Bank of America Corporation Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

Fair Value Disclosures

Fair Value Disclosures

12 Months Ended

Dec. 31, 2011



Note 4.	Fair Value Disclosures

Fair Value Accounting

Fair Value Hierarchy

In accordance with Fair Value Accounting, Merrill Lynch has categorized its financial instruments, based on the priority of the inputs to the valuation technique, into a three-level fair value hierarchy.

The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3).

Financial assets and liabilities recorded on the Consolidated Balance Sheets are categorized based on the inputs to the valuation techniques as follows:

Level 1. Financial assets and liabilities whose values are based on unadjusted quoted prices for identical assets or liabilities in an active market that Merrill Lynch has the ability to access (examples include active exchange-traded equity securities, exchange-traded derivatives, U.S. Government securities, and certain other sovereign government obligations).

Level 2. Financial assets and liabilities whose values are based on quoted prices in markets that are not active or model inputs that are observable either directly or indirectly for substantially the full term of the asset or liability. Level 2 inputs include the following:

a) Quoted prices for similar assets or liabilities in active markets (examples include restricted stock and U.S. agency securities);

b) Quoted prices for identical or similar assets or liabilities in non-active markets (examples include corporate and municipal bonds, which can trade infrequently);

c) Pricing models whose inputs are observable for substantially the full term of the asset or liability (examples include most over-the-counter derivatives, including interest rate and currency swaps); and

d) Pricing models whose inputs are derived principally from or corroborated by observable market data through correlation or other means for substantially the full term of the asset or liability (examples include certain residential and commercial mortgage-related assets, including loans, securities and derivatives).

Level 3. Financial assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. These inputs reflect management's view about the assumptions a market participant would use in pricing the asset or liability (examples include certain private equity investments, certain residential and commercial mortgage-related assets and long-dated or complex derivatives).

As required by Fair Value Accounting, when the inputs used to measure fair value fall within different levels of the hierarchy, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement in its entirety. For example, a Level 3 fair value measurement may include inputs that are observable (Level 1 and 2) and unobservable (Level 3). Therefore gains and losses for such assets and liabilities categorized within the Level 3 reconciliation below may include changes in fair value that are attributable to both observable inputs (Levels 1 and 2) and unobservable inputs (Level 3). Further, the following reconciliations do not take into consideration the offsetting effect of Level 1 and 2 financial instruments entered into by Merrill Lynch that economically hedge certain exposures to the Level 3 positions.

A review of fair value hierarchy classifications is conducted on a quarterly basis. Changes in the observability of valuation inputs may result in a reclassification for certain financial assets or liabilities. Level 3 gains and losses represent amounts incurred during the period in which the instrument was classified as Level 3. Reclassifications impacting Level 3 of the fair value hierarchy are reported as transfers in or transfers out of the Level 3 category as of the beginning of the quarter in which the reclassifications occur. Refer to the recurring and non-recurring sections within this Note for further information on transfers in and out of Level 3.

Valuation Techniques

The following outlines the valuation methodologies for Merrill Lynch's material categories of assets and liabilities:

U.S. Government and agencies

U.S. Treasury securities U.S. Treasury securities are valued using quoted market prices and are generally classified as Level 1 in the fair value hierarchy.

U.S. agency securities U.S. agency securities are comprised of two main categories consisting of agency issued debt and mortgage pass-throughs. The fair value of agency issued debt securities is derived using market prices and recent trade activity gathered from independent dealer pricing services or brokers. Mortgage pass-throughs include To-be-announced (“TBA”) securities and mortgage pass-through certificates. TBA securities are generally valued using quoted market prices. Generally, the fair value of mortgage pass-through certificates is based on market prices of comparable securities. Agency issued debt securities and mortgage pass-throughs are generally classified as Level 2 in the fair value hierarchy.

Non-U.S. governments and agencies

Sovereign government obligations Sovereign government obligations are valued using quoted prices in active markets when available. To the extent quoted prices are not available, fair value is determined based on reference to recent trading activity and quoted prices of similar securities. These securities are generally classified in Level 1 or Level 2 in the fair value hierarchy, primarily based on the issuing country.

Municipal debt

Municipal bonds The fair value of municipal bonds is calculated using recent trade activity, market price quotations and new issuance levels. In the absence of this information, fair value is calculated using comparable bond credit spreads. Current interest rates, credit events, and individual bond characteristics such as coupon, call features, maturity, and revenue purpose are considered in the valuation process. The majority of these bonds are classified as Level 2 in the fair value hierarchy.

Auction Rate Securities (“ARS”) Merrill Lynch holds investments in certain ARS, including student loan and municipal ARS. Student loan ARS are comprised of various pools of student loans. Municipal ARS are issued by states and municipalities for a wide variety of purposes, including but not limited to healthcare, industrial development, education and transportation infrastructure. The fair value of the student loan ARS is calculated using a pricing model that relies upon a number of assumptions including weighted average life, coupon, discount margin and liquidity discounts. The fair value of the municipal ARS is calculated based upon projected refinancing and spread assumptions. In both cases, recent trades and issuer tenders are considered in the valuations. Student loan ARS and municipal ARS are classified as Level 3 in the fair value hierarchy.

Corporate and other debt

Corporate bonds Corporate bonds are valued based on either the most recent observable trade and/or external quotes, depending on availability. The most recent observable trade price is given highest priority as the valuation benchmark based on an evaluation of transaction date, size, frequency, and bid-offer. This price may be adjusted by bond or credit default swap spread movement. When credit default swap spreads are referenced, cash-to-synthetic basis magnitude and movement as well as maturity matching are incorporated into the value. When neither external quotes nor a recent trade is available, the bonds are valued using a discounted cash flow approach based on risk parameters of comparable securities. In such cases, the potential pricing difference in spread and/or price terms with the traded comparable is considered. Corporate bonds are generally classified as Level 2 or Level 3 in the fair value hierarchy.

Corporate loans and commitments The fair values of corporate loans and loan commitments are based on market prices and most recent transactions when available. When not available, a discounted cash flow valuation approach is applied using market-based credit spreads of comparable debt instruments, recent new issuance activity or relevant credit derivatives with appropriate cash-to-synthetic basis adjustments. Corporate loans and commitments are generally classified as Level 2 in the fair value hierarchy. Certain corporate loans, particularly those related to emerging market, leveraged and distressed companies have limited price transparency. These loans are generally classified as Level 3 in the fair value hierarchy.

Mortgages, mortgage-backed and asset-backed

Residential Mortgage-Backed Securities (“RMBS”), Commercial Mortgage-Backed Securities (“CMBS”), and other Asset-Backed Securities (“ABS”) RMBS, CMBS and other ABS are valued based on observable price or credit spreads for the particular security, or when price or credit spreads are not observable, the valuation is based on prices of comparable bonds or the present value of expected future cash flows. Valuation levels of RMBS and CMBS indices are used as an additional data point for benchmarking purposes or to price outright index positions.

When estimating the fair value based upon the present value of expected future cash flows, Merrill Lynch uses its best estimate of the key assumptions, including forecasted credit losses, prepayment rates, forward yield curves and discount rates commensurate with the risks involved, while also taking into account performance of the underlying collateral.

RMBS, CMBS and other ABS are classified as Level 3 in the fair value hierarchy if external prices or credit spreads are unobservable or if comparable trades/assets involve significant subjectivity related to property type differences, cash flows, performance and other inputs; otherwise, they are classified as Level 2 in the fair value hierarchy.

Equities

Exchange-Traded Equity Securities Exchange-traded equity securities are generally valued based on quoted prices from the exchange. To the extent these securities are actively traded, they are classified as Level 1 in the fair value hierarchy, otherwise they are classified as Level 2.

Convertible debentures Convertible debentures are valued based on observable trades and/or external quotes, depending on availability. When neither observable trades nor external quotes are available, the instruments are valued using a discounted cash flow approach based on risk parameters of comparable securities. In such cases, the potential pricing difference in spread and/or price terms with the traded comparable is considered. Convertible debentures are generally classified as Level 2 in the fair value hierarchy.

