10-Q 1 d22013d10q.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 September 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 October 16, 2015, there were 426,536,163 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 SEPTEMBER 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 nine months ended September 30,  2015 and September 30, 2014

   2
 
 

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

   3
 
 

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

   4
 
 

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

   5
 
 

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30,  2015 and September 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

   24
 
 

Note 8.        Fair Value Option

   38
 
 

Note 9.        Loans Receivable

   45
 
 

Note 10.      Collateralized Agreements and Financings

   47
 
 

Note 11.      Securitization Activities

   52
 
 

Note 12.      Variable Interest Entities

   55
 
 

Note 13.      Other Assets

   58
 
 

Note 14.      Deposits

   61
 
 

Note 15.      Short-Term Borrowings

   61
 
 

Note 16.      Long-Term Borrowings

   62
 
 

Note 17.      Other Liabilities and Accrued Expenses

   64
 
 

Note 18.      Commitments, Contingencies and Guarantees

   65
 
 

Note 19.      Shareholders’ Equity

   71
 
 

Note 20.      Regulation and Capital Adequacy

   73
 
 

Note 21.      Earnings Per Common Share

   82
 
 

Note 22.      Transactions with Affiliated Funds

   82
 
 

Note 23.      Interest Income and Interest Expense

   83
 
 

Note 24.      Income Taxes

   83
 
 

Note 25.      Business Segments

   85
 
 

Note 26.      Credit Concentrations

   87
 
 

Note 27.      Legal Proceedings

   88
 
 

Report of Independent Registered Public Accounting Firm

   96
 
 

Statistical Disclosures

   97
 

Item 2

 

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

   99
 

Item 3

 

Quantitative and Qualitative Disclosures About Market Risk

   167
 

Item 4

 

Controls and Procedures

   167
 

PART II

 

OTHER INFORMATION

   167
 

Item 1

 

Legal Proceedings

   167
 

Item 2

 

Unregistered Sales of Equity Securities and Use of Proceeds

   167
 

Item 6

 

Exhibits

   168
 

SIGNATURES

   169

 

    Goldman Sachs September 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 September
        Nine Months
Ended September
 
in millions, except per share amounts     2015         2014            2015         2014   

Revenues

           

Investment banking

    $1,556         $1,464          $  5,480         $  5,024   
   

Investment management

    1,331         1,386          4,400         4,262   
   

Commissions and fees

    859         783          2,517         2,441   
   

Market making

    1,730         2,087          7,964         6,911   
   

Other principal transactions

    543         1,618            3,822         5,116   

Total non-interest revenues

    6,019         7,338          24,183         23,754   
   

 

Interest income

    2,119         2,297          6,304         7,470   
   

Interest expense

    1,277         1,248            3,940         4,384   

Net interest income

    842         1,049            2,364         3,086   

Net revenues, including net interest income

    6,861         8,387            26,547         26,840   

 

Operating expenses

           

Compensation and benefits

    2,351         2,801          10,619         10,736   
   

 

Brokerage, clearing, exchange and distribution fees

    665         624          1,950         1,832   
   

Market development

    123         129          409         408   
   

Communications and technology

    200         190          601         576   
   

Depreciation and amortization

    222         301          706         985   
   

Occupancy

    182         212          572         627   
   

Professional fees

    253         220          714         656   
   

Other expenses

    819         605            3,270         1,873   

Total non-compensation expenses

    2,464         2,281            8,222         6,957   

Total operating expenses

    4,815         5,082            18,841         17,693   

 

Pre-tax earnings

    2,046         3,305          7,706         9,147   
   

Provision for taxes

    620         1,064            2,388         2,836   

Net earnings

    1,426         2,241          5,318         6,311   
   

Preferred stock dividends

    96         98            324         266   

Net earnings applicable to common shareholders

    $1,330         $2,143            $  4,994         $  6,045   

 

Earnings per common share

           

Basic

    $  2.95         $  4.69          $  11.03         $  13.05   
   

Diluted

    2.90         4.57          10.84         12.69   
   

 

Dividends declared per common share

    $  0.65         $  0.55          $    1.90         $    1.65   
   

 

Average common shares outstanding

           

Basic

    449.0         455.5          451.2         461.8   
   

Diluted

    458.6         469.2            460.9         476.5   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

2   Goldman Sachs September 2015 Form 10-Q    


Table of Contents

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income

(Unaudited)

 

   

Three Months

Ended September

       

Nine Months

Ended September

 
$ in millions     2015         2014            2015         2014   

Net earnings

    $1,426         $2,241          $5,318         $6,311   
   

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

           

Currency translation

    (39      (44       (94      (103
   

Pension and postretirement liabilities

    36         (7       (74      (21
   

Cash flow hedges

            3                    5   

Other comprehensive loss

    (3      (48         (168      (119

Comprehensive income

    $1,423         $2,193            $5,150         $6,192   

 

 

 

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

 

    Goldman Sachs September 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    
 
September
2015
  
  
    
 
December
2014
  
  

Assets

    

Cash and cash equivalents

    $  65,575         $  57,600   
   

Cash and securities segregated for regulatory and other purposes (includes $38,044 and $34,291 at fair value as of September 2015 and December 2014, respectively)

    58,168         51,716   
   

Collateralized agreements:

    

Securities purchased under agreements to resell and federal funds sold (includes $125,265 and $126,036 at fair value as of September 2015 and December 2014, respectively)

    126,903         127,938   
   

Securities borrowed (includes $68,481 and $66,769 at fair value as of September 2015 and December 2014, respectively)

    173,315         160,722   
   

Receivables:

    

Brokers, dealers and clearing organizations

    46,986         30,671   
   

Customers and counterparties (includes $6,346 and $6,944 at fair value as of September 2015 and December 2014, respectively)

    52,016         63,808   
   

Loans receivable

    42,189         28,938   
   

Financial instruments owned, at fair value (includes $52,029 and $64,473 pledged as collateral as of September 2015 and December 2014, respectively)

    290,487         312,248   
   

Other assets

    24,920         22,201   

Total assets

    $880,559         $855,842   

 

Liabilities and shareholders’ equity

    

Deposits (includes $14,802 and $13,523 at fair value as of September 2015 and December 2014, respectively)

    $  91,458         $  82,880   
   

Collateralized financings:

    

Securities sold under agreements to repurchase, at fair value

    89,481         88,215   
   

Securities loaned (includes $1,081 and $765 at fair value as of September 2015 and December 2014, respectively)

    3,519         5,570   
   

Other secured financings (includes $23,787 and $21,450 at fair value as of September 2015 and December 2014, respectively)

    25,222         22,809   
   

Payables:

    

Brokers, dealers and clearing organizations

    6,956         6,636   
   

Customers and counterparties

    215,822         206,936   
   

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

    125,428         132,083   
   

Unsecured short-term borrowings, including the current portion of unsecured long-term borrowings (includes $16,390 and $18,826 at fair value as of September 2015 and December 2014, respectively)

    41,331         44,539   
   

Unsecured long-term borrowings (includes $20,820 and $16,005 at fair value as of September 2015 and December 2014, respectively)

    175,817         167,302   
   

Other liabilities and accrued expenses (includes $1,446 and $831 at fair value as of September 2015 and December 2014, respectively)

    17,822         16,075   

Total liabilities

    792,856         773,045   
   

 

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 September 2015 and December 2014, respectively

