JPMORGAN CHASE & CO | 2013 | FY | 3

Fair value measurement
JPMorgan Chase carries a portion of its assets and liabilities at fair value. These assets and liabilities are predominantly carried at fair value on a recurring basis (i.e., assets and liabilities that are measured and reported at fair value on the Firm’s Consolidated Balance Sheets). Certain assets (e.g., certain mortgage, home equity and other loans, where the carrying value is based on the fair value of the underlying collateral), liabilities and unfunded lending-related commitments are measured at fair value on a nonrecurring basis; that is, they are not measured at fair value on an ongoing basis but are subject to fair value adjustments only in certain circumstances (for example, when there is evidence of impairment).
Fair value is defined as the price 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. Fair value is based on quoted market prices, where available. If listed prices or quotes are not available, fair value is based on models that consider relevant transaction characteristics (such as maturity) and use as inputs observable or unobservable market parameters, including but not limited to yield curves, interest rates, volatilities, equity or debt prices, foreign exchange rates and credit curves. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value, as described below.
Imprecision in estimating unobservable market inputs or other factors can affect the amount of gain or loss recorded for a particular position. Furthermore, while the Firm believes its valuation methods are appropriate and consistent with those of other market participants, the methods and assumptions used reflect management judgment and may vary across the Firm’s businesses and portfolios.
The Firm uses various methodologies and assumptions in the determination of fair value. The use of different methodologies or assumptions to those used by the Firm could result in a different estimate of fair value at the reporting date.
Valuation process
Risk-taking functions are responsible for providing fair value estimates for assets and liabilities carried on the Consolidated Balance Sheets at fair value. The Firm’s valuation control function, which is part of the Firm’s Finance function and independent of the risk-taking functions, is responsible for verifying these estimates and determining any fair value adjustments that may be required to ensure that the Firm’s positions are recorded at fair value. In addition, the Firm has a firmwide Valuation Governance Forum (“VGF”) comprising senior finance and risk executives to oversee the management of risks arising from valuation activities conducted across the Firm. The VGF is chaired by the firm-wide head of the valuation control function, and also includes sub-forums for the Corporate & Investment Bank (“CIB”), Mortgage Banking, (part of Consumer & Community Banking) and certain corporate functions including Treasury and Chief Investment Office (“CIO”).
The valuation control function verifies fair value estimates leveraging independently derived prices, valuation inputs and other market data, where available. Where independent prices or inputs are not available, additional review is performed by the valuation control function to ensure the reasonableness of estimates that cannot be verified to external independent data, and may include: evaluating the limited market activity including client unwinds; benchmarking of valuation inputs to those for similar instruments; decomposing the valuation of structured instruments into individual components; comparing expected to actual cash flows; reviewing profit and loss trends; and reviewing trends in collateral valuation. In addition there are additional levels of management review for more significant or complex positions.
The valuation control function determines any valuation adjustments that may be required to the estimates provided by the risk-taking functions. No adjustments are applied to the quoted market price for instruments classified within level 1 of the fair value hierarchy (see below for further information on the fair value hierarchy). For other positions, judgment is required to assess the need for valuation adjustments to appropriately reflect liquidity considerations, unobservable parameters, and, for certain portfolios that meet specified criteria, the size of the net open risk position. The determination of such adjustments follows a consistent framework across the Firm:
•
Liquidity valuation adjustments are considered when the Firm may not be able to observe a recent market price for a financial instrument that trades in an inactive (or less active) market. The Firm estimates the amount of uncertainty in the initial fair value estimate based on the degree of liquidity in the market. Factors that may be considered in determining the liquidity adjustment include: (1) the amount of time since the last relevant pricing point; (2) whether there was an actual trade or relevant external quotes or alternatively pricing points for similar instruments in active markets; and (3) the volatility of the principal risk component of the financial instrument.
The Firm manages certain portfolios of financial instruments on the basis of net open risk exposure and, as permitted by US GAAP, has elected to estimate the fair value of such portfolios on the basis of a transfer of the entire net open risk position in an orderly transaction. Where this is the case, valuation adjustments may be necessary to reflect the cost of exiting a larger-than-normal market-size net open risk position. Where applied, such adjustments are based on factors that a relevant market participant would consider in the transfer of the net open risk position including the size of the adverse market move that is likely to occur during the period required to reduce the net open risk position to a normal market-size.
•
Unobservable parameter valuation adjustments may be made when positions are valued using internally developed models that incorporate unobservable parameters – that is, parameters that must be estimated and are, therefore, subject to management judgment. Unobservable parameter valuation adjustments are applied to reflect the uncertainty inherent in the valuation estimate provided by the model.
Where appropriate, the Firm also applies adjustments to its estimates of fair value in order to appropriately reflect counterparty credit quality and the Firm’s own creditworthiness, applying a consistent framework across the Firm. For more information on such adjustments see Credit adjustments on page 212 of this Note
Impact of funding on valuation estimates
The Firm incorporates the impact of funding in its valuation estimates where there is evidence that a market participant in the principal market would incorporate it in a transfer of the instrument. As a result, the fair value of collateralized derivatives is estimated by discounting expected future cash flows at the relevant overnight indexed swap (“OIS”) rate given the underlying collateral agreement with the counterparty. Prior to the fourth quarter of 2013, the Firm did not incorporate the impact of funding in its valuation of uncollateralized (including partially collateralized) derivatives and structured notes. However, during the fourth quarter of 2013, the Firm implemented a funding valuation adjustment (“FVA”) framework to incorporate its best estimate of the funding cost or benefit that a relevant market participant would consider in the transfer of an OTC derivative or structured note. As a result, the Firm recorded a one time $1.5 billion loss in principal transactions revenue in the fourth quarter, which was recorded in the CIB.
The FVA framework applies to both assets and liabilities, but the adjustment in the fourth quarter largely relates to uncollateralized derivative receivables given that the impact of the Firm’s own credit risk, which is a significant component of funding costs, is already incorporated in the valuation of liabilities through the application of DVA.
Valuation model review and approval
If prices or quotes are not available for an instrument or a similar instrument, fair value is generally determined using valuation models that consider relevant transaction data such as maturity and use as inputs market-based or independently sourced parameters. Where this is the case the price verification process described above is applied to the inputs to those models.
The Firm’s Model Risk function within the Firm’s Model Risk and Development Group, which in turn reports to the Chief Risk Officer, reviews and approves valuation models used by the Firm. Model reviews consider a number of factors about the model’s suitability for valuation of a particular product including whether it accurately reflects the characteristics and significant risks of a particular instrument; the selection and reliability of model inputs; consistency with models for similar products; the appropriateness of any model-related adjustments; and sensitivity to input parameters and assumptions that cannot be observed from the market. When reviewing a model, the Model Risk function analyzes and challenges the model methodology and the reasonableness of model assumptions and may perform or require additional testing, including back-testing of model outcomes.
New significant valuation models, as well as material changes to existing models, are reviewed and approved prior to implementation except where specified conditions are met. The Model Risk function performs an annual firmwide model risk assessment where developments in the product or market are considered in determining whether valuation models which have already been reviewed need to be reviewed and approved again.
Valuation hierarchy
A three-level valuation hierarchy has been established under U.S. GAAP for disclosure of fair value measurements. The valuation hierarchy is based on the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows.
•
Level 1 – inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
•
Level 2 – inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
•
Level 3 – one or more inputs to the valuation methodology are unobservable and significant to the fair value measurement.
A financial instrument’s categorization within the valuation hierarchy is based on the lowest level of input that is significant to the fair value measurement.
The following table describes the valuation methodologies used by the Firm to measure its more significant products/instruments at fair value, including the general classification of such instruments pursuant to the valuation hierarchy.
 
Product/instrument
 Valuation methodology
Classifications in the valuation hierarchy
 
Securities financing agreements
Valuations are based on discounted cash flows, which consider:
Level 2
 
 • Derivative features. For further information refer to the
   discussion of derivatives below.
 
 • Market rates for the respective maturity
 
 • Collateral
 
Loans and lending-related commitments - wholesale
 
 
Trading portfolio
Where observable market data is available, valuations are based on:
Level 2 or 3
 
 
 • Observed market prices (circumstances are limited)
 
 
 
 • Relevant broker quotes
 
 
 
 • Observed market prices for similar instruments
 
 
 
Where observable market data is unavailable or limited, valuations are based on discounted cash flows, which consider the following:
 
 
 
• Yield
 
 
 
• Lifetime credit losses
 
 
 
• Loss severity
 
 
 
• Prepayment speed
 
 
 
• Servicing costs
 
 
Loans held for investment and associated lending related commitments
Valuations are based on discounted cash flows, which consider:
Predominantly level 3
 
• Credit spreads, derived from the cost of CDS; or benchmark credit curves developed by the Firm, by industry and credit rating, and which take into account the difference in loss severity rates between bonds and loans
 
 
 
 
• Prepayment speed
 
 
 
Lending related commitments are valued similar to loans and reflect the portion of an unused commitment expected, based on the Firm’s average portfolio historical experience, to become funded prior to an obligor default
 
 
 
 
 
 
 
 
 
For information regarding the valuation of loans measured at collateral value, see Note 14 on pages 258-283 of this Annual Report.
 
 
 
 
 
Loans - consumer
 
 
 
Held for investment consumer loans, excluding credit card
Valuations are based on discounted cash flows, which consider:
Predominantly level 3
 
• Discount rates (derived from primary origination rates and market activity)
 
 
 
 
• Expected lifetime credit losses (considering expected and current default rates for existing portfolios, collateral prices, and economic environment expectations (i.e., unemployment rates))
 
 
 
 
 
 
 
 
• Estimated prepayments
 
 
 
• Servicing costs
 
 
 
• Market liquidity
 
 
 
For information regarding the valuation of loans measured at collateral value, see Note 14 on pages 258-283 of this Annual Report.
 
