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, corporate loans and debt securities, equity securities, 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 certain money market instruments, U.S. government obligations, most non-U.S. government obligations, certain government agency obligations, certain corporate debt securities and actively traded listed equities. 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 most money market instruments, most government agency obligations, certain non-U.S. government obligations, most mortgage-backed loans and securities, most corporate loans and debt securities, most state and municipal obligations, most other debt obligations, restricted or less liquid listed equities, commodities 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;

•

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.

Corporate Loans and Debt Securities. Corporate loans and debt securities includes bank loans and bridge loans and corporate debt securities. 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.

Equity Securities. Equity securities include private equity securities and convertible debentures. 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 and capitalization rates; and

•

For equity securities 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 non-U.S. government and agency obligations, 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;

•

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.

As of March 2017

$ in millions

Level 1

Level 2

Level 3

Total

Assets

Money market instruments

$ 307

$ 1,428

$ —

$ 1,735

U.S. government and federal agency obligations

44,423

26,612

—

71,035

Non-U.S. government and agency obligations

29,523

6,061

35,614

Loans and securities backed by:

Commercial real estate

—

1,998

1,604

3,602

Residential real estate

—

11,303

830

12,133

Corporate loans and debt securities

410

26,758

4,553

31,721

State and municipal obligations

—

1,012

1,108

Other debt obligations

—

868

496

1,364

Equity securities

76,969

7,855

10,715

95,539

Commodities

—

3,643

—

3,643

Subtotal

$151,632

$87,538

$18,324

$257,494

Investments in funds at NAV

6,183

Total cash instrument assets

$263,677

Liabilities

U.S. government and federal agency obligations

$ (19,827

)

$ (354

)

$ —

$ (20,181

)

Non-U.S. government and agency obligations

(21,532

)

(1,753

)

—

(23,285

)

Corporate loans and debt securities

)

(7,208

)

(42

)

(7,258

)

Other debt obligations

—

)

—

)

Equity securities

(25,900

)

(288

)

(26,195

)

Total cash instrument liabilities

$ (67,267

)

$ (9,604

)

$ (49

)

$ (76,920

)


	As of December 2016
$ in millions		Level 1		Level 2		Level 3		Total
Assets
Money market instruments		$ 188		$ 1,131		$ —		$ 1,319

U.S. government and federal agency obligations		35,254		22,403		—		57,657

Non-U.S. government and agency obligations		22,433		6,933		15		29,381

Loans and securities backed by:
Commercial real estate		—		2,197		1,645		3,842

Residential real estate		—		11,350		845		12,195

Corporate loans and debt securities		215		23,804		4,640		28,659

State and municipal obligations		—		960		99		1,059

Other debt obligations		—		830		528		1,358

Equity securities		77,276		7,153		10,263		94,692

Commodities		—		5,653		—		5,653
Subtotal		$135,366		$82,414		$18,035		$235,815

Investments in funds at NAV								6,465
Total cash instrument assets								$242,280
Liabilities
U.S. government and federal agency obligations		$ (16,615	)	$ (12	)	$ —		$ (16,627	)

Non-U.S. government and agency obligations		(19,137	)	(1,364	)	(1	)	(20,502	)

Loans and securities backed by residential real estate		—		(3	)	—		(3	)

Corporate loans and debt securities		(2	)	(6,524	)	(44	)	(6,570	)

Other debt obligations		—		(1	)	—		(1	)

Equity securities		(25,768	)	(156	)	(17	)	(25,941	)
Total cash instrument liabilities		$ (61,522	)	$ (8,060	)	$ (62	)	$ (69,644	)

In the tables above:

•

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.

•

Money market instruments include commercial paper, certificates of deposit and time deposits.

•

Equity securities include public and private equities, exchange-traded funds and convertible debentures.

•

As of March 2017 and December 2016, substantially all of the firm’s level 3 equity securities were comprised of private equity securities.

•

Total cash instrument assets include collateralized debt obligations (CDOs) and collateralized loan obligations (CLOs) backed by real estate and corporate obligations of $414 million and $461 million in level 2, and $527 million and $624 million in level 3 as of March 2017 and December 2016, respectively.

