Note 6.

Cash Instruments

Cash instruments include U.S. government and federal agency obligations, non-U.S. government and agency obligations, mortgage-backed loans and securities, bank loans and bridge loans, corporate debt securities, equities and convertible debentures, investments in funds 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.

Valuation Techniques and Significant Inputs of Level 3 Cash Instruments

Valuation techniques of level 3 cash instruments vary by instrument, but are generally based on discounted cash flow techniques. The valuation techniques and the nature of significant inputs used to determine the fair values of each type of level 3 cash instrument are described below:

Loans and Securities Backed by Commercial Real Estate. Loans and securities backed by commercial real estate are directly or indirectly collateralized by a single commercial real estate property or a portfolio of properties, and may include tranches of varying levels of subordination. 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; and

•

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. Loans and securities backed by residential real estate are directly or indirectly collateralized by portfolios of residential real estate and may include tranches of varying levels of subordination. 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; and

•

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

Bank Loans and Bridge Loans. 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; and

•

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; and

•

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, growth rates and capitalization rates; and

•

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

Other Cash Instruments. Other cash instruments consists of 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; and other debt obligations. 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; and

•

Duration.

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. In the tables below:

•

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 are shown as positive amounts and cash instrument liabilities are shown as negative amounts.

As of September 2016

$ in millions

Level 1

Level 2

Level 3

Total

Assets

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

$ 616

$ 1,847

$ —

$ 2,463

U.S. government and federal agency obligations

21,999

23,307

—

45,306

Non-U.S. government and agency obligations

29,947

8,029

38,036

Loans and securities backed by:

Commercial real estate

—

2,532

1,991

4,523

Residential real estate

—

8,416

995

9,411

Bank loans and bridge loans

—

7,154

2,705

9,859

Corporate debt securities

766

18,005

2,357

21,128

State and municipal obligations

—

1,613

1,705

Other debt obligations

—

599

564

1,163

Equities and convertible debentures

74,242

7,661

9,377

91,280

Commodities

—

5,943

—

5,943

Subtotal

$127,570

$85,106

$18,141

$230,817

Investments in funds at NAV

6,859

Total cash instrument assets

$237,676

Liabilities

U.S. government and federal agency obligations

$ (14,388

)

$ (363

)

$ —

$ (14,751

)

Non-U.S. government and agency obligations

(18,462

)

(1,127

)

—

(19,589

)

Loans and securities backed by commercial real estate

—

)

Bank loans and bridge loans

—

(401

)

(67

)

(468

)

Corporate debt securities

(19

)

(6,280

)

(14

)

(6,313

)

Other debt obligations

—

)

Equities and convertible debentures

(29,187

)

(390

)

(29,586

)

Total cash instrument liabilities

$ (62,056

)

$ (8,567

)

$ (92

)

$ (70,715

)


	As of December 2015
$ in millions		Level 1		Level 2		Level 3		Total
Assets
Commercial paper, certificates of deposit, time deposits and other money market instruments		$ 625		$ 1,958		$ —		$ 2,583

U.S. government and federal agency obligations		24,844		21,538		—		46,382

Non-U.S. government and agency obligations		26,500		5,260		12		31,772

Loans and securities backed by:
Commercial real estate		—		3,051		1,924		4,975

Residential real estate		—		11,418		1,765		13,183

Bank loans and bridge loans		—		9,014		3,150		12,164

Corporate debt securities		218		14,330		2,092		16,640

State and municipal obligations		—		891		101		992

Other debt obligations		—		1,057		538		1,595

Equities and convertible debentures		81,252		8,271		8,549		98,072

Commodities		—		3,935		—		3,935
Subtotal		$133,439		$80,723		$18,131		$232,293

Investments in funds at NAV								7,757
Total cash instrument assets								$240,050
Liabilities
U.S. government and federal agency obligations		$ (15,455	)	$ (61	)	$ —		$ (15,516	)

Non-U.S. government and agency obligations		(13,522	)	(1,451	)	—		(14,973	)

Loans and securities backed by:
Commercial real estate		—		(4	)	—		(4	)

Residential real estate		—		(2	)	—		(2	)

Bank loans and bridge loans		—		(337	)	(124	)	(461	)

Corporate debt securities		(2	)	(6,119	)	(2	)	(6,123	)

State and municipal obligations		—		(2	)	—		(2	)

Other debt obligations		—		(1	)	(1	)	(2	)

Equities and convertible debentures		(30,790	)	(538	)	(66	)	(31,394	)
Total cash instrument liabilities		$ (59,769	)	$ (8,515	)	$ (193	)	$ (68,477	)

In the tables above:

•

Total cash instrument assets include collateralized debt obligations (CDOs) and collateralized loan obligations (CLOs) backed by real estate and corporate obligations of $374 million in level 2 and $754 million in level 3 as of September 2016, and $405 million in level 2 and $774 million in level 3 as of December 2015, respectively.