 
 
 
 
Held for investment credit card receivables
Valuations are based on discounted cash flows, which consider:
Level 3
 
• Projected interest income and late fee revenue, funding, servicing and credit costs, and loan repayment rates
 
 
 
 
• Estimated life of receivables (based on projected loan payment rates)
 
 
• Discount rate - based on expected return on receivables
 
 
 
• Credit costs - allowance for loan losses is considered a reasonable proxy for the credit cost based on the short-term nature of credit card receivables
 
 
Trading loans - Conforming residential mortgage loans expected to be sold
Fair value is based upon observable prices for mortgage-backed securities with similar collateral and incorporates adjustments to these prices to account for differences between the securities and the value of the underlying loans, which include credit characteristics, portfolio composition, and liquidity.
Predominantly level 2
 
 
 
 
 
 
Product/instrument
Valuation methodology, inputs and assumptions
Classifications in the valuation hierarchy
Securities
Quoted market prices are used where available.
Level 1
 
In the absence of quoted market prices, securities are valued based on:
Level 2 or 3
 
• Observable market prices for similar securities
 
 
• Relevant broker quotes
 
 
• Discounted cash flows
 
 
In addition, the following inputs to discounted cash flows are used for the following products:
 
 
Mortgage- and asset-backed securities specific inputs:
 
 
• Collateral characteristics
 
 
• Deal-specific payment and loss allocations
 
 
• Current market assumptions related to yield, prepayment speed, conditional default rates and loss severity
 
 
Collateralized loan obligations (“CLOs”), specific inputs:
 
 
• Collateral characteristics
 
 
• Deal-specific payment and loss allocations
 
 
• Expected prepayment speed, conditional default rates, loss severity
 
 
• Credit spreads
 
 
• Credit rating data
 
Physical commodities
Valued using observable market prices or data
Predominantly Level 1 and 2
Derivatives
Exchange-traded derivatives that are actively traded and valued using the exchange price, and over-the-counter contracts where quoted prices are available in an active market.
Level 1
 
Derivatives that are valued using models such as the Black-Scholes option pricing model, simulation models, or a combination of models, that use observable or unobservable valuation inputs (e.g. plain vanilla options and interest rate and credit default swaps). Inputs include:
Level 2 or 3
 
 
 
 
• Contractual terms including the period to maturity
 
 
• Readily observable parameters including interest rates and volatility
 
 
• Credit quality of the counterparty and of the Firm
 
 
• Market funding levels
 
 
• Correlation levels
 
 
In addition, the following specific inputs are used for the following derivatives that are valued based on models with significant unobservable inputs:
 
 
Structured credit derivatives specific inputs include:
 
 
• CDS spreads and recovery rates
 
 
• Credit correlation between the underlying debt instruments (levels are modeled on a transaction basis and calibrated to liquid benchmark tranche indices)
 
 
 
 
 
 
• Actual transactions, where available, are used to regularly recalibrate unobservable parameters
 
 
 
 
Certain long-dated equity option specific inputs include:
 
 
• Long-dated equity volatilities
 
 
Certain interest rate and FX exotic options specific inputs include:
 
 
• Interest rate correlation
 
 
• Interest rate spread volatility
 
 
• Foreign exchange correlation
 
 
• Correlation between interest rates and foreign exchange rates
 
 
• Parameters describing the evolution of underlying interest rates
 
 
Certain commodity derivatives specific inputs include:
 
 
• Commodity volatility
 
 
• Forward commodity price
 
 
Adjustments to reflect counterparty credit quality (credit valuation adjustments or “CVA”), the Firms own creditworthiness (debit valuation adjustments or “DVA”), and FVA to incorporate the impact of funding see page 212 of this Note.
 
 
 
 
 
 
 
 
Product/instrument
Valuation methodology, inputs and assumptions
Classification in the valuation hierarchy
 
Mortgage servicing rights (“MSRs”)
See Mortgage servicing rights in Note 17 on pages 299-304 of this Annual Report.
Level 3
 
 
 
Private equity direct investments
Private equity direct investments
Level 3
 
 
Fair value is estimated using all available information and considering the range of potential inputs, including:



 
 
• Transaction prices
 
 
 
• Trading multiples of comparable public companies
 
 
 
• Operating performance of the underlying portfolio company
 
 
 
• Additional available inputs relevant to the investment
 
 
 
• Adjustments as required, since comparable public companies are not identical to the company being valued, and for company-specific issues and lack of liquidity
 
 
 
Public investments held in the Private Equity portfolio
Level 1 or 2
 
 
• Valued using observable market prices less adjustments for relevant restrictions, where applicable
 
 
 
 
 
Fund investments (i.e., mutual/collective investment funds, private equity funds, hedge funds, and real estate funds)
Net asset value (“NAV”)
 
 
• NAV is validated by sufficient level of observable activity (i.e., purchases and sales)
Level 1
 
 
 
• Adjustments to the NAV as required, for restrictions on redemption (e.g., lock up periods or withdrawal limitations) or where observable activity is limited
Level 2 or 3
 
 
 
 
Beneficial interests issued by consolidated VIE
Valued using observable market information, where available
Level 2 or 3
 
In the absence of observable market information, valuations are based on the fair value of the underlying assets held by the VIE
 
 
Long-term debt, not carried at fair value
Valuations are based on discounted cash flows, which consider:
Predominantly level 2
 
•  Market rates for respective maturity
 
 
• The Firm’s own creditworthiness (DVA), see page 212 of this Note.
 
Structured notes (included in deposits, other borrowed funds and long-term debt)
• Valuations are based on discounted cash flow analyses that consider the embedded derivative and the terms and payment structure of the note.
• The embedded derivative features are considered using models such as the Black-Scholes option pricing model, simulation models, or a combination of models that use observable or unobservable valuation inputs, depending on the embedded derivative. The specific inputs used vary according to the nature of the embedded derivative features, as described in the discussion above regarding derivative valuation. Adjustments are then made to this base valuation to reflect the Firm’s own credit risk (DVA) and to incorporate the impact of funding (FVA). See page 212 of this Note.
Level 2 or 3
 
 
 
 


The following table presents the asset and liabilities measured at fair value as of December 31, 2013 and 2012 by major product category and fair value hierarchy.
Assets and liabilities measured at fair value on a recurring basis
 
Fair value hierarchy
 
 
 
December 31, 2013 (in millions)
Level 1
Level 2
 
Level 3
 
Netting adjustments
Total fair value
Federal funds sold and securities purchased under resale agreements
$
—

$
25,135

 
$
—

 
$
—

$
25,135

Securities borrowed
—

3,739

 
—

 
—

3,739

Trading assets:
 
 
 
 
 
 
 
Debt instruments:
 
 
 
 
 
 
 
Mortgage-backed securities:
 
 
 
 
 
 
 
U.S. government agencies(a)
4

25,582

 
1,005

 
—

26,591

Residential – nonagency
—

1,749

 
726

 
—

2,475

Commercial – nonagency
—

871

 
432

 
—

1,303

Total mortgage-backed securities
4

28,202

 
2,163

 
—

30,369

U.S. Treasury and government agencies(a)
14,933

10,547

 
—

 
—

25,480

Obligations of U.S. states and municipalities
—

6,538

 
1,382

 
—

7,920

Certificates of deposit, bankers’ acceptances and commercial paper
—

3,071

 
—

 
—

3,071

Non-U.S. government debt securities
25,762

22,379

 
143

 
—

48,284

Corporate debt securities
—

24,802

 
5,920

 
—

30,722

Loans(b)
—

17,331

 
13,455

 
—

30,786

Asset-backed securities
—

3,647

 
1,272

 
—

4,919

Total debt instruments
40,699

116,517

 
24,335

 
—

181,551

Equity securities
107,667

954

 
885

 
—

109,506

Physical commodities(c)
4,968

5,217

 
4

 
—

10,189

Other
—

5,659

 
2,000

 
—

7,659

Total debt and equity instruments(d)
153,334

128,347

 
27,224

 
—

308,905

Derivative receivables:
 
 
 
 
 
 
 
Interest rate
419

848,862

 
5,398

 
(828,897
)
25,782

Credit
—

79,754

 
3,766

 
(82,004
)
1,516

Foreign exchange
434

151,521

 
1,644

 
(136,809
)
16,790

Equity
—

45,892

 
7,039

 
(40,704
)
12,227

Commodity
320

34,696

 
722

 
(26,294
)
9,444

Total derivative receivables(e)
1,173

1,160,725

 
18,569

 
(1,114,708
)
65,759

Total trading assets
154,507

1,289,072

 
45,793

 
(1,114,708
)
374,664

Available-for-sale securities:
 
 
 
 
 
 
 
Mortgage-backed securities:
 
 
 
 
 
 
 
U.S. government agencies(a)
—

77,815

 
—

 
—

77,815

Residential – nonagency
—

61,760

 
709

 
—

62,469

Commercial – nonagency
—

15,900

 
525

 
—

16,425

Total mortgage-backed securities
—

155,475

 
1,234

 
—

156,709

U.S. Treasury and government agencies(a)
21,091

298

 
—

 
—

21,389

Obligations of U.S. states and municipalities
—

29,461

 
—

 
—

29,461

Certificates of deposit
—

1,041

 
—

 
—

1,041

Non-U.S. government debt securities
25,648

30,600

 
—

 
—

56,248

Corporate debt securities
—

21,512

 
—

 
—

21,512

Asset-backed securities:
 
 
 
 
 
 
 
Collateralized loan obligations
—

27,409

 
821

 
—

28,230

Other
—

11,978

 
267

 
—

12,245

Equity securities
3,142

—

 
—

 
—

3,142

Total available-for-sale securities
49,881

277,774

 
2,322

 
—

329,977

Loans
—

80

 
1,931

 
—

2,011

Mortgage servicing rights
—

—

 
9,614

 
—

9,614

Other assets:
 
 
 
 
 
 
 
Private equity investments(f)
606

429

 
6,474

 
—

7,509

All other
4,213

289

 
3,176

 
—

7,678

Total other assets
4,819

718

 
9,650

 
—

15,187

Total assets measured at fair value on a recurring basis
$
209,207

$
1,596,518

(g) 
$
69,310

(g) 
$
(1,114,708
)
$
760,327

Deposits
$
—

$
4,369

 
$
2,255

 
$
—

$
6,624

Federal funds purchased and securities loaned or sold under repurchase agreements
—

5,426

 
—

 
—

5,426

Other borrowed funds
—

11,232

 
2,074

 
—

13,306

Trading liabilities:
 
 
 
 
 
 


Debt and equity instruments(d)
61,262

19,055

 
113

 
—

80,430

Derivative payables:
 
 
 
 
 
 