    11,200         9,200   
   

Common stock, par value $0.01 per share; 4,000,000,000 shares authorized, 863,546,793 and 852,784,764 shares issued as of September 2015 and December 2014, respectively, and 427,904,332 and 430,259,102 shares outstanding as of September 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

    51,281         50,049   
   

Retained earnings

    83,105         78,984   
   

Accumulated other comprehensive loss

    (911      (743
   

Stock held in treasury, at cost, par value $0.01 per share; 435,642,463 and 422,525,664 shares as of September 2015 and December 2014, respectively

    (60,992      (58,468

Total shareholders’ equity

    87,703         82,797   

Total liabilities and shareholders’ equity

    $880,559         $855,842   

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

 

4   Goldman Sachs September 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    
 
Nine Months Ended
September 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

    2,147         2,079   
   

Delivery of common stock underlying share-based awards

    (1,738      (1,725
   

Forfeiture of share-based awards

    (70      (92
   

Exercise of share-based awards

    (94      (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

    2,037         2,206   
   

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

    (1,185      (1,922
   

Preferred stock issuance costs

    (7      (20
   

Excess net tax benefit related to share-based awards

    388         788   
   

Cash settlement of share-based awards

    (1      (1

Balance, end of period

    51,281         50,049   
   

Retained earnings

    

Balance, beginning of year

    78,984         71,961   
   

Net earnings

    5,318         8,477   
   

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

    (873      (1,054
   

Dividends declared on preferred stock

    (324      (400

Balance, end of period

    83,105         78,984   
   

Accumulated other comprehensive loss

    

Balance, beginning of year

    (743      (524
   

Other comprehensive loss

    (168      (219

Balance, end of period

    (911      (743
   

Stock held in treasury, at cost

    

Balance, beginning of year

    (58,468      (53,015
   

Repurchased

    (2,545      (5,469
   

Reissued

    29         49   
   

Other

    (8      (33

Balance, end of period

    (60,992      (58,468

Total shareholders’ equity

    $ 87,703         $ 82,797   

 

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

 

    Goldman Sachs September 2015 Form 10-Q   5


Table of Contents

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

   

Nine Months

Ended September

 
$ in millions     2015           2014   

Cash flows from operating activities

      

Net earnings

    $   5,318           $   6,311   
   

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

      

Depreciation and amortization

    706           985   
   

Share-based compensation

    2,107           1,931   
   

Gain related to extinguishment of junior subordinated debt

    (34        (270
   

Changes in operating assets and liabilities

      

Cash and securities segregated for regulatory and other purposes

    (6,452        5,480   
   

Receivables and payables (excluding loans receivable), net

    4,524           12,952   
   

Collateralized transactions (excluding other secured financings), net

    (12,902        (52,273
   

Financial instruments owned, at fair value

    18,366           13,228   
   

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

    (6,753        4,580   
   

Other, net

    (4,714        (5,515

Net cash provided by/(used for) operating activities

    166           (12,591
   

Cash flows from investing activities

      

Purchase of property, leasehold improvements and equipment

    (1,205        (508
   

Proceeds from sales of property, leasehold improvements and equipment

    120           17   
   

Business acquisitions, net of cash acquired

    (1,684        (626
   

Proceeds from sales of investments

    714           1,127   
   

Loans receivable, net

    (12,692        (10,601

Net cash used for investing activities

    (14,747        (10,591
   

Cash flows from financing activities

      

Unsecured short-term borrowings, net

    (1,228        1,417   
   

Other secured financings (short-term), net

    (492        417   
   

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

    10,772           5,700   
   

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

    (7,360        (5,562
   

Proceeds from issuance of unsecured long-term borrowings

    36,031           30,402   
   

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

    (22,513        (19,940
   

Purchase of trust preferred securities

    (1        (1,429
   

Derivative contracts with a financing element, net

    (89        550   
   

Deposits, net

    8,578           7,144   
   

Common stock repurchased

    (2,545        (4,219
   

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

    (1,197        (1,045
   

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

    220           79   
   

Excess tax benefit related to share-based awards

    388           706   
   

Cash settlement of share-based awards

    (1        (1

Net cash provided by financing activities

    22,556           16,199   

Net increase/(decrease) in cash and cash equivalents

    7,975           (6,983
   

Cash and cash equivalents, beginning of year

    57,600           61,133   

Cash and cash equivalents, end of period

    $ 65,575           $ 54,150   

SUPPLEMENTAL DISCLOSURES:

Cash payments for interest, net of capitalized interest, were $4.09 billion and $5.45 billion during the nine months ended September 2015 and September 2014, respectively.

Cash payments for income taxes, net of refunds, were $2.20 billion and $2.51 billion during the nine months ended September 2015 and September 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 nine months ended September 2015. Following the exchange, this junior subordinated debt was extinguished.

The firm exchanged $1.59 billion of Trust Preferred Securities, common beneficial interests and senior guaranteed trust securities held by the firm for $1.86 billion of the firm’s junior subordinated debt held by the issuing trusts during the nine months ended September 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 September 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 September 2015, June 2015 and September 2014 refer to the firm’s periods ended, or the dates, as the context requires, September 30, 2015, June 30, 2015 and September 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 September 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 September 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 September 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 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 September 2015 and December 2014, “Cash and cash equivalents” included $6.85 billion and $5.79 billion, respectively, of cash and due from banks, and $58.73 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 September 2015 and December 2014, the firm’s receivables from customers and counterparties included $1.63 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 September 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 September 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 September 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 September 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 September 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 September 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 August 2015, the FASB issued ASU No. 2015-14, which deferred the effective date of ASU No. 2014-09 by one year, to annual reporting periods beginning after December 15, 2017. Early adoption is 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 ASU No. 2014-11 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 September 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 the fourth quarter of 2015. Adoption of ASU No. 2015-02 will not 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. ASU No. 2015-03 is required to be applied retrospectively to all periods presented beginning in the year of adoption. Early adoption is permitted. The firm early adopted ASU No. 2015-03 in September 2015. In accordance with ASU No. 2015-03, previously reported amounts have been conformed to the current presentation, as reflected in Notes 13 through 16. The impact of adoption as of September 2015 and December 2014 was a reduction to both total assets and total liabilities of $444 million and $398 million, respectively.

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. Early adoption is permitted. 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.

Simplifying the Accounting for Measurement-Period Adjustments (ASC 805). In September 2015, the FASB issued ASU No. 2015-16, “Business Combinations (Topic 805) — Simplifying the Accounting for Measurement-Period Adjustments.” ASU No. 2015-16 eliminates the requirement for an acquirer in a business combination to account for measurement-period adjustments retrospectively. ASU No. 2015-16 is effective for annual reporting periods beginning after December 15, 2015, including interim periods within that reporting period. Adoption of ASU No. 2015-16 will not materially affect the firm’s financial condition, results of operations, or cash flows.

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 September 2015 Form 10-Q   13


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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 September 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

    $    4,636         $          —   
   

U.S. government and federal agency obligations

    51,357         11,163   
   

Non-U.S. government and agency obligations

    31,666         18,483   
   

Loans and securities backed by commercial real estate

    5,904  1         
   

Loans and securities backed by residential real estate

    13,212  2         
   

Bank loans and bridge loans

    11,844         434   
   

Corporate debt securities

    17,492         5,726   
   

State and municipal obligations

    1,570           
   

Other debt obligations

    1,862  3       1   
   

Equities and convertible debentures

    81,091         38,124   
   

Commodities

    3,466         435   
   

Investments in funds measured at NAV

    7,896           

Subtotal

    231,996         74,366   
   

Derivatives

    58,491         51,062   

Total

    $290,487         $125,428   
    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   
   

Loans and securities backed by commercial real estate

    7,140  1       1   
   

Loans and securities backed by residential real estate

    11,717  2         
   

Bank loans and bridge loans

    14,171         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 $3.74 billion and $4.97 billion of loans backed by commercial real estate as of September 2015 and December 2014, respectively.