•

Level 3 equities and convertible debenture assets include $8.55 billion of private equity investments, $377 million of investments in real estate entities and $449 million of convertible debentures as of September 2016, and $7.69 billion of private equity investments, $308 million of investments in real estate entities and $552 million of convertible debentures as of December 2015.

Significant Unobservable Inputs

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


	Level 3 Assets and Range of Significant Unobservable Inputs (Weighted Average) as of
$ in millions		September 2016		December 2015
Loans and securities backed by commercial real estate		$1,991		$1,924

Yield		2.8% to 23.0% (12.1%	)	3.5% to 22.0% (11.8%	)

Recovery rate		9.3% to 95.0% (55.9%	)	19.6% to 96.5% (59.4%	)

Duration (years)		0.8 to 6.3 (2.5	)	0.3 to 5.3 (2.3	)

Basis (points)		N/A		(11) to 4 ((2)	)
Loans and securities backed by residential real estate		$ 995		$1,765

Yield		1.3% to 15.0% (8.3%	)	3.2% to 17.0% (7.9%	)

Cumulative loss rate		14.7% to 50.4% (28.8%	)	4.6% to 44.2% (27.3%	)

Duration (years)		1.3 to 16.6 (7.3	)	1.5 to 13.8 (7.0	)
Bank loans and bridge loans		$2,705		$3,150

Yield		2.1% to 20.6% (9.1%	)	1.9% to 36.6% (10.2%	)

Recovery rate		6.7% to 85.3% (44.4%	)	14.5% to 85.6% (51.2%	)

Duration (years)		0.8 to 5.3 (2.5	)	0.7 to 6.1 (2.2	)
Equities and convertible debentures		$9,377		$8,549

Multiples		0.6x to 18.0x (6.4x	)	0.7x to 21.4x (6.4x	)

Discount rate/yield		6.5% to 25.0% (14.9%	)	7.1% to 20.0% (14.8%	)

Growth rate		N/A		3.0% to 5.2% (4.5%	)

Capitalization rate		5.0% to 12.0% (7.1%	)	5.5% to 12.5% (7.6%	)
Other cash instruments		$3,073		$2,743

Yield		1.5% to 18.0% (10.6%	)	0.9% to 25.6% (10.9%	)

Recovery rate		0.0% to 91.6% (63.1%	)	0.0% to 70.0% (59.7%	)

Duration (years)		0.3 to 13.4 (3.9	)	1.1 to 11.4 (4.5	)

In the table above:

•

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 cash 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 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 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 or 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.

•

Equities and convertible debentures include private equity investments and investments in real estate entities. Growth rate includes long-term growth rate and compound annual growth rate.

•

Loans and securities backed by commercial and residential real estate, bank loans and bridge loans and other cash instruments are valued using discounted cash flows, and equities and convertible debentures are valued using market comparables and discounted cash flows.

•

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.

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 and nine months ended September 2016, transfers into level 2 from level 1 of cash instruments were $143 million and $88 million, respectively, 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 during the three and nine months ended September 2016, were $200 million and $203 million, respectively, reflecting transfers of public equity securities, principally due to increased market activity in these instruments.

During the three and nine months ended September 2015, transfers into level 2 from level 1 of cash instruments were $95 million and $138 million, respectively, 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 during the three and nine months ended September 2015, were $113 million and $264 million, respectively, reflecting transfers of public equity securities, principally due to increased market activity in these instruments.

See “Level 3 Rollforward” below for information about transfers between level 2 and level 3.

Level 3 Rollforward

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

•

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.

•

Purchases include both originations and secondary market purchases.

•

Net unrealized gains/(losses) relate to instruments that were still held at period-end.

•

For the three months ended September 2016, the net realized and unrealized gains on level 3 cash instrument assets of $655 million (reflecting $194 million of realized gains and $461 million of unrealized gains) include gains/(losses) of approximately $(65) million, $487 million and $233 million reported in “Market making,” “Other principal transactions” and “Interest income,” respectively.

•

For the nine months ended September 2016, the net realized and unrealized gains on level 3 cash instrument assets of $861 million (reflecting $503 million of realized gains and $358 million of unrealized gains) include gains/(losses) of approximately $(394) million, $557 million and $698 million reported in “Market making,” “Other principal transactions” and “Interest income,” respectively.