Derivative contracts

Listed Derivative Contracts Listed derivatives that are actively traded are generally valued based on quoted prices from the exchange and are classified as Level 1 in the fair value hierarchy. Listed derivatives that are not actively traded are valued using the same approaches as those applied to OTC derivatives; they are generally classified as Level 2 in the fair value hierarchy.

OTC Derivative Contracts OTC derivative contracts include forwards, swaps and options related to interest rate, foreign currency, credit, equity or commodity underlyings.

The fair value of OTC derivatives is derived using market prices and other market based pricing parameters such as interest rates, currency rates and volatilities that are observed directly in the market or gathered from independent sources such as dealer consensus pricing services or brokers. Where models are used, they are used consistently and reflect the contractual terms of and specific risks inherent in the contracts. Generally, the models do not require a high level of subjectivity since the valuation techniques used in the models do not require significant judgment and inputs to the models are readily observable in active markets. When appropriate, valuations are adjusted for various factors such as liquidity and credit considerations based on available market evidence. In addition, for most collateralized interest rate and currency derivatives the requirement to pay interest on the collateral may be considered in the valuation. The majority of OTC derivative contracts are classified as Level 2 in the fair value hierarchy.

OTC derivative contracts that do not have readily observable market based pricing parameters are classified as Level 3 in the fair value hierarchy. Examples of derivative contracts classified within Level 3 include contractual obligations that have tenures that extend beyond periods in which inputs to the model would be observable, exotic derivatives with significant inputs into a valuation model that are less transparent in the market and certain credit default swaps (“CDS”) referenced to mortgage-backed securities. For example, derivative instruments, such as certain CDS referenced to RMBS, CMBS, ABS and collateralized debt obligations (“CDOs”), may be valued based on the underlying mortgage risk where these instruments are not actively quoted. Inputs to the valuation will include available information on similar underlying loans or securities in the cash market. The prepayments and loss assumptions on the underlying loans or securities are estimated using a combination of historical data, prices on recent market transactions, relevant observable market indices such as the Asset Backed Securities Index (“ABX”) or Commercial Mortgage Backed Securities Index (“CMBX”) and prepayment and default scenarios and analyses.

CDOs The fair value of CDOs is derived from a referenced basket of CDS, the CDO's capital structure, and the default correlation, which is an input to a proprietary CDO valuation model. The underlying CDO portfolios typically contain investment grade as well as non-investment grade obligors. After adjusting for differences in risk profile, the correlation parameter for an actual transaction is estimated by benchmarking against observable standardized index tranches and other comparable transactions. CDOs are classified as either Level 2 or Level 3 in the fair value hierarchy.

Investment securities non-qualifying

Investments in Private Equity, Real Estate and Hedge Funds Merrill Lynch has investments in numerous asset classes, including: direct private equity, private equity funds, hedge funds and real estate funds. Valuing these investments requires significant management judgment due to the nature of the assets and the lack of quoted market prices and liquidity in these assets. Initially, the transaction price of the investment is generally considered to be the best indicator of fair value. Thereafter, valuation of direct investments is based on an assessment of each individual investment using various methodologies, which include publicly traded comparables derived by multiplying a key performance metric (e.g., earnings before interest, taxes, depreciation and amortization) of the portfolio company by the relevant valuation multiple observed for comparable companies, acquisition comparables, entry level multiples and discounted cash flows. These valuations are subject to appropriate discounts for lack of liquidity or marketability. Certain factors which may influence changes to fair value include but are not limited to, recapitalizations, subsequent rounds of financing, and offerings in the equity or debt capital markets. For fund investments, Merrill Lynch generally records the fair value of its proportionate interest in the fund's capital as reported by the fund's respective managers.

Investment securities non-qualifying include equity securities that have recently gone through initial public offerings or secondary sales of public positions. These investments are primarily classified as either Level 1 or Level 2 in the fair value hierarchy. Level 2 classifications generally include those publicly traded equity investments that have a legal or contractual transfer restriction. All other investments in private equity, real estate and hedge funds are classified as Level 3 in the fair value hierarchy due to infrequent trading and/or unobservable market prices.

Resale and repurchase agreements

Merrill Lynch elected the fair value option for certain resale and repurchase agreements. For such agreements, the fair value is estimated using a discounted cash flow model which incorporates inputs such as interest rate yield curves and option volatility. Resale and repurchase agreements for which the fair value option has been elected are generally classified as Level 2 in the fair value hierarchy.

Long-term and short-term borrowings

Merrill Lynch and its consolidated VIEs issue structured notes that have coupons or repayment terms linked to the performance of debt or equity securities, indices, currencies or commodities. The fair value of structured notes is estimated using valuation models for the combined derivative and debt portions of the notes when the fair value option has been elected. These models incorporate observable, and in some instances unobservable, inputs including security prices, interest rate yield curves, option volatility, currency, commodity or equity rates and correlations between these inputs. The impact of Merrill Lynch's own credit spreads is also included based on Merrill Lynch's observed secondary bond market spreads. Structured notes are classified as either Level 2 or Level 3 in the fair value hierarchy.

Recurring Fair Value

The following tables present Merrill Lynch’s fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis as of December 31, 2011 and December 31, 2010, respectively.



(dollars in millions)
	Fair Value Measurements on a Recurring Basis
	as of December 31, 2011
	Level 1		Level 2		Level 3		Netting Adj⁽¹⁾		Total
Assets:
Securities segregated for regulatory purposes or deposited with clearing organizations:
Corporate debt	$	—	$	295	$	—	$	—	$	295
Non-U.S. governments and agencies	—		1,757		—		—		1,757
U.S. Government and agencies	1,796		740		—		—		2,536



Total securities segregated for regulatory purposes or deposited with clearing organizations	1,796	2,792	—	—		4,588
Receivables under resale agreements	—	85,652	—	—		85,652
Receivables under securities borrowed transactions	—	259	—	—		259
Trading assets, excluding derivative contracts:
Equities	14,962	5,860	179	—		21,001
Convertible debentures	—	4,519	99	—		4,618
Non-U.S. governments and agencies	28,026	1,871	342	—		30,239
Corporate debt	—	13,027	3,962	—		16,989
Preferred stock	—	89	227	—		316
Mortgages, mortgage-backed and asset-backed	—	5,055	3,199	—		8,254
U.S. Government and agencies	22,183	20,820	—	—		43,003
Municipals and money markets	1,067	9,755	2,047	—		12,869
Physical commodities and other	—	175	—	—		175
Total trading assets, excluding derivative contracts	66,238	61,171	10,055	—		137,464
Derivative contracts⁽²⁾	1,810	722,108	10,110	(699,015	)	35,013
Investment securities available-for-sale:
U.S. treasury securities and agency debentures	398	—	—	—		398
Securities, mortgage-backed and asset backed
Non-agency MBS	—	249	—	—		249
Corporate ABS	—	—	47	—		47
Total investment securities available-for-sale	398	249	47	—		694
Investment securities non-qualifying	2,624	328	574	—		3,526
Total investment securities	3,022	577	621	—		4,220
Securities received as collateral	13,058	658	—	—		13,716
Loans, notes and mortgages	—	596	1,726	—		2,322
Other assets	—	—	1,349	—		1,349
Liabilities:
Payables under repurchase agreements	—	34,235	—	—		34,235
Short-term borrowings	—	5,908	—	—		5,908
Trading liabilities, excluding derivative contracts:
Equities	10,868	1,230	—	—		12,098
Convertible debentures	—	125	—	—		125
Non-U.S. governments and agencies	15,911	643	—	—		16,554
Corporate debt	—	6,927	52	—		6,979
Preferred stock	—	89	16	—		105
U.S. Government and agencies	15,603	1,373	—	—		16,976
Municipals, money markets and other	549	51	45	—		645
Total trading liabilities, excluding derivative contracts	42,931	10,438	113	—		53,482
Derivative contracts⁽²⁾	1,419	724,713	5,615	(705,508	)	26,239
Obligation to return securities received as collateral	13,058	658	—	—		13,716
Other payables — interest and other	—	163	10	—		173
Long-term borrowings	—	28,139	2,186	—		30,325


(1)	Represents counterparty and cash collateral netting.


(2)	Refer to Note 6 for product level detail.

Transfers between Level 1 and Level 2 assets and liabilities were not significant for the year ended December 31, 2011.

