Interest income.”

Receivables from and Payables to Brokers, Dealers and Clearing Organizations

Receivables from and payables to brokers, dealers and clearing organizations are accounted for at cost plus accrued interest, which generally approximates fair value. While these receivables and payables are carried at amounts that approximate fair value, they are not accounted for at fair value under the fair value option or at fair value in accordance with other U.S. GAAP and therefore are not included in the firm’s fair value hierarchy in Notes 6 through 8. Had these receivables and payables been included in the firm’s fair value hierarchy, substantially all would have been classified in level 2 as of June 2015 and December 2014.

Payables to Customers and Counterparties

Payables to customers and counterparties primarily consist of customer credit balances related to the firm’s prime brokerage activities. Payables to customers and counterparties are accounted for at cost plus accrued interest, which generally approximates fair value. While these payables are carried at amounts that approximate fair value, they are not accounted for at fair value under the fair value option or at fair value in accordance with other U.S. GAAP and therefore are not included in the firm’s fair value hierarchy in Notes 6 through 8. Had these payables been included in the firm’s fair value hierarchy, substantially all would have been classified in level 2 as of June 2015 and December 2014. Interest on payables to customers and counterparties is recognized over the life of the transaction and included in “Interest expense.”

 

 

10 Goldman Sachs June 2015 Form 10-Q  


Table of Contents

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Offsetting Assets and Liabilities

To reduce credit exposures on derivatives and securities financing transactions, the firm may enter into master netting agreements or similar arrangements (collectively, netting agreements) with counterparties that permit it to offset receivables and payables with such counterparties. A netting agreement is a contract with a counterparty that permits net settlement of multiple transactions with that counterparty, including upon the exercise of termination rights by a non-defaulting party. Upon exercise of such termination rights, all transactions governed by the netting agreement are terminated and a net settlement amount is calculated. In addition, the firm receives and posts cash and securities collateral with respect to its derivatives and securities financing transactions, subject to the terms of the related credit support agreements or similar arrangements (collectively, credit support agreements). An enforceable credit support agreement grants the non-defaulting party exercising termination rights the right to liquidate the collateral and apply the proceeds to any amounts owed. In order to assess enforceability of the firm’s right of setoff under netting and credit support agreements, the firm evaluates various factors including applicable bankruptcy laws, local statutes and regulatory provisions in the jurisdiction of the parties to the agreement.

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) in the condensed consolidated statements of financial condition when a legal right of setoff exists under an enforceable netting agreement. Resale and repurchase agreements and securities borrowed and loaned transactions with the same term and currency are presented on a net-by-counterparty basis in the condensed consolidated statements of financial condition when such transactions meet certain settlement criteria and are subject to netting agreements.

In the condensed consolidated statements of financial condition, derivatives are reported net of cash collateral received and posted under enforceable credit support agreements, when transacted under an enforceable netting agreement. In the condensed consolidated statements of financial condition, resale and repurchase agreements, and securities borrowed and loaned, are not reported net of the related cash and securities received or posted as collateral. See Note 10 for further information about collateral received and pledged, including rights to deliver or repledge collateral. See Notes 7 and 10 for further information about offsetting.

Share-based Compensation

The cost of employee services received in exchange for a share-based award is generally measured based on the grant-date fair value of the award. Share-based awards that do not require future service (i.e., vested awards, including awards granted to retirement-eligible employees) are expensed immediately. Share-based awards that require future service are amortized over the relevant service period. Expected forfeitures are included in determining share-based employee compensation expense.

The firm pays cash dividend equivalents on outstanding restricted stock units (RSUs). Dividend equivalents paid on RSUs are generally charged to retained earnings. Dividend equivalents paid on RSUs expected to be forfeited are included in compensation expense. The firm accounts for the tax benefit related to dividend equivalents paid on RSUs as an increase to additional paid-in capital.

The firm generally issues new shares of common stock upon delivery of share-based awards. In certain cases, primarily related to conflicted employment (as outlined in the applicable award agreements), the firm may cash settle share-based compensation awards accounted for as equity instruments. For these awards, whose terms allow for cash settlement, additional paid-in capital is adjusted to the extent of the difference between the value of the award at the time of cash settlement and the grant-date value of the award.

Foreign Currency Translation

Assets and liabilities denominated in non-U.S. currencies are translated at rates of exchange prevailing on the date of the condensed consolidated statements of financial condition and revenues and expenses are translated at average rates of exchange for the period. Foreign currency remeasurement gains or losses on transactions in nonfunctional currencies are recognized in earnings. Gains or losses on translation of the financial statements of a non-U.S. operation, when the functional currency is other than the U.S. dollar, are included, net of hedges and taxes, in the condensed consolidated statements of comprehensive income.

 

 

    Goldman Sachs June 2015 Form 10-Q   11


Table of Contents

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Recent Accounting Developments

Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity (ASC 205 and ASC 360). In April 2014, the FASB issued ASU No. 2014-08, “Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360) — Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity.” ASU No. 2014-08 limits discontinued operations reporting to disposals of components of an entity that represent strategic shifts that have (or will have) a major effect on an entity’s operations and financial results. The ASU requires expanded disclosures for discontinued operations and disposals of individually significant components of an entity that do not qualify for discontinued operations reporting. The ASU was effective for disposals and components classified as held for sale that occurred within annual periods beginning on or after December 15, 2014, and interim periods within those years. Early adoption was permitted. The firm early adopted ASU No. 2014-08 in 2014 and adoption did not materially affect the firm’s financial condition, results of operations, or cash flows.

Revenue from Contracts with Customers (ASC 606). In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606).” ASU No. 2014-09 provides comprehensive guidance on the recognition of revenue from customers arising from the transfer of goods and services. The ASU also provides guidance on accounting for certain contract costs, and requires new disclosures. ASU No. 2014-09 is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. In July 2015, the FASB voted to defer the effective date of ASU No. 2014-09 by one year, to annual reporting periods beginning after December 15, 2017. Early adoption will be permitted for annual reporting periods beginning after December 15, 2016. The firm is still evaluating the effect of the ASU on its financial condition, results of operations, and cash flows.

Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures (ASC 860). In June 2014, the FASB issued ASU No. 2014-11, “Transfers and Servicing (Topic 860) — Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures.” ASU No. 2014-11 changes the accounting for repurchase- and resale-to-maturity agreements by requiring that such agreements be recognized as financing arrangements, and requires that a transfer of a financial asset and a repurchase agreement entered into contemporaneously be accounted for separately. ASU No. 2014-11 also requires additional disclosures about certain transferred financial assets accounted for as sales and certain securities financing transactions. The accounting changes and additional disclosures about certain transferred financial assets accounted for as sales were effective for the first interim and annual reporting periods beginning after December 15, 2014. The additional disclosures for certain securities financing transactions were required for annual reporting periods beginning after December 15, 2014 and for interim reporting periods beginning after March 15, 2015. Adoption of the accounting changes in ASU No. 2014-11 on January 1, 2015 did not materially affect the firm’s financial condition, results of operations, or cash flows.

Measuring the Financial Assets and the Financial Liabilities of a Consolidated Collateralized Financing Entity (ASC 810). In August 2014, the FASB issued ASU No. 2014-13, “Consolidation (Topic 810) — Measuring the Financial Assets and the Financial Liabilities of a Consolidated Collateralized Financing Entity (CFE).” ASU No. 2014-13 provides an alternative to reflect changes in the fair value of the financial assets and the financial liabilities of the CFE by measuring either the fair value of the assets or liabilities, whichever is more observable. ASU No. 2014-13 provides new disclosure requirements for those electing this approach, and is effective for interim and annual periods beginning after December 15, 2015. Early adoption is permitted. Adoption of ASU No. 2014-13 will not materially affect the firm’s financial condition, results of operations, or cash flows.

 

 

12   Goldman Sachs June 2015 Form 10-Q    


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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Amendments to the Consolidation Analysis (ASC 810). In February 2015, the FASB issued ASU No. 2015-02, “Consolidation (Topic 810) — Amendments to the Consolidation Analysis.” ASU No. 2015-02 eliminates the deferral of the requirements of ASU No. 2009-17, “Consolidations (Topic 810) — Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities” for certain interests in investment funds and provides a scope exception from Topic 810 for certain investments in money market funds. The ASU also makes several modifications to the consolidation guidance for VIEs and general partners’ investments in limited partnerships, as well as modifications to the evaluation of whether limited partnerships are VIEs or voting interest entities. ASU No. 2015-02 is effective for interim and annual reporting periods beginning after December 15, 2015. Early adoption is permitted and the firm intends to early adopt in 2015. Adoption of ASU No. 2015-02 is not expected to materially affect the firm’s financial condition, results of operations, or cash flows.

Simplifying the Presentation of Debt Issuance Costs (ASC 835). In April 2015, the FASB issued ASU No. 2015-03, “Interest — Imputation of Interest (Subtopic 835-30) — Simplifying the Presentation of Debt Issuance Costs.” ASU No. 2015-03 simplifies the presentation of debt issuance costs by requiring that these costs related to a recognized debt liability be presented in the statement of financial condition as a direct reduction from the carrying amount of that liability. ASU No. 2015-03 is effective for annual reporting periods beginning after December 15, 2015, including interim periods within that reporting period. Early adoption is permitted and the firm intends to early adopt in 2015. ASU No. 2015-03 is required to be applied retrospectively to all periods presented beginning in the year of adoption. Adoption will not materially affect the firm’s financial condition, results of operations, or cash flows.

Disclosures for Investments in Certain Entities That Calculate Net Asset Value (NAV) per Share (or Its Equivalent) (ASC 820). In May 2015, the FASB issued ASU No. 2015–07, “Fair Value Measurement (Topic 820) — Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent).” ASU No. 2015–07 requires that investments for which the fair value is measured at NAV using the practical expedient (investments in funds measured at NAV) under “Fair Value Measurements and Disclosures” (Topic 820) be excluded from the fair value hierarchy. ASU No. 2015–07 is effective for annual reporting periods beginning after December 15, 2015, including interim periods within that reporting period. ASU No. 2015–07 is required to be applied retrospectively to all periods presented beginning in the period of adoption. The firm early adopted ASU No. 2015–07 in June 2015 and adoption did not affect the firm’s financial condition, results of operations, or cash flows. In accordance with ASU No. 2015-07, previously reported amounts have been conformed to the current presentation. See Notes 4 through 6 for the disclosures required by ASU No. 2015-07.

Note 4.

Financial Instruments Owned, at Fair Value and Financial Instruments Sold, But Not Yet Purchased, at Fair Value

Financial instruments owned, at fair value and financial instruments sold, but not yet purchased, at fair value are accounted for at fair value either under the fair value option or in accordance with other U.S. GAAP. See Note 8 for further information about other financial assets and financial liabilities accounted for at fair value primarily under the fair value option.

 

 

    Goldman Sachs June 2015 Form 10-Q   13


Table of Contents

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

The tables below present the firm’s financial instruments owned, at fair value, and financial instruments sold, but not yet purchased, at fair value.