 

2.

Includes $9.79 billion and $6.43 billion of loans backed by residential real estate as of September 2015 and December 2014, respectively.

 

3.

Includes $410 million and $618 million of loans backed by consumer loans and other assets as of September 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  

Three Months

Ended September

       

Nine Months

Ended September

 
Product Type     2015         2014            2015         2014   

Interest rates

    $  (132      $(2,811       $      146         $ (3,267
   

Credit

    298         497          1,218         2,699   
   

Currencies

    (656      3,689          1,135         4,545   
   

Equities

    1,968         498          4,671         1,725   
   

Commodities

    252         214            794         1,209   

Market making

    1,730         2,087            7,964         6,911   

Other principal transactions 1

    543         1,618            3,822         5,116   

Total

    $2,273         $ 3,705            $11,786         $12,027   

 

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 September 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    
 
September
2015
  
  
   

 

June

2015

  

  

   
 
December
2014
  
  

Total level 1 financial assets

    $124,475        $143,808        $139,484   
   

Total level 2 financial assets

    464,679        423,629        466,030   
   

Total level 3 financial assets

    27,213        32,412        35,780   
   

Investments in funds measured
at NAV

    7,896        8,956        9,610   
   

Counterparty and cash collateral netting

    (95,640     (90,510     (104,616

Total financial assets at fair value

    $528,623        $518,295        $546,288   

Total assets 1

    $880,559        $859,454        $855,842   
   

Total level 3 financial assets as a percentage of total assets

    3.1%        3.8%        4.2%   
   

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

    5.1%        6.3%        6.5%   

Total level 1 financial liabilities

    $  65,269        $  63,772        $  59,697   
   

Total level 2 financial liabilities

    256,247        247,883        253,364   
   

Total level 3 financial liabilities

    16,949        18,353        15,904   
   

Counterparty and cash collateral netting

    (45,230     (39,075     (37,267

Total financial liabilities at fair value

    $293,235        $290,933        $291,698   
   

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

    5.8%        6.3%        5.5%   

 

1.

Includes $856 billion as of September 2015, and $834 billion as of both June 2015 and December 2014, 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    
 
September
2015
  
  
    

 

June

2015

  

  

    
 
December
2014
  
  

Cash instruments

    $  20,305         $  26,195         $  28,650   
   

Derivatives

    6,866         6,175         7,074   
   

Other financial assets

    42         42         56   

Total

    $  27,213         $  32,412         $  35,780   
 

 

    Goldman Sachs September 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 September 2015 decreased compared with June 2015 and 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 September 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, related costs and subsequent recoveries

    

 

   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 and LCDX

    

 

   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 September 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 September 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

 

($2.11 billion and $3.28 billion of level 3 assets as of September 2015 and December 2014, respectively)

 

 

 

Discounted cash flows:

     
 

 

  Yield

 

 

3.1% to 20.0% (11.1%)

 

 

3.2% to 20.0% (10.5%)

 

 

  Recovery rate

 

 

31.6% to 96.4% (57.6%)

 

 

24.9% to 100.0% (68.3%)

 

 

  Duration (years)

 

 

0.2 to 5.5 (2.2)

 

 

0.3 to 4.7 (2.0)

 

 

  Basis

 

 

 

 

 

(9) points to 4 points ((2) 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

 

($1.64 billion and $2.55 billion of level 3 assets as of September 2015 and December 2014, respectively)

 

 

 

 

Discounted cash flows:

     
 

 

  Yield

 

 

2.9% to 12.0% (7.4%)

 

 

1.9% to 17.5% (7.6%)

 

 

  Cumulative loss rate

 

 

6.0% to 41.6% (27.0%)

 

 

0.0% to 95.1% (24.4%)

 

 

  Duration (years)

 

 

 

 

1.5 to 13.1 (7.0)

 

 

0.5 to 13.0 (4.3)

 

Bank loans and bridge loans

 

($3.76 billion and $6.97 billion of level 3 assets as of September 2015 and December 2014, respectively)

 

 

Discounted cash flows:

     
 

 

  Yield

 

 

1.4% to 27.8% (9.8%)

 

 

1.4% to 29.5% (8.7%)

 

 

  Recovery rate

 

 

16.9% to 85.1% (52.6%)

 

 

26.6% to 92.5% (60.6%)

 

 

  Duration (years)

 

 

 

0.4 to 6.2 (2.4)

 

 

0.3 to 7.8 (2.5)

 

Non-U.S. government and agency obligations

 

Corporate debt securities

 

State and municipal obligations

 

Other debt obligations

 

($2.96 billion and $4.75 billion of level 3 assets as of September 2015 and December 2014, respectively)

 

 

 

Discounted cash flows:

     
 

 

  Yield

 

 

1.0% to 19.3% (10.1%)

 

 

0.9% to 24.4% (9.2%)

 

 

  Recovery rate

 

 

0.0% to 71.7% (62.1%)

 

 

0.0% to 71.9% (59.2%)

 

 

  Duration (years)

 

 

 

 

 

 

 

 

1.3 to 12.8 (4.9)

 

 

0.5 to 19.6 (3.7)

 

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

 

($9.84 billion and $11.11 billion of level 3 assets as of September 2015 and December 2014, respectively)

 

 

Market comparables and discounted cash flows:

     
 

 

  Multiples

 

 

0.8x to 21.0x (4.8x)

 

 

0.8x to 16.6x (6.5x)

 

 

  Discount rate/yield

 

 

6.0% to 20.0% (14.4%)

 

 

3.7% to 30.0% (14.4%)

 

 

  Long-term growth rate/

    compound annual growth rate

 

 

3.0% to 9.9% (5.2%)

 

 

1.0% to 10.0% (6.0%)

 

 

  Capitalization rate

 

 

 

 

5.3% to 12.5% (7.5%)

 

 

 

3.8% to 13.0% (7.6%)

 

 

18   Goldman Sachs September 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 September 2015         As of December 2014  
$ in millions     Level 1         Level 2         Level 3        Total            Level 1         Level 2         Level 3        Total   

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

    $       961         $  3,675         $        —        $    4,636          $          —         $  3,654         $        —        $    3,654   
   

U.S. government and federal agency obligations

    23,201         28,156                51,357          18,540         29,462                48,002   
   

Non-U.S. government and agency obligations

    26,873         4,780         13        31,666          30,255         6,668         136        37,059   
   

Loans and securities backed by commercial real estate

            3,799         2,105        5,904                  3,865         3,275        7,140   
   

Loans and securities backed by residential real estate

            11,572         1,640        13,212                  9,172         2,545        11,717   
   

Bank loans and bridge loans

            8,083         3,761        11,844                  7,198         6,973        14,171   
   

Corporate debt securities

    264         14,910         2,318        17,492          249         17,537         3,633        21,419   
   

State and municipal obligations

            1,481         89        1,570                  1,093         110        1,203   
   

Other debt obligations

            1,321         541        1,862                  2,387         870        3,257   
   

Equities and convertible debentures

    60,036         11,217         9,838  2      81,091          68,974         7,818         11,108  2      87,900   
   