Level 3 derivative contracts (assets) relate to derivative positions on U.S. ABS CDOs and other mortgage products of $2.4 billion, $3.1 billion of other credit derivatives that incorporate unobservable model valuation inputs, and $4.6 billion of equity, currency, interest rate and commodity derivatives that are long-dated and/or have unobservable model valuation inputs (e.g., unobservable correlation).

Level 3 non-qualifying investment securities primarily relate to certain private equity positions.

Level 3 loans, notes and mortgages primarily relate to residential mortgage and corporate loans.

Level 3 other assets represent net monoline exposure to a single counterparty. This exposure was reclassified from derivative contracts (assets) during the third quarter of 2011 because of the inherent default risk and given that these contracts no longer provide a hedge benefit (see Note 6).

Level 3 derivative contracts (liabilities) relate to derivative positions on U.S. ABS CDOs and other mortgage products of $1.6 billion, $0.7 billion of other credit derivatives that incorporate unobservable model valuation inputs, and $3.3 billion of equity, currency, interest rate and commodity derivatives that are long-dated and/or have unobservable model valuation inputs (e.g., unobservable correlation).

Level 3 long-term borrowings primarily relate to equity-linked structured notes of $1.7 billion, which have unobservable model valuation inputs (e.g., unobservable correlation).



(dollars in millions)
	Fair Value Measurements on a Recurring Basis
	as of December 31, 2010
	Level 1		Level 2		Level 3		Netting Adj⁽¹⁾			Total
Assets:
Securities segregated for regulatory purposes or deposited with clearing organizations:
Corporate debt	$	—	$	306	$	—	$	—		$	306
Non-U.S. governments and agencies	1,652		1,402		—		—			3,054
U.S. Government and agencies	1,419		1,413		—		—			2,832
Total securities segregated for regulatory purposes or deposited with clearing organizations	3,071		3,121		—		—			6,192
Receivables under resale agreements ⁽²⁾	—		74,255		—		—			74,255
Receivables under securities borrowed transactions	—		1,672		—		—			1,672
Trading assets, excluding derivative contracts:
Equities	20,458		7,673		170		—			28,301
Convertible debentures	—		5,903		—		—			5,903
Non-U.S. governments and agencies	18,393		3,612		243		—			22,248
Corporate debt	—		22,300		4,605		—			26,905
Preferred stock	—		511		287		—			798
Mortgages, mortgage-backed and asset-backed	—		5,247		5,747		—			10,994
U.S. Government and agencies ⁽³⁾	17,742		23,636		—		—			41,378
Municipals and money markets	732		11,102		2,327		—			14,161
Physical commodities and other	—		598		—		—			598
Total trading assets, excluding derivative contracts	57,325		80,582		13,379		—			151,286
Derivative contracts⁽⁴⁾	1,622		590,020		14,359		(566,630		)	39,371
Investment securities available-for-sale:
U.S. treasury securities and agency debentures	430		—		—		—			430
Mortgage-backed securities — residential MBS	—		3,869		—		—			3,869
Mortgage-backed securities — agency CMOs	—		61		—		—			61
Mortgage-backed securities — non-agency MBSs	—		518		213		—			731
Total investment securities available-for-sale	430		4,448		213		—			5,091
Investment securities non-qualifying	2,792		690		3,394		—			6,876
Total investment securities	3,222		5,138		3,607		—			11,967
Securities received as collateral	19,471		892		—		—			20,363
Loans, notes and mortgages	—		1,423		1,891		—			3,314
Liabilities:
Payables under repurchase agreements	—		37,394		—		—			37,394
Short-term borrowings	—		6,472		—		—			6,472
Trading liabilities, excluding derivative contracts:
Equities	11,706		914		—		—			12,620
Convertible debentures	—		1,406		—		—			1,406
Non-U.S. governments and agencies	14,748		957		—		—			15,705
Corporate debt	—		9,500		—		—			9,500
U.S. Government and agencies	19,860		4,887		—		—			24,747
Municipals, money markets and other	224		347		—		—			571
Total trading liabilities, excluding derivative contracts	46,538		18,011		—		—			64,549
Derivative contracts⁽⁴⁾	1,142		590,138		7,991		(567,074		)	32,197



Obligation to return securities received as collateral	19,471	892	—	—	20,363
Other payables — interest and other	—	39	126	—	165
Long-term borrowings	—	36,818	2,396	—	39,214


(1)	Represents counterparty and cash collateral netting.


(2)	Receivables under resale agreements have been revised from approximately $51 billion (as previously reported) to approximately $74 billion. A similar revision has been made on the balance sheet to the parenthetical disclosure of receivables under resale agreements measured at fair value in accordance with the fair value option election.


(3)	U.S. Government and agencies trading asset amounts shown in Level 1 and Level 2 have been revised from approximately $7 billion and $34 billion, respectively (as previously reported) to approximately $18 billion and $24 billion, respectively.


(4)	Refer to Note 6 for product level detail.

Level 3 derivative contracts (assets) relate to derivative positions on U.S. ABS CDOs and other mortgage products of $5.7 billion, $4.1 billion of other credit derivatives that incorporate unobservable model valuation inputs, and $4.5 billion of equity, currency, interest rate and commodity derivatives that are long-dated and/or have unobservable model valuation inputs (e.g., unobservable correlation).

Level 3 non-qualifying investment securities primarily relate to certain private equity positions.

Level 3 loans, notes and mortgages primarily relate to residential mortgage and corporate loans.

Level 3 derivative contracts (liabilities) relate to derivative positions on U.S. ABS CDOs and other mortgage products of $2.2 billion, $2.0 billion of other credit derivatives that incorporate unobservable model valuation inputs, and $3.8 billion of equity, currency, interest rate and commodity derivatives that are long-dated and/or have unobservable model valuation inputs (e.g., unobservable correlation).

Level 3 long-term borrowings primarily relate to equity-linked structured notes of $1.9 billion that are long-dated and/or have unobservable model valuation inputs (e.g., unobservable correlation).

The following tables provide a summary of changes in Merrill Lynch’s Level 3 financial assets and liabilities for the years ended December 31, 2011, December 31, 2010 and December 31, 2009.



(dollars in millions)
	Level 3 Financial Assets and Liabilities Year Ended December 31, 2011
			Total Realized and Unrealized Gains or (Losses) included in Income								Total Realized and Unrealized Gains or (Losses) included in Income			Unrealized Gains or (Losses) to OCI			Sales		Purchases		Issuances		Settlements
	Beginning Balance		Principal Transactions			Other Revenue			Interest					Unrealized Gains or (Losses) to OCI			Sales		Purchases		Issuances		Settlements		Transfers In		Transfers Out			Ending Balance
Assets:
Trading assets, excluding derivative contracts:
Equities	$	170	$	15		$	—		$	—	$	15		$	—		(159	)	232		$	—	(64	)	$	11	$	(26	)	$	179
Convertible debentures	—		3			—			—		3			—			(106	)	298		—		(4	)	36		(128		)	99
Non-U.S. governments and agencies	243		87			—			—		87			—			(137	)	188		—		(3	)	8		(44		)	342
Corporate debt	4,605		163			—			—		163			—			(3,198	)	2,596		—		(459	)	832		(577		)	3,962
Preferred stock	287		30			—			—		30			—			(201	)	66		—		(76	)	121		—			227
Mortgages, mortgage-backed and asset-backed	5,747		221			—			—		221			—			(3,759	)	1,820		—		(196	)	3		(637		)	3,199
Municipals and money markets	2,327		60			—			—		60			—			(2,133	)	2,097		—		(425	)	126		(5		)	2,047
Total trading assets, excluding derivative contracts	13,379		579			—			—		579			—			(9,693	)	7,297		—		(1,227	)	1,137		(1,417		)	10,055
Derivative contracts, net	6,368		809			—			—		809			—			(884	)	929		—		(3,211	)	1,146		(662		)	4,495
Investment securities available-for-sale :
Mortgage-backed securities — agency CMOs	—		—			—			—		—			—			(55	)	56		—		(1	)	—		—			—
Mortgage-backed securities — non-agency MBSs	213		—			(19		)	—		(19		)	(38		)	(167	)	11		—		—		—		—			—
Corporate ABS	—		—			(16		)	—		(16		)	—			—		304		—		—		—		(241		)	47
Total investment securities available-for-sale	213		—			(35		)	—		(35		)	(38		)	(222	)	371		—		(1	)	—		(241		)	47
Investment securities non-qualifying	3,394		—			476			—		476			—			(1,575	)	92		—		(298	)	375		(1,890		)	574
Total investment securities	3,607		—			441			—		441			(38		)	(1,797	)	463		—		(299	)	375		(2,131		)	621
Loans, notes and mortgages	1,891		—			155			34		189			—			(669	)	154		665		(273	)	135		(366		)	1,726
Other assets	—		—			(229		)	—		(229		)	—			—		1,578		—		—		—		—			1,349
Liabilities:
Trading liabilities, excluding derivative contracts:
Corporate debt	—		1			—			—		1			—			120		(94	)	—		—		37		(10		)	52
Preferred stock	—		4			—			—		4			—			27		(7	)	—		—		—		—			16
Municipals, money markets and other	—		(2		)	—			—		(2		)	—			35		(20	)	—		—		28		—			45
Total trading liabilities, excluding derivative contracts	—		3			—			—		3			—			182		(121	)	—		—		65		(10		)	113
Other payables - interest and other	126		—			23			—		23			—			4		(6	)	9		—		—		(100		)	10
Long-term borrowings	2,396		(106		)	(43		)	—		(149		)	—			72		(382	)	412		(583	)	975		(853		)	2,186