 

    As of June 2015  
$ in millions    
 
 
Financial
Instruments
Owned
  
  
  
   
 
 
 
 
Financial
Instruments
Sold, But
Not Yet
Purchased
  
  
  
  
  

Commercial paper, certificates of deposit, time deposits and other money market instruments

    $    2,767        $          —   
   

U.S. government and federal agency obligations

    52,295        15,103   
   

Non-U.S. government and agency obligations

    34,006        21,794   
   

Mortgage and other asset-backed loans and securities:

   

Loans and securities backed by commercial real estate

    4,483  1      1   
   

Loans and securities backed by residential real estate

    11,075  2        
   

Bank loans and bridge loans

    12,064        371   
   

Corporate debt securities

    17,383        4,555   
   

State and municipal obligations

    1,417          
   

Other debt obligations

    2,190  3      1   
   

Equities and convertible debentures

    98,073        30,049   
   

Commodities

    4,253        704   
   

Investments in funds measured at NAV

    8,956          

Subtotal

    248,962        72,578   
   

Derivatives

    54,501        51,726   

Total

    $303,463        $124,304   
    As of December 2014  
$ in millions    
 
 
Financial
Instruments
Owned
  
  
  
   
 
 
 
 
Financial
Instruments
Sold, But
Not Yet
Purchased
  
  
  
  
  

Commercial paper, certificates of deposit, time deposits and other money market instruments

    $     3,654        $          —   
   

U.S. government and federal agency obligations

    48,002        12,762   
   

Non-U.S. government and agency obligations

    37,059        20,500   
   

Mortgage and other asset-backed loans and securities:

   

Loans and securities backed by commercial real estate

    6,463  1      1   
   

Loans and securities backed by residential real estate

    11,717  2        
   

Bank loans and bridge loans

    14,848        464   
   

Corporate debt securities

    21,419        5,800   
   

State and municipal obligations

    1,203          
   

Other debt obligations

    3,257  3      2   
   

Equities and convertible debentures

    87,900        28,314   
   

Commodities

    3,846        1,224   
   

Investments in funds measured at NAV

    9,610          

Subtotal

    248,978        69,067   
   

Derivatives

    63,270        63,016   

Total

    $ 312,248        $132,083   

 

1.

Includes $2.39 billion and $4.29 billion of loans backed by commercial real estate as of June 2015 and December 2014, respectively.

 

2.

Includes $7.31 billion and $6.43 billion of loans backed by residential real estate as of June 2015 and December 2014, respectively.

 

3.

Includes $493 million and $618 million of loans backed by consumer loans and other assets as of June 2015 and December 2014, respectively.

Gains and Losses from Market Making and Other Principal Transactions

The table below presents “Market making” revenues by major product type, as well as “Other principal transactions” revenues. These gains/(losses) include both realized and unrealized gains and losses, and are primarily related to the firm’s financial instruments owned, at fair value and financial instruments sold, but not yet purchased, at fair value, including both derivative and non-derivative financial instruments. These gains/(losses) exclude related interest income and interest expense. See Note 23 for further information about interest income and interest expense.

The gains/(losses) in the table below are not representative of the manner in which the firm manages its business activities because many of the firm’s market-making and client facilitation strategies utilize financial instruments across various product types. Accordingly, gains or losses in one product type frequently offset gains or losses in other product types. For example, most of the firm’s longer-term derivatives across product types are sensitive to changes in interest rates and may be economically hedged with interest rate swaps. Similarly, a significant portion of the firm’s cash instruments and derivatives across product types has exposure to foreign currencies and may be economically hedged with foreign currency contracts.

 

$ in millions

 

Product Type

 

Three Months

Ended June

       

Six Months

Ended June

 
    2015         2014            2015         2014   

Interest rates

    $ 2,864         $  (176       $   278         $  (456
   

Credit

    (12      1,022          920         2,202   
   

Currencies

    (1,861      561          1,791         856   
   

Equities

    1,041         544          2,703         1,227   
   

Commodities

    277         234            542         995   

Market making

    2,309         2,185            6,234         4,824   

Other principal transactions 1

    1,707         1,995            3,279         3,498   

Total

    $ 4,016         $4,180            $9,513         $8,322   

 

1.

Other principal transactions are included in the firm’s Investing & Lending segment. See Note 25 for net revenues, including net interest income, by product type for Investing & Lending, as well as the amount of net interest income included in Investing & Lending.

 

 

14   Goldman Sachs June 2015 Form 10-Q    


Table of Contents

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Note 5.

Fair Value Measurements

 

The fair value of a financial instrument is the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Financial assets are marked to bid prices and financial liabilities are marked to offer prices. Fair value measurements do not include transaction costs. The firm measures certain financial assets and financial liabilities as a portfolio (i.e., based on its net exposure to market and/or credit risks).

The best evidence of fair value is a quoted price in an active market. If quoted prices in active markets are not available, fair value is determined by reference to prices for similar instruments, quoted prices or recent transactions in less active markets, or internally developed models that primarily use market-based or independently sourced parameters as inputs including, but not limited to, interest rates, volatilities, equity or debt prices, foreign exchange rates, commodity prices, credit spreads and funding spreads (i.e., the spread, or difference, between the interest rate at which a borrower could finance a given financial instrument relative to a benchmark interest rate).

U.S. GAAP has a three-level fair value hierarchy for disclosure of fair value measurements. The fair value hierarchy prioritizes inputs to the valuation techniques used to measure fair value, giving the highest priority to level 1 inputs and the lowest priority to level 3 inputs. A financial instrument’s level in the fair value hierarchy is based on the lowest level of input that is significant to its fair value measurement. The fair value hierarchy is as follows:

Level 1. Inputs are unadjusted quoted prices in active markets to which the firm had access at the measurement date for identical, unrestricted assets or liabilities.

Level 2. Inputs to valuation techniques are observable, either directly or indirectly.

Level 3. One or more inputs to valuation techniques are significant and unobservable.

The fair values for substantially all of the firm’s financial assets and financial liabilities are based on observable prices and inputs and are classified in levels 1 and 2 of the fair value hierarchy. Certain level 2 and level 3 financial assets and financial liabilities may require appropriate valuation adjustments that a market participant would require to arrive at fair value for factors such as counterparty and the firm’s credit quality, funding risk, transfer restrictions, liquidity and bid/offer spreads. Valuation adjustments are generally based on market evidence.

See Notes 6 through 8 for further information about fair value measurements of cash instruments, derivatives and other financial assets and financial liabilities accounted for at fair value primarily under the fair value option (including information about unrealized gains and losses related to level 3 financial assets and financial liabilities, and transfers in and out of level 3), respectively.

The table below presents financial assets and financial liabilities accounted for at fair value under the fair value option or in accordance with other U.S. GAAP. Counterparty and cash collateral netting represents the impact on derivatives of netting across levels of the fair value hierarchy. Netting among positions classified in the same level is included in that level.

 

    As of  
$ in millions    

 

June

2015

  

  

   

 

March

2015

  

  

   
 
December
2014
  
  

Total level 1 financial assets

    $143,808        $ 146,659        $ 139,484   
   

Total level 2 financial assets

    423,629        448,886        466,030   
   

Total level 3 financial assets

    32,412        34,342        35,780   
   

Investments in funds measured at NAV

    8,956        9,216        9,610   
   

Counterparty and cash collateral netting

    (90,510     (106,649     (104,616

Total financial assets at fair value

    $518,295        $ 532,454        $ 546,288   

Total assets 1

    $859,879        $ 865,458        $ 856,240   
   

Total level 3 financial assets as a percentage of total assets

    3.8%        4.0%        4.2%   
   

Total level 3 financial assets as a percentage of total financial assets at fair value

    6.3%        6.4%        6.5%   

Total level 1 financial liabilities

    $  63,772        $   60,609        $   59,697   
   

Total level 2 financial liabilities

    247,883        262,860        253,364   
   

Total level 3 financial liabilities

    18,353        16,309        15,904   
   

Counterparty and cash collateral netting

    (39,075     (46,587     (37,267

Total financial liabilities at fair value

    $290,933        $ 293,191        $ 291,698   
   

Total level 3 financial liabilities as a percentage of total financial liabilities at fair value

    6.3%        5.6%        5.5%   

 

1.

Includes $834 billion, $842 billion and $834 billion as of June 2015, March 2015 and December 2014, respectively, that is carried at fair value or at amounts that generally approximate fair value.

The table below presents a summary of level 3 financial assets. See Notes 6 through 8 for further information about level 3 financial assets.

 

    Level 3 Financial Assets as of  
$ in millions    

 

June

2015

  

  

   
 
March
2015
  
  
   
 
December
2014
  
  

Cash instruments

    $26,195        $27,235        $28,650   
   

Derivatives

    6,175        7,069        7,074   
   

Other financial assets

    42        38        56   

Total

    $32,412        $34,342        $35,780   
 

 

    Goldman Sachs June 2015 Form 10-Q   15


Table of Contents

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Level 3 financial assets as of June 2015 decreased compared with March 2015, primarily reflecting a decrease in level 3 cash instruments and derivative assets. See Note 6 for further information about changes in level 3 cash instruments. The decrease in level 3 derivative assets was primarily attributable to unrealized losses on certain credit derivative assets, and transfers to level 2 of certain equity derivative assets.

Level 3 financial assets as of June 2015 decreased compared with December 2014, primarily reflecting a decrease in level 3 cash instruments. See Note 6 for further information about changes in level 3 cash instruments.

Note 6.

Cash Instruments

Cash instruments include U.S. government and federal agency obligations, non-U.S. government and agency obligations, bank loans and bridge loans, corporate debt securities, equities and convertible debentures, investments in funds measured at NAV, and other non-derivative financial instruments owned and financial instruments sold, but not yet purchased. See below for the types of cash instruments included in each level of the fair value hierarchy and the valuation techniques and significant inputs used to determine their fair values. See Note 5 for an overview of the firm’s fair value measurement policies.

Level 1 Cash Instruments

Level 1 cash instruments include U.S. government obligations and most non-U.S. government obligations, actively traded listed equities, certain government agency obligations and money market instruments. These instruments are valued using quoted prices for identical unrestricted instruments in active markets.

The firm defines active markets for equity instruments based on the average daily trading volume both in absolute terms and relative to the market capitalization for the instrument. The firm defines active markets for debt instruments based on both the average daily trading volume and the number of days with trading activity.

Level 2 Cash Instruments

Level 2 cash instruments include commercial paper, certificates of deposit, time deposits, most government agency obligations, certain non-U.S. government obligations, most corporate debt securities, commodities, certain mortgage-backed loans and securities, certain bank loans and bridge loans, restricted or less liquid listed equities, most state and municipal obligations and certain lending commitments.

Valuations of level 2 cash instruments can be verified to quoted prices, recent trading activity for identical or similar instruments, broker or dealer quotations or alternative pricing sources with reasonable levels of price transparency. Consideration is given to the nature of the quotations (e.g., indicative or firm) and the relationship of recent market activity to the prices provided from alternative pricing sources.

Valuation adjustments are typically made to level 2 cash instruments (i) if the cash instrument is subject to transfer restrictions and/or (ii) for other premiums and liquidity discounts that a market participant would require to arrive at fair value. Valuation adjustments are generally based on market evidence.

Level 3 Cash Instruments

Level 3 cash instruments have one or more significant valuation inputs that are not observable. Absent evidence to the contrary, level 3 cash instruments are initially valued at transaction price, which is considered to be the best initial estimate of fair value. Subsequently, the firm uses other methodologies to determine fair value, which vary based on the type of instrument. Valuation inputs and assumptions are changed when corroborated by substantive observable evidence, including values realized on sales of financial assets.