Commodities

            3,466                3,466                    3,846                3,846   

Subtotal

    $111,335         $92,460         $20,305        $224,100          $118,018         $92,700         $28,650        $239,368   
   

Investments in funds measured at NAV

                              7,896                                      9,610   

Total 1

                              $231,996                                      $248,978   
    Cash Instrument Liabilities at Fair Value  
    As of September 2015         As of December 2014  
$ in millions     Level 1         Level 2         Level 3        Total            Level 1         Level 2         Level 3        Total   

U.S. government and federal agency obligations

    $  11,143         $       20                —        $  11,163          $  12,746         $       16         $        —        $  12,762   
   

Non-U.S. government and agency obligations

    16,703         1,780                18,483          19,256         1,244                20,500   
   

Loans and securities backed by commercial real estate

                                            1                1   
   

Bank loans and bridge loans

            305         129        434                  286         178        464   
   

Corporate debt securities

    4         5,720         2        5,726                  5,741         59        5,800   
   

Other debt obligations

                    1        1                          2        2   
   

Equities and convertible debentures

    37,391         646         87        38,124          27,587         722         5        28,314   
   

Commodities

            435                435                    1,224                1,224   

Total

    $  65,241         $  8,906         $     219        $  74,366            $  59,589         $  9,234         $     244        $  69,067   

 

1.

Includes collateralized debt obligations (CDOs) and collateralized loan obligations (CLOs) backed by real estate and corporate obligations of $313 million in level 2 and $915 million in level 3 as of September 2015, and $234 million in level 2 and $1.34 billion in level 3 as of December 2014, respectively.

 

2.

Includes $9.09 billion of private equity investments, $327 million of investments in real estate entities and $423 million of convertible debentures as of September 2015, and $10.25 billion of private equity investments, $294 million of investments in real estate entities and $562 million of convertible debentures as of December 2014.

 

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 September 2015:

 

 

Transfers into level 2 from level 1 of cash instruments were $95 million, reflecting transfers of public equity securities primarily due to decreased market activity in these instruments.

 

 

Transfers into level 1 from level 2 of cash instruments were $113 million, reflecting transfers of public equity securities due to increased market activity in these instruments.

During the nine months ended September 2015:

 

 

Transfers into level 2 from level 1 of cash instruments were $138 million, reflecting transfers of public equity securities primarily due to decreased market activity in these instruments.

 

 

Transfers into level 1 from level 2 of cash instruments were $264 million, reflecting transfers of public equity securities due to increased market activity in these instruments.

During the three months ended September 2014:

 

 

Transfers into level 2 from level 1 of cash instruments were $25 million, reflecting transfers of public equity securities due to decreased market activity in these instruments.

 

 

Transfers into level 1 from level 2 of cash instruments were $1 million, reflecting transfers of public equity securities due to increased market activity in these instruments.

During the nine months ended September 2014:

 

 

Transfers into level 2 from level 1 of cash instruments were $65 million, including $47 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.

 

 

Transfers into level 1 from level 2 of cash instruments were $80 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.

 

 

    Goldman Sachs September 2015 Form 10-Q   19


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. For level 3 cash instrument assets, increases are shown as positive amounts, while decreases are shown as negative amounts. For level 3 cash instrument liabilities, increases are shown as negative amounts, while decreases are shown as positive amounts.

 

 

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.

 

 

See “Level 3 Rollforward Commentary” below for an explanation of the net unrealized gains/(losses) on level 3 cash instruments, and the activity related to transfers into and transfers out of level 3.

 

 

    Level 3 Cash Instrument Assets and Liabilities at Fair Value  
$ 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
  
  
  

 

Three Months Ended September 2015

               

 

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

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

Non-U.S. government and agency obligations

    21                                     (9     1                13   
   

Loans and securities backed by
commercial real estate

    2,134        22        28        232         (100     (131     87        (167      2,105   
   

Loans and securities backed by
residential real estate

    2,717        24        29        91         (238     (76     69        (976      1,640   
   

Bank loans and bridge loans

    5,377        55        (77     243         (43     (574     152        (1,372      3,761   
   

Corporate debt securities

    2,595        51        (34     95         (153     (19     161        (378      2,318   
   

State and municipal obligations

    143                      7         (9            12        (64      89   
   

Other debt obligations

    740        2        4        16         (63     (102            (56      541   
   

Equities and convertible debentures

    12,457        77        (2     177         (93     (514     212        (2,476      9,838   

Total cash instrument assets

    $26,195        $231  1      $ (52 ) 1      $   861         $   (709     $(1,426     $    694        $(5,489      $20,305   

Total cash instrument liabilities

       (178     $  13        $ (31     $   102         $     (35     $         3        $    (98     $         5         $    (219

 

Nine Months Ended September 2015

               

Non-U.S. government and agency obligations

    $     136            9        $           $       1         $      (35     $      (24     $     —        $    (74)         $        13   
   

Loans and securities backed by
commercial real estate

    3,275        120        91        429         (605     (1,332     340        (213      2,105   
   

Loans and securities backed by
residential real estate

    2,545        115        19        387         (639     (255     158        (690      1,640   
   

Bank loans and bridge loans

    6,973        228        (177     760         (833     (1,481     389        (2,098      3,761   
   

Corporate debt securities

    3,633        128        (58     455         (448     (399     345        (1,338      2,318   
   

State and municipal obligations

    110        3        2        11         (21     (2     12        (26      89   
   

Other debt obligations

    870        21        5        91         (192     (82     2        (174      541   
   

Equities and convertible debentures

    11,108        197        962        676         (489     (1,313     885        (2,188      9,838   

Total cash instrument assets

    $28,650        $821  1      $844  1      $2,810         $(3,262     $(4,888     $2,131        $(6,801      $20,305   

Total cash instrument liabilities

       (244     $  12        $ (26     $   170         $     (45     $       (6     $  (121     $       41         $    (219

 

1.

The aggregate amounts include gains/(losses) of approximately $(39) million, $(18) million and $236 million reported in “Market making,” “Other principal transactions” and “Interest income,” respectively, for the three months ended September 2015, and approximately $(10) million, $1.13 billion and $547 million reported in “Market making,” “Other principal transactions” and “Interest income,” respectively, for the nine months ended September 2015.