Interest rate
321

822,014

 
3,019

 
(812,071
)
13,283

Credit
—

78,731

 
3,671

 
(80,121
)
2,281

Foreign exchange
443

156,838

 
2,844

 
(144,178
)
15,947

Equity
—

46,552

 
8,102

 
(39,935
)
14,719

Commodity
398

36,609

 
607

 
(26,530
)
11,084

Total derivative payables(e)
1,162

1,140,744

 
18,243

 
(1,102,835
)
57,314

Total trading liabilities
62,424

1,159,799

 
18,356

 
(1,102,835
)
137,744

Accounts payable and other liabilities
—

—

 
25

 
—

25

Beneficial interests issued by consolidated VIEs
—

756

 
1,240

 
—

1,996

Long-term debt
—

18,870

 
10,008

 
—

28,878

Total liabilities measured at fair value on a recurring basis
$
62,424

$
1,200,452

 
$
33,958

 
$
(1,102,835
)
$
193,999

 
Fair value hierarchy
 
 
 
December 31, 2012 (in millions)
Level 1
Level 2
 
Level 3
 
Netting adjustments
Total fair value
Federal funds sold and securities purchased under resale agreements
$
—

$
24,258

 
$
—

 
$
—

$
24,258

Securities borrowed
—

10,177

 
—

 
—

10,177

Trading assets:
 
 
 
 
 
 
 
Debt instruments:
 
 
 
 
 
 
 
Mortgage-backed securities:
 
 
 
 
 
 
 
U.S. government agencies(a)
—

36,240

 
498

 
—

36,738

Residential – nonagency
—

1,509

 
663

 
—

2,172

Commercial – nonagency
—

1,565

 
1,207

 
—

2,772

Total mortgage-backed securities
—

39,314

 
2,368

 
—

41,682

U.S. Treasury and government agencies(a)(h)
15,170

7,255

 
—

 
—

22,425

Obligations of U.S. states and municipalities
—

16,726

 
1,436

 
—

18,162

Certificates of deposit, bankers’ acceptances and commercial paper
—

4,759

 
—

 
—

4,759

Non-U.S. government debt securities(h)
26,095

44,028

 
67

 
—

70,190

Corporate debt securities(h)
—

31,882

 
5,308

 
—

37,190

Loans(b)
—

30,754

 
10,787

 
—

41,541

Asset-backed securities
—

4,182

 
3,696

 
—

7,878

Total debt instruments
41,265

178,900

 
23,662

 
—

243,827

Equity securities
106,898

2,687

 
1,114

 
—

110,699

Physical commodities(c)
10,107

6,066

 
—

 
—

16,173

Other
—

3,483

 
863

 
—

4,346

Total debt and equity instruments(d)
158,270

191,136

 
25,639

 
—

375,045

Derivative receivables:
 
 
 
 
 
 
 
Interest rate(h)
476

1,295,239

 
6,617

 
(1,263,127
)
39,205

Credit
—

93,821

 
6,489

 
(98,575
)
1,735

Foreign exchange(h)
450

143,752

 
3,051

 
(133,111
)
14,142

Equity(h)
—

37,758

 
4,921

 
(33,413
)
9,266

Commodity(h)
316

42,300

 
1,155

 
(33,136
)
10,635

Total derivative receivables(e)
1,242

1,612,870

 
22,233

 
(1,561,362
)
74,983

Total trading assets
159,512

1,804,006

 
47,872

 
(1,561,362
)
450,028

Available-for-sale securities:
 
 
 
 
 
 
 
Mortgage-backed securities:
 
 
 
 
 
 
 
U.S. government agencies(a)
—

98,388

 
—

 
—

98,388

Residential – nonagency
—

74,189

 
450

 
—

74,639

Commercial – nonagency
—

12,948

 
255

 
—

13,203

Total mortgage-backed securities
—

185,525

 
705

 
—

186,230

U.S. Treasury and government agencies(a)(h)
11,089

1,041

 
—

 
—

12,130

Obligations of U.S. states and municipalities
35

21,489

 
187

 
—

21,711

Certificates of deposit
—

2,783

 
—

 
—

2,783

Non-U.S. government debt securities(h)
29,556

36,488

 
—

 
—

66,044

Corporate debt securities
—

38,609

 
—

 
—

38,609

Asset-backed securities:
 
 
 
 
 
 
 
Collateralized loan obligations
—

—

 
27,896

 
—

27,896

Other
—

12,843

 
128

 
—

12,971

Equity securities
2,733

38

 
—

 
—

2,771

Total available-for-sale securities
43,413

298,816

 
28,916

 
—

371,145

Loans
—

273

 
2,282

 
—

2,555

Mortgage servicing rights
—

—

 
7,614

 
—

7,614

Other assets:
 
 
 
 
 
 
 
Private equity investments(f)
578

—

 
7,181

 
—

7,759

All other
4,188

253

 
4,258

 
—

8,699

Total other assets
4,766

253

 
11,439

 
—

16,458

Total assets measured at fair value on a recurring basis
$
207,691

$
2,137,783

(g) 
$
98,123

(g) 
$
(1,561,362
)
$
882,235

Deposits
$
—

$
3,750

 
$
1,983

 
$
—

$
5,733

Federal funds purchased and securities loaned or sold under repurchase agreements
—

4,388

 
—

 
—

4,388

Other borrowed funds
—

9,972

 
1,619

 
—

11,591

Trading liabilities:
 
 
 
 
 
 
 
Debt and equity instruments(d)(h)
47,469

13,588

 
205

 
—

61,262

Derivative payables:
 
 
 
 
 
 
 
Interest rate(h)
490

1,256,989

 
3,295

 
(1,235,868
)
24,906

Credit
—

95,411

 
4,616

 
(97,523
)
2,504

Foreign exchange(h)
428

155,323

 
4,801

 
(141,951
)
18,601

Equity(h)
—

37,808

 
6,727

 
(32,716
)
11,819

Commodity(h)
176

46,548

 
901

 
(34,799
)
12,826

Total derivative payables(e)
1,094

1,592,079

 
20,340

 
(1,542,857
)
70,656

Total trading liabilities
48,563

1,605,667

 
20,545

 
(1,542,857
)
131,918

Accounts payable and other liabilities
—

—

 
36

 
—

36

Beneficial interests issued by consolidated VIEs
—

245

 
925

 
—

1,170

Long-term debt
—

22,312

 
8,476

 
—

30,788

Total liabilities measured at fair value on a recurring basis
$
48,563

$
1,646,334

 
$
33,584

 
$
(1,542,857
)
$
185,624

(a)
At December 31, 2013 and 2012, included total U.S. government-sponsored enterprise obligations of $91.5 billion and $119.4 billion, respectively, which were predominantly mortgage-related.
(b)
At December 31, 2013 and 2012, included within trading loans were $14.8 billion and $26.4 billion, respectively, of residential first-lien mortgages, and $2.1 billion and $2.2 billion, respectively, of commercial first-lien mortgages. Residential mortgage loans include conforming mortgage loans originated with the intent to sell to U.S. government agencies of $6.0 billion and $17.4 billion, respectively, and reverse mortgages of $3.6 billion and $4.0 billion, respectively.
(c)
Physical commodities inventories are generally accounted for at the lower of cost or market. “Market” is a term defined in U.S. GAAP as not exceeding fair value less costs to sell (“transaction costs”). Transaction costs for the Firm’s physical commodities inventories are either not applicable or immaterial to the value of the inventory. Therefore, market approximates fair value for the Firm’s physical commodities inventories. When fair value hedging has been applied (or when market is below cost), the carrying value of physical commodities approximates fair value, because under fair value hedge accounting, the cost basis is adjusted for changes in fair value. For a further discussion of the Firm’s hedge accounting relationships, see Note 6 on pages 220–233 of this Annual Report. To provide consistent fair value disclosure information, all physical commodities inventories have been included in each period presented.
(d)
Balances reflect the reduction of securities owned (long positions) by the amount of securities sold but not yet purchased (short positions) when the long and short positions have identical Committee on Uniform Security Identification Procedures numbers (“CUSIPs”).
(e)
As permitted under U.S. GAAP, the Firm has elected to net derivative receivables and derivative payables and the related cash collateral received and paid when a legally enforceable master netting agreement exists. For purposes of the tables above, the Firm does not reduce derivative receivables and derivative payables balances for this netting adjustment, either within or across the levels of the fair value hierarchy, as such netting is not relevant to a presentation based on the transparency of inputs to the valuation of an asset or liability. Therefore, the balances reported in the fair value hierarchy table are gross of any counterparty netting adjustments. However, if the Firm were to net such balances within level 3, the reduction in the level 3 derivative receivables and payables balances would be $7.6 billion and $7.4 billion at December 31, 2013 and 2012, respectively; this is exclusive of the netting benefit associated with cash collateral, which would further reduce the level 3 balances.
(f)
Private equity instruments represent investments within the Corporate/Private Equity line of business. The cost basis of the private equity investment portfolio totaled $8.0 billion and $8.4 billion at December 31, 2013 and 2012, respectively.
(g)
Includes investments in hedge funds, private equity funds, real estate and other funds that do not have readily determinable fair values. The Firm uses net asset value per share when measuring the fair value of these investments. At December 31, 2013 and 2012, the fair values of these investments were $3.2 billion and $4.9 billion, respectively, of which $899 million and $1.1 billion, respectively were classified in level 2, and $2.3 billion and $3.8 billion, respectively, in level 3.
(h)
The prior period amounts have been revised. This revision had no impact on the Firm’s Consolidated Balance Sheets or its results of operations.