 

 

16   Goldman Sachs June 2015 Form 10-Q    


Table of Contents

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Valuation Techniques and Significant Inputs

The table below presents the valuation techniques and the nature of significant inputs. These valuation techniques and

significant inputs are generally used to determine the fair values of each type of level 3 cash instrument.

 

 

Level 3 Cash Instruments         Valuation Techniques and Significant Inputs

 

Loans and securities backed by commercial real estate

 

  Collateralized by a single commercial real estate property or a portfolio of properties

 

  May include tranches of varying levels of subordination

      

 

Valuation techniques vary by instrument, but are generally based on discounted cash flow techniques.

    

 

Significant inputs are generally determined based on relative value analyses and include:

    

 

  Transaction prices in both the underlying collateral and instruments with the same or similar underlying collateral and the basis, or price difference, to such prices

    

 

  Market yields implied by transactions of similar or related assets and/or current levels and changes in market indices such as the CMBX (an index that tracks the performance of commercial mortgage bonds)

    

 

  A measure of expected future cash flows in a default scenario (recovery rates) implied by the value of the underlying collateral, which is mainly driven by current performance of the underlying collateral, capitalization rates and multiples. Recovery rates are expressed as a percentage of notional or face value of the instrument and reflect the benefit of credit enhancements on certain instruments

    

 

  Timing of expected future cash flows (duration) which, in certain cases, may incorporate the impact of other unobservable inputs (e.g., prepayment speeds)

 

 

Loans and securities backed by residential real estate

 

  Collateralized by portfolios of residential real estate

 

  May include tranches of varying levels of subordination

      

 

Valuation techniques vary by instrument, but are generally based on discounted cash flow techniques.

    

 

Significant inputs are generally determined based on relative value analyses, which incorporate comparisons to instruments with similar collateral and risk profiles. Significant inputs include:

    

 

  Transaction prices in both the underlying collateral and instruments with the same or similar underlying collateral

    

 

  Market yields implied by transactions of similar or related assets

    

 

  Cumulative loss expectations, driven by default rates, home price projections, residential property liquidation timelines and related costs

    

 

  Duration, driven by underlying loan prepayment speeds and residential property liquidation timelines

 

 

Bank loans and bridge loans

      

 

Valuation techniques vary by instrument, but are generally based on discounted cash flow techniques.

    

 

Significant inputs are generally determined based on relative value analyses, which incorporate comparisons both to prices of credit default swaps that reference the same or similar underlying instrument or entity and to other debt instruments for the same issuer for which observable prices or broker quotations are available. Significant inputs include:

    

 

  Market yields implied by transactions of similar or related assets and/or current levels and trends of market indices such as CDX and LCDX (indices that track the performance of corporate credit and loans, respectively)

    

 

  Current performance and recovery assumptions and, where the firm uses credit default swaps to value the related cash instrument, the cost of borrowing the underlying reference obligation

    

 

  Duration

 

 

Commercial paper, certificates of deposit, time deposits and other money market instruments

 

Non-U.S. government and

agency obligations

 

Corporate debt securities

 

State and municipal obligations

 

Other debt obligations

      

 

Valuation techniques vary by instrument, but are generally based on discounted cash flow techniques.

    

 

Significant inputs are generally determined based on relative value analyses, which incorporate comparisons both to prices of credit default swaps that reference the same or similar underlying instrument or entity and to other debt instruments for the same issuer for which observable prices or broker quotations are available. Significant inputs include:

    

 

  Market yields implied by transactions of similar or related assets and/or current levels and trends of market indices such as CDX, LCDX and MCDX (an index that tracks the performance of municipal obligations)

    

 

  Current performance and recovery assumptions and, where the firm uses credit default swaps to value the related cash instrument, the cost of borrowing the underlying reference obligation

    

 

  Duration

 

 

Equities and convertible debentures (including private equity investments and investments in real estate entities)

      

 

Recent third-party completed or pending transactions (e.g., merger proposals, tender offers, debt restructurings) are considered to be the best evidence for any change in fair value. When these are not available, the following valuation methodologies are used, as appropriate:

    

 

  Industry multiples (primarily EBITDA multiples) and public comparables

    

 

  Transactions in similar instruments

    

 

  Discounted cash flow techniques

    

 

  Third-party appraisals

    

 

The firm also considers changes in the outlook for the relevant industry and financial performance of the issuer as compared to projected performance. Significant inputs include:

    

 

  Market and transaction multiples

    

 

  Discount rates, long-term growth rates, earnings compound annual growth rates and capitalization rates

    

 

  For equity instruments with debt-like features: market yields implied by transactions of similar or related assets, current performance and recovery assumptions, and duration

 

 

    Goldman Sachs June 2015 Form 10-Q   17


Table of Contents

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Significant Unobservable Inputs

The table below presents the ranges and weighted averages of significant unobservable inputs used to value the firm’s level 3 cash instruments. In the table below:

 

 

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

 

 

Weighted averages are calculated by weighting each input by the relative fair value of the financial instruments.

 

 

The ranges and weighted averages of these inputs are not representative of the appropriate inputs to use when calculating the fair value of any one cash instrument. For example, the highest multiple presented in the tables below for private equity investments is appropriate for valuing a specific private equity investment but may not be appropriate for valuing any other private equity investment. Accordingly, the ranges of inputs presented below do not represent uncertainty in, or possible ranges of, fair value measurements of the firm’s level 3 cash instruments.

 

Increases in yield, discount rate, capitalization rate, duration or cumulative loss rate used in the valuation of the firm’s level 3 cash instruments would result in a lower fair value measurement, while increases in recovery rate, basis, multiples, long-term growth rate or compound annual growth rate would result in a higher fair value measurement. Due to the distinctive nature of each of the firm’s level 3 cash instruments, the interrelationship of inputs is not necessarily uniform within each product type.

 

 

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

 

 

Level 3 Cash Instruments

 

 

Valuation Techniques and

Significant Unobservable Inputs   

 

 

Range of Significant Unobservable Inputs (Weighted Average)

 

   

As of June 2015

 

 

As of December 2014

 

 

Loans and securities backed by commercial real estate

 

  Collateralized by a single commercial real estate property or a portfolio of properties

 

  May include tranches of varying levels of subordination

 

($2.13 billion and $3.28 billion of level 3 assets as of June 2015 and December 2014, respectively.)

 

 

 

Discounted cash flows:

     
 

 

  Yield

 

 

3.3% to 20.0% (12.0%)

 

 

3.2% to 20.0% (10.5%)

 

 

  Recovery rate

 

 

15.1% to 95.3% (54.4%)

 

 

24.9% to 100.0% (68.3%)

 

 

  Duration (years)

 

 

0.3 to 4.4 (1.9)

 

 

0.3 to 4.7 (2.0)

 

 

  Basis

 

 

 

 

 

(6) points to 11 points (3 points)

 

 

(8) points to 13 points (2 points)

 

Loans and securities backed by residential real estate

 

  Collateralized by portfolios of residential real estate

 

  May include tranches of varying levels of subordination

 

($2.72 billion and $2.55 billion of level 3 assets as of June 2015 and December 2014, respectively.)

 

 

 

Discounted cash flows:

     
 

 

  Yield

 

 

2.8% to 12.0% (6.7%)

 

 

1.9% to 17.5% (7.6%)

 

 

  Cumulative loss rate

 

 

6.0% to 42.6% (19.4%)

 

 

0.0% to 95.1% (24.4%)

 

 

  Duration (years)

 

 

 

 

 

1.7 to 13.0 (5.1)

 

 

0.5 to 13.0 (4.3)

 

Bank loans and bridge loans

 

($5.38 billion and $6.97 billion of level 3 assets as of June 2015 and December 2014, respectively.)

 

 

Discounted cash flows:

     
 

 

  Yield

 

 

1.5% to 22.0% (8.6%)

 

 

1.4% to 29.5% (8.7%)

 

 

  Recovery rate

 

 

15.3% to 88.9% (51.2%)

 

 

26.6% to 92.5% (60.6%)

 

 

  Duration (years)

 

 

 

0.4 to 6.5 (2.4)

 

 

0.3 to 7.8 (2.5)

 

Commercial paper, certificates of deposit, time deposits and other money market instruments

 

Non-U.S. government and agency obligations

 

Corporate debt securities

 

State and municipal obligations

 

Other debt obligations

 

($3.51 billion and $4.75 billion of level 3 assets as of June 2015 and December 2014, respectively.)

 

 

 

Discounted cash flows:

     
 

 

  Yield

 

 

1.0% to 17.3% (9.4%)

 

 

0.9% to 24.4% (9.2%)

 

 

  Recovery rate

 

 

0.0% to 71.7% (61.0%)

 

 

0.0% to 71.9% (59.2%)

 

 

  Duration (years)

 

 

 

 

 

 

 

 

0.5 to 17.0 (4.4)

 

 

0.5 to 19.6 (3.7)

 

Equities and convertible debentures (including private equity investments and investments in real estate entities)

 

($12.46 billion and $11.11 billion of level 3 assets as of June 2015 and December 2014, respectively.)

 

 

Market comparables and discounted cash flows:

     
 

 

  Multiples

 

 

0.7x to 23.2x (6.1x)

 

 

0.8x to 16.6x (6.5x)

 

 

  Discount rate/yield

 

 

3.7% to 25.0% (14.3%)

 

 

3.7% to 30.0% (14.4%)

 

 

  Long-term growth  rate/

    compound annual growth rate

 

 

3.0% to 10.7% (5.6%)

 

 

1.0% to 10.0% (6.0%)

 

 

  Capitalization rate

 

 

 

 

5.3% to 11.9% (7.5%)

 

 

3.8% to 13.0% (7.6%)

 

18   Goldman Sachs June 2015 Form 10-Q    


Table of Contents

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Fair Value of Cash Instruments by Level

The tables below present cash instrument assets and liabilities at fair value by level within the fair value hierarchy. Cash instrument assets and liabilities are

included in “Financial instruments owned, at fair value” and “Financial instruments sold, but not yet purchased, at fair value,” respectively.

 

 

    Cash Instrument Assets at Fair Value as of June 2015  
$ in millions     Level 1           Level 2           Level 3           Total   

Commercial paper, certificates of deposit, time deposits
and other money market instruments

    $         69           $  2,687           $       11           $    2,767   
   

U.S. government and federal agency obligations

    26,183           26,112                     52,295   
   

Non-U.S. government and agency obligations

    28,255           5,730           21           34,006   
   

Mortgage and other asset-backed loans and securities:

                

Loans and securities backed by commercial real estate

              2,349           2,134           4,483   
   

Loans and securities backed by residential real estate

              8,358           2,717           11,075   
   

Bank loans and bridge loans

              6,687           5,377           12,064   
   

Corporate debt securities

    239           14,549           2,595           17,383   
   

State and municipal obligations

              1,274           143           1,417   
   

Other debt obligations

              1,450           740           2,190   
   

Equities and convertible debentures

    76,614           9,002           12,457  2         98,073   
   

Commodities

              4,253                     4,253   

Subtotal

    $131,360           $82,451           $26,195           240,006   
   

Investments in funds measured at NAV

                                     8,956   

Total 1

                                     $248,962   
    Cash Instrument Liabilities at Fair Value as of June 2015  
$ in millions     Level 1           Level 2           Level 3           Total   

U.S. government and federal agency obligations

    $  15,093           $       10           $       —           $  15,103   
   

Non-U.S. government and agency obligations

    19,677           2,117                     21,794   
   

Mortgage and other asset-backed loans and securities:

                

Loans and securities backed by commercial real estate

              1                     1   
   

Bank loans and bridge loans

              233           138           371   
   

Corporate debt securities

    3           4,551           1           4,555   
   

Other debt obligations

                        1           1   
   

Equities and convertible debentures

    28,984           1,027           38           30,049   
   

Commodities

              704                     704   

Total

    $  63,757           $  8,643           $     178           $  72,578   

 

1.