 

20   Goldman Sachs September 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 and Liabilities at Fair Value  
$ 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
  
  
  

 

Three Months Ended September 2014

                   

 

Non-U.S. government and agency obligations

    $       53        $       1        $      —        $       87         $       (6     $     (11     $      —        $       —         $     124   
   

Loans and securities backed by commercial real estate

    2,508        56        (7     108         (62     (165     877        (125      3,190   
   

Loans and securities backed by
residential real estate

    2,039        37        37        373         (167     (125     155        (49      2,300   
   

Bank loans and bridge loans

    6,280        109        (46     1,697         (355     (1,099     880        (435      7,031   
   

Corporate debt securities

    2,192        83        (42     1,793         (491     (557     697        (239      3,436   
   

State and municipal obligations

    169        2        (1     3         (35            27        (34      131   
   

Other debt obligations

    629        5        2        102         (12     (68     44        (91      611   
   

Equities and convertible debentures

    10,551        33        358        460         (232     (215     705        (922      10,738   

Total cash instrument assets

    $24,421        $   326  1      $   301  1      $  4,623         $(1,360     $(2,240     $3,385        $(1,895      $27,561   

Total cash instrument liabilities

    $    (197     $      (6     $    (20     $       76         $     (31     $        7        $    (29     $      11         $    (189

 

Nine Months Ended September 2014

                   

 

Non-U.S. government and agency obligations

    $       40        $       4        $       2        $       93         $     (19     $       (4     $       8        $       —         $     124   
   

Loans and securities backed by commercial real estate

    2,515        112        127        1,318         (373     (472     178        (215      3,190   
   

Loans and securities backed by
residential real estate

    1,961        145        148        648         (289     (329     232        (216      2,300   
   

Bank loans and bridge loans

    6,071        450        47        3,667         (696     (2,590     375        (293      7,031   
   

Corporate debt securities

    2,744        233        22        2,277         (926     (872     380        (422      3,436   
   

State and municipal obligations

    257        3        3        31         (112     (1            (50      131   
   

Other debt obligations

    807        45        62        99         (187     (106     18        (127      611   
   

Equities and convertible debentures

    8,671        189        1,046        2,097         (873     (537     1,236        (1,091      10,738   

Total cash instrument assets

    $23,066        $1,181  1      $1,457  1      $10,230         $(3,475     $(4,911     $2,427        $(2,414      $27,561   

Total cash instrument liabilities

    $    (297     $       2        $     47        $     171         $     (89     $     (27     $    (19     $      23         $    (189

 

1.

The aggregate amounts include gains of approximately $27 million, $325 million and $275 million reported in “Market making,” “Other principal transactions” and “Interest income,” respectively, for the three months ended September 2014, and approximately $464 million, $1.40 billion and $771 million reported in “Market making,” “Other principal transactions” and “Interest income,” respectively, for the nine months ended September 2014.

 

    Goldman Sachs September 2015 Form 10-Q   21


Table of Contents

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Level 3 Rollforward Commentary

Three Months Ended September 2015. The net unrealized loss on level 3 cash instruments of $83 million (reflecting $52 million on cash instrument assets and $31 million on cash instrument liabilities) for the three months ended September 2015 primarily reflected losses on bank loans and bridge loans, principally reflecting the impact of wider credit spreads.

Transfers into level 3 during the three months ended September 2015 primarily reflected transfers of certain private equity investments, corporate debt securities and bank loans and bridge loans 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 September 2015 primarily reflected transfers of certain private equity investments and loans and securities backed by residential real estate to level 2 principally due to increased price transparency as a result of market evidence, including market transactions in these instruments, and transfers of certain bank loans and bridge loans to level 2 principally due to certain unobservable yield and duration inputs not being significant to the valuation of these instruments.

Nine Months Ended September 2015. The net unrealized gain on level 3 cash instruments of $818 million (reflecting $844 million of gains on cash instrument assets and $26 million of losses on cash instrument liabilities) for the nine months ended September 2015 primarily reflected gains on private equity investments principally driven by strong corporate performance and company-specific events.

Transfers into level 3 during the nine months ended September 2015 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 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 nine months ended September 2015 primarily reflected transfers of certain private equity investments, corporate debt securities and loans and securities backed by residential real estate to level 2 principally due to increased price transparency as a result of market evidence, including market transactions in these instruments, and transfers of certain bank loans and bridge loans to level 2 principally due to certain unobservable yield and duration inputs not being significant to the valuation of these instruments.

Three Months Ended September 2014. The net unrealized gain on level 3 cash instruments of $281 million (reflecting $301 million of gains on cash instrument assets and $20 million of losses on cash instrument liabilities) for the three months ended September 2014 reflected gains on private equity investments principally driven by company-specific events and strong corporate performance.

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

Nine Months Ended September 2014. The net unrealized gain on level 3 cash instruments of $1.50 billion (reflecting $1.46 billion on cash instrument assets and $47 million on cash instrument liabilities) for the nine months ended September 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 nine months ended September 2014 primarily reflected transfers of certain private equity investments, corporate debt securities and bank loans and bridge loans 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 nine months ended September 2014 primarily reflected transfers of certain private equity investments, 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 market transactions in these instruments.

 

 

22   Goldman Sachs September 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 $3.18 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 September 2015  
$ in millions    
 
Fair Value of
Investments
  
  
        
 
Unfunded
Commitments
  
  

Private equity funds

    $5,290           $2,068   
   

Credit funds

    667           375   
   

Hedge funds

    614             
   

Real estate funds

    1,325             296   

Total

    $7,896             $2,739   
    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 September 2015 Form 10-Q   23


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.

 

 

24   Goldman Sachs September 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 September 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

    $        365         $        389         $  4,365,237           $           228         $         238         $  3,151,865   
   

OTC-cleared

    272,253         250,611         23,715,996           351,801         330,298         30,408,636   
   

Bilateral OTC

    380,259         356,608         13,083,131             434,333         409,071         13,552,017   

Total interest rates

    652,877         607,608         41,164,364             786,362         739,607         47,112,518   

OTC-cleared

    5,732         6,087         453,464           5,812         5,663         378,099   
   

Bilateral OTC

    36,903         32,609         1,740,633             49,036         44,491         2,122,859   

Total credit

    42,635         38,696         2,194,097             54,848         50,154         2,500,958   

Exchange-traded

    332         248         26,526           69         69         17,214   
   

OTC-cleared

    215         164         18,174           100         96         13,304   
   

Bilateral OTC

    102,439         107,568         5,668,553             109,747         108,442         5,535,685   

Total currencies

    102,986         107,980         5,713,253             109,916         108,607         5,566,203   

Exchange-traded

    5,235         5,274         297,402           7,683         7,166         321,378   
   

OTC-cleared

    226         233         2,888           313         315         3,036   
   

Bilateral OTC

    16,271         17,701         272,286             20,994         21,065         345,065   

Total commodities

    21,732         23,208         572,576             28,990         28,546         669,479   

Exchange-traded

    11,202         10,284         651,206           9,592         9,636         541,711   
   

Bilateral OTC

    44,975         43,384         999,681             49,339         49,013         983,784   

Total equities

    56,177         53,668         1,650,887             58,931         58,649         1,525,495   

Subtotal

    876,407         831,160         51,295,177             1,039,047         985,563         57,374,653   

Derivatives accounted for as hedges

                  

OTC-cleared

    2,224         72         42,149           2,713         228         31,109   
   

Bilateral OTC

    10,223         11         72,868             11,559         34         95,389   

Total interest rates

    12,447         83         115,017             14,272         262         126,498   

OTC-cleared

    22         4         1,191           12         3         1,205   
   

Bilateral OTC

    219         9         8,165             113         13         8,431   

Total currencies

    241         13         9,356             125         16         9,636   

Subtotal

    12,688         96         124,373             14,397         278         136,134   

Total gross fair value/notional amount of derivatives

    $ 889,095  1       $ 831,256  1       $51,419,550             $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

    $  (13,298      $  (13,298           $    (15,039      $  (15,039   
   

OTC-cleared

    (254,089      (254,089           (335,792      (335,792   
   

Bilateral OTC

    (469,322      (469,322                   (535,839      (535,839         

Total counterparty netting

    (736,709      (736,709                   (886,670      $(886,670         

OTC-cleared

    (26,205      (2,973           (24,801      (738   
   

Bilateral OTC

    (67,690      (40,512                   (78,703      (35,417         

Total cash collateral netting

    (93,895      (43,485                   (103,504      (36,155         

Total counterparty and cash collateral netting

    $(830,604      $(780,194                   $  (990,174      $(922,825         

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

                  

Exchange-traded

    $     3,836         $     2,897              $       2,533         $     2,070      
   

OTC-cleared

    378         109              158         73      
   

Bilateral OTC

    54,277         48,056                      60,579         60,873            

Total amounts included in the condensed consolidated statements of financial condition

    $   58,491         $   51,062                      $     63,270         $   63,016            

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

                  

Cash collateral received/posted

    $    (1,011      $    (2,047           $         (980      $    (2,940   
   

Securities collateral received/posted

    (15,084      (12,472                   (14,742      (18,159         

Total

    $   42,396         $   36,543                      $     47,548         $   41,917            

 

1.