Sales of corporate debt primarily relates to sales of corporate ARS and distressed loans during the first quarter of 2011. Sales of mortgages, mortgage-backed and asset-backed securities primarily relates to the sale of CDO positions in conjunction with the liquidation of a VIE and sales of collateralized loan obligation ("CLO") positions due to the exit of Merrill Lynch's proprietary trading business. Purchases of corporate debt primarily relates to purchases of non-investment grade and distressed corporate loans and bonds. Purchases of mortgages, mortgage-backed and asset-backed securities primarily relates to purchases of CDO and CLO positions. Sales and purchases of municipal securities is primarily due to dealer activity in student loan ARS. Sales of investment securities non-qualifying primarily relates to the sale of private equity investments during 2011.

The purchases for other assets and settlements for derivative contracts, net reflect the reclassification of approximately $1.6 billion of net monoline exposure from derivative contracts (assets) to other assets because of the inherent default risk and given that these contracts no longer provide a hedge benefit.

Transfers out for convertible debentures are due to increased observability (i.e., market comparables) for certain convertible bond positions. Transfers in for corporate debt are primarily due to decreased observability (i.e., decreased market liquidity) for certain corporate loans and bonds. Transfers out for corporate debt primarily relates to increased price observability (i.e., market comparables) for certain corporate bond positions. Transfers out for mortgages, mortgage-backed and asset-backed securities primarily relates to increased price observability for certain RMBS, CMBS and consumer ABS portfolios. Transfers in for derivative contracts, net primarily relates to changes in the valuation methodology for certain CDOs and total return swaps ("TRS"), in addition to certain equity derivative positions with unobservable correlation. Transfers out for derivative contracts, net primarily relates to increased price observability for certain equity and credit derivative positions.

Transfers out for investment securities available-for-sale - corporate ABS are due to increased price observability (i.e., market comparables) for certain positions. Transfers in for investment securities non-qualifying are due to a change in the valuation methodology for a real estate private equity fund. Transfers out related to investment securities non-qualifying are primarily due to a private equity investment that underwent an initial public offering during the first quarter of 2011. Transfers out for loans, notes and mortgages and other payables - interest and other primarily relates to increased observability (i.e., market comparables) for certain corporate loans and unfunded loan commitments. Transfers in and out related to long-term borrowings are primarily due to changes in the impact of unobservable inputs on the value of certain equity-linked structured notes.



(dollars in millions)
	Level 3 Financial Assets and Liabilities Year Ended December 31, 2010
			Total Realized and Unrealized Gains or (Losses) included in Income								Total Realized and Unrealized Gains or (Losses) included in Income			Unrealized Gains or (Losses) to OCI			Purchases, Issuances and Settlements
	Beginning Balance		Principal Transactions			Other Revenue			Interest											Transfers In		Transfers Out			Ending Balance
Assets:
Trading assets, excluding derivative contracts:
Equities	$	351	$	(17	)	$	—		$	—	$	(17	)	$	—		$	(167	)	$	130	$	(127	)	$	170
Non-U.S. governments and agencies	1,142		(143		)	—			—		(143		)	—			(144		)	103		(715		)	243
Corporate debt	6,790		398			—			—		398			—			(2,271		)	965		(1,277		)	4,605
Preferred stock	562		(34		)	—			—		(34		)	—			(204		)	—		(37		)	287
Mortgages, mortgage-backed and asset-backed	7,294		253			—			—		253			—			(1,793		)	390		(397		)	5,747
Municipals and money markets	2,148		112			—			—		112			—			(1,054		)	1,234		(113		)	2,327
Total trading assets, excluding derivative contracts	18,287		569			—			—		569			—			(5,633		)	2,822		(2,666		)	13,379
Derivative contracts, net	6,866		(1,173		)	—			—		(1,173		)	—			648			691		(664		)	6,368
Investment securities available-for-sale :
Mortgage-backed securities — non-agency MBSs	473		—			(96		)	31		(65		)	(36		)	(224		)	77		(12		)	213
Total investment securities available-for-sale	473		—			(96		)	31		(65		)	(36		)	(224		)	77		(12		)	213
Investment securities non-qualifying	3,696		—			1,437			—		1,437			—			(1,540		)	—		(199		)	3,394
Total investment securities	4,169		—			1,341			31		1,372			(36		)	(1,764		)	77		(211		)	3,607
Loans, notes and mortgages	4,115		—			133			144		277			—			(2,420		)	28		(109		)	1,891
Liabilities:
Trading liabilities, excluding derivative contracts:
Non-U.S. governments and agencies	386		23			—			—		23			—			17			—		(380		)	—
Total trading liabilities, excluding derivative contracts	386		23			—			—		23			—			17			—		(380		)	—
Other payables - interest and other	186		—			44			—		44			—			(16		)	—		—			126
Long-term borrowings	4,683		676			41			—		717			—			(1,254		)	1,353		(1,669		)	2,396

Net losses in principal transactions related to derivative contracts, net were primarily due to credit spreads tightening on short CMBS-linked positions and valuation changes on correlation and long-dated equity derivative positions.

Other revenue related to investment securities non-qualifying primarily represents net gains on certain private equity investments.

Decreases in purchases, issuances and settlements of corporate debt primarily relates to the sale and redemption of certain positions (e.g., corporate ARS). Decreases in purchases, issuances and settlements related to mortgages, mortgage-backed and asset-backed securities primarily relates to the termination and redemption of certain positions during the fourth quarter of 2010. Decreases in purchases, issuances and settlements related to municipals and money markets primarily relates to the sale of municipal ARS during the fourth quarter of 2010. Decreases in purchases, issuances and settlements related to investment securities non-qualifying relates to the settlement of certain private equity investments. Decreases in purchases, issuances and settlements related to loans, notes and mortgages primarily relates to sales and repayments of some sizable positions and portfolios during the first and second quarters of 2010 in addition to sales and the deconsolidation of certain loan VIEs during the fourth quarter of 2010. Decreases in purchases, issuances and settlements related to long-term borrowings relates to the deconsolidation of certain loan VIEs during the fourth quarter of 2010.

Transfers in for corporate debt primarily relates to reduced price transparency for certain corporate bond positions. Transfers in for municipals and money markets relates to reduced price transparency (e.g., lower trading activity) for municipal ARS. Transfers out for corporate debt primarily relates to increased price testing coverage for certain positions. Transfers in and transfers out related to long-term borrowings are primarily due to changes in the impact of unobservable inputs on the value of certain equity-linked structured notes.