Includes collateralized debt obligations (CDOs) and collateralized loan obligations (CLOs) backed by real estate and corporate obligations of $180 million in level 2 and $1.14 billion in level 3.

 

2.

Includes $11.67 billion of private equity investments, $315 million of investments in real estate entities and $472 million of convertible debentures.

 

    Goldman Sachs June 2015 Form 10-Q   19


Table of Contents

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

    Cash Instrument Assets at Fair Value as of December 2014  
$ in millions     Level 1           Level 2           Level 3           Total   

Commercial paper, certificates of deposit, time deposits
and other money market instruments

    $         —           $  3,654           $       —           $    3,654   
   

U.S. government and federal agency obligations

    18,540           29,462                     48,002   
   

Non-U.S. government and agency obligations

    30,255           6,668           136           37,059   
   

Mortgage and other asset-backed loans and securities:

                

Loans and securities backed by commercial real estate

              3,188           3,275           6,463   
   

Loans and securities backed by residential real estate

              9,172           2,545           11,717   
   

Bank loans and bridge loans

              7,875           6,973           14,848   
   

Corporate debt securities

    249           17,537           3,633           21,419   
   

State and municipal obligations

              1,093           110           1,203   
   

Other debt obligations

              2,387           870           3,257   
   

Equities and convertible debentures

    68,974           7,818           11,108  2         87,900   
   

Commodities

              3,846                     3,846   

Subtotal

    $118,018           $92,700           $28,650           239,368   
   

Investments in funds measured at NAV

                                     9,610   

Total 1

                                     $248,978   
    Cash Instrument Liabilities at Fair Value as of December 2014  
$ in millions     Level 1           Level 2           Level 3           Total   

U.S. government and federal agency obligations

    $  12,746           $       16           $       —           $  12,762   
   

Non-U.S. government and agency obligations

    19,256           1,244                     20,500   
   

Mortgage and other asset-backed loans and securities:

                

Loans and securities backed by commercial real estate

              1                     1   
   

Bank loans and bridge loans

              286           178           464   
   

Corporate debt securities

              5,741           59           5,800   
   

Other debt obligations

                        2           2   
   

Equities and convertible debentures

    27,587           722           5           28,314   
   

Commodities

              1,224                     1,224   

Total

    $  59,589           $  9,234           $     244           $  69,067   

 

1.

Includes CDOs and CLOs backed by real estate and corporate obligations of $234 million in level 2 and $1.34 billion in level 3.

 

2.

Includes $10.25 billion of private equity investments, $294 million of investments in real estate entities and $562 million of convertible debentures.

Transfers Between Levels of the Fair Value Hierarchy

Transfers between levels of the fair value hierarchy are reported at the beginning of the reporting period in which they occur. During the three months ended June 2015, transfers into level 2 from level 1 of cash instruments were $480 million, reflecting transfers of public equity securities primarily due to decreased market activity in these instruments. During the three months ended June 2015, transfers into level 1 from level 2 of cash instruments were $211 million, reflecting transfers of public equity securities due to increased market activity in these instruments. During the three months ended June 2014, transfers into level 2 from level 1 of cash instruments were $552 million, including $346 million of public equity securities and $206 million of U.S. government and federal agency obligations primarily due to decreased market activity in these instruments. During the three months ended June 2014, transfers into level 1 from level 2 of cash instruments were $7 million, reflecting transfers of public equity securities due to increased market activity in these instruments.

During the six months ended June 2015, transfers into level 2 from level 1 of cash instruments were $500 million, reflecting transfers of public equity securities primarily due to decreased market activity in these instruments. During the six months ended June 2015, transfers into level 1 from level 2 of cash instruments were $126 million, reflecting transfers of public equity securities due to increased market activity in these instruments. During the six months ended June 2014, transfers into level 2 from level 1 of cash instruments were $67 million, including $49 million of public equity securities and $18 million of U.S. government and federal agency obligations primarily due to decreased market activity in these instruments. During the six months ended June 2014, transfers into level 1 from level 2 of cash instruments were $81 million, reflecting transfers of public equity securities, due to increased market activity in these instruments.

See level 3 rollforward below for information about transfers between level 2 and level 3.

 

 

20   Goldman Sachs June 2015 Form 10-Q    


Table of Contents

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Level 3 Rollforward

The tables below present changes in fair value for all cash instrument assets and liabilities categorized as level 3 as of the end of the period. In the tables below:

 

 

If a cash instrument asset or liability was transferred to level 3 during a reporting period, its entire gain or loss for the period is included in level 3.

 

 

Purchases include both originations and secondary market purchases.

 

Level 3 cash instruments are frequently economically hedged with level 1 and level 2 cash instruments and/or level 1, level 2 or level 3 derivatives. Accordingly, gains or losses that are reported in level 3 can be partially offset by gains or losses attributable to level 1 or level 2 cash instruments and/or level 1, level 2 or level 3 derivatives. 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.

 

 

    Level 3 Cash Instrument Assets at Fair Value for the Three Months Ended June 2015  
$ in millions    
 
 
Balance,
beginning
of period
  
  
  
    
 
 
 
Net
realized
gains/
(losses)
  
  
  
  
   
 
 
 
 
 
Net unrealized
gains/(losses)
relating to
instruments
still held at
period-end
  
  
  
  
  
  
    Purchases         Sales        Settlements       
 
 
Transfers
into
level 3
  
  
  
    
 
 
Transfers
out of
level 3
  
  
  
   
 
 
Balance,
end of
period
  
  
  

Commercial paper, certificates of deposit, time deposits and other money market instruments

    $       10         $  —        $     —        $       1         $       —        $       —        $     —         $       —        $       11   
   

Non-U.S. government and
agency obligations

    95         2        1                       (9     1         (69     21   
   

Mortgage and other asset-backed loans and securities:

                    

Loans and securities backed by commercial real estate

    2,763         43        65        81         (277     (436     103         (208     2,134   
   

Loans and securities backed by residential real estate

    2,773         37        87        179         (248     (71     73         (113     2,717   
   

Bank loans and bridge loans

    6,311         122               383         (394     (430     180         (795     5,377   
   

Corporate debt securities

    2,766         29        (35     387         (112     (196     164         (408     2,595   
   

State and municipal obligations

    142         1        1        20         (13            19         (27     143   
   

Other debt obligations

    886         4        (4     105         (67     (6     35         (213     740   
   

Equities and convertible debentures

    11,489         92        1,098        251         (230     (379     584         (448     12,457   

Total

    $27,235         $330  1      $1,213  1      $1,407         $(1,341     $(1,527     $1,159         $(2,281     $26,195   
    Level 3 Cash Instrument Liabilities at Fair Value for the Three Months Ended June 2015  
$ in millions    
 
 
Balance,
beginning
of period
  
  
  
    
 
 
 
Net
realized
(gains)/
losses
  
  
  
  
   
 
 
 
 
 
Net unrealized
(gains)/losses
relating to
instruments
still held at
period-end
  
  
  
  
  
  
    Purchases         Sales        Settlements       
 
 
Transfers
into
level 3
  
  
  
    
 
 
Transfers
out of
level 3
  
  
  
   
 
 
Balance,
end of
period
  
  
  

Total

    $     162         $    1        $       8        $    (34      $      36        $        2        $        9         $        (6     $     178   

 

1.

The aggregate amounts include gains/(losses) of approximately $(26) million, $1.36 billion and $206 million reported in “Market making,” “Other principal transactions” and “Interest income,” respectively.

 

The net unrealized gain on level 3 cash instruments of $1.21 billion (reflecting $1.21 billion of gains on cash instrument assets and $8 million of losses on cash instrument liabilities) for the three months ended June 2015 primarily reflected gains on private equity investments principally driven by strong corporate performance and company-specific events.

Transfers into level 3 during the three months ended June 2015 primarily reflected transfers of certain private equity investments, bank loans and bridge loans and corporate debt securities from level 2 principally due to reduced price transparency as a result of a lack of market evidence, including fewer transactions in these instruments.

 

 

    Goldman Sachs June 2015 Form 10-Q   21


Table of Contents

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Transfers out of level 3 during the three months ended June 2015 primarily reflected transfers of certain bank loans and bridge loans, private equity securities and corporate debt securities to level 2 principally due to

increased price transparency as a result of market evidence, including additional market transactions in these instruments and due to certain unobservable yield and duration inputs no longer being significant to the valuation of these instruments.

 

 

    Level 3 Cash Instrument Assets at Fair Value for the Six Months Ended June 2015  
$ in millions    
 
 
Balance,
beginning
of period
  
  
  
    
 
 
 
Net
realized
gains/
(losses)
  
  
  
  
   
 
 
 
 
 
Net unrealized
gains/(losses)
relating to
instruments
still held at
period-end
  
  
  
  
  
  
    Purchases         Sales        Settlements       
 
 
Transfers
into
level 3
  
  
  
    
 
 
Transfers
out of
level 3
  
  
  
   
 
 
Balance,
end of
period
  
  
  

Commercial paper, certificates of deposit, time deposits and other money market instruments

    $         —         $    —        $       —        $       —         $       (1     $        —        $     12         $       —        $       11   
   

Non-U.S. government and
agency obligations

    136         2               1         (18     (26             (74     21   
   

Mortgage and other asset-backed loans and securities:

                    

Loans and securities backed by commercial real estate

    3,275         65        67        214         (333     (1,212     335         (277     2,134   
   

Loans and securities backed by residential real estate

    2,545         95        67        496         (498     (177     327         (138     2,717   
   

Bank loans and bridge loans

    6,973         218        (92     579         (668     (1,258     589         (964     5,377   
   

Corporate debt securities

    3,633         62        (46     484         (454     (380     309         (1,013     2,595   
   

State and municipal obligations

    110         3        2        14         (1     (1     40         (24     143   
   

Other debt obligations

    870         18        3        189         (109     (63     16         (184     740   
   

Equities and convertible debentures

    11,108         135        1,560        486         (375     (800     725         (382     12,457   

Total

    $28,650         $598  1      $1,561  1      $2,463         $(2,457     $(3,917     $2,353         $(3,056     $26,195   
    Level 3 Cash Instrument Liabilities at Fair Value for the Six Months Ended June 2015  
$ in millions    
 
 
Balance,
beginning
of period
  
  
  
    
 
 
 
Net
realized
(gains)/
losses
  
  
  
  
   
 
 
 
 
 
Net unrealized
(gains)/losses
relating to
instruments
still held at
period-end
  
  
  
  
  
  
    Purchases         Sales        Settlements       
 
 
Transfers
into
level 3
  
  
  
    
 
 
Transfers
out of
level 3
  
  
  
   
 
 
Balance,
end of
period
  
  
  

Total

    $     244         $    2        $    (13     $  (112      $      46        $        2        $     46         $     (37     $     178   

 

1.