Includes derivative assets and derivative liabilities of $19.87 billion and $18.64 billion, respectively, as of September 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 September 2015 Form 10-Q   25


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.

 

 

26   Goldman Sachs September 2015 Form 10-Q    


Table of Contents

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 September 2015 Form 10-Q   27


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, 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 September 2015   As of December 2014

 

Interest rates

 

($200 million and $40 million of net level 3 liabilities as of September 2015 and December 2014, respectively)

 

 

Option pricing models:

 

   Correlation 1

 

  Volatility

 

 

 

 

(25)% to 92% (56% / 61%)

 

31 basis points per annum (bpa) to 152 bpa (84 bpa / 57 bpa)

 

 

 

 

 

 

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

 

36 basis points per annum (bpa) to 156 bpa (100 bpa / 115 bpa)

 

 

 

Credit

 

($3.29 billion and $3.53 billion of net level 3 assets as of September 2015
and December 2014, respectively)

 

 

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

 

  Correlation 1

 

  Credit spreads

 

 

  Upfront credit points

 

  Recovery rates

 

 

 

 

 

 

44% to 99% (70% / 70%)

 

1 basis points (bps) to 660 bps (145 bps / 108 bps) 2

 

0 points to 99 points (40 points / 33 points)

 

11% to 71% (45% / 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

 

($160 million of net level 3 assets and $267 million of net level 3 liabilities as of September 2015 and December 2014, respectively)

 

 

 

Option pricing models:

 

   Correlation 1

 

 

 

 

 

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

 

 

 

 

 

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

 

 

Commodities

 

($23 million of net level 3 assets and $1.14 billion of net level 3 liabilities as of September 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

 

 

 

 

 

 

13% to 61% (35% / 34%)

 

$(1.63) to $6.82 ($0.00 / $(0.03))

 

 

$(8.00) to $(5.00) ($(7.08) / $(7.46))

 

$(8.39) to $55.46 ($7.37 / $0.11) 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

 

($884 million and $1.38 billion of
net level 3 liabilities as of September 2015   
and December 2014, respectively)

 

 

 

Option pricing models:

 

   Correlation 1

 

  Volatility

 

 

 

 

 

28% to 94% (62% / 60%)

 

3% to 103% (28% / 26%)

 

 

 

 

 

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 (30)% to 80% (Average: 35% / Median: 43%) as of September 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.

 

28   Goldman Sachs September 2015 Form 10-Q    


Table of Contents

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Range of Significant Unobservable Inputs

Below is 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

Below is 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 September 2015 Form 10-Q   29


Table of Contents

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 netting within levels.” Where the counterparty netting is across levels, the netting is reflected in “Cross-level counterparty netting.”

 

   

Derivative Assets at Fair Value

as of September 2015

 
$ in millions     Level 1         Level 2        Level 3        Total   

Interest rates

    $  5         $ 664,814        $    505        $ 665,324   
   

Credit

            35,911        6,724        42,635   
   

Currencies

            102,870        357        103,227   
   

Commodities

            21,037        695        21,732   
   

Equities

    4         55,498        675        56,177   

Gross fair value of derivative assets

    9         880,130        8,956        889,095   
   

Counterparty netting within levels

            (732,874     (2,090     (734,964

Subtotal

    $  9         $ 147,256        $ 6,866        $ 154,131   
   

Cross-level counterparty netting

           (1,745
   

Cash collateral netting

                             (93,895

Fair value included
in financial
instruments
owned

    

                     $   58,491   
   

Derivative Liabilities at Fair Value

as of September 2015

 
$ in millions     Level 1         Level 2        Level 3        Total   

Interest rates

    $13         $ 606,973        $    705        $ 607,691   
   

Credit

            35,266        3,430        38,696   
   

Currencies

            107,796        197        107,993   
   

Commodities

            22,536        672        23,208   
   

Equities

    15         52,094        1,559        53,668   

Gross fair value of derivative assets

    28         824,665        6,563        831,256   
   

Counterparty netting within levels

            (732,874     (2,090     (734,964

Subtotal

    $28         $   91,791        $ 4,473        $   96,292   
   

Cross-level counterparty netting

           (1,745
   

Cash collateral netting

                             (43,485

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

     

                     $   51,062   
   

Derivative Assets at Fair Value

as of December 2014

 
$ in millions     Level 1        Level 2        Level 3        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 netting within levels

           (882,841     (2,717     (885,558

Subtotal

    $298        $   160,514        $ 7,074        $   167,886   
   

Cross-level counterparty netting

          (1,112
   

Cash collateral netting

                            (103,504

Fair value included in financial instruments owned

                            $     63,270   
   

Derivative Liabilities at Fair Value

as of December 2014

 
$ in millions     Level 1        Level 2        Level 3        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 assets

    108        976,648        9,085        985,841   
   

Counterparty netting within levels

           (882,841     (2,717     (885,558

Subtotal

    $108        $     93,807        $ 6,368        $   100,283   
   

Cross-level counterparty netting

          (1,112
   

Cash collateral netting

                            (36,155

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

                            $     63,016   
 

 

30   Goldman Sachs September 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 table below presents changes in fair value for all derivatives categorized as level 3 as of the end of the period. In the table 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.

 

 

Positive amounts for transfers into level 3 and negative amounts for transfers out of level 3 represent net transfers of derivative assets. 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.

 

 

See “Level 3 Rollforward Commentary” below for an explanation of the net unrealized gains/(losses) on level 3 derivative assets and liabilities, and the activity related to transfers into and transfers out of level 3.

 

 

    Level 3 Derivative Assets and Liabilities at Fair Value  
$ 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
  
  
  
  
  

 

Three Months Ended September 2015

  

           

Interest rates — net

    $     (78     $  (27     $     1        $    2        $       (1     $      10        $(112     $       5        $   (200
   

Credit — net

    2,968        39        416        32        (46     109        (5     (219     3,294   
   

Currencies — net

    (149     (18     183        4               37        (4     107        160   
   

Commodities — net

    (54     1        (27     2        (56     (4     7        154        23   
   

Equities — net

    (2,349     (17     318        39        (407     1,513        (88     107        (884

Total derivatives — net

    $    338        $  (22 ) 1      $ 891  1      $  79        $   (510     $ 1,665        $(202     $   154        $ 2,393   

 

Nine Months Ended September 2015

  

           

Interest rates — net

    $     (40     $  (10     $    (4     $    5        $     (32     $      31        $(105     $    (45     $   (200
   

Credit — net

    3,530        147        553        56        (151     (700     127        (268     3,294   
   

Currencies — net

    (267     (71     301        31        (8     108        (19     85        160   
   

Commodities — net

    (1,142     9        (68            (87     (95     (20     1,426        23   
   

Equities — net

    (1,375     83        185        105        (694     942        (148     18        (884