(dollars in millions)
	Level 3 Financial Assets and Liabilities Year Ended December 31, 2009
			Total Realized and Unrealized Gains or (Losses) included in Income								Total Realized and Unrealized Gains or (Losses) included in Income			Unrealized Gains or (Losses) to OCI		Purchases, Issuances and Settlements
	Beginning Balance		Principal Transactions			Other Revenue			Interest										Transfers In (out)			Ending Balance
Assets:
Trading assets, excluding derivative contracts:
Equities	$	660	$	(202	)	$	—		$	—	$	(202	)	$	—	$	234		$	(341	)	$	351
Non-U.S. governments and agencies	30		136			—			—		136			—		174			802			1,142
Corporate debt & convertible debentures	11,286		553			—			—		553			—		(898		)	(4,151		)	6,790
Preferred stock	3,344		(191		)	—			—		(191		)	—		(2,696		)	105			562
Mortgages, mortgage-backed and asset-backed	8,246		(441		)	—			—		(441		)	—		1,666			(2,177		)	7,294
Municipals and money markets	798		(27		)	—			—		(27		)	—		1,390			(13		)	2,148
Total trading assets, excluding derivative contracts	24,364		(172		)	—			—		(172		)	—		(130		)	(5,775		)	18,287
Derivative contracts, net	2,307		(2,209		)	—			—		(2,209		)	—		1,910			4,858			6,866
Investment securities available-for-sale :
Mortgage-backed securities — residential non-agency MBSs	350		—			(449		)	178		(271		)	41		(1,859		)	2,212			473
Total investment securities available-for-sale	350		—			(449		)	178		(271		)	41		(1,859		)	2,212			473
Investment securities non-qualifying	2,761		—			1,029			—		1,029			—		(103		)	9			3,696
Total investment securities	3,111		—			580			178		758			41		(1,962		)	2,221			4,169
Loans, notes and mortgages	359		—			710			88		798			—		(2,931		)	5,889			4,115
Liabilities:
Trading liabilities, excluding derivative contracts:
Non-U.S. governments and agencies	—		(38		)	—			—		(38		)	—		—			348			386
Total trading liabilities, excluding derivative contracts	—		(38		)	—			—		(38		)	—		—			348			386
Other payables - interest and other	—		—			754			—		754			—		(358		)	1,298			186
Long-term borrowings	7,480		(2,083		)	(227		)	—		(2,310		)	—		(829		)	(4,278		)	4,683

Net losses in principal transactions related to net derivative contracts were primarily due to net losses on long-dated exotic equity options, which were offset by gains on Level 1 and Level 2 instruments that hedged these positions. Net losses in principal transactions related to net derivative contracts were also due to net losses from changes in credit spreads on underlying ABS and CMBS positions, which were offset by gains on Level 2 instruments that hedged these positions. Net losses in principal transactions related to long-term borrowings were primarily due to the narrowing of Merrill Lynch’s credit spreads on certain equity linked notes.

Other revenue related to investment securities non-qualifying primarily represents net gains on certain private equity investments.

Increases in purchases, issuances and settlements of mortgages, mortgage-backed and asset-backed securities were primarily due to the reclassification of certain positions from corporate debt during the fourth quarter of 2009. Decreases in purchases, issuances and settlements of preferred stock were primarily attributable to the sale of certain closed-end auction rate securities to Bank of America during the fourth quarter of 2009. Increases in purchases, issuances and settlements of municipals and money markets were due to the purchase of certain student loan auction rate securities from Bank of America during the fourth quarter of 2009. Increases in purchases, issuances and settlements related to net derivative contracts primarily relates to the termination and settlement of certain derivative liabilities related to CMBS during the fourth quarter of 2009. Decreases in purchases, issuances and settlements related to available-for-sale mortgage-backed securities — residential non agency primarily relate to the sale of certain positions during the third quarter of 2009. Decreases in purchases, issuances and settlements related to loans, notes and mortgages were due to the sale of certain held for investment loans associated with the sale of MLBUSA and MLBT-FSB to Bank of America during 2009.

Net transfers out for mortgages, mortgage-backed and asset-backed securities primarily relates to increased price transparency (e.g., trading activity and external vendor quotes) for certain U.S. ABS CDOs. Net transfers out for corporate debt primarily relates to the reclassification in the first quarter of 2009 of certain loans from trading assets to loans, notes and mortgages held for investment, which are not measured at fair value. Net transfers in for net derivative contracts primarily relates to decreased price observability for certain underlying U.S. ABS CDOs and other mortgage positions. Net transfers in for available-for-sale mortgage-backed securities — residential non agency is the result of reduced price transparency. Net transfers in for loans, notes and mortgages relates to the fair value option election by Merrill Lynch for certain mortgage, corporate and leveraged loans as a result of its acquisition by Bank of America. Net transfers in for other payables — interest and other relates to the fair value option election by Merrill Lynch for certain loan commitments as a result of its acquisition by Bank of America. Net transfers out for long-term borrowings were primarily due to decreases in the significance of unobservable pricing inputs for certain equity linked notes.

The following tables provide the portion of gains or losses included in income for years ended December 31, 2011, December 31, 2010 and December 31, 2009 attributable to unrealized gains or losses relating to those Level 3 assets and liabilities held at December 31, 2011, December 31, 2010 and December 31, 2009, respectively.



(dollars in millions)
	Unrealized Gains or (Losses) for Level 3 Assets and Liabilities Still Held
	Year Ended December 31, 2011
	Principal Transactions			Other Revenue			Interest		Total
Assets:
Trading assets, excluding derivative contracts:
Equities	$	(66	)	$	—		$	—	$	(66	)
Convertible debentures	(2		)	—			—		(2		)
Non-U.S. governments and agencies	101			—			—		101
Corporate debt	(35		)	—			—		(35		)
Preferred stock	6			—			—		6
Mortgages, mortgage-backed and asset-backed	41			—			—		41
Municipals and money markets	22			—			—		22
Total trading assets, excluding derivative contracts	67			—			—		67
Derivative contracts, net	932			—			—		932
Investment securities available-for-sale:
Mortgage-backed securities - non-agency MBSs	—			(30		)	—		(30		)
Corporate ABS	—			(6		)	—		(6		)
Total investment securities available-for-sale	—			(36		)	—		(36		)
Investment securities non-qualifying	—			(101		)	—		(101		)
Total investment securities	—			(137		)	—		(137		)
Loans, notes and mortgages	—			14			—		14
Other assets⁽¹⁾	—			(229		)	—		(229		)
Liabilities:
Trading liabilities, excluding derivative contracts:
Corporate debt	1			—			—		1
Preferred stock	4			—			—		4
Municipals, money markets and other	(2		)	—			—		(2		)
Total trading liabilities, excluding derivative contracts	3			—			—		3
Other payables — interest and other	—			(2		)	—		(2		)
Long-term borrowings	(107		)	(55		)	—		(162		)

(1) Includes unrealized losses related to net monoline exposure from certain derivative contracts subsequent to their reclassification to other assets in the third quarter of 2011.



(dollars in millions)
	Unrealized Gains or (Losses) for Level 3 Assets and Liabilities Still Held
	Year Ended December 31, 2010
	Principal Transactions			Other Revenue			Interest		Total
Assets:
Trading assets, excluding derivative contracts:
Equities	$	(29	)	$	—		$	—	$	(29	)
Non-U.S. governments and agencies	(144		)	—			—		(144		)
Corporate debt	136			—			—		136
Preferred stock	(36		)	—			—		(36		)
Mortgages, mortgage-backed and asset-backed	136			—			—		136
Municipals and money markets	88			—			—		88
Total trading assets, excluding derivative contracts	151			—			—		151
Derivative contracts, net	(770		)	—			—		(770		)
Investment securities available-for-sale:
Mortgage-backed securities - non-agency MBSs	—			(47		)	31		(16		)
Total investment securities available-for-sale	—			(47		)	31		(16		)
Investment securities non-qualifying	—			20			—		20
Total investment securities	—			(27		)	31		4
Loans, notes and mortgages	—			199			—		199
Liabilities:
Trading liabilities, excluding derivative contracts:
Non-U.S. governments and agencies	52			—			—		52
Total trading liabilities, excluding derivative contracts	52			—			—		52
Other payables — interest and other	—			42			—		42
Long-term borrowings	585			43			—		628