Transfers between levels for instruments carried at fair value on a recurring basis
For the year ended December 31, 2013 and 2011, there were no significant transfers between levels 1 and 2.
During the year ended December 31, 2013, transfers from level 3 to level 2 included certain highly rated CLOs, including $27.4 billion held in the Firm’s available-for-sale (“AFS”) securities portfolio and $1.4 billion held in the trading portfolio, based on increased liquidity and price transparency; and $1.3 billion of long-term debt, largely driven by an increase in observability of certain equity structured notes. Transfers from level 2 to level 3 included $1.4 billion of corporate debt securities in the trading portfolio largely driven by a decrease in observability for certain credit instruments.
For the year ended December 31, 2012, $113.9 billion of settled U.S. government agency mortgage-backed securities were transferred from level 1 to level 2. While the U.S. government agency mortgage-backed securities market remained highly liquid and transparent, the transfer reflected greater market price differentiation between settled securities based on certain underlying loan specific factors. There were no significant transfers from level 2 to level 1 for the year ended December 31, 2012.
For the years ended December 31, 2012 and 2011, there were no significant transfers from level 2 into level 3. For the year ended December 31, 2012, transfers from level 3 into level 2 included $1.2 billion of derivative payables based on increased observability of certain structured equity derivatives; and $1.8 billion of long-term debt due to increased observability of certain equity structured notes. For the year ended December 31, 2011, transfers from level 3 into level 2 included $2.6 billion of long-term debt due to a decrease in valuation uncertainty of certain structured notes.
All transfers are assumed to occur at the beginning of the quarterly reporting period in which they occur.
During 2012 the liquidity for certain collateralized loan obligations increased and price transparency improved. Accordingly, the Firm incorporated a revised valuation model into its valuation process for CLOs to better calibrate to market data where available. The Firm began to verify fair value estimates from this model to independent sources during the fourth quarter of 2012. Although market liquidity and price transparency have improved, CLO market prices were not yet considered materially observable and therefore CLOs remained in level 3 as of December 31, 2012. The change in the valuation process did not have a significant impact on the fair value of the Firm’s CLO positions. As previously described, a portion of the CLOs that were subject to the revised valuation model (namely certain highly rated CLOs) were transferred from level 3 to level 2 of the fair value hierarchy during the year ended December 31, 2013.

Level 3 valuations
The Firm has established well-documented processes for determining fair value, including for instruments where fair value is estimated using significant unobservable inputs (level 3). For further information on the Firm’s valuation process and a detailed discussion of the determination of fair value for individual financial instruments, see pages 196–200 of this Note.
Estimating fair value requires the application of judgment. The type and level of judgment required is largely dependent on the amount of observable market information available to the Firm. For instruments valued using internally developed models that use significant unobservable inputs and are therefore classified within level 3 of the fair value hierarchy, judgments used to estimate fair value are more significant than those required when estimating the fair value of instruments classified within levels 1 and 2.
In arriving at an estimate of fair value for an instrument within level 3, management must first determine the appropriate model to use. Second, due to the lack of observability of significant inputs, management must assess all relevant empirical data in deriving valuation inputs — including, but not limited to, transaction details, yield curves, interest rates, prepayment speed, default rates, volatilities, correlations, equity or debt prices, valuations of comparable instruments, foreign exchange rates and credit curves.
Finally, management judgment must be applied to assess the appropriate level of valuation adjustments to reflect counterparty credit quality, the Firm’s creditworthiness, the impact of funding, constraints on liquidity and unobservable parameters, where relevant. The judgments made are typically affected by the type of product and its specific contractual terms, and the level of liquidity for the product or within the market as a whole.
The following table presents the Firm’s primary level 3 financial instruments, the valuation techniques used to measure the fair value of those financial instruments, the significant unobservable inputs, the range of values for those inputs and, for certain instruments, the weighted averages of such inputs. While the determination to classify an instrument within level 3 is based on the significance of the unobservable inputs to the overall fair value measurement, level 3 financial instruments typically include observable components (that is, components that are actively quoted and can be validated to external sources) in addition to the unobservable components. The level 1 and/or level 2 inputs are not included in the table. In addition, the Firm manages the risk of the observable components of level 3 financial instruments using securities and derivative positions that are classified within levels 1 or 2 of the fair value hierarchy.
The range of values presented in the table is representative of the highest and lowest level input used to value the significant groups of instruments within a product/instrument classification. The input range does not reflect the level of input uncertainty; rather, it is driven by the different underlying characteristics of the various instruments within the classification. For example, two option contracts may have similar levels of market risk exposure and valuation uncertainty, but may have significantly different implied volatility levels because the option contracts have different underlyings, tenors, or strike prices.
Where provided, the weighted averages of the input values presented in the table are calculated based on the fair value of the instruments that the input is being used to value. In the Firm’s view, the input range and the weighted average value do not reflect the degree of input uncertainty or an assessment of the reasonableness of the Firm’s estimates and assumptions. Rather, they reflect the characteristics of the various instruments held by the Firm and the relative distribution of instruments within the range of characteristics. The input range and weighted average values will therefore vary from period-to-period and parameter to parameter based on the characteristics of the instruments held by the Firm at each balance sheet date.
For the Firm’s derivatives and structured notes positions classified within level 3, the equity and interest rate correlation inputs used in estimating fair value were concentrated at the upper end of the range presented, while the credit correlation inputs were distributed across the range presented and the foreign exchange correlation inputs were concentrated at the lower end of the range presented. In addition, the interest rate volatility inputs used in estimating fair value were concentrated at the upper end of the range presented, while equity volatilities were concentrated at the lower end of the range. The forward commodity prices used in estimating the fair value of commodity derivatives were concentrated within the lower end of the range presented.

Level 3 inputs(a)
 
December 31, 2013 (in millions, except for ratios and basis points)
 
 
 
 
 
Product/Instrument
Fair value
 
Principal valuation technique
Unobservable inputs
Range of input values
Weighted average
Residential mortgage-backed securities and loans
$
11,089

 
Discounted cash flows
Yield
3
 %
-
18%
7%
 
 
 
Prepayment speed
0
 %
-
15%
7%
 
 
 
 
Conditional default rate
0
 %
-
100%
26%
 
 
 
 
Loss severity
0
 %
-
100%
21%
Commercial mortgage-backed securities and loans(b)
1,204

 
Discounted cash flows
Yield
6
 %
-
29%
11%
 
 
 
Conditional default rate
0
 %
-
100%
10%
 
 
 
 
Loss severity
0
 %
-
40%
33%
Corporate debt securities, obligations of U.S. states and municipalities, and other(c)
15,209

 
Discounted cash flows
Credit spread
88 bps

-
255 bps
154 bps
 
 
 
Yield
1
 %
-
40%
10%
5,843

 
Market comparables
Price
3

-
122
95
Net interest rate derivatives
2,379

 
Option pricing
Interest rate correlation
(75
)%
-
95%
 
 
 
 
 
Interest rate spread volatility
0
 %
-
60%
 
Net credit derivatives(b)(c)
95

 
Discounted cash flows
Credit correlation
34
 %
-
82%
 
Net foreign exchange derivatives
(1,200
)
 
Option pricing
Foreign exchange correlation
45
 %
-
75%
 
Net equity derivatives
(1,063
)
 
Option pricing
Equity volatility
20
 %
-
55%
 
Net commodity derivatives
115

 
Discounted cash flows
Forward commodity price
$20
-
$160 per megawatt hour
Collateralized loan obligations
821

 
Discounted cash flows
Credit spread
214 bps

-
575 bps
234 bps
 
 
 
 
Prepayment speed
20%
20%
 
 
 
 
Conditional default rate
2%
2%
 
 
 
 
Loss severity
40%
40%
 
487

 
Market comparables
Price
0

-
114
88
Mortgage servicing rights (“MSRs”)
9,614

 
Discounted cash flows
Refer to Note 17 on pages 299–304 of this Annual Report.
 
Private equity direct investments
4,872

 
Market comparables
EBITDA multiple
4.0x

-
14.7x
8.1x
 
 
 
Liquidity adjustment
0
 %
-
37%
11%
Private equity fund investments(d)
1,602

 
Net asset value
Net asset value(f)
 
 
Long-term debt, other borrowed funds, and deposits(e)
13,282

 
Option pricing
Interest rate correlation
(75
)%
-
95%
 
 
 
 
Foreign exchange correlation
0
 %
-
75%
 
 
 
 
Equity correlation
(50
)%
-
85%
 
 
1,055

 
Discounted cash flows
Credit correlation
34
 %
-
82%
 

(a)
The categories presented in the table have been aggregated based upon the product type, which may differ from their classification on the Consolidated Balance Sheets.
(b)
The unobservable inputs and associated input ranges for approximately $735 million of credit derivative receivables and $644 million of credit derivative payables with underlying mortgage risk have been included in the inputs and ranges provided for commercial mortgage-backed securities and loans.
(c)
The unobservable inputs and associated input ranges for approximately $1.0 billion of credit derivative receivables and $890 million of credit derivative payables with underlying asset-backed securities risk have been included in the inputs and ranges provided for corporate debt securities, obligations of U.S. states and municipalities and other.
(d)
As of December 31, 2013, $757 million of private equity fund exposure was carried at a discount to net asset value per share.
(e)
Long-term debt, other borrowed funds and deposits include structured notes issued by the Firm that are predominantly financial instruments containing embedded derivatives. The estimation of the fair value of structured notes is predominantly based on the derivative features embedded within the instruments. The significant unobservable inputs are broadly consistent with those presented for derivative receivables.
(f)
The range has not been disclosed due to the wide range of possible values given the diverse nature of the underlying investments.