The aggregate amounts include gains of approximately $4 million, $1.80 billion and $358 million reported in “Market making,” “Other principal transactions” and “Interest income,” respectively.

 

The net unrealized gain on level 3 cash instruments of $1.57 billion (reflecting $1.56 billion on cash instrument assets and $13 million on cash instrument liabilities) for the six months ended June 2015 primarily reflected gains on private equity investments principally driven by strong corporate performance and company-specific events.

Transfers into level 3 during the six months ended June 2015 primarily reflected transfers of certain private equity investments, bank loans and bridge loans, loans and securities backed by residential real estate, loans and securities backed by commercial real estate and corporate debt securities from level 2 principally due to reduced price transparency as a result of a lack of market evidence, including fewer transactions in these instruments.

Transfers out of level 3 during the six months ended June 2015 primarily reflected transfers of certain corporate debt securities and bank loans and bridge loans to level 2 principally due to increased price transparency as a result of market evidence, including additional market transactions in these instruments and due to certain unobservable yield and duration inputs no longer being significant to the valuation of these instruments.

 

 

22   Goldman Sachs June 2015 Form 10-Q    


Table of Contents

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

    Level 3 Cash Instrument Assets at Fair Value for the Three Months Ended June 2014  
$ in millions    
 
 
Balance,
beginning
of period
  
  
  
    
 
 
 
Net
realized
gains/
(losses)
  
  
  
  
   
 
 
 
 
 
Net unrealized
gains/(losses)
relating to
instruments
still held at
period-end
  
  
  
  
  
  
    Purchases        Sales        Settlements       
 
 
Transfers
into
level 3
  
  
  
    
 
 
Transfers
out of
level 3
  
  
  
   
 
 
Balance,
end of
period
  
  
  

Non-U.S. government and
agency obligations

    $       45         $     1        $    1        $       9        $       (1     $       (2     $     —         $      —        $       53   
   

Mortgage and other asset-backed
loans and securities:

                   

Loans and securities backed by commercial real estate

    2,518         31        87        114        (155     (305     417         (199     2,508   
   

Loans and securities backed by residential real estate

    2,065         34        90        149        (194     (3     27         (129     2,039   
   

Bank loans and bridge loans

    6,798         86        102        714        (169     (1,134     662         (779     6,280   
   

Corporate debt securities

    2,496         85        32        211        (665     (177     401         (191     2,192   
   

State and municipal obligations

    242         1        2        28        (41            1         (64     169   
   

Other debt obligations

    640         5        32        53        (51     (25     41         (66     629   
   

Equities and convertible debentures

    9,808         71        641        223        (416     (181     676         (271     10,551   

Total

    $24,612         $314  1      $987  1      $1,501        $(1,692     $(1,827     $2,225         $(1,699     $24,421   
    Level 3 Cash Instrument Liabilities at Fair Value for the Three Months Ended June 2014  
$ in millions    
 
 
Balance,
beginning
of period
  
  
  
    
 
 
 
Net
realized
(gains)/
losses
  
  
  
  
   
 
 
 
 
 
Net unrealized
(gains)/losses
relating to
instruments
still held at
period-end
  
  
  
  
  
  
    Purchases        Sales        Settlements       
 
 
Transfers
into
level 3
  
  
  
    
 
 
Transfers
out of
level 3
  
  
  
   
 
 
Balance,
end of
period
  
  
  

Total

    $     204         $    (6     $   (9     $    (49     $      51        $      11        $     15         $     (20     $     197   

 

1.

The aggregate amounts include gains of approximately $232 million, $743 million and $326 million reported in “Market making,” “Other principal transactions” and “Interest income,” respectively.

 

The net unrealized gain on level 3 cash instruments of $996 million (reflecting $987 million on cash instrument assets and $9 million on cash instrument liabilities) for the three months ended June 2014 primarily consisted of gains on private equity investments principally driven by company-specific events and strong corporate performance.

Transfers into level 3 during the three months ended June 2014 primarily reflected transfers of certain bank loans and bridge loans, private equity investments, loans and securities backed by commercial real estate and corporate debt securities from level 2 principally due to reduced price transparency as a result of a lack of market evidence, including fewer market transactions in these instruments.

Transfers out of level 3 during the three months ended June 2014 primarily reflected transfers of certain bank loans and bridge loans, private equity investments, loans and securities backed by commercial real estate and corporate debt securities to level 2 principally due to increased price transparency as a result of market evidence, including market transactions in these instruments.

 

 

    Goldman Sachs June 2015 Form 10-Q   23


Table of Contents

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

    Level 3 Cash Instrument Assets at Fair Value for the Six Months Ended June 2014  
$ in millions    
 
 
Balance,
beginning
of period
  
  
  
    
 
 
 
Net
realized
gains/
(losses)
  
  
  
  
   
 
 
 
 
 
Net unrealized
gains/(losses)
relating to
instruments
still held at
period-end
  
  
  
  
  
  
    Purchases         Sales         Settlements        
 
 
Transfers
into
level 3
  
  
  
    
 
 
Transfers
out of
level 3
  
  
  
    
 
 
Balance,
end of
period
  
  
  

Non-U.S. government and
agency obligations

    $       40         $    1        $      —        $     22         $     (18      $       (1      $       9         $       —         $       53   
   

Mortgage and other asset-backed loans and securities:

                       

Loans and securities backed by commercial real estate

    2,515         66        157        366         (259      (388      404         (353      2,508   
   

Loans and securities backed by residential real estate

    1,961         68        132        252         (177      (178      199         (218      2,039   
   

Bank loans and bridge loans

    6,071         149        179        1,813         (397      (1,406      478         (607      6,280   
   

Corporate debt securities

    2,744         155        61        629         (709      (401      88         (375      2,192   
   

State and municipal obligations

    257         2        4        34         (82      (2      1         (45      169   
   

Other debt obligations

    807         15        38        122         (160      (76      38         (155      629   
   

Equities and convertible debentures

    8,671         93        758        1,229         (609      (314      1,436         (713      10,551   

Total

    $23,066         $549  1      $1,329  1      $4,467         $(2,411      $(2,766      $2,653         $(2,466      $24,421   
    Level 3 Cash Instrument Liabilities at Fair Value for the Six Months Ended June 2014  
$ in millions    
 
 
Balance,
beginning
of period
  
  
  
    
 
 
 
Net
realized
(gains)/
losses
  
  
  
  
   
 
 
 
 
 
Net unrealized
(gains)/losses
relating to
instruments
still held at
period-end
  
  
  
  
  
  
    Purchases         Sales         Settlements        
 
 
Transfers
into
level 3
  
  
  
    
 
 
Transfers
out of
level 3
  
  
  
    
 
 
Balance,
end of
period
  
  
  

Total

    $     297         $   (6     $    (70     $  (110      $      71         $      11         $       5         $       (1      $     197   

 

1.

The aggregate amounts include gains of approximately $400 million, $881 million and $597 million reported in “Market making,” “Other principal transactions” and “Interest income,” respectively.

 

The net unrealized gain on level 3 cash instruments of $1.40 billion (reflecting $1.33 billion on cash instrument assets and $70 million on cash instrument liabilities) for the six months ended June 2014 primarily consisted of gains on private equity investments and bank loans and bridge loans, principally driven by company-specific events and strong corporate performance, and gains on loans and securities backed by commercial and residential real estate primarily due to tighter credit spreads.

Transfers into level 3 during the six months ended June 2014 primarily reflected transfers of certain private equity investments, bank loans and bridge loans and loans and securities backed by commercial real estate from level 2 principally due to reduced price transparency as a result of a lack of market evidence, including fewer market transactions in these instruments.

Transfers out of level 3 during the six months ended June 2014 primarily reflected transfers of certain private equity investments, bank loans and bridge loans, corporate debt securities and loans and securities backed by commercial real estate to level 2 principally due to increased price transparency as a result of market evidence, including market transactions in these instruments.

 

 

24   Goldman Sachs June 2015 Form 10-Q    


Table of Contents

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Investments in Funds That Are Measured at Net Asset Value Per Share

Cash instruments at fair value include investments in funds that are measured at NAV of the investment fund. The firm uses NAV to measure the fair value of its fund investments when (i) the fund investment does not have a readily determinable fair value and (ii) the NAV of the investment fund is calculated in a manner consistent with the measurement principles of investment company accounting, including measurement of the underlying investments at fair value. The firm early adopted ASU No. 2015-07 in June 2015 and as required, disclosures in the paragraphs and tables below are limited to only those investments in funds that are measured at NAV. In accordance with ASU No. 2015-07, previously reported amounts have been conformed to the current presentation.

The firm’s investments in funds measured at NAV primarily consist of investments in firm-sponsored private equity, credit, real estate and hedge funds where the firm co-invests with third-party investors.

Private equity funds primarily invest in a broad range of industries worldwide in a variety of situations, including leveraged buyouts, recapitalizations, growth investments and distressed investments. Credit funds generally invest in loans and other fixed income instruments and are focused on providing private high-yield capital for mid- to large-sized leveraged and management buyout transactions, recapitalizations, financings, refinancings, acquisitions and restructurings for private equity firms, private family companies and corporate issuers. Real estate funds invest globally, primarily in real estate companies, loan portfolios, debt recapitalizations and property. The private equity, credit and real estate funds are primarily closed-end funds in which the firm’s investments are generally not eligible for redemption. Distributions will be received from these funds as the underlying assets are liquidated or distributed.

The firm also invests in hedge funds, primarily multi-disciplinary hedge funds that employ a fundamental bottom-up investment approach across various asset classes and strategies including long/short equity, credit, convertibles, risk arbitrage, special situations and capital structure arbitrage. The firm’s investments in hedge funds primarily include interests where the underlying assets are illiquid in nature, and proceeds from redemptions will not be received until the underlying assets are liquidated or distributed.

Many of the funds described above are “covered funds” as defined by the Volcker Rule of the U.S. Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). The Board of Governors of the Federal Reserve System (Federal Reserve Board) extended the conformance period through July 2016 for investments in, and relationships with, covered funds that were in place prior to December 31, 2013, and indicated that it intends to further extend the conformance period through July 2017. The firm currently expects to be able to exit substantially all such interests in these funds in orderly transactions prior to July 2017, subject to market conditions. However, to the extent that the underlying investments of particular funds are not sold, the firm may be required to sell its interests in such funds. If that occurs, the firm may receive a value for its interests that is less than the then carrying value as there could be a limited secondary market for these investments and the firm may be unable to sell them in orderly transactions.

The firm continues to manage its existing funds, taking into account the conformance period outlined above, and has redeemed $3.09 billion of its interests in hedge funds since March 2012. In order to be compliant with the Volcker Rule, the firm will be required to reduce most of its interests in the funds in the table below by the end of the conformance period.

The tables below present the fair value of the firm’s investments in, and unfunded commitments to, funds that are measured at NAV.