(dollars in millions)
	Unrealized Gains or (Losses) for Level 3 Assets and Liabilities Still Held
	Year Ended December 31, 2009
	Principal Transactions			Other Revenue			Interest		Total
Assets:
Trading assets, excluding derivative contracts:
Equities	$	(179	)	$	—		$	—	$	(179	)
Non-U.S. governments and agencies	137			—			—		137
Corporate debt & convertible debentures	192			—			—		192
Preferred stock	(155		)	—			—		(155		)
Mortgages, mortgage-backed and asset-backed	(371		)	—			—		(371		)
Municipals and money markets	(26		)	—			—		(26		)
Total trading assets, excluding derivative contracts	(402		)	—			—		(402		)
Derivative contracts, net	(2,030		)	—			—		(2,030		)
Investment securities available-for-sale:
Mortgage-backed securities - non-agency MBSs	—			(258		)	178		(80		)
Total investment securities available-for-sale	—			(258		)	178		(80		)
Investment securities non-qualifying	—			1,057			—		1,057
Total investment securities	—			799			178		977
Loans, notes and mortgages	—			856			—		856
Liabilities:
Trading liabilities, excluding derivative contracts:
Non-U.S. governments and agencies	(38		)	—			—		(38		)
Total trading liabilities, excluding derivative contracts	(38		)	—			—		(38		)
Other payables — interest and other	—			782			—		782
Long-term borrowings	(2,303		)	(225		)	—		(2,528		)

Other revenue related to investment securities non-qualifying primarily represents net gains on certain private equity investments.

Non-recurring Fair Value

Certain assets and liabilities are measured at fair value on a non-recurring basis and are not included in the tables above. These assets and liabilities primarily include loans and loan commitments held for sale that are reported at lower of cost or fair value and loans held for investment that were initially measured at cost and have been written down to fair value as a result of an impairment. The following tables show the fair value hierarchy for those assets and liabilities measured at fair value on a non-recurring basis as of December 31, 2011 and December 31, 2010, respectively.



(dollars in millions)
	Non-Recurring Basis								Gains/(Losses)
	as of December 31, 2011								Year Ended
	Level 1		Level 2		Level 3		Total		December 31, 2011
Assets:
Investment securities non-qualifying	$	—	$	—	$	5	$	5	$	(1	)
Loans, notes and mortgages	—		298		245		543		(59		)
Other assets	—		—		19		19		(8		)



(dollars in millions)
	Non-Recurring Basis								Gains/(Losses)			Gains/(Losses)
	as of December 31, 2010								Year Ended			Year Ended
	Level 1		Level 2		Level 3		Total		December 31, 2010			December 31, 2009
Assets:
Investment securities non-qualifying	$	—	$	—	$	85	$	85	$	(32	)	$	(43	)
Loans, notes and mortgages	—		25		1,280		1,305		(19		)	(101		)
Other assets	—		10		35		45		(26		)	(225		)
Liabilities:
Other payables — interest and other	—		—		31		31		8			(38		)

Loans, notes and mortgages includes held for sale loans that are carried at the lower of cost or fair value and for which the fair value was below the cost basis at December 31, 2011 and December 31, 2010. It also includes certain impaired held for investment loans where an allowance for loan losses has been calculated based upon the fair value of the loans or collateral. Level 3 assets as of December 31, 2011 and December 31, 2010 primarily relate to commercial real estate loans that are classified as held for sale where there continues to be significant illiquidity in the loan trading and securitization markets.

Other payables - interest and other includes amounts recorded for loan commitments at lower of cost or fair value where the funded loan will be held for sale.

Fair Value Option Election

The fair value option election allows companies to irrevocably elect fair value as the initial and subsequent measurement attribute for certain financial assets and liabilities. Changes in fair value for assets and liabilities for which the election is made will be recognized in earnings as they occur. The fair value option election is permitted on an instrument by instrument basis at initial recognition of an asset or liability or upon an event that gives rise to a new basis of accounting for that instrument. As discussed above, certain of Merrill Lynch’s financial instruments are required to be accounted for at fair value under Investment Accounting and Derivatives Accounting, as well as industry level guidance. For certain financial instruments that are not accounted for at fair value under other applicable accounting guidance, the fair value option election has been made.

The following tables provide information about the line items in the Consolidated Statements of (Loss) Earnings where changes in fair values of assets and liabilities, for which the fair value option election has been made, are included for the years ended December 31, 2011, December 31, 2010 and December 31, 2009.



(dollars in millions)
	Changes in Fair Value For the Year Ended December 31, 2011, for Items Measured at Fair Value Pursuant to the Fair Value Option Election									Changes in Fair Value For the Year Ended December 31, 2010, for Items Measured at Fair Value Pursuant to the Fair Value Option Election
	Gains/ (losses) Principal Transactions			Gains/ (losses) Other Revenues			Total Changes in Fair Value			Gains/ (losses) Principal Transactions			Gains/ (losses) Other Revenues			Total Changes in Fair Value
Assets:
Receivables under resale agreements ⁽¹⁾	$	179		$	—		$	179		$	(24	)	$	—		$	(24	)
Investment securities	—			18			18			—			107			107
Loans ⁽²⁾	(31		)	30			(1		)	—			290			290
Liabilities:
Payables under repurchase agreements	(22		)	—			(22		)	13			—			13
Short-term borrowings	261			—			261			110			—			110
Other payables — interest and other	—			(53		)	(53		)	—			13			13
Long-term borrowings ⁽³⁾	3,612			124			3,736			357			(115		)	242


(1)	Changes in fair value for the year ended December 31, 2010 were revised from $(34) million (as previously reported) to $(24) million.


(2)	Effective July 1, 2011, includes certain loans accounted for under the fair value option that were reclassified from loans held for sale to trading assets because they are risk managed on that basis.


(3)	Other revenues primarily represent fair value changes on non-recourse long-term borrowings issued by consolidated VIEs.



	Changes in Fair Value For the Year Ended December 31, 2009, for Items Measured at Fair Value Pursuant to the Fair Value Option Election
	Gains/ (losses) Principal Transactions			Gains/ (losses) Other Revenues			Total Changes in Fair Value
Assets:
Receivables under resale agreements⁽¹⁾	$	(348	)	$	—		$	(348	)
Investment securities	379			(177		)	202
Loans, notes and mortgages	—			839			839
Liabilities:
Payables under repurchase agreements	162			—			162
Short-term borrowings	(242		)	6			(236		)
Other payables — interest and other	—			761			761
Long-term borrowings⁽²⁾	(9,121		)	(33		)	(9,154		)


(1)	Changes in fair value for the year ended December 31, 2009 were revised from $(356) million (as previously reported) to $(348) million


(2)	Other revenues primarily represent fair value changes on non-recourse long-term borrowings issued by consolidated VIEs.

The following describes the rationale for electing to account for certain financial assets and liabilities at fair value, as well as the impact of instrument-specific credit risk on the fair value.

Resale and repurchase agreements

Merrill Lynch elected the fair value option for certain resale and repurchase agreements and, to a lesser extent, securities lending. The fair value option election was made based on the tenor of the agreements, which reflect the magnitude of the interest rate risk. The majority of resale and repurchase agreements collateralized by U.S. Government securities were excluded from the fair value option election as these contracts are generally short-dated and therefore the interest rate risk is not considered significant. Amounts loaned under resale agreements require collateral with a market value equal to or in excess of the principal amount loaned, resulting in minimal credit risk for such transactions.

Loans and loan commitments

Merrill Lynch made the fair value option election for certain loans that are risk managed on a fair value basis. Upon the acquisition of Merrill Lynch by Bank of America, Merrill Lynch also made the fair value option election for certain mortgage, corporate, and leveraged loans and loan commitments. The changes in the fair value of loans and commitments, for which the fair value option was elected, that were attributable to changes in borrower-specific credit risk were not material for the years ended December 31, 2011 and December 31, 2010, and were gains of $560 million for the year ended December 31, 2009.

As of December 31, 2011 and December 31, 2010, the aggregate fair value of loans for which the fair value option election has been made that were 90 days or more past due was $28 million and $32 million, respectively, and the aggregate fair value of loans that were in non-accrual status was $117 million and $32 million at December 31, 2011 and December 31, 2010, respectively. As of December 31, 2011 and December 31, 2010, the unpaid principal amount due exceeded the aggregate fair value of such loans that are 90 days or more past due and/or in non-accrual status by $172 million and $173 million, respectively.