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		March 2017		December 2016
Loans and securities backed by commercial real estate
Level 3 assets		$1,604		$1,645

Yield		4.5% to 22.0% (12.3%	)	3.7% to 23.0% (13.0%	)

Recovery rate		17.4% to 97.9% (61.3%	)	8.9% to 99.0% (60.6%	)

Duration (years)		0.7 to 6.1 (1.9	)	0.8 to 6.2 (2.1	)
Loans and securities backed by residential real estate
Level 3 assets		$830		$845

Yield		1.9% to 15.0% (8.3%	)	0.8% to 15.6% (8.7%	)

Cumulative loss rate		9.4% to 46.8% (25.7%	)	8.9% to 47.1% (24.2%	)

Duration (years)		1.1 to 14.6 (6.8	)	1.1 to 16.1 (7.3	)
Corporate loans and debt securities
Level 3 assets		$4,553		$4,640

Yield		2.6% to 24.5% (10.4%	)	2.5% to 25.0% (10.3%	)

Recovery rate		0.0% to 94.0% (56.5%	)	0.0% to 85.0% (56.5%	)

Duration (years)		0.3 to 5.4 (2.9	)	0.6 to 15.7 (2.9	)
Equity securities
Level 3 assets		$10,715		$10,263

Multiples		0.8x to 24.6x (7.0x	)	0.8x to 19.7x (6.8x	)

Discount rate/yield		6.5% to 30.0% (16.2%	)	6.5% to 25.0% (16.0%	)

Capitalization rate		4.1% to 12.9% (6.6%	)	4.2% to 12.5% (6.8%	)
Other cash instruments
Level 3 assets		$622		$642

Yield		2.4% to 16.1% (9.0%	)	1.9% to 14.0% (8.8%	)

Recovery rate		2.7% to 93.0% (82.6%	)	0.0% to 93.0% (61.4%	)

Duration (years)		0.8 to 12.0 (3.9	)	0.9 to 12.0 (4.3	)

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 securities is appropriate for valuing a specific private equity security but may not be appropriate for valuing any other private equity security. 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 or multiples 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.

•

Equity securities include private equity securities and convertible debentures.

•

Loans and securities backed by commercial and residential real estate, corporate loans and debt securities and other cash instruments are valued using discounted cash flows, and equity securities 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. See “Level 3 Rollforward” below for information about transfers between level 2 and level 3.

During the three months ended March 2017, transfers into level 2 from level 1 of cash instruments were $182 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 $33 million, reflecting transfers of public equity securities due to increased market activity in these instruments.

During the three months ended March 2016, transfers into level 2 from level 1 of cash instruments were $137 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 $195 million, primarily reflecting transfers of public equity securities principally due to increased market activity in these instruments.

Level 3 Rollforward

The table below presents a summary of the changes in fair value for level 3 cash instrument assets and liabilities.


	Three Months Ended March
$ in millions		2017		2016
Total cash instrument assets
Beginning balance		$18,035		$18,131

Net realized gains/(losses)		131		150

Net unrealized gains/(losses)		402		(40	)

Purchases		683		1,418

Sales		(687	)	(794	)

Settlements		(716	)	(986	)

Transfers into level 3		1,605		1,568

Transfers out of level 3		(1,129	)	(978	)
Ending balance		$18,324		$18,469
Total cash instrument liabilities
Beginning balance		$ (62	)	$ (193	)

Net realized gains/(losses)		—		3

Net unrealized gains/(losses)		4		8

Purchases		36		58

Sales		(28	)	(26	)

Settlements		(2	)	(1	)

Transfers into level 3		(2	)	(18	)

Transfers out of level 3		5		31
Ending balance		$ (49	)	$ (138	)

In the table above:

•

Changes in fair value are presented for all cash instrument assets and liabilities that are classified in level 3 as of the end of the period.

•

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

•

Purchases include originations and secondary purchases.

•

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 classified 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 classified 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.

The table below disaggregates, by product type, the information for cash instrument assets included in the summary table above.