Total derivatives — net

    $    706        $ 158  1      $ 967  1      $197        $   (972     $    286        $(165     $1,216        $ 2,393   

 

Three Months Ended September 2014

  

           

Interest rates — net

    $   (129     $  (28     $     6        $    1        $       (1     $      21        $   27        $       5        $     (98
   

Credit — net

    3,900        9        170        11        (36     (512     (116     (106     3,320   
   

Currencies — net

    (81     (22     (256     6               61        9        (3     (286
   

Commodities — net

    (7     6        61        27        (20     4        126        (9     188   
   

Equities — net

    (1,499     13        (175     36        (2,939     340        (212     1,009        (3,427

Total derivatives — net

    $ 2,184        $  (22 ) 2      $(194 ) 2      $  81        $(2,996     $     (86     $(166     $   896        $   (303
                 

Nine Months Ended September 2014

  

           

Interest rates — net

    $     (86     $  (57     $  (63     $    4        $       (8     $    103        $   33        $    (24     $     (98
   

Credit — net

    4,176        (18     803        174        (139     (1,491     (102     (83     3,320   
   

Currencies — net

    (200     (60     (210     15        (24     188        8        (3     (286
   

Commodities — net

    60        130        73        38        (37     (58     41        (59     188   
   

Equities — net

    (959     (27     (253     187        (3,204     111        (150     868        (3,427

Total derivatives — net

    $ 2,991        $  (32 ) 2      $ 350  2      $418        $(3,412     $(1,147     $(170     $   699        $   (303

 

1.

The aggregate amounts include gains of approximately $647 million and $222 million reported in “Market making” and “Other principal transactions,” respectively, for the three months ended September 2015, and approximately $945 million and $180 million reported in “Market making” and “Other principal transactions,” respectively, for the nine months ended September 2015.

 

2.

The aggregate amounts include gains/(losses) of approximately $(243) million and $27 million reported in “Market making” and “Other principal transactions,” respectively, for the three months ended September 2014, and approximately $394 million and $(76) million reported in “Market making” and “Other principal transactions,” respectively, for the nine months ended September 2014.

 

    Goldman Sachs September 2015 Form 10-Q   31


Table of Contents

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Level 3 Rollforward Commentary

Three Months Ended September 2015. The net unrealized gain on level 3 derivatives of $891 million for the three months ended September 2015 was primarily attributable to gains on certain credit derivatives, reflecting the impact of a decrease in interest rates, wider credit spreads, and changes in foreign exchange rates, and gains on certain equity derivatives, reflecting the impact of decreases in global equity prices.

Transfers into level 3 derivatives during the three months ended September 2015 primarily reflected transfers of certain interest rate liabilities from level 2, principally due to certain unobservable inputs becoming significant to the valuation of these derivatives, and transfers of certain equity derivative liabilities from level 2, primarily due to unobservable volatility inputs becoming significant to the valuation of these derivatives.

Transfers out of level 3 derivatives during the three months ended September 2015 primarily reflected transfers of certain commodity derivative liabilities to level 2, principally due to increased transparency of volatility inputs used to value these derivatives, transfers of certain equity derivative liabilities and currency derivative liabilities to level 2, primarily due to certain unobservable inputs no longer being significant to the valuation of these derivatives, and transfers of certain credit derivative assets to level 2, principally due to unobservable credit spread inputs not being significant to the net risk of certain portfolios.

Nine Months Ended September 2015. The net unrealized gain on level 3 derivatives of $967 million for the nine months ended September 2015 was primarily attributable to gains on certain credit derivatives, principally reflecting the impact of wider credit spreads and a decrease in interest rates, and gains on certain currency derivatives, reflecting the impact of changes in foreign exchange rates.

Transfers into level 3 derivatives during the nine months ended September 2015 primarily reflected transfers of certain equity derivative liabilities from level 2, primarily due to reduced transparency of volatility inputs used to value these derivatives, transfers of certain interest rate derivative liabilities from level 2, primarily due to unobservable inputs becoming significant to the valuations of these derivatives, and transfers of certain credit derivative assets from level 2, principally due to unobservable credit spread inputs becoming significant to the valuation of these derivatives.

Transfers out of level 3 derivatives during the nine months ended September 2015 primarily reflected transfers of certain commodity derivative liabilities to level 2, principally due to increased transparency of oil and refined product spread inputs used to value these derivatives, and transfers of certain credit derivative assets to level 2, principally due to unobservable credit spread inputs not being significant to the net risk of certain portfolios.

Three Months Ended September 2014. The net unrealized loss on level 3 derivatives of $194 million for the three months ended September 2014 principally resulted from changes in observable inputs and was primarily attributable to the impact of changes in foreign exchange rates on certain currency derivatives and a decrease in equity prices on certain equity derivatives, partially offset by the impact of wider credit spreads on certain credit derivatives.

Transfers into level 3 derivatives during the three months ended September 2014 primarily reflected transfers of certain equity derivative liabilities from level 2, principally due to reduced transparency of volatility inputs used to value these derivatives, transfers of certain credit derivative liabilities from level 2, primarily due to reduced transparency of upfront credit point inputs used to value these derivatives, and transfers of certain commodity derivative assets from level 2, reflecting the impact of unobservable volatility inputs becoming significant to the valuation of these derivatives.

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

Nine Months Ended September 2014. The net unrealized gain on level 3 derivatives of $350 million for the nine months ended September 2014 principally resulted from changes in observable inputs and was primarily attributable to the impact of tighter credit spreads and a decrease in interest rates on certain credit derivatives, partially offset by the impact of changes in foreign exchange rates on certain currency derivatives and a decrease in equity prices on certain equity derivatives.

Transfers into level 3 derivatives during the nine months ended September 2014 primarily reflected transfers of certain equity derivative liabilities from level 2, principally due to reduced transparency of volatility inputs used to value these derivatives, and transfers of certain credit derivative liabilities from level 2, primarily due to reduced transparency of upfront credit point inputs used to value these derivatives.

 

 

32   Goldman Sachs September 2015 Form 10-Q    


Table of Contents

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Transfers out of level 3 derivatives during the nine months ended September 2014 primarily reflected transfers of certain equity derivative liabilities to level 2, principally due to unobservable correlation inputs no longer being significant to the valuation of these derivatives.

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 netting within tenors.” Where the counterparty netting is across tenor categories, the netting is reflected in “Cross-tenor counterparty netting.”