Short-term and long-term borrowings

Merrill Lynch made the fair value option election for certain short-term and long-term borrowings that are risk managed on a fair value basis (e.g., structured notes) and/or for which hedge accounting under Derivatives Accounting had been difficult to obtain. The majority of the fair value changes on long-term borrowings are from structured notes with coupon or repayment terms that are linked to the performance of debt and equity securities, indices, currencies or commodities. Excluding gains (losses) related to changes in Merrill Lynch's credit spreads, the majority of the gains (losses) for the respective years are offset by gains (losses) on derivatives and securities that economically hedge these borrowings and that are accounted for at fair value. The changes in the fair value of liabilities for which the fair value option election was made that were attributable to changes in Merrill Lynch's credit spreads were gains of approximately $2.0 billion, losses of approximately $0.1 billion and losses of approximately $5.2 billion for the years ended December 31, 2011, December 31, 2010 and December 31, 2009, respectively. Changes in Merrill Lynch specific credit risk are derived by isolating fair value changes due to changes in Merrill Lynch's credit spreads as observed in the secondary cash market.

The fair value option election was also made for certain non-recourse long-term borrowings and secured borrowings issued by consolidated VIEs. The fair value of these borrowings is not materially affected by changes in Merrill Lynch's creditworthiness.

The following tables present the difference between fair values and the aggregate contractual principal amounts of receivables under resale agreements, receivables under securities borrowed transactions, loans and long-term borrowings for which the fair value option election has been made as of December 31, 2011 and December 31, 2010.



(dollars in millions)
	Fair Value at		Principal Amount Due Upon Maturity
	December 31, 2011		Principal Amount Due Upon Maturity		Difference
Assets:
Receivables under resale agreements	$	85,652	$	85,197	$	455
Receivables under securities borrowed transactions	259		287		(28		)
Loans ⁽¹⁾	2,742		4,023		(1,281		)
Liabilities:
Long-term borrowings⁽²⁾	30,325		36,537		(6,212		)


(1)	Includes $420 million of loans held for sale accounted for under the fair value option that were reclassified to trading assets because they are risk managed on that basis.


(2)	The majority of the difference between the fair value and principal amount due upon maturity at December 31, 2011 relates to the impact of widening of Merrill Lynch's credit spreads, as well as the fair value of the embedded derivative, where applicable.



(dollars in millions)
	Fair Value at		Principal Amount Due Upon Maturity
	December 31, 2010		Principal Amount Due Upon Maturity		Difference
Assets:
Receivables under resale agreements ⁽¹⁾	$	74,255	$	73,941	$	314
Receivables under securities borrowed transactions	1,672		1,672		—
Loans, notes and mortgages	3,190		4,518		(1,328		)
Liabilities:
Long-term borrowings ⁽²⁾	39,214		43,014		(3,800		)


(1)	The fair value and principal amount due upon maturity of receivables under resale agreements have been revised from approximately $51 billion for each (as previously reported) to approximately $74 billion.


(2)	The majority of the difference relates to the impact of the widening of Merrill Lynch’s credit spreads, the change in fair value of non-recourse debt, and zero coupon notes issued at a substantial discount from the principal amount.

Trading Risk Management

Trading activities subject Merrill Lynch to market and credit risks. These risks are managed in accordance with established risk management policies and procedures. On January 1, 2009, pursuant to the acquisition of Merrill Lynch by Bank of America, Merrill Lynch adopted Bank of America's risk management and governance practices to maintain consistent risk measurement and disciplined risk taking. Bank of America's risk management structure as applicable to Merrill Lynch is described below.

Bank of America's Global Markets Risk Committee (“GRC”), chaired by Bank of America's Global Markets Risk Executive, has been designated by its Asset, Liability and Market Risk Committee (“ALMRC”) as the primary governance authority for its Global Markets Risk Management, including trading risk management. The GRC's focus is to take a forward-looking view of the primary credit and market risks impacting Bank of America's Global Banking and Markets business (which includes Merrill Lynch's sales and trading businesses) and prioritize those that need a proactive risk mitigation strategy. Market risks that impact businesses outside of the Global Banking and Markets business are monitored and governed by their respective governance authorities.

The GRC monitors significant daily revenues and losses by business and the primary drivers of the revenues or losses. Thresholds are in place for each business in order to determine if the revenue or loss is considered to be significant for that business. If any of the thresholds are exceeded, an explanation of the variance is provided to the GRC. The thresholds are developed in coordination with the respective risk managers to highlight those revenues or losses that exceed what is considered to be normal daily income statement volatility.

Market Risk

Market risk is the potential change in an instrument's value caused by fluctuations in interest and currency exchange rates, equity and commodity prices, credit spreads, or other risks. The level of market risk is influenced by the volatility and the liquidity in the markets in which financial instruments are traded.

Merrill Lynch seeks to mitigate market risk associated with trading inventories by employing hedging strategies that correlate rate, price, and spread movements of trading inventories and related financing and hedging activities. Merrill Lynch uses a combination of cash instruments and derivatives to hedge its market exposures. The following discussion describes the types of market risk faced by Merrill Lynch.

Interest Rate Risk

Interest rate risk arises from the possibility that changes in interest rates will affect the value of financial instruments. Interest rate swap agreements, Eurodollar futures, and U.S. Treasury securities and futures are common interest rate risk management tools. The decision to manage interest rate risk using futures or swap contracts, as opposed to buying or selling short U.S. Treasury or other securities, depends on current market conditions and funding considerations.

Interest rate agreements used by Merrill Lynch include caps, collars, floors, basis swaps, leveraged swaps, and options. Interest rate caps and floors provide the purchaser with protection against rising and falling interest rates, respectively. Interest rate collars combine a cap and a floor, providing the purchaser with a predetermined interest rate range. Basis swaps are a type of interest rate swap agreement where variable rates are received and paid, but are based on different index rates. Leveraged swaps are another type of interest rate swap where changes in the variable rate are multiplied by a contractual leverage factor, such as four times three-month London Interbank Offered Rate (“LIBOR”). Merrill Lynch's exposure to interest rate risk resulting from these leverage factors is typically hedged with other financial instruments.

Currency Risk

Currency risk arises from the possibility that fluctuations in foreign exchange rates will impact the value of financial instruments. Merrill Lynch's trading assets and liabilities include both cash instruments denominated in and derivatives linked to more than 50 currencies, including the euro, Japanese yen, British pound, and Swiss franc. Currency forwards and options are commonly used to manage currency risk associated with these instruments. Currency swaps may also be used in situations where a long-dated forward market is not available or where the client needs a customized instrument to hedge a foreign currency cash flow stream. Typically, parties to a currency swap initially exchange principal amounts in two currencies, agreeing to exchange interest payments and to re-exchange the currencies at a future date and exchange rate.

Equity Price Risk

Equity price risk arises from the possibility that equity security prices will fluctuate, affecting the value of equity securities and other instruments that derive their value from a particular stock, a defined basket of stocks, or a stock index. Instruments typically used by Merrill Lynch to manage equity price risk include equity options, warrants, and baskets of equity securities. Equity options, for example, can require the writer to purchase or sell a specified stock or to make a cash payment based on changes in the market price of that stock, basket of stocks, or stock index.

Credit Spread Risk

Credit spread risk arises from the possibility that changes in credit spreads will affect the value of financial instruments. Credit spreads represent the credit risk premiums required by market participants for a given credit quality (e.g., the additional yield that a debt instrument issued by a AA-rated entity must produce over a risk-free alternative). Certain instruments are used by Merrill Lynch to manage this type of risk. Swaps and options, for example, can be designed to mitigate losses due to changes in credit spreads, as well as the credit downgrade or default of the issuer. Credit risk resulting from default on counterparty obligations is discussed in the Counterparty Credit Risk section.