•

For the three months ended September 2015, the net realized and unrealized gains on level 3 cash instrument assets of $179 million (reflecting $231 million of realized gains and $52 million of unrealized losses) 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 nine months ended September 2015, the net realized and unrealized gains on level 3 cash instrument assets of $1.67 billion (reflecting $821 million of realized gains and $844 million of unrealized gains) include gains/(losses) of approximately $(10) million, $1.13 billion and $547 million reported in “Market making,” “Other principal transactions” and “Interest income,” respectively.

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 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)		Purchases	Sales		Settlements		Transfers into level 3		Transfers out of level 3		Balance, end of period
Three Months Ended September 2016
Non-U.S. government and agency obligations		$ 61		$ —		$ 2		$ —	$ (5	)	$ 1		$ 1		$ —		$ 60

Loans and securities backed by:
Commercial real estate		2,112		12		59		46	(97	)	(144	)	119		(116	)	1,991

Residential real estate		1,300		15		(5	)	76	(123	)	(85	)	95		(278	)	995

Bank loans and bridge loans		2,911		59		49		112	(37	)	(432	)	118		(75	)	2,705

Corporate debt securities		2,422		48		58		166	(285	)	(215	)	225		(62	)	2,357

State and municipal obligations		92		1		—		4	(12	)	(2	)	10		(1	)	92

Other debt obligations		528		7		7		19	(7	)	(39	)	55		(6	)	564

Equities and convertible debentures		8,705		52		291		96	(137	)	(165	)	704		(169	)	9,377
Total cash instrument assets		$18,131		$194		$461		$ 519	$ (703	)	$(1,081	)	$1,327		$ (707	)	$18,141
Total cash instrument liabilities		$ (123	)	$ 25		$ 18		$ 51	$ (38	)	$ 1		$ (26	)	$ —		$ (92	)
Nine Months Ended September 2016
Non-U.S. government and agency obligations		$ 12		$ (4	)	$ 10		$ 17	$ (11	)	$ —		$ 36		$ —		$ 60

Loans and securities backed by:
Commercial real estate		1,924		58		14		491	(292	)	(459	)	516		(261	)	1,991

Residential real estate		1,765		38		45		297	(780	)	(233	)	120		(257	)	995

Bank loans and bridge loans		3,150		112		(18	)	452	(148	)	(1,090	)	457		(210	)	2,705

Corporate debt securities		2,092		132		82		501	(329	)	(463	)	492		(150	)	2,357

State and municipal obligations		101		2		—		9	(31	)	(2	)	25		(12	)	92

Other debt obligations		538		27		(27	)	217	(110	)	(120	)	42		(3	)	564

Equities and convertible debentures		8,549		138		252		957	(301	)	(555	)	1,008		(671	)	9,377
Total cash instrument assets		$18,131		$503		$358		$2,941	$(2,002	)	$(2,922	)	$2,696		$(1,564	)	$18,141
Total cash instrument liabilities		$ (193	)	$ 27		$ 32		$ 88	$ (61	)	$ (6	)	$ (9	)	$ 30		$ (92	)
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

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		$ (52	)	$ 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

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		$844		$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	)

Level 3 Rollforward Commentary

Three Months Ended September 2016. The net unrealized gain on level 3 cash instruments of $479 million (reflecting $461 million on cash instrument assets and $18 million on cash instrument liabilities) for the three months ended September 2016 primarily reflected gains on private equity investments, principally driven by strong corporate performance and company-specific events.

Transfers into level 3 during the three months ended September 2016 primarily reflected transfers of 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 2016 primarily reflected transfers of loans and securities backed by residential real estate and private equity investments 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 2016. The net unrealized gain on level 3 cash instruments of $390 million (reflecting $358 million on cash instrument assets and $32 million on cash instrument liabilities) for the nine months ended September 2016 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 2016 primarily reflected transfers of private equity investments, loans and securities backed by commercial real estate, 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 transactions in these instruments.

Transfers out of level 3 during the nine months ended September 2016 primarily reflected transfers of private equity investments, loans and securities backed by commercial and residential real estate 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.

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.

Investments in Funds 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 investments at fair value.

The firm’s investments in funds 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, 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 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. 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 2017 for investments in, and relationships with, covered funds that were in place prior to December 2013. To the extent that the underlying investments of particular funds are not sold within the conformance period, 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. 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 table below presents the fair value of the firm’s investments in funds at NAV and related unfunded commitments.


$ in millions	Fair Value of Investments	Unfunded Commitments
As of September 2016
Private equity funds	$4,803	$1,398

Credit funds	478	214

Hedge funds	471	—

Real estate funds	1,107	200
Total	$6,859	$1,812
As of December 2015
Private equity funds	$5,414	$2,057

Credit funds	611	344

Hedge funds	560	—

Real estate funds	1,172	296
Total	$7,757	$2,697