 

    OTC Derivative Assets as of September 2015  
$ in millions    

 

Less than

1 Year

  

  

   

 

1 - 5

Years

  

  

   

 

Greater than

5 Years

  

  

    Total   

Interest rates

    $  6,182        $24,494        $86,704        $117,380   
   

Credit

    1,224        4,424        6,275        11,923   
   

Currencies

    13,366        9,355        6,698        29,419   
   

Commodities

    4,978        4,769        101        9,848   
   

Equities

    7,913        6,605        3,360        17,878   
   

Counterparty netting within tenors

    (3,905     (6,938     (5,833     (16,676

Subtotal

    $29,758        $42,709        $97,305        $169,772   
   

Cross-tenor counterparty netting

          (21,222
   

Cash collateral netting

                            (93,895

Total

                            $  54,655   
    OTC Derivative Liabilities as of September 2015  
$ in millions    

 

Less than

1 Year

  

  

   

 

1 - 5

Years

  

  

   

 

Greater than

5 Years

  

  

    Total   

Interest rates

    $  5,420        $17,056        $37,248        $  59,724   
   

Credit

    1,919        3,964        2,101        7,984   
   

Currencies

    12,728        10,972        10,569        34,269   
   

Commodities

    5,156        3,449        2,680        11,285   
   

Equities

    7,084        5,640        3,562        16,286   
   

Counterparty netting within tenors

    (3,905     (6,938     (5,833     (16,676

Subtotal

    $28,402        $34,143        $50,327        $112,872   
   

Cross-tenor counterparty netting

          (21,222
   

Cash collateral netting

                            (43,485

Total

                            $  48,165   
    OTC Derivative Assets as of December 2014  
$ in millions    

 

Less than

1 Year

  

  

   

 

1 - 5

Years

  

  

   

 

Greater than

5 Years

  

  

    Total   

Interest rates

    $  7,064        $25,049        $  90,553        $122,666   
   

Credit

    1,696        6,093        5,707        13,496   
   

Currencies

    17,835        9,897        6,386        34,118   
   

Commodities

    8,298        4,068        161        12,527   
   

Equities

    4,771        9,285        3,750        17,806   
   

Counterparty netting within tenors

    (4,479     (7,016     (4,058     (15,553

Subtotal

    $35,185        $47,376        $102,499        $185,060   
   

Cross-tenor counterparty netting

          (20,819
   

Cash collateral netting

                            (103,504

Total

                            $  60,737   
    OTC Derivative Liabilities as of December 2014  
$ in millions    

 

Less than

1 Year

  

  

   

 

1 - 5

Years

  

  

   

 

Greater than

5 Years

  

  

    Total   

Interest rates

    $  7,001        $17,649        $  37,242        $  61,892   
   

Credit

    2,154        4,942        1,706        8,802   
   

Currencies

    18,549        7,667        6,482        32,698   
   

Commodities

    5,686        4,105        2,810        12,601   
   

Equities

    7,064        6,845        3,571        17,480   
   

Counterparty netting within tenors

    (4,479     (7,016     (4,058     (15,553

Subtotal

    $35,975        $34,192        $  47,753        $117,920   
   

Cross-tenor counterparty netting

          (20,819
   

Cash collateral netting

                            (36,155

Total

                            $  60,946   
 

 

    Goldman Sachs September 2015 Form 10-Q   33


Table of Contents

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Credit Derivatives

The firm enters into a broad array of credit derivatives in locations around the world to facilitate client transactions and to manage the credit risk associated with market-making and investing and lending activities. Credit derivatives are actively managed based on the firm’s net risk position.

Credit derivatives are individually negotiated contracts and can have various settlement and payment conventions. Credit events include failure to pay, bankruptcy, acceleration of indebtedness, restructuring, repudiation and dissolution of the reference entity.

The firm enters into the following types of credit derivatives:

 

 

Credit Default Swaps. Single-name credit default swaps protect the buyer against the loss of principal on one or more bonds, loans or mortgages (reference obligations) in the event the issuer (reference entity) of the reference obligations suffers a credit event. The buyer of protection pays an initial or periodic premium to the seller and receives protection for the period of the contract. If there is no credit event, as defined in the contract, the seller of protection makes no payments to the buyer of protection. However, if a credit event occurs, the seller of protection is required to make a payment to the buyer of protection, which is calculated in accordance with the terms of the contract.

 

 

Credit Indices, Baskets and Tranches. Credit derivatives may reference a basket of single-name credit default swaps or a broad-based index. If a credit event occurs in one of the underlying reference obligations, the protection seller pays the protection buyer. The payment is typically a pro-rata portion of the transaction’s total notional amount based on the underlying defaulted reference obligation. In certain transactions, the credit risk of a basket or index is separated into various portions (tranches), each having different levels of subordination. The most junior tranches cover initial defaults and once losses exceed the notional amount of these junior tranches, any excess loss is covered by the next most senior tranche in the capital structure.

 

Total Return Swaps. A total return swap transfers the risks relating to economic performance of a reference obligation from the protection buyer to the protection seller. Typically, the protection buyer receives from the protection seller a floating rate of interest and protection against any reduction in fair value of the reference obligation, and in return the protection seller receives the cash flows associated with the reference obligation, plus any increase in the fair value of the reference obligation.

 

 

Credit Options. In a credit option, the option writer assumes the obligation to purchase or sell a reference obligation at a specified price or credit spread. The option purchaser buys the right, but does not assume the obligation, to sell the reference obligation to, or purchase it from, the option writer. The payments on credit options depend either on a particular credit spread or the price of the reference obligation.

The firm economically hedges its exposure to written credit derivatives primarily by entering into offsetting purchased credit derivatives with identical underliers. Substantially all of the firm’s purchased credit derivative transactions are with financial institutions and are subject to stringent collateral thresholds. In addition, upon the occurrence of a specified trigger event, the firm may take possession of the reference obligations underlying a particular written credit derivative, and consequently may, upon liquidation of the reference obligations, recover amounts on the underlying reference obligations in the event of default.

As of September 2015, written and purchased credit derivatives had total gross notional amounts of $1.07 trillion and $1.12 trillion, respectively, for total net notional purchased protection of $55.20 billion. As of December 2014, written and purchased credit derivatives had total gross notional amounts of $1.22 trillion and $1.28 trillion, respectively, for total net notional purchased protection of $59.35 billion. Substantially all of the firm’s written and purchased credit derivatives are in the form of credit default swaps.

 

 

34   Goldman Sachs September 2015 Form 10-Q    


Table of Contents

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

The tables below present certain information about credit derivatives. In the tables below:

 

 

Fair values exclude the effects of both netting of receivable balances with payable balances under enforceable netting agreements, and netting of cash received or posted under enforceable credit support agreements, and therefore are not representative of the firm’s credit exposure.

 

 

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

 

 

The credit spread on the underlier, together with the tenor of the contract, are indicators of payment/performance risk. The firm is less likely to pay or otherwise be required to perform where the credit spread and the tenor are lower.

 

 

Offsetting purchased credit derivatives represent the notional amount of purchased credit derivatives that economically hedge written credit derivatives with identical underliers and are included in “Offsetting.”

 

 

Other purchased credit derivatives represent the notional amount of all other purchased credit derivatives not included in “Offsetting.”

 

    As of September 2015  
    Credit Spread on Underlier (basis points)  
$ in millions     0 - 250       

 

251 -

500

  

  

   

 

501 -

1,000

  

  

   
 
 
Greater
than
1,000
  
  
  
    Total   

 

Maximum Payout/Notional Amount of Written Credit Derivatives by Tenor

  

Less than 1 year

    $   213,120        $  5,479        $  2,996        $   9,721        $   231,316   
   

1 – 5 years

    620,419        59,098        17,704        25,823        723,044   
   

Greater than 5 years

    92,863        14,981        4,199        3,101        115,144   

Total

    $   926,402        $79,558        $24,899        $ 38,645        $1,069,504   

 

Maximum Payout/Notional Amount of Purchased Credit Derivatives

  

Offsetting

    $   861,969        $72,341        $21,659        $ 33,700        $   989,669   
   

Other

    118,099        7,238        5,074        4,621        135,032   

 

Fair Value of Written Credit Derivatives

  

Asset

    $     18,213        $  1,597        $     272        $      166        $     20,248   
   

Liability

    3,761        3,650        1,415        10,816        19,642   

Net asset/(liability)