Changes in and ranges of unobservable inputs
The following discussion provides a description of the impact on a fair value measurement of a change in each unobservable input in isolation, and the interrelationship between unobservable inputs, where relevant and significant. The impact of changes in inputs may not be independent as a change in one unobservable input may give rise to a change in another unobservable input, and where relationships exist between two unobservable inputs, those relationships are discussed below. Relationships may also exist between observable and unobservable inputs (for example, as observable interest rates rise, unobservable prepayment rates decline). Such relationships have not been included in the discussion below. In addition, for each of the individual relationships described below, the inverse relationship would also generally apply.
In addition, the following discussion provides a description of attributes of the underlying instruments and external market factors that affect the range of inputs used in the valuation of the Firm’s positions.
Yield – The yield of an asset is the interest rate used to discount future cash flows in a discounted cash flow calculation. An increase in the yield, in isolation, would result in a decrease in a fair value measurement.
Credit spread – The credit spread is the amount of additional annualized return over the market interest rate that a market participant would demand for taking exposure to the credit risk of an instrument. The credit spread for an instrument forms part of the discount rate used in a discounted cash flow calculation. Generally, an increase in the credit spread would result in a decrease in a fair value measurement.
The yield and the credit spread of a particular mortgage-backed security primarily reflect the risk inherent in the instrument. The yield is also impacted by the absolute level of the coupon paid by the instrument (which may not correspond directly to the level of inherent risk). Therefore, the range of yield and credit spreads reflects the range of risk inherent in various instruments owned by the Firm. The risk inherent in mortgage-backed securities is driven by the subordination of the security being valued and the characteristics of the underlying mortgages within the collateralized pool, including borrower FICO scores, loan-to-value ratios for residential mortgages and the nature of the property and/or any tenants for commercial mortgages. For corporate debt securities, obligations of U.S. states and municipalities and other similar instruments, credit spreads reflect the credit quality of the obligor and the tenor of the obligation.
Prepayment speed – The prepayment speed is a measure of the voluntary unscheduled principal repayments of a prepayable obligation in a collateralized pool. Prepayment speeds generally decline as borrower delinquencies rise. An increase in prepayment speeds, in isolation, would result in a decrease in a fair value measurement of assets valued at a premium to par and an increase in a fair value measurement of assets valued at a discount to par.
Prepayment speeds may vary from collateral pool to collateral pool, and are driven by the type and location of the underlying borrower, the remaining tenor of the obligation as well as the level and type (e.g., fixed or floating) of interest rate being paid by the borrower. Typically collateral pools with higher borrower credit quality have a higher prepayment rate than those with lower borrower credit quality, all other factors being equal.
Conditional default rate – The conditional default rate is a measure of the reduction in the outstanding collateral balance underlying a collateralized obligation as a result of defaults. While there is typically no direct relationship between conditional default rates and prepayment speeds, collateralized obligations for which the underlying collateral have high prepayment speeds will tend to have lower conditional default rates. An increase in conditional default rates would generally be accompanied by an increase in loss severity and an increase in credit spreads. An increase in the conditional default rate, in isolation, would result in a decrease in a fair value measurement. Conditional default rates reflect the quality of the collateral underlying a securitization and the structure of the securitization itself. Based on the types of securities owned in the Firm’s market-making portfolios, conditional default rates are most typically at the lower end of the range presented.
Loss severity – The loss severity (the inverse concept is the recovery rate) is the expected amount of future realized losses resulting from the ultimate liquidation of a particular loan, expressed as the net amount of loss relative to the outstanding loan balance. An increase in loss severity is generally accompanied by an increase in conditional default rates. An increase in the loss severity, in isolation, would result in a decrease in a fair value measurement.
The loss severity applied in valuing a mortgage-backed security investment depends on a host of factors relating to the underlying mortgages. This includes the loan-to-value ratio, the nature of the lender’s charge over the property and various other instrument-specific factors.
Correlation – Correlation is a measure of the relationship between the movements of two variables (e.g., how the change in one variable influences the change in the other). Correlation is a pricing input for a derivative product where the payoff is driven by one or more underlying risks. Correlation inputs are related to the type of derivative (e.g., interest rate, credit, equity and foreign exchange) due to the nature of the underlying risks. When parameters are positively correlated, an increase in one parameter will result in an increase in the other parameter. When parameters are negatively correlated, an increase in one parameter will result in a decrease in the other parameter. An increase in correlation can result in an increase or a decrease in a fair value measurement. Given a short correlation position, an increase in correlation, in isolation, would generally result in a decrease in a fair value measurement. Correlation inputs between risks within the same asset class are generally narrower than those between underlying risks across asset classes. In addition, the ranges of credit correlation inputs tend to be narrower than those affecting other asset classes.
The level of correlation used in the valuation of derivatives with multiple underlying risks depends on a number of factors including the nature of those risks. For example, the correlation between two credit risk exposures would be different than that between two interest rate risk exposures. Similarly, the tenor of the transaction may also impact the correlation input as the relationship between the underlying risks may be different over different time periods. Furthermore, correlation levels are very much dependent on market conditions and could have a relatively wide range of levels within or across asset classes over time, particularly in volatile market conditions.
Volatility – Volatility is a measure of the variability in possible returns for an instrument, parameter or market index given how much the particular instrument, parameter or index changes in value over time. Volatility is a pricing input for options, including equity options, commodity options, and interest rate options. Generally, the higher the volatility of the underlying, the riskier the instrument. Given a long position in an option, an increase in volatility, in isolation, would generally result in an increase in a fair value measurement.
The level of volatility used in the valuation of a particular option-based derivative depends on a number of factors, including the nature of the risk underlying the option (e.g., the volatility of a particular equity security may be significantly different from that of a particular commodity index), the tenor of the derivative as well as the strike price of the option.
EBITDA multiple – EBITDA multiples refer to the input (often derived from the value of a comparable company) that is multiplied by the historic and/or expected earnings before interest, taxes, depreciation and amortization (“EBITDA”) of a company in order to estimate the company’s value. An increase in the EBITDA multiple, in isolation, net of adjustments, would result in an increase in a fair value measurement.
Net asset value – Net asset value is the total value of a fund’s assets less liabilities. An increase in net asset value would result in an increase in a fair value measurement.
Changes in level 3 recurring fair value measurements
The following tables include a rollforward of the Consolidated Balance Sheet amounts (including changes in fair value) for financial instruments classified by the Firm within level 3 of the fair value hierarchy for the years ended December 31, 2013, 2012 and 2011. When a determination is made to classify a financial instrument within level 3, the determination is based on the significance of the unobservable parameters to the overall fair value measurement. However, level 3 financial instruments typically include, in addition to the unobservable or level 3 components, observable components (that is, components that are actively quoted and can be validated to external sources); accordingly, the gains and losses in the table below include changes in fair value due in part to observable factors that are part of the valuation methodology. Also, the Firm risk-manages the observable components of level 3 financial instruments using securities and derivative positions that are classified within level 1 or 2 of the fair value hierarchy; as these level 1 and level 2 risk management instruments are not included below, the gains and losses in the following tables do not reflect the effect of the Firm’s risk management activities related to such level 3 instruments.
 
Fair value measurements using significant unobservable inputs
 
 
Year ended
December 31, 2013
(in millions)
Fair value at January 1, 2013
Total realized/unrealized gains/(losses)
 
 
 
 
Transfers into and/or out of level 3(h)
Fair value at Dec. 31, 2013
 
Change in unrealized gains/(losses) related to financial instruments held at Dec. 31, 2013
Purchases(g)
Sales
 
Settlements
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
Trading assets:
 
 
 
 
 
 
 
 
 
 
 
 
Debt instruments:
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government agencies
$
498

$
169

 
$
819

$
(381
)
 
$
(100
)
$
—

$
1,005

 
$
200

 
Residential – nonagency
663

407

 
780

(1,028
)
 
(91
)
(5
)
726

 
205

 
Commercial – nonagency
1,207

114

 
841

(1,522
)
 
(208
)
—

432

 
(4
)
 
Total mortgage-backed securities
2,368

690

 
2,440

(2,931
)
 
(399
)
(5
)
2,163

 
401

 
Obligations of U.S. states and municipalities
1,436

71

 
472

(251
)
 
(346
)
—

1,382

 
18

 
Non-U.S. government debt securities
67

4

 
1,449

(1,479
)
 
(8
)
110

143

 
(1
)
 
Corporate debt securities
5,308

103

 
7,602

(5,975
)
 
(1,882
)
764

5,920

 
466

 
Loans
10,787

665

 
10,411

(7,431
)
 
(685
)
(292
)
13,455

 
315

 
Asset-backed securities
3,696

191

 
1,912

(2,379
)
 
(292
)
(1,856
)
1,272

 
105

 
Total debt instruments
23,662

1,724

 
24,286

(20,446
)
 
(3,612
)
(1,279
)
24,335

 
1,304

 
Equity securities
1,114

(41
)
 
328

(266
)
 
(135
)
(115
)
885

 
46

 
Physical commodities
—

(4
)
 
—

(8
)
 
—

16

4

 
(4
)
 
Other
863

558

 
659

(95
)
 
(120
)
135

2,000

 
1,074

 
Total trading assets – debt and equity instruments
25,639

2,237

(c) 
25,273

(20,815
)
 
(3,867
)
(1,243
)
27,224

 
2,420

(c) 
Net derivative receivables:(a)
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate
3,322

1,358

 
344

(220
)
 
(2,391
)
(34
)
2,379

 
107

 
Credit
1,873

(1,697
)
 
115

(12
)
 
(357
)
173

95

 
(1,449
)
 
Foreign exchange
(1,750
)
(101
)
 
3

(4
)
 
683

(31
)
(1,200
)
 
(110
)
 
Equity
(1,806
)
2,587

 
2,918

(3,783
)
 
(1,353
)
374

(1,063
)
 
872

 
Commodity
254

816

 
105

(3
)
 
(1,107
)
50

115

 
410

 
Total net derivative receivables
1,893

2,963

(c) 
3,485

(4,022
)
 
(4,525
)
532

326

 
(170
)
(c) 
Available-for-sale securities:
 
 
 
 
 
 
 
 
 
 
 
 
Asset-backed securities
28,024

4

 
579

(57
)
 
(57
)
(27,405
)
1,088

 
4

 
Other
892

26

 
508

(216
)
 
(6
)
30

1,234

 
25

 
Total available-for-sale securities
28,916

30

(d) 
1,087

(273
)
 
(63
)
(27,375
)
2,322

 
29

(d) 
Loans
2,282

81

(c) 
1,065

(191
)
 
(1,306
)
—

1,931

 
(21
)
(c) 
Mortgage servicing rights
7,614

1,612

(e) 
2,215

(725
)
 
(1,102
)
—

9,614

 
1,612

(e) 
Other assets:
 
 
 
 
 
 
 
 
 
 
 
 
Private equity investments
7,181

645

(c) 
673

(1,137
)
 
(687
)
(201
)
6,474

 
262

(c) 
All other
4,258

98

(f) 
272

(730
)
 
(722
)
—

3,176

 
53

(f) 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fair value measurements using significant unobservable inputs
 
 
Year ended
December 31, 2013
(in millions)
Fair value at January 1, 2013
Total realized/unrealized (gains)/losses
 
 
 
 
Transfers into and/or out of level 3(h)
Fair value at Dec. 31, 2013
 
Change in unrealized (gains)/losses related to financial instruments held at Dec. 31, 2013
Purchases(g)
Sales
Issuances
Settlements
Liabilities:(b)
 
 
 
 
 
 
 
 
 
 
 