 

    As of June 2015  
$ in millions    
 
Fair Value of
Investments
  
  
    
 
Unfunded
Commitments
  
  

Private equity funds

    $6,095         $2,093   
   

Credit funds

    775         363   
   

Hedge funds

    744           
   

Real estate funds

    1,342         302   

Total

    $8,956         $2,758   
    As of December 2014  
$ in millions    
 
Fair Value of
Investments
  
  
    
 
Unfunded
Commitments
  
  

Private equity funds

    $6,307         $2,175   
   

Credit funds

    1,008         383   
   

Hedge funds

    863           
   

Real estate funds

    1,432         310   

Total

    $9,610         $2,868   
 

 

    Goldman Sachs June 2015 Form 10-Q   25


Table of Contents

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Note 7.

Derivatives and Hedging Activities

Derivative Activities

Derivatives are instruments that derive their value from underlying asset prices, indices, reference rates and other inputs, or a combination of these factors. Derivatives may be traded on an exchange (exchange-traded) or they may be privately negotiated contracts, which are usually referred to as OTC derivatives. Certain of the firm’s OTC derivatives are cleared and settled through central clearing counterparties (OTC-cleared), while others are bilateral contracts between two counterparties (bilateral OTC).

Market-Making. As a market maker, the firm enters into derivative transactions to provide liquidity to clients and to facilitate the transfer and hedging of their risks. In this capacity, the firm typically acts as principal and is consequently required to commit capital to provide execution. As a market maker, it is essential to maintain an inventory of financial instruments sufficient to meet expected client and market demands.

Risk Management. The firm also enters into derivatives to actively manage risk exposures that arise from its market-making and investing and lending activities in derivative and cash instruments. The firm’s holdings and exposures are hedged, in many cases, on either a portfolio or risk-specific basis, as opposed to an instrument-by-instrument basis. The offsetting impact of this economic hedging is reflected in the same business segment as the related revenues. In addition, the firm may enter into derivatives designated as hedges under U.S. GAAP. These derivatives are used to manage interest rate exposure in certain fixed-rate unsecured long-term and short-term borrowings, and deposits, and to manage foreign currency exposure on the net investment in certain non-U.S. operations.

The firm enters into various types of derivatives, including:

 

 

Futures and Forwards. Contracts that commit counterparties to purchase or sell financial instruments, commodities or currencies in the future.

 

 

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 and liabilities are included in “Financial instruments owned, at fair value” and “Financial instruments sold, but not yet purchased, at fair value,” respectively. Realized and unrealized gains and losses on derivatives not designated as hedges under ASC 815 are included in “Market making” and “Other principal transactions” in Note 4.

 

 

26   Goldman Sachs June 2015 Form 10-Q    


Table of Contents

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

The table below presents the gross fair value and the notional amount of derivative contracts by major product type, the amounts of counterparty and cash collateral netting in the condensed consolidated statements of financial condition, 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.

In the table below:

 

 

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.

 

 

    As of June 2015         As of December 2014  
$ in millions    
 
Derivative
Assets
  
  
   
 
Derivative
Liabilities
  
  
   
 
Notional
Amount
  
  
       
 
Derivative
Assets
  
  
   
 
Derivative
Liabilities
  
  
   
 
Notional
Amount
  
  

Derivatives not accounted for as hedges

             

Exchange-traded

    $        265        $        261        $  3,297,942          $          228        $        238        $  3,151,865   
   

OTC-cleared

    243,453        220,466        26,297,086          351,801        330,298        30,408,636   
   

Bilateral OTC

    361,531        337,954        13,423,822            434,333        409,071        13,552,017   

Total interest rates

    605,249        558,681        43,018,850            786,362        739,607        47,112,518   

OTC-cleared

    6,109        5,979        441,067          5,812        5,663        378,099   
   

Bilateral OTC

    36,573        32,991        1,847,118            49,036        44,491        2,122,859   

Total credit

    42,682        38,970        2,288,185            54,848        50,154        2,500,958   

Exchange-traded

    76        242        19,955          69        69        17,214   
   

OTC-cleared

    107        58        12,665          100        96        13,304   
   

Bilateral OTC

    95,156        99,549        5,565,689            109,747        108,442        5,535,685   

Total currencies

    95,339        99,849        5,598,309            109,916        108,607        5,566,203   

Exchange-traded

    5,324        5,065        322,798          7,683        7,166        321,378   
   

OTC-cleared

    185        181        2,368          313        315        3,036   
   

Bilateral OTC

    13,149        15,124        287,989            20,994        21,065        345,065   

Total commodities

    18,658        20,370        613,155            28,990        28,546        669,479   

Exchange-traded

    9,243        9,055        585,950          9,592        9,636        541,711   
   

Bilateral OTC

    44,976        46,124        1,071,701            49,339        49,013        983,784   

Total equities

    54,219        55,179        1,657,651            58,931        58,649        1,525,495   

Subtotal

    816,147        773,049        53,176,150            1,039,047        985,563        57,374,653   

Derivatives accounted for as hedges

             

OTC-cleared

    1,566        131        39,730          2,713        228        31,109   
   

Bilateral OTC

    9,634        11        80,626            11,559        34        95,389   

Total interest rates

    11,200        142        120,356            14,272        262        126,498   

OTC-cleared

    2        14        1,154          12        3        1,205   
   

Bilateral OTC

    101        35        8,069            113        13        8,431   

Total currencies

    103        49        9,223            125        16        9,636   

Subtotal

    11,303        191        129,579            14,397        278        136,134   

Total gross fair value/notional amount of derivatives

    $ 827,450  1      $ 773,240  1      $53,305,729            $1,053,444  1      $ 985,841  1      $57,510,787   

Amounts that have been offset in the condensed
consolidated statements of financial condition

             

Exchange-traded

    $  (12,228     $  (12,228         $    (15,039     $  (15,039  
   

OTC-cleared

    (224,199     (224,199         (335,792     (335,792  
   

Bilateral OTC

    (447,672     (447,672                 (535,839     (535,839        

Total counterparty netting

    (684,099     (684,099                 (886,670     (886,670        

OTC-cleared

    (26,955     (2,553         (24,801     (738  
   

Bilateral OTC

    (61,895     (34,862                 (78,703     (35,417        

Total cash collateral netting

    (88,850     (37,415                 (103,504     (36,155        

Total counterparty and cash collateral netting

    $(772,949     $(721,514                 $  (990,174     $(922,825        

Amounts included in financial instruments owned/
financial instruments sold, but not yet purchased

             

Exchange-traded

    $     2,680        $     2,395            $       2,533        $     2,070     
   

OTC-cleared

    268        77            158        73     
   

Bilateral OTC

    51,553        49,254                    60,579        60,873           

Total amounts included in the condensed consolidated
statements of financial condition

    $   54,501        $   51,726                    $     63,270        $   63,016           

Amounts that have not been offset in the condensed
consolidated statements of financial condition

             

Cash collateral received/posted

    $       (577     $    (1,898         $         (980     $    (2,940  
   

Securities collateral received/posted

    (13,358     (11,915                 (14,742     (18,159        

Total

    $   40,566        $   37,913                    $     47,548        $   41,917           

 

1.

Includes derivative assets and derivative liabilities of $18.98 billion and $20.53 billion, respectively, as of June 2015, and derivative assets and derivative liabilities of $25.93 billion and $26.19 billion, respectively, as of December 2014, 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.

 

    Goldman Sachs June 2015 Form 10-Q   27


Table of Contents

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Valuation Techniques for Derivatives

The firm’s level 2 and level 3 derivatives are valued using derivative pricing models (e.g., discounted cash flow models, correlation models, and models that incorporate option pricing methodologies, such as Monte Carlo simulations). Price transparency of derivatives can generally be characterized by product type.

 

 

Interest Rate. In general, the key inputs used to value interest rate derivatives are transparent, even for most long-dated contracts. Interest rate swaps and options denominated in the currencies of leading industrialized nations are characterized by high trading volumes and tight bid/offer spreads. Interest rate derivatives that reference indices, such as an inflation index, or the shape of the yield curve (e.g., 10-year swap rate vs. 2-year swap rate) are more complex, but the key inputs are generally observable.

 

 

Credit. Price transparency for credit default swaps, including both single names and baskets of credits, varies by market and underlying reference entity or obligation. Credit default swaps that reference indices, large corporates and major sovereigns generally exhibit the most price transparency. For credit default swaps with other underliers, price transparency varies based on credit rating, the cost of borrowing the underlying reference obligations, and the availability of the underlying reference obligations for delivery upon the default of the issuer. Credit default swaps that reference loans, asset-backed securities and emerging market debt instruments tend to have less price transparency than those that reference corporate bonds. In addition, more complex credit derivatives, such as those sensitive to the correlation between two or more underlying reference obligations, generally have less price transparency.

 

 

Currency. Prices for currency derivatives based on the exchange rates of leading industrialized nations, including those with longer tenors, are generally transparent. The primary difference between the price transparency of developed and emerging market currency derivatives is that emerging markets tend to be observable for contracts with shorter tenors.

 

Commodity. Commodity derivatives include transactions referenced to energy (e.g., oil and natural gas), metals (e.g., precious and base) and soft commodities (e.g., agricultural). Price transparency varies based on the underlying commodity, delivery location, tenor and product quality (e.g., diesel fuel compared to unleaded gasoline). In general, price transparency for commodity derivatives is greater for contracts with shorter tenors and contracts that are more closely aligned with major and/or benchmark commodity indices.

 

 

Equity. Price transparency for equity derivatives varies by market and underlier. Options on indices and the common stock of corporates included in major equity indices exhibit the most price transparency. Equity derivatives generally have observable market prices, except for contracts with long tenors or reference prices that differ significantly from current market prices. More complex equity derivatives, such as those sensitive to the correlation between two or more individual stocks, generally have less price transparency.

Liquidity is essential to observability of all product types. If transaction volumes decline, previously transparent prices and other inputs may become unobservable. Conversely, even highly structured products may at times have trading volumes large enough to provide observability of prices and other inputs. See Note 5 for an overview of the firm’s fair value measurement policies.

Level 1 Derivatives

Level 1 derivatives include short-term contracts for future delivery of securities when the underlying security is a level 1 instrument, and exchange-traded derivatives if they are actively traded and are valued at their quoted market price.

Level 2 Derivatives

Level 2 derivatives include OTC derivatives for which all significant valuation inputs are corroborated by market evidence and exchange-traded derivatives that are not actively traded and/or that are valued using models that calibrate to market-clearing levels of OTC derivatives. In evaluating the significance of a valuation input, the firm considers, among other factors, a portfolio’s net risk exposure to that input.

 

 

28 Goldman Sachs June 2015 Form 10-Q  


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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

The selection of a particular model to value a derivative depends on the contractual terms of and specific risks inherent in the instrument, as well as the availability of pricing information in the market. For derivatives that trade in liquid markets, model selection does not involve significant management judgment because outputs of models can be calibrated to market-clearing levels.

Valuation models require a variety of inputs, such as contractual terms, market prices, yield curves, discount rates (including those derived from interest rates on collateral received and posted as specified in credit support agreements for collateralized derivatives), credit curves, measures of volatility, prepayment rates, loss severity rates and correlations of such inputs. Significant inputs to the valuations of level 2 derivatives can be verified to market transactions, broker or dealer quotations or other alternative pricing sources with reasonable levels of price transparency. Consideration is given to the nature of the quotations (e.g., indicative or firm) and the relationship of recent market activity to the prices provided from alternative pricing sources.

Level 3 Derivatives

Level 3 derivatives are valued using models which utilize observable level 1 and/or level 2 inputs, as well as unobservable level 3 inputs.