	Three Months Ended March
$ in millions		2017		2016
Loans and securities backed by commercial real estate
Beginning balance		$ 1,645		$1,924

Net realized gains/(losses)		16		21

Net unrealized gains/(losses)		51		(8	)

Purchases		47		340

Sales		(55	)	(135	)

Settlements		(130	)	(123	)

Transfers into level 3		147		253

Transfers out of level 3		(117	)	(104	)
Ending balance		$ 1,604		$2,168
Loans and securities backed by residential real estate
Beginning balance		$ 845		$1,765

Net realized gains/(losses)		9		12

Net unrealized gains/(losses)		35		45

Purchases		149		61

Sales		(156	)	(298	)

Settlements		(49	)	(82	)

Transfers into level 3		39		132

Transfers out of level 3		(42	)	(201	)
Ending balance		$ 830		$1,434
Corporate loans and debt securities
Beginning balance		$ 4,640		$5,242

Net realized gains/(losses)		66		74

Net unrealized gains/(losses)		69		8

Purchases		306		587

Sales		(375	)	(137	)

Settlements		(330	)	(492	)

Transfers into level 3		762		802

Transfers out of level 3		(585	)	(293	)
Ending balance		$ 4,553		$5,791
Equity securities
Beginning balance		$10,263		$8,549

Net realized gains/(losses)		29		32

Net unrealized gains/(losses)		252		(82	)

Purchases		103		380

Sales		(56	)	(96	)

Settlements		(142	)	(250	)

Transfers into level 3		616		295

Transfers out of level 3		(350	)	(354	)
Ending balance		$10,715		$8,474
Other cash instruments
Beginning balance		$ 642		$ 651

Net realized gains/(losses)		11		11

Net unrealized gains/(losses)		(5	)	(3	)

Purchases		78		50

Sales		(45	)	(128	)

Settlements		(65	)	(39	)

Transfers into level 3		41		86

Transfers out of level 3		(35	)	(26	)
Ending balance		$ 622		$ 602

Level 3 Rollforward Commentary

Three Months Ended March 2017. The net realized and unrealized gains on level 3 cash instrument assets of $533 million (reflecting $131 million of net realized gains and $402 million of net unrealized gains) for the three months ended March 2017 include gains/(losses) of approximately $(10) million, $396 million and $147 million reported in “Market making,” “Other principal transactions” and “Interest income,” respectively.

The net unrealized gain on level 3 cash instrument assets for the three months ended March 2017 primarily reflected gains on private equity securities, principally driven by strong corporate performance and company-specific events.

Transfers into level 3 during the three months ended March 2017 primarily reflected transfers of certain corporate loans and debt securities and private equity securities from level 2, principally due to reduced price transparency as a result of a lack of market evidence, including fewer transactions in these instruments.

Transfers out of level 3 during the three months ended March 2017 primarily reflected transfers of certain corporate loans and debt securities to level 2, principally due to certain unobservable duration and yield inputs no longer being significant to the valuation of these instruments and certain private equity securities to level 2, principally due to increased price transparency as a result of market evidence, including new transactions in these instruments.

Three Months Ended March 2016. The net realized and unrealized gains on level 3 cash instrument assets of $110 million (reflecting $150 million of realized gains and $40 million of unrealized losses) for the three months ended March 2016 include gains/(losses) of approximately $(115) million, $9 million and $216 million reported in “Market making,” “Other principal transactions” and “Interest income,” respectively.

The net unrealized loss on level 3 cash instrument assets for the three months ended March 2016 reflected losses on private equity securities principally driven by lower global equity prices and corporate performance.

Transfers into level 3 during the three months ended March 2016 primarily reflected transfers of certain corporate loans and debt securities, private equity 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 market transactions in these instruments, and transfers of certain other corporate loans and debt securities from level 2 principally due to certain unobservable yield inputs becoming significant to the valuation of these instruments.

Transfers out of level 3 during the three months ended March 2016 primarily reflected transfers of certain private equity securities, corporate loans and 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.

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.

Substantially all of the firm’s investments in funds at NAV 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. Private equity, credit and real estate funds are 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 for investments in, and relationships with, covered funds that were in place prior to December 2013 through July 2017, and in December 2016 issued guidance that permitted banking entities to apply for an extension of up to an additional five years (through July 2022) for certain legacy “illiquid funds” (as defined by the Volcker Rule). The firm received this extension for substantially all of its remaining investments in, and relationships with, covered funds in the table below. The firm will continue to manage and conform its investments in, and relationships with, such covered funds, taking into account the extended conformance period under the Volcker Rule.

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 March 2017
Private equity funds	$4,514	$1,397

Credit funds	418	190

Hedge funds	337	—

Real estate funds	914	270
Total	$6,183	$1,857
As of December 2016
Private equity funds	$4,628	$1,393

Credit funds	421	166

Hedge funds	410	—

Real estate funds	1,006	272
Total	$6,465	$1,831