 
Deposits
$
1,983

$
(82
)
(c) 
$
—

$
—

$
1,248

$
(222
)
$
(672
)
$
2,255

 
$
(88
)
(c) 
Other borrowed funds
1,619

(177
)
(c) 
—

—

7,108

(6,845
)
369

2,074

 
291

(c) 
Trading liabilities – debt and equity instruments
205

(83
)
(c) 
(2,418
)
2,594

—

(54
)
(131
)
113

 
(100
)
(c) 
Accounts payable and other liabilities
36

(2
)
(f) 
—

—

—

(9
)
—

25

 
(2
)
(f) 
Beneficial interests issued by consolidated VIEs
925

174

(c) 
—

—

353

(212
)
—

1,240

 
167

(c) 
Long-term debt
8,476

(435
)
(c) 
—

—

6,830

(4,362
)
(501
)
10,008

 
(85
)
(c) 
 
Fair value measurements using significant unobservable inputs
 
 
Year ended
December 31, 2012
(in millions)
Fair value at January 1, 2012
Total realized/unrealized gains/(losses)
 
 
 
 
Transfers into and/or out of level 3(h)
Fair value at
Dec. 31, 2012
Change in unrealized gains/(losses) related to financial instruments held at Dec. 31, 2012
Purchases(g)
Sales
 
Settlements
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
Trading assets:
 
 
 
 
 
 
 
 
 
 
 
 
Debt instruments:
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government agencies
$
86

$
(44
)
 
$
575

$
(103
)
 
$
(16
)
$
—

$
498

 
$
(21
)
 
Residential – nonagency
796

151

 
417

(533
)
 
(145
)
(23
)
663

 
74

 
Commercial – nonagency
1,758

(159
)
 
287

(475
)
 
(104
)
(100
)
1,207

 
(145
)
 
Total mortgage-backed securities
2,640

(52
)
 
1,279

(1,111
)
 
(265
)
(123
)
2,368

 
(92
)
 
Obligations of U.S. states and municipalities
1,619

37

 
336

(552
)
 
(4
)
—

1,436

 
(15
)
 
Non-U.S. government debt securities
104

(6
)
 
661

(668
)
 
(24
)
—

67

 
(5
)
 
Corporate debt securities
6,373

187

 
8,391

(6,186
)
 
(3,045
)
(412
)
5,308

 
689

 
Loans
12,209

836

 
5,342

(3,269
)
 
(3,801
)
(530
)
10,787

 
411

 
Asset-backed securities
7,965

272

 
2,550

(6,468
)
 
(614
)
(9
)
3,696

 
184

 
Total debt instruments
30,910

1,274

 
18,559

(18,254
)
 
(7,753
)
(1,074
)
23,662

 
1,172

 
Equity securities
1,177

(209
)
 
460

(379
)
 
(12
)
77

1,114

 
(112
)
 
Other
880

186

 
68

(108
)
 
(163
)
—

863

 
180

 
Total trading assets – debt and equity instruments
32,967

1,251

(c) 
19,087

(18,741
)
 
(7,928
)
(997
)
25,639

 
1,240

(c) 
Net derivative receivables:(a)
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate
3,561

6,930

 
406

(194
)
 
(7,071
)
(310
)
3,322

 
905

 
Credit
7,732

(4,487
)
 
124

(84
)
 
(1,416
)
4

1,873

 
(3,271
)
 
Foreign exchange
(1,263
)
(800
)
 
112

(184
)
 
436

(51
)
(1,750
)
 
(957
)
 
Equity
(3,105
)
168

 
1,676

(2,579
)
 
899

1,135

(1,806
)
 
580

 
Commodity
(687
)
(673
)
 
74

64

 
1,278

198

254

 
(160
)
 
Total net derivative receivables
6,238

1,138

(c) 
2,392

(2,977
)
 
(5,874
)
976

1,893

 
(2,903
)
(c) 
Available-for-sale securities:
 
 
 
 
 
 
 
 
 
 
 
 
Asset-backed securities
24,958

135

 
9,280

(3,361
)
 
(3,104
)
116

28,024

 
118

 
Other
528

55

 
667

(113
)
 
(245
)
—

892

 
59

 
Total available-for-sale securities
25,486

190

(d) 
9,947

(3,474
)
 
(3,349
)
116

28,916

 
177

(d) 
Loans
1,647

695

(c) 
1,536

(22
)
 
(1,718
)
144

2,282

 
12

(c) 
Mortgage servicing rights
7,223

(635
)
(e) 
2,833

(579
)
 
(1,228
)
—

7,614

 
(635
)
(e) 
Other assets:
 
 
 
 
 
 
 
 
 
 
 
 
Private equity investments
6,751

420

(c) 
1,545

(512
)
 
(977
)
(46
)
7,181

 
333

(c) 
All other
4,374

(195
)
(f) 
818

(238
)
 
(501
)
—

4,258

 
(200
)
(f) 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fair value measurements using significant unobservable inputs
 
 
Year ended
December 31, 2012
(in millions)
Fair value at January 1, 2012
Total realized/unrealized (gains)/losses
 
 
 
 
Transfers into and/or out of level 3(h)
Fair value at Dec. 31, 2012
Change in unrealized (gains)/losses related to financial instruments held at Dec. 31, 2012
Purchases(g)
Sales
Issuances
Settlements
Liabilities:(b)
 
 
 
 
 
 
 
 
 
 
 
 
Deposits
$
1,418

$
212

(c) 
$
—

$
—

$
1,236

$
(380
)
$
(503
)
$
1,983

 
$
185

(c) 
Other borrowed funds
1,507

148

(c) 
—

—

1,646

(1,774
)
92

1,619

 
72

(c) 
Trading liabilities – debt and equity instruments
211

(16
)
(c) 
(2,875
)
2,940

—

(50
)
(5
)
205

 
(12
)
(c) 
Accounts payable and other liabilities
51

1

(f) 
—

—

—

(16
)
—

36

 
1

(f) 
Beneficial interests issued by consolidated VIEs
791

181

(c) 
—

—

221

(268
)
—

925

 
143

(c) 
Long-term debt
10,310

328

(c) 
—

—

3,662

(4,511
)
(1,313
)
8,476

 
(101
)
(c) 

 
Fair value measurements using significant unobservable inputs
 
 
Year ended
December 31, 2011
(in millions)
Fair value at January 1, 2011
Total realized/unrealized gains/(losses)
 
 
 
 
Transfers into and/or out of level 3(h)
Fair value at
Dec. 31, 2011
Change in unrealized gains/(losses) related to financial instruments held at Dec. 31, 2011
Purchases(g)
Sales
 
Settlements
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
Trading assets:
 
 
 
 
 
 
 
 
 
 
 
 
Debt instruments:
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government agencies
$
174

$
24

 
$
28

$
(39
)
 
$
(43
)
$
(58
)
$
86

 
$
(51
)
 
Residential – nonagency
687

109

 
708

(432
)
 
(221
)
(55
)
796

 
(9
)
 
Commercial – nonagency
2,069

37

 
796

(973
)
 
(171
)
—

1,758

 
33

 
Total mortgage-backed securities
2,930

170

 
1,532

(1,444
)
 
(435
)
(113
)
2,640

 
(27
)
 
Obligations of U.S. states and municipalities
2,257

9

 
807

(1,465
)
 
(1
)
12

1,619

 
(11
)
 
Non-U.S. government debt securities
202

35

 
552

(531
)
 
(80
)
(74
)
104

 
38

 
Corporate debt securities
4,946

32

 
8,080

(5,939
)
 
(1,005
)
259

6,373

 
26

 
Loans
13,144

329

 
5,532

(3,873
)
 
(2,691
)
(232
)
12,209

 
142

 
Asset-backed securities
8,460

90

 
4,185

(4,368
)
 
(424
)
22

7,965

 
(217
)
 
Total debt instruments
31,939

665

 
20,688

(17,620
)
 
(4,636
)
(126
)
30,910

 
(49
)
 
Equity securities
1,685

267

 
180

(541
)
 
(352
)
(62
)
1,177

 
278

 
Other
930

48

 
36

(39
)
 
(95
)
—

880

 
79

 
Total trading assets – debt and equity instruments
34,554

980

(c) 
20,904

(18,200
)
 
(5,083
)
(188
)
32,967

 
308

(c) 
Net derivative receivables:(a)
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate
2,836

5,205

 
511

(219
)
 
(4,534
)
(238
)
3,561

 
1,497

 
Credit
5,386

2,240

 
22

(13
)
 
116

(19
)
7,732

 
2,744

 
Foreign exchange
(614
)
(1,913
)
 
191

(20
)
 
886

207

(1,263
)
 
(1,878
)
 
Equity
(2,446
)
(60
)
 
715

(1,449
)
 
37

98

(3,105
)
 
(132
)
 
Commodity
(805
)
596

 
328

(350
)
 
(294
)
(162
)
(687
)
 
208

 
Total net derivative receivables
4,357

6,068

(c) 
1,767

(2,051
)
 
(3,789
)
(114
)
6,238

 
2,439

(c) 
Available-for-sale securities:
 
 
 
 
 
 
 
 
 
 
 
 
Asset-backed securities
13,775

(95
)
 
15,268

(1,461
)
 
(2,529
)
—

24,958

 
(106
)
 
Other
512

—

 
57

(15
)
 
(26
)
—

528

 
8

 
Total available-for-sale securities
14,287

(95
)
(d) 
15,325

(1,476
)
 
(2,555
)
—

25,486

 
(98
)
(d) 
Loans
1,466

504

(c) 
326

(9
)
 
(639
)
(1
)
1,647

 
484

(c) 
Mortgage servicing rights
13,649

(7,119
)
(e) 
2,603

—

 
(1,910
)
—

7,223

 
(7,119
)
(e) 
Other assets:
 
 
 
 
 
 
 
 
 
 
 
 
Private equity investments
7,862

943

(c) 
1,452

(2,746
)
 
(594
)
(166
)
6,751

 
(242
)
(c) 
All other
4,179

(54
)
(f) 
938

(139
)
 
(521
)
(29
)
4,374

 
(83
)
(f) 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fair value measurements using significant unobservable inputs
 
 
Year ended
December 31, 2011
(in millions)
Fair value at January 1, 2011
Total realized/unrealized (gains)/losses
 
 
 
 
Transfers into and/or out of level 3(h)
Fair value at Dec. 31, 2011
Change in unrealized (gains)/losses related to financial instruments held at Dec. 31, 2011
Purchases(g)
Sales
Issuances
Settlements
Liabilities:(b)
 