 

 

For the majority of the firm’s interest rate and currency derivatives classified within level 3, significant unobservable inputs include correlations of certain currencies and interest rates (e.g., the correlation between Euro inflation and Euro interest rates) and specific interest rate volatilities.

 

 

For level 3 credit derivatives, significant unobservable inputs include illiquid credit spreads and upfront credit points, which are unique to specific reference obligations and reference entities, recovery rates and certain correlations required to value credit and mortgage derivatives (e.g., the likelihood of default of the underlying reference obligation relative to one another).

 

For level 3 equity derivatives, significant unobservable inputs generally include equity volatility inputs for options that are very long-dated and/or have strike prices that differ significantly from current market prices. In addition, the valuation of certain structured trades requires the use of level 3 correlation inputs, such as the correlation of the price performance of two or more individual stocks or the correlation of the price performance for a basket of stocks to another asset class such as commodities.

 

 

For level 3 commodity derivatives, significant unobservable inputs include volatilities for options with strike prices that differ significantly from current market prices and prices or spreads for certain products for which the product quality or physical location of the commodity is not aligned with benchmark indices.

Subsequent to the initial valuation of a level 3 derivative, the firm updates the level 1 and level 2 inputs to reflect observable market changes and any resulting gains and losses are recorded in level 3. Level 3 inputs are changed when corroborated by evidence such as similar market transactions, third-party pricing services and/or broker or dealer quotations or other empirical market data. In circumstances where the firm cannot verify the model value by reference to market transactions, it is possible that a different valuation model could produce a materially different estimate of fair value. See below for further information about significant unobservable inputs used in the valuation of level 3 derivatives.

Valuation Adjustments

Valuation adjustments are integral to determining the fair value of derivative portfolios and are used to adjust the mid-market valuations produced by derivative pricing models to the appropriate exit price valuation. These adjustments incorporate bid/offer spreads, the cost of liquidity, credit valuation adjustments and funding valuation adjustments, which account for the credit and funding risk inherent in the uncollateralized portion of derivative portfolios. The firm also makes funding valuation adjustments to collateralized derivatives where the terms of the agreement do not permit the firm to deliver or repledge collateral received. Market-based inputs are generally used when calibrating valuation adjustments to market-clearing levels.

In addition, for derivatives that include significant unobservable inputs, the firm makes model or exit price adjustments to account for the valuation uncertainty present in the transaction.

 

 

    Goldman Sachs June 2015 Form 10-Q   29


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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Significant Unobservable Inputs

The table below presents the ranges, averages and medians of significant unobservable inputs used to value the firm’s level 3 derivatives. In the table below:

 

 

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.

 

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 presented in the tables below 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 presented below do not represent uncertainty in, or possible ranges of, fair value measurements of the firm’s level 3 derivatives.

 

 

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.

 

 

Level 3 Derivative Product Type  

Valuation Techniques and

Significant Unobservable Inputs

  Range of Significant Unobservable Inputs (Average / Median)
    As of June 2015   As of December 2014

 

Interest rates (consists of $78 million and $40 million of net level 3 liabilities as of June 2015 and December 2014, respectively)

 

 

Option pricing models:

 

Correlation 1

 

Volatility

 

 

 

 

(25)% to 86% (53% / 55%)

 

31 basis points per annum (bpa) to

153 bpa (84 bpa / 57 bpa)

 

 

 

 

 

 

(16)% to 84% (37% / 40%)

 

36 basis points per annum (bpa) to

156 bpa (100 bpa / 115 bpa)

 

 

 

Credit (consists of $2.97 billion and $3.53 billion of net level 3 assets as of June 2015 and December 2014, respectively)

 

 

Option pricing models, correlation models and discounted cash flows models:

 

Correlation 1

 

Credit spreads

 

 

Upfront credit points

 

 

Recovery rates

 

 

 

 

 

 

5% to 97% (68% / 69%)

 

1 basis points (bps) to 803 bps (120 bps / 97 bps) 2

 

0 points to 99 points (41 points / 40 points)

 

10% to 72% (48% / 40%)

 

 

 

 

 

 

5% to 99% (71% / 72%)

 

1 basis points (bps) to 700 bps (116 bps / 79 bps) 2

 

0 points to 99 points (40 points / 30 points)

 

14% to 87% (44% / 40%)

 

 

Currencies (consists of $149 million and $267 million of net level 3 liabilities as of June 2015 and December 2014, respectively)

 

 

 

Option pricing models:

 

Correlation 1

 

 

 

 

 

55% to 80% (69% / 73%)

 

 

 

 

 

55% to 80% (69% / 73%)

 

 

Commodities (consists of $54 million and $1.14 billion of net level 3 liabilities as of June 2015 and December 2014, respectively)

 

 

Option pricing models and discounted cash flows models:

 

Volatility

 

Spread per million British Thermal units (MMBTU) of natural gas

 

Spread per Metric Tonne (MT) of coal

 

 

Spread per barrel of oil and refined products

 

 

 

 

 

 

15% to 56% (31% / 30%)

 

$(1.76) to $6.99 ($(0.08) / $(0.05))

 

 

$(9.63) to $(4.50) ($(8.07) / $(8.21))

 

$(8.14) to $56.54 ($10.31 / $1.85) 2

 

 

 

 

 

 

16% to 68% (33% / 32%)

 

$(1.66) to $4.45 ($(0.13) / $(0.03))

 

 

$(10.50) to $3.00 ($(4.04) / $(6.74))

 

$(15.35) to $80.55 ($22.32 / $13.50) 2

 

 

Equities (consists of $2.35 billion and $1.38 billion of net level 3 liabilities as of June 2015 and December 2014, respectively)

 

 

 

Option pricing models:

 

Correlation 1

 

Volatility

 

 

 

 

 

28% to 99% (63% / 61%)

 

5% to 83% (25% / 23%)

 

 

 

 

 

30% to 99% (62% / 55%)

 

5% to 90% (23% / 21%)

 

 

1.

The range of unobservable inputs for correlation across derivative product types (i.e., cross-asset correlation) was (45)% to 80% (Average: 32% / Median: 40%) as of June 2015, and (34)% to 80% (Average: 33% / Median: 35%) as of December 2014.

 

2.

The difference between the average and the median for these spread inputs indicates that the majority of the inputs fall in the lower end of the range.

 

30   Goldman Sachs June 2015 Form 10-Q    


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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Range of Significant Unobservable Inputs

The following provides further 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 market (e.g., equity index and equity single stock names) and across markets (e.g., correlation of an interest rate and a foreign exchange rate), as well as across regions. Generally, cross-asset 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 locations.

Sensitivity of Fair Value Measurement to Changes in Significant Unobservable Inputs

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

 

 

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.

 

 

    Goldman Sachs June 2015 Form 10-Q   31


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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Fair Value of Derivatives by Level

The tables below present the fair value of derivatives on a gross basis by level and major product type as well as the impact of netting. In the tables below:

 

 

The 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 and cash collateral netting.” Where the counterparty netting is across levels, the netting is reflected in “Cross-Level Netting.”

 

 

    Derivative Assets at Fair Value as of June 2015  
$ in millions     Level 1        Level 2        Level 3       
 
Cross-Level
Netting
  
  
   
 
Cash Collateral
Netting
  
  
    Total   

Interest rates

    $    9        $   616,049        $    391        $       —        $            —        $  616,449   
   

Credit

           35,656        7,026                      42,682   
   

Currencies

           95,283        159                      95,442   
   

Commodities

           17,969        689                      18,658   
   

Equities

    10        53,731        478                      54,219   

Gross fair value of derivative assets

    19        818,688        8,743                      827,450   
   

Counterparty and cash collateral netting

           (679,871     (2,568     (1,660     (88,850     (772,949

Fair value included in financial instruments owned

    $  19        $   138,817        $ 6,175        $(1,660     $  (88,850     $    54,501   
    Derivative Liabilities at Fair Value as of June 2015  
$ in millions     Level 1        Level 2        Level 3       
 
Cross-Level
Netting
  
  
   
 
Cash Collateral
Netting
  
  
    Total   

Interest rates

    $    9        $   558,345        $    469        $       —        $            —        $  558,823   
   

Credit

           34,912        4,058                      38,970   
   

Currencies

           99,590        308                      99,898   
   

Commodities

           19,627        743                      20,370   
   

Equities

    6        52,346        2,827                      55,179   

Gross fair value of derivative liabilities

    15        764,820        8,405                      773,240   
   

Counterparty and cash collateral netting

           (679,871     (2,568     (1,660     (37,415     (721,514

Fair value included in financial instruments
sold, but not yet purchased

    $  15        $     84,949        $ 5,837        $(1,660     $  (37,415     $    51,726   
    Derivative Assets at Fair Value as of December 2014  
$ in millions     Level 1        Level 2        Level 3       
 
Cross-Level
Netting
  
  
   
 
Cash Collateral
Netting
  
  
    Total   

Interest rates

    $123        $   800,028        $    483        $       —        $            —        $  800,634   
   

Credit

           47,190        7,658                      54,848   
   

Currencies

           109,891        150                      110,041   
   

Commodities

           28,124        866                      28,990   
   

Equities

    175        58,122        634                      58,931   

Gross fair value of derivative assets

    298        1,043,355        9,791                      1,053,444   
   

Counterparty and cash collateral netting

           (882,841     (2,717     (1,112     (103,504     (990,174

Fair value included in financial instruments
owned

    $298        $   160,514        $ 7,074        $(1,112     $(103,504     $    63,270   
    Derivative Liabilities at Fair Value as of December 2014  
$ in millions     Level 1        Level 2        Level 3       
 
Cross-Level
Netting
  
  
   
 
Cash Collateral
Netting
  
  
    Total   

Interest rates

    $  14        $   739,332        $    523        $       —        $            —        $  739,869   
   

Credit

           46,026        4,128                      50,154   
   

Currencies

           108,206        417                      108,623   
   

Commodities

           26,538        2,008                      28,546   
   

Equities

    94        56,546        2,009                      58,649   

Gross fair value of derivative liabilities

    108        976,648        9,085                      985,841   
   

Counterparty and cash collateral netting

           (882,841     (2,717     (1,112     (36,155     (922,825

Fair value included in financial instruments
sold, but not yet purchased

    $108        $     93,807        $ 6,368        $(1,112     $   (36,155     $    63,016   

 

32   Goldman Sachs June 2015 Form 10-Q    


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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Level 3 Rollforward

The tables below present changes in fair value for all derivatives categorized as level 3 as of the end of the period. In the tables below:

 

 

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

 

 

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 as level 3.

 

 

Gains or losses that have been reported 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 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.

 

 

    Level 3 Derivative Assets and Liabilities at Fair Value for the Three Months Ended June 2015  
$ in millions    
 
 
 
 
Asset/
(liability)
balance,
beginning
of period
  
  
  
  
  
    
 
 
 
Net
realized
gains/
(losses)
  
  
  
  
    
 
 
 
 
 
Net unrealized
gains/(losses)
relating to
instruments
still held at
period-end
  
  
  
  
  
  
    Purchases         Sales         Settlements        
 
 
Transfers
into
level 3
  
  
  
    
 
 
Transfers
out of
level 3
  
  
  
    

 
 
 
 

Asset/

(liability)
balance,
end of
period

  

  
  
  
  

Interest rates — net

    $     (36      $(10      $   17        $    4         $       (4      $  (14      $  (45      $     10         $     (78
   

Credit — net

    3,589         16         (332     39         (75      (205      (49      (15      2,968   
   

Currencies — net

    (182      (12      10        14         (12      32         13         (12      (149
   

Commodities — net

    (1,386      21         136        4         (36      18         (97      1,286         (54
   

Equities — net

    (774      20         (28     44         (1,507      184         (4      (284      (2,349

Total derivatives — net

    $ 1,211         $ 35  1       $(197 ) 1      $105         $(1,634      $   15         $(182      $   985         $    338   

 

1.