 
 
 
 
 
 
 
 
 
 
 
Deposits
$
773

$
15

(c) 
$
—

$
—

$
433

$
(386
)
$
583

$
1,418

 
$
4

(c) 
Other borrowed funds
1,384

(244
)
(c) 
—

—

1,597

(834
)
(396
)
1,507

 
(85
)
(c) 
Trading liabilities – debt and equity instruments
54

17

(c) 
(533
)
778

—

(109
)
4

211

 
(7
)
(c) 
Accounts payable and other liabilities
236

(61
)
(f) 
—

—

—

(124
)
—

51

 
5

(f) 
Beneficial interests issued by consolidated VIEs
873

17

(c) 
—

—

580

(679
)
—

791

 
(15
)
(c) 
Long-term debt
13,044

60

(c) 
—

—

2,564

(3,218
)
(2,140
)
10,310

 
288

(c) 
(a)
All level 3 derivatives are presented on a net basis, irrespective of underlying counterparty.
(b)
Level 3 liabilities as a percentage of total Firm liabilities accounted for at fair value (including liabilities measured at fair value on a nonrecurring basis) were 18%, 18% and 22% at December 31, 2013, 2012 and 2011, respectively.
(c)
Predominantly reported in principal transactions revenue, except for changes in fair value for Consumer & Community Banking (“CCB”) mortgage loans, lending-related commitments originated with the intent to sell, and mortgage loan purchase commitments, which are reported in mortgage fees and related income.
(d)
Realized gains/(losses) on AFS securities, as well as other-than-temporary impairment losses that are recorded in earnings, are reported in securities gains. Unrealized gains/(losses) are reported in OCI. Realized gains/(losses) and foreign exchange remeasurement adjustments recorded in income on AFS securities were $17 million, $145 million, and $(240) million for the years ended December 31, 2013, 2012 and 2011, respectively. Unrealized gains/(losses) recorded on AFS securities in OCI were $13 million, $45 million and $145 million for the years ended December 31, 2013, 2012 and 2011, respectively.
(e)
Changes in fair value for CCB mortgage servicing rights are reported in mortgage fees and related income.
(f)
Largely reported in other income.
(g)
Loan originations are included in purchases.
(h)
All transfers into and/or out of level 3 are assumed to occur at the beginning of the quarterly reporting period in which they occur.



Level 3 analysis
Consolidated Balance Sheets changes
Level 3 assets (including assets measured at fair value on a nonrecurring basis) were 3.1% of total Firm assets at December 31, 2013. The following describes significant changes to level 3 assets since December 31, 2012, for those items measured at fair value on a recurring basis. For further information on changes impacting items measured at fair value on a nonrecurring basis, see Assets and liabilities measured at fair value on a nonrecurring basis on page 213 of this Annual Report.
For the year ended December 31, 2013
Level 3 assets were $69.3 billion at December 31, 2013, reflecting a decrease of $28.8 billion from December 31, 2012, due to the following:
•
$27.0 billion decrease in asset-backed AFS securities, predominantly driven by transfers of highly rated CLOs from level 3 to into level 2 during the year ended 2013, based on increased liquidity and price transparency;
•
$3.7 billion decrease in gross derivative receivables, predominantly driven by a $2.7 billion decrease from the impact of tightening reference entity credit spreads and risk reductions of credit derivatives, $1.4 billion decrease in foreign exchange derivatives due to market movements, and $1.2 billion decrease in interest rate derivatives due to the increase in interest rates, partially offset by $2.1 billion increase in equity derivatives due to client-driven market-making activity;
•
$1.1 billion decrease in all other assets, predominantly driven by sales of tax-oriented and hedge fund investments, and redemptions from investment funds.
The decreases above are partially offset by:
•
$2.0 billion increase in MSRs. For further discussion of the change, refer to Note 17 on pages 299–304 of this Annual Report;
•
$1.6 billion increase in trading assets – debt and equity instruments, largely driven by net purchases of trading loans, new client-driven financing transactions, and partially offset by transfers of highly rated CLOs from level 3 to into level 2 during the year ended 2013, based on increased liquidity and price transparency.



Gains and Losses
The following describes significant components of total realized/unrealized gains/(losses) for instruments measured at fair value on a recurring basis for the years ended 2013, 2012 and 2011. For further information on these instruments, see Changes in level 3 recurring fair value measurements rollforward tables on pages 207–210 of this Annual Report.
2013
•
$3.0 billion of net gains on derivatives, largely driven by $2.6 billion of gains on equity derivatives, primarily related to client-driven market-making activity and a rise in equity markets; and $1.4 billion of gains, predominantly on interest rate lock and mortgage loan purchase commitments; partially offset by $1.7 billion of losses on credit derivatives from the impact of tightening reference entity credit spreads;
•
$2.2 billion of net gains on trading assets - debt and equity instruments, largely driven by market making and credit spread tightening in nonagency mortgage-backed securities and trading loans, and the impact of market movements on client-driven financing transactions;
•
$1.6 billion of net gains on MSRs. For further discussion of the change, refer to Note 17 on pages 299–304 of this Annual Report.
2012
•
$1.3 billion of net gains on trading assets - debt and equity instruments, largely driven by tightening of credit spreads and fluctuation in foreign exchange rates;
• $1.1 billion of net gains on derivatives, driven by $6.9 billion of net gains predominantly on interest rate lock commitments due to increased volumes and lower interest rates, partially offset by $4.5 billion of net losses on credit derivatives largely as a result of tightening of reference entity credit spreads.
2011
• $7.1 billion of losses on MSRs. For further discussion of the change, refer to Note 17 on pages 299–304 of this Annual Report;
• $6.1 billion of net gains on derivatives, related to declining interest rates and widening of reference entity credit spreads, partially offset by losses due to fluctuation in foreign exchange rates.
Credit and funding adjustments
When determining the fair value of an instrument, it may be necessary to record adjustments to the Firm’s estimates of fair value in order to reflect the counterparty credit quality and the Firm’s own creditworthiness:
•
Credit valuation adjustments (“CVA”) are taken to reflect the credit quality of a counterparty in the valuation of derivatives. CVA adjustments are necessary when the market price (or parameter) is not indicative of the credit quality of the counterparty. As few classes of derivative contracts are listed on an exchange, derivative positions are predominantly valued using models that use as their basis observable market parameters. An adjustment therefore may be necessary to reflect the credit quality of each derivative counterparty to arrive at fair value.
The Firm estimates derivatives CVA using a scenario analysis to estimate the expected credit exposure across all of the Firm’s positions with each counterparty, and then estimates losses as a result of a counterparty credit event. The key inputs to this methodology are (i) the expected positive exposure to each counterparty based on a simulation that assumes the current population of existing derivatives with each counterparty remains unchanged and considers contractual factors designed to mitigate the Firm’s credit exposure, such as collateral and legal rights of offset; (ii) the probability of a default event occurring for each counterparty, as derived from observed or estimated credit default swap (“CDS”) spreads; and (iii) estimated recovery rates implied by CDS, adjusted to consider the differences in recovery rates as a derivative creditor relative to those reflected in CDS spreads, which generally reflect senior unsecured creditor risk.
•
Debit valuation adjustments (“DVA”) are taken to reflect the credit quality of the Firm in the valuation of liabilities measured at fair value. The DVA calculation methodology is generally consistent with the CVA methodology described above and incorporates JPMorgan Chase’s credit spread as observed through the CDS market to estimate the probability of default and loss given default as a result of a systemic event affecting the Firm. Structured notes DVA is estimated using the current fair value of the structured note as the exposure amount, and is otherwise consistent with the derivative DVA methodology.
During the fourth quarter of 2013 the Firm implemented the FVA framework to incorporate the impact of funding into its valuation estimates for OTC derivatives and structured notes. The Firm’s FVA framework leverages its existing CVA and DVA calculation methodologies, and the key inputs are: (i) the expected funding requirements arising from the Firm’s positions with each counterparty and collateral arrangements; (ii) for assets, the estimated market funding cost in the principal market; and (iii) for liabilities, the hypothetical market funding cost for a transfer to a market participant with similar credit standing as the Firm.
The following table provides the credit and funding adjustments, excluding the effect of any hedging activity, reflected within the Consolidated Balance Sheets as of the dates indicated.
December 31, (in millions)
2013
 
2012
Derivative receivables balance(a)
$
65,759

 
$
74,983

Derivative payables balance(a)
57,314

 
70,656

Derivatives CVA(b)(c)
(2,352
)
 
(4,238
)
Derivatives DVA and FVA(b)(d)
(322
)
 
830

Structured notes balance (net of structured notes DVA and FVA)(b)(e)
48,808

 
48,112

Structured notes DVA and FVA(b)(f)
952

 
1,712


(a)
Balances are presented net of applicable credit and funding adjustments.
(b)
Positive credit and funding adjustments represent amounts that increased receivable balances or decreased payable balances; negative credit and funding adjustments represent amounts that decreased receivable balances or increased payable balances.
(c)
Derivatives CVA, gross of hedges, includes results managed by the Credit Portfolio and other lines of business within the CIB.
(d)
At December 31, 2013 and 2012 included derivatives DVA of $715 million and $830 million, respectively.
(e)
Structured notes are predominantly financial instruments containing embedded derivatives. At December 31, 2013 and 2012, included $1.1 billion and $1.1 billion, respectively, of financial instruments with with no embedded derivative for which the fair value option has been elected.
(f)
At December 31, 2013 and 2012 included structured notes DVA of $1.4 billion and $1.7 billion, respectively.

The following table provides the impact of credit and funding adjustments on earnings in the respective periods, excluding the effect of any hedging activity.
Year ended December 31,
(in millions)
2013
 
2012
 
2011
Derivative CVA(a)
$
1,886

 
$
2,698

 
$
(2,574
)
Derivative DVA and FVA(b)
(1,152
)
 
(590
)
 
538

Structured notes DVA and FVA(c)(d)
(760
)
 
(340
)
 
899


(a)
Derivatives CVA, gross of hedges, includes results managed by the Credit Portfolio and other lines of business within the CIB.
(b)
At December 31, 2013, 2012 and 2011 included derivatives DVA of $(115) million, $(590) million and $538 million, respectively.
(c)
Structured notes are measured at fair value based on the Firm’s election under the fair value option. For further information on these elections, see Note 4 on pages 215–218 of this Annual Report.
(d)
At December 31, 2013, 2012 and 2011 included structured notes DVA of $(337) million, $(340) million and $899 million, respectively.


Assets and liabilities measured at fair value on a nonrecurring basis
At December 31, 2013 and 2012, assets measured at fair value on a nonrecurring basis were $6.2 billion and $5.1 billion, respectively, comprised predominantly of loans. At December 31, 2013, $339 million and $5.8 billion of these assets were classified in levels 2 and 3 of the fair value hierarchy, respectively. At December 31, 2012, $667 million and $4.4 billion of these assets were classified in levels 2 and 3 of the fair value hierarchy, respectively. Liabilities measured at fair value on a nonrecurring basis were not significant at December 31, 2013 and 2012. For the years ended December 31, 2013, 2012 and 2011, there were no significant transfers between levels 1, 2,
and 3.
Of the $6.2 billion of assets measured at fair value on a nonrecurring basis, $3.6 billion related to trade finance loans that were reclassified to held-for-sale during the fourth quarter of 2013 and subject to a lower of cost or fair value adjustment. These loans were classified as level 3, as they are valued based on the indicative pricing received from external investors, which ranged from a spread of 30 bps to 78 bps, with a weighted average of 60 bps.
At December 31, 2013, the assets measured at fair value on a nonrecurring basis also included $1.7 billion related to residential real estate loans at the net realizable value of the underlying collateral (i.e., collateral-dependent loans and other loans charged off in accordance with regulatory guidance). These amounts are classified as level 3, as they are valued using a broker’s price opinion and discounted based upon the Firm’s experience with actual liquidation values. These discounts to the broker price opinions ranged from 17% to 62%, with a weighted average of 29%.
The total change in the value of assets and liabilities for which a fair value adjustment has been included in the Consolidated Statements of Income for the years ended December 31, 2013, 2012 and 2011, related to financial instruments held at those dates were losses of $789 million, $1.6 billion and $2.2 billion, respectively; these losses were predominantly associated with loans. The changes reported for the year ended December 31, 2012, included the impact of charge-offs recognized on residential real estate loans discharged under Chapter 7 bankruptcy, as described in Note 14 on page 267 of this Annual Report.
For further information about the measurement of impaired collateral-dependent loans, and other loans where the carrying value is based on the fair value of the underlying collateral (e.g., residential mortgage loans charged off in accordance with regulatory guidance), see Note 14 on pages 258–283 of this Annual Report.
Additional disclosures about the fair value of financial instruments that are not carried on the Consolidated Balance Sheets at fair value
U.S. GAAP requires disclosure of the estimated fair value of certain financial instruments, and the methods and significant assumptions used to estimate their fair value. Financial instruments within the scope of these disclosure requirements are included in the following table. However, certain financial instruments and all nonfinancial instruments are excluded from the scope of these disclosure requirements. Accordingly, the fair value disclosures provided in the following table include only a partial estimate of the fair value of JPMorgan Chase’s assets and liabilities. For example, the Firm has developed long-term relationships with its customers through its deposit base and credit card accounts, commonly referred to as core deposit intangibles and credit card relationships. In the opinion of management, these items, in the aggregate, add significant value to JPMorgan Chase, but their fair value is not disclosed in this Note.
Financial instruments for which carrying value approximates fair value
Certain financial instruments that are not carried at fair value on the Consolidated Balance Sheets are carried at amounts that approximate fair value, due to their short-term nature and generally negligible credit risk. These instruments include cash and due from banks; deposits with banks; federal funds sold; securities purchased under resale agreements and securities borrowed with short-dated maturities; short-term receivables and accrued interest receivable; commercial paper; federal funds purchased; securities loaned and sold under repurchase agreements with short-dated maturities; other borrowed funds; accounts payable; and accrued liabilities. In addition, U.S. GAAP requires that the fair value of deposit liabilities with no stated maturity (i.e., demand, savings and certain money market deposits) be equal to their carrying value; recognition of the inherent funding value of these instruments is not permitted.

The following table presents the carrying values and estimated fair values at December 31, 2013 and 2012, of financial assets and liabilities, excluding financial instruments which are carried at fair value on a recurring basis, and information is provided on their classification within the fair value hierarchy. For additional information regarding the financial instruments within the scope of this disclosure, and the methods and significant assumptions used to estimate their fair value, see pages 196–200 of this Note.
 
December 31, 2013
 
December 31, 2012
 
 
Estimated fair value hierarchy
 
 
 
Estimated fair value hierarchy
 
(in billions)
Carrying
value
Level 1
Level 2
Level 3
Total estimated
fair value
 
Carrying
value
Level 1
Level 2
Level 3
Total estimated
fair value
Financial assets
 
 
 
 
 
 
 
 
 
 
 
Cash and due from banks
$
39.8

$
39.8

$
—

$
—

$
39.8

 
$
53.7

$
53.7

$
—

$
—

$
53.7

Deposits with banks
316.1

309.7

6.4

—

316.1

 
121.8

114.1

7.7

—

121.8

Accrued interest and accounts receivable
65.2

—

64.9

0.3

65.2

 
60.9

—

60.3

0.6

60.9

Federal funds sold and securities purchased under resale agreements
223.0

—

223.0

—

223.0

 
272.0

—

272.0

—

272.0

Securities borrowed
107.7

—

107.7

—

107.7

 
108.8

—

108.8

—

108.8

Securities, held-to-maturity(a)
24.0

—

23.7

—

23.7

 
—

—

—

—

—

Loans, net of allowance for loan losses(b)
720.1

—

23.0

697.2

720.2

 
709.3

—

26.4

685.4

711.8

Other
58.1

—

54.5

4.3

58.8

 
49.7

—

42.7

7.4

50.1

Financial liabilities
 
 
 
 
 
 
 
 
 
 
 
Deposits
$
1,281.1

$
—

$
1,280.3

$
1.2

$
1,281.5

 
$
1,187.9

$
—

$
1,187.2

$
1.2

$
1,188.4

Federal funds purchased and securities loaned or sold under repurchase agreements
175.7

—

175.7

—

175.7

 
235.7

—

235.7

—

235.7

Commercial paper
57.8

—

57.8

—

57.8

 
55.4

—

55.4

—

55.4

Other borrowed funds
14.7

—

14.7

—

14.7

 
15.0

—

15.0

—

15.0

Accounts payable and other liabilities
160.2

—

158.2

1.8

160.0

 
156.5

—

153.8

2.5

156.3

Beneficial interests issued by consolidated VIEs
47.6

—

44.3

3.2

47.5

 
62.0

—

57.7

4.4

62.1

Long-term debt and junior subordinated deferrable interest debentures(c)
239.0

—

240.8

6.0

246.8

 
218.2

—

220.0

5.4

225.4

(a)
Carrying value includes unamortized discount or premium.
(b)
Fair value is typically estimated using a discounted cash flow model that incorporates the characteristics of the underlying loans (including principal, contractual interest rate and contractual fees) and other key inputs, including expected lifetime credit losses, interest rates, prepayment rates, and primary origination or secondary market spreads. For certain loans, the fair value is measured based on the value of the underlying collateral. The difference between the estimated fair value and carrying value of a financial asset or liability is the result of the different methodologies used to determine fair value as compared with carrying value. For example, credit losses are estimated for a financial asset’s remaining life in a fair value calculation but are estimated for a loss emergence period in the allowance for loan loss calculation; future loan income (interest and fees) is incorporated in a fair value calculation but is generally not considered in the allowance for loan losses. For a further discussion of the Firm’s methodologies for estimating the fair value of loans and lending-related commitments, see Valuation hierarchy on pages 196–200 of this Annual Report.
(c)
Carrying value includes unamortized original issue discount and other valuation adjustments.
The majority of the Firm’s lending-related commitments are not carried at fair value on a recurring basis on the Consolidated Balance Sheets, nor are they actively traded. The carrying value and estimated fair value of the Firm’s wholesale lending-related commitments were as follows for the periods indicated.
 
December 31, 2013
 
December 31, 2012
 
 
Estimated fair value hierarchy
 
 
 
Estimated fair value hierarchy
 
(in billions)
Carrying value(a)
Level 1
Level 2
Level 3
Total estimated fair value
 
Carrying value(a)
Level 1
Level 2
Level 3
Total estimated fair value
Wholesale lending-related commitments
$
0.7

$
—

$
—

$
1.0

$
1.0

 
$
0.7

$
—

$
—

$
1.9

$
1.9

(a)
Represents the allowance for wholesale lending-related commitments. Excludes the current carrying values of the guarantee liability and the offsetting asset, each of which are recognized at fair value at the inception of guarantees.
The Firm does not estimate the fair value of consumer lending-related commitments. In many cases, the Firm can reduce or cancel these commitments by providing the borrower notice or, in some cases, without notice as permitted by law. For a further discussion of the valuation of lending-related commitments, see page 198 of this Note.
Trading assets and liabilities
Trading assets include debt and equity instruments owned by JPMorgan Chase (“long” positions) that are held for client market-making and client-driven activities, as well as for certain risk management activities, certain loans managed on a fair value basis and for which the Firm has elected the fair value option, and physical commodities inventories that are generally accounted for at the lower of cost or market (market approximates fair value). Trading liabilities include debt and equity instruments that the Firm has sold to other parties but does not own (“short” positions). The Firm is obligated to purchase instruments at a future date to cover the short positions. Included in trading assets and trading liabilities are the reported receivables (unrealized gains) and payables (unrealized losses) related to derivatives. Trading assets and liabilities are carried at fair value on the Consolidated Balance Sheets. Balances reflect the reduction of securities owned (long positions) by the amount of identical securities sold but not yet purchased (short positions).

Trading assets and liabilities – average balances
Average trading assets and liabilities were as follows for the periods indicated.
Year ended December 31, (in millions)
 
2013
 
2012
 
2011
Trading assets – debt and equity instruments
 
$
340,449

 
$
349,337

 
$
393,890

Trading assets – derivative receivables
 
72,629

 
85,744

 
90,003

Trading liabilities – debt and equity instruments(a)
 
77,706

 
69,001

 
81,916

Trading liabilities – derivative payables
 
64,553

 
76,162

 
71,539

(a)
Primarily represent securities sold, not yet purchased.

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