The aggregate amounts include gains/(losses) of approximately $(168) million and $6 million reported in “Market making” and “Other principal transactions,” respectively.

 

The net unrealized loss on level 3 derivatives of $197 million for the three months ended June 2015 was primarily attributable to losses on certain credit derivatives, principally reflecting the impact of an increase in interest rates and changes in foreign exchange rates, partially offset by gains on certain commodity derivatives, primarily reflecting the impact of an increase in commodity prices.

Transfers into level 3 derivatives during the three months ended June 2015 reflected transfers of certain commodity derivative liabilities into level 3, principally due to unobservable volatility inputs becoming significant to the valuation of these derivatives.

Transfers out of level 3 derivatives during the three months ended June 2015 primarily reflected transfers of certain commodity derivative liabilities to level 2, principally due to increased transparency of oil and refined products spread inputs used to value these derivatives and transfers of certain equity derivative assets to level 2, principally due to unobservable inputs no longer being significant to the valuation of these derivatives.

 

 

    Goldman Sachs June 2015 Form 10-Q   33


Table of Contents

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

    Level 3 Derivative Assets and Liabilities at Fair Value for the Six Months Ended June 2015  
$ in millions    
 
 
 
 
Asset/
(liability)
balance,
beginning
of period
  
  
  
  
  
    
 
 
 
Net
realized
gains/
(losses)
  
  
  
  
    
 
 
 
 
 
Net unrealized
gains/(losses)
relating to
instruments
still held at
period-end
  
  
  
  
  
  
    Purchases         Sales         Settlements        
 
 
Transfers
into
level 3
  
  
  
    
 
 
Transfers
out of
level 3
  
  
  
    

 
 
 
 

Asset/

(liability)
balance,
end of
period

  

  
  
  
  

Interest rates — net

    $     (40      $  17         $      (4     $    4         $     (33      $     9         $  15         $    (46      $    (78
   

Credit — net

    3,530         134         3        97         (205      (737      261         (115      2,968   
   

Currencies — net

    (267      (51      50        24         (17      90         16         6         (149
   

Commodities — net

    (1,142      29         55        27         (13      (87      (40      1,117         (54
   

Equities — net

    (1,375      49         (200     80         (1,825      872         (18      68         (2,349

Total derivatives — net

    $    706         $178  1       $    (96 ) 1      $232         $(2,093      $ 147         $234         $1,030         $    338   

 

1.

The aggregate amounts include gains/(losses) of approximately $108 million and $(26) million reported in “Market making” and “Other principal transactions,” respectively.

 

The net unrealized loss on level 3 derivatives of $96 million for the six months ended June 2015 reflected losses on certain equity derivatives, primarily due to an increase in equity prices.

Transfers into level 3 derivatives during the six months ended June 2015 reflected transfers of certain credit derivative assets from level 2, principally due to unobservable credit spread inputs becoming significant to the valuation of certain credit derivatives and to the net risk of certain portfolios.

Transfers out of level 3 derivatives during the six months ended June 2015 reflected transfers of certain commodity derivative liabilities to level 2, principally due to increased transparency of oil and refined products spread inputs used to value these derivatives.

 

 

    Level 3 Derivative Assets and Liabilities at Fair Value for the Three Months Ended June 2014  
$ in millions    
 
 
 
 
Asset/
(liability)
balance,
beginning
of period
  
  
  
  
  
    
 
 
 
Net
realized
gains/
(losses)
  
  
  
  
   
 
 
 
 

 

Net unrealized
gains/(losses)
relating to
instruments
still held at

period-end

  
  
  
  
  

  

     Purchases         Sales         Settlements        
 
 
Transfers
into
level 3
  
  
  
    
 

 

Transfers
out of

level 3

  
  

  

    
 

 

 
 

Asset/
(liability)

balance,

end of
period

  
  

  

  
  

Interest rates — net

    $     (31      $  (10     $    (51      $    2         $      (6      $     4         $  (5      $   (32      $   (129
   

Credit — net

    3,958         26        233         122         (110      (429      195         (95      3,900   
   

Currencies — net

    (143      (17     (36      2                 120                 (7      (81
   

Commodities — net

    43         5        (42              (9      (22      (3      21         (7
   

Equities — net

    (1,883      (25     1,004         144         (1,110      2         (23      392         (1,499

Total derivatives — net

    $ 1,944         $  (21 ) 1      $1,108  1       $270         $(1,235      $(325      $164         $   279         $ 2,184   

 

1.

The aggregate amounts include gains/(losses) of approximately $1.11 billion and $(26) million reported in “Market making” and “Other principal transactions,” respectively.

 

The net unrealized gain on level 3 derivatives of $1.11 billion for the three months ended June 2014 principally resulted from changes in observable inputs and was primarily attributable to the impact of an increase in equity prices on certain equity derivatives.

Transfers into level 3 derivatives during the three months ended June 2014 reflected transfers of certain credit derivative assets from level 2, principally due to unobservable credit spread inputs becoming significant to the valuation of these derivatives and reduced transparency of upfront credit point inputs used to value certain other credit derivatives.

Transfers out of level 3 derivatives during the three months ended June 2014 primarily reflected transfers of certain equity derivative liabilities to level 2, principally due to unobservable inputs no longer being significant to the valuation of these derivatives and transfers of certain credit derivatives to level 2, principally due to unobservable inputs no longer being significant to the net risk of certain portfolios.

 

 

34   Goldman Sachs June 2015 Form 10-Q    


Table of Contents

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

    Level 3 Derivative Assets and Liabilities at Fair Value for the Six Months Ended June 2014  
$ in millions    
 
 
 
 
Asset/
(liability)
balance,
beginning
of period
  
  
  
  
  
    
 
 
 
Net
realized
gains/
(losses)
  
  
  
  
   
 
 
 

 
 

Net unrealized
gains/(losses)
relating to
instruments

still held at
period-end

  
  
  
  

  
  

     Purchases         Sales        Settlements       
 
 
Transfers
into
level 3
  
  
  
    
 
 
Transfers
out of
level 3
  
  
  
    
 

 

 
 

Asset/
(liability)

balance,

end of
period

  
  

  

  
  

Interest rates — net

    $    (86      $(34     $    (83      $    4         $        (7     $   81        $ 13         $  (17      $   (129
   

Credit — net

    4,176         69        564         90         (122     (891     117         (103      3,900   
   

Currencies — net

    (200      (43     (3      6         (15     177        (2      (1      (81
   

Commodities — net

    60         64        (91      10         (38     39        (12      (39      (7
   

Equities — net

    (959      (33     1,393         155         (2,210     217        (45      (17      (1,499

Total derivatives — net

    $2,991         $ 23  1      $1,780  1       $265         $(2,392     $(377     $ 71         $(177      $ 2,184   

 

1.

The aggregate amounts include gains/(losses) of approximately $1.85 billion and $(49) million reported in “Market making” and “Other principal transactions,” respectively.

 

The net unrealized gain on level 3 derivatives of $1.78 billion for the six months ended June 2014 principally resulted from changes in observable inputs and was primarily attributable to the impact of an increase in equity prices on certain equity derivatives.

Transfers into level 3 derivatives during the six months ended June 2014 primarily reflected transfers from level 2 of certain credit derivative assets, principally due to reduced transparency of upfront credit point inputs used to value these derivatives.

Transfers out of level 3 derivatives during the six months ended June 2014 primarily reflected transfers of certain credit derivatives to level 2, principally due to unobservable inputs no longer being significant to the net risk of certain portfolios.

Impact of Credit Spreads on Derivatives

On an ongoing basis, the firm realizes gains or losses relating to changes in credit risk through the unwind of derivative contracts and changes in credit mitigants.

The net gain/(loss), including hedges, attributable to the impact of changes in credit exposure and credit spreads (counterparty and the firm’s) on derivatives was $78 million and $56 million for the three months ended June 2015 and June 2014, respectively, and $(21) million and $149 million for the six months ended June 2015 and June 2014, respectively.

Bifurcated Embedded Derivatives

The table below presents the fair value and the notional amount of derivatives that have been bifurcated from their related borrowings. These derivatives, which are recorded at fair value, primarily consist of interest rate, equity and commodity products and are included in “Unsecured short-term borrowings” and “Unsecured long-term borrowings” with the related borrowings. See Note 8 for further information.

 

    As of  
$ in millions    
 
June
2015
  
  
    
 
December
2014
  
  

Fair value of assets

    $   394         $   390   
   

Fair value of liabilities

    850         690   

Net liability

    $   456         $   300   

Notional amount

    $7,224         $7,735   
 

 

    Goldman Sachs June 2015 Form 10-Q   35


Table of Contents

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

OTC Derivatives

The tables below present the fair values of OTC derivative assets and liabilities by tenor and major product type. In the tables below:

 

 

Tenor is based on expected duration for mortgage-related credit derivatives and generally on remaining contractual maturity for other derivatives.

 

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 and cash collateral netting.” Where the counterparty netting is across tenor categories, the netting is reflected in “Cross-Tenor Netting.”

 

 

    OTC Derivative Assets as of June 2015  
$ in millions    
 
Less than
1 Year
  
  
    
 
1 - 5
Years
  
  
    
 
Greater than
5 Years
  
  
   
 
Cross-Tenor
Netting
  
  
   
 
Cash Collateral
Netting
  
  
     Total   

Interest rates

    $  5,356         $24,710         $  82,916        $          —        $           —         $ 112,982   
   

Credit

    1,264         5,051         5,139                       11,454   
   

Currencies

    13,188         8,910         6,321                       28,419   
   

Commodities

    4,871         3,188         170                       8,229   
   

Equities

    5,566         7,338         3,642                       16,546   
   

Counterparty and cash collateral netting

    (3,557      (6,755      (4,961     (21,686     (88,850      (125,809

Total

    $26,688         $42,442         $  93,227        $(21,686     $  (88,850      $   51,821   
    OTC Derivative Liabilities as of June 2015  
$ in millions    
 
Less than
1 Year
  
  
    
 
1 - 5
Years
  
  
    
 
Greater than
5 Years
  
  
   
 
Cross-Tenor
Netting
  
  
   
 
Cash Collateral
Netting
  
  
     Total   

Interest rates

    $  6,170         $15,847         $  33,346        $           —        $           —         $   55,363   
   

Credit

    1,655         4,605         1,481                       7,741   
   

Currencies

    14,128         9,369         9,211                       32,708   
   

Commodities

    4,784         2,227         3,188                       10,199   
   

Equities

    8,780         5,497         3,417                       17,694   
   

Counterparty and cash collateral netting

    (3,557      (6,755      (4,961     (21,686     (37,415      (74,374

Total

    $31,960         $30,790         $  45,682        $(