Commodity Price and Other Risks

Through its commodities business, Merrill Lynch enters into exchange-traded contracts, financially settled OTC derivatives, contracts for physical delivery and contracts providing for the transportation, transmission and/or storage rights on or in vessels, barges, pipelines, transmission lines or storage facilities. Commodity, related storage, transportation or other contracts expose Merrill Lynch to the risk that the price of the underlying commodity or the cost of storing or transporting commodities may rise or fall. In addition, contracts relating to physical ownership and/or delivery can expose Merrill Lynch to numerous other risks, including performance and environmental risks.

Counterparty Credit Risk

Merrill Lynch is exposed to risk of loss if an individual, counterparty or issuer fails to perform its obligations under contractual terms (“default risk”). Both cash instruments and derivatives expose Merrill Lynch to default risk. Credit risk arising from changes in credit spreads is discussed above.

Merrill Lynch has established policies and procedures for mitigating credit risk on principal transactions, including reviewing and establishing limits for credit exposure, maintaining qualifying collateral, purchasing credit protection, and continually assessing the creditworthiness of counterparties.

In the normal course of business, Merrill Lynch executes, settles, and finances various customer securities transactions. Execution of these transactions includes the purchase and sale of securities by Merrill Lynch. These activities may expose Merrill Lynch to default risk arising from the potential that customers or counterparties may fail to satisfy their obligations. In these situations, Merrill Lynch may be required to purchase or sell financial instruments at unfavorable market prices to satisfy obligations to other customers or counterparties. In addition, Merrill Lynch seeks to control the risks associated with its customer margin activities by requiring customers to maintain collateral in compliance with regulatory and internal guidelines.

Liabilities to other brokers and dealers related to unsettled transactions (i.e., securities failed-to-receive) are recorded at the amount for which the securities were purchased, and are paid upon receipt of the securities from other brokers or dealers. In the case of aged securities failed-to-receive, Merrill Lynch may purchase the underlying security in the market and seek reimbursement for losses from the counterparty.

Concentrations of Credit Risk

Merrill Lynch's exposure to credit risk (both default and credit spread) associated with its trading and other activities is measured on an individual counterparty basis, as well as by groups of counterparties that share similar attributes. Concentrations of credit risk can be affected by changes in political, industry, or economic factors. To reduce the potential for risk concentration, credit limits are established and monitored in light of changing counterparty and market conditions.

Concentration of Risk to the U.S. Government and its Agencies

At December 31, 2011, Merrill Lynch had exposure to the U.S. Government and its agencies. This concentration consists of both direct and indirect exposures. Direct exposure, which primarily includes trading asset positions in instruments issued by the U.S. Government and its agencies, amounted to $43.0 billion at December 31, 2011. Merrill Lynch's indirect exposure results from maintaining U.S. Government and agencies securities as collateral for resale agreements and securities borrowed transactions. Merrill Lynch's direct credit exposure on these transactions is with the counterparty; thus Merrill Lynch has credit exposure to the U.S. Government and its agencies only in the event of the counterparty's default. Securities issued by the U.S. Government or its agencies held as collateral for resale agreements and securities borrowed transactions at December 31, 2011 totaled $128.2 billion.

Other Concentrations of Risk

At December 31, 2011, Merrill Lynch had other concentrations of credit risk, the largest of which was related to a counterparty having a total outstanding unsecured exposure of approximately $1.3 billion.

Merrill Lynch's most significant industry credit concentration is with financial institutions. Financial institutions include banks, insurance companies, finance companies, investment managers, and other diversified financial institutions. This concentration arises in the normal course of Merrill Lynch's brokerage, trading, hedging, financing, and underwriting activities. Merrill Lynch also monitors credit exposures worldwide by region. Outside the U.S., financial institutions and multi-national corporations represent the most significant concentrations of credit risk.

In the normal course of business, Merrill Lynch purchases, sells, underwrites, and makes markets in non-investment grade instruments. Merrill Lynch also provides extensions of credit and makes equity investments to facilitate leveraged transactions. These activities expose Merrill Lynch to a higher degree of credit risk than is associated with trading, investing in, and underwriting investment grade instruments and extending credit to investment grade counterparties.

Derivatives

Merrill Lynch's trading derivatives consist of derivatives provided to customers and derivatives entered into for trading strategies or risk management purposes.

Default risk exposure varies by type of derivative. Default risk on derivatives can occur for the full notional amount of the trade where a final exchange of principal takes place, as may be the case for currency swaps. Swap agreements and forward contracts are generally OTC-transacted and thus are exposed to default risk to the extent of their replacement cost. Since futures contracts are exchange-traded and usually require daily cash settlement, the related risk of loss is generally limited to a one-day net positive change in fair value. Generally such receivables and payables are recorded in customers' receivables and payables on the Consolidated Balance Sheets. Option contracts can be exchange-traded or OTC. Purchased options have default risk to the extent of their replacement cost. Written options represent a potential obligation to counterparties and typically do not subject Merrill Lynch to default risk except under circumstances where the option premium is being financed or in cases where Merrill Lynch is required to post collateral. Refer to Note 6 for further information on credit risk management related to derivatives. Additional information about derivatives that meet the definition of a guarantee for accounting purposes is included in Note 6.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

+ References

Reference 1: http://www.xbrl.org/2003/role/presentationRef

-Publisher FASB

-Name Accounting Standards Codification

-Topic 820

-SubTopic 10

-Section 50

-Paragraph 5

-URI http://asc.fasb.org/extlink&oid=6925170&loc=d3e19296-110258

Reference 2: http://www.xbrl.org/2003/role/presentationRef

-Publisher FASB

-Name Statement of Financial Accounting Standard (FAS)

-Number 159

-Paragraph 17-22, 27, 28

-LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy.

Reference 3: http://www.xbrl.org/2003/role/presentationRef

-Publisher FASB

-Name Accounting Standards Codification

-Topic 825

-SubTopic 10

-Section 50

-Paragraph 10

-URI http://asc.fasb.org/extlink&oid=6947722&loc=d3e13433-108611

Reference 4: http://www.xbrl.org/2003/role/presentationRef

-Publisher FASB

-Name Statement of Financial Accounting Standard (FAS)

-Number 107

-Paragraph 15C, 15D

-LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy.

Reference 5: http://www.xbrl.org/2003/role/presentationRef

-Publisher FASB

-Name Accounting Standards Codification

-Topic 825

-SubTopic 10

-Section 50

-Paragraph 28

-URI http://asc.fasb.org/extlink&oid=6957238&loc=d3e14064-108612

Reference 6: http://www.xbrl.org/2003/role/presentationRef

-Publisher FASB

-Name Accounting Standards Codification

-Topic 825

-SubTopic 10

-Section 50

-Paragraph 16

-URI http://asc.fasb.org/extlink&oid=6947722&loc=d3e13504-108611

Reference 7: http://www.xbrl.org/2003/role/presentationRef

-Publisher FASB

-Name Statement of Financial Accounting Standard (FAS)

-Number 107

-Paragraph 15A

-Subparagraph a-d

-LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy.

Reference 8: http://www.xbrl.org/2003/role/presentationRef

-Publisher FASB

-Name Accounting Standards Codification

-Topic 825

-SubTopic 10

-Section 50

-Paragraph 21

-URI http://asc.fasb.org/extlink&oid=6947722&loc=d3e13537-108611

Reference 9: http://www.xbrl.org/2003/role/presentationRef

-Publisher FASB

-Name Statement of Financial Accounting Standard (FAS)

-Number 133

-Paragraph 44A, 44B

-LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy.

Reference 10: http://www.xbrl.org/2003/role/presentationRef

-Publisher FASB

-Name Accounting Standards Codification

-Topic 820

-SubTopic 10

-Section 50

-Paragraph 2

-URI http://asc.fasb.org/extlink&oid=6925170&loc=d3e19207-110258

Reference 11: http://www.xbrl.org/2003/role/presentationRef

-Publisher FASB

-Name Accounting Standards Codification

-Topic 825

-SubTopic 10

-Section 50

-Paragraph 30

-URI http://asc.fasb.org/extlink&oid=6957238&loc=d3e14172-108612

Reference 12: http://www.xbrl.org/2003/role/presentationRef

-Publisher FASB

-Name Statement of Financial Accounting Standard (FAS)

-Number 107

-Paragraph 3, 10, 14, 15

-LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy.

Reference 13: http://www.xbrl.org/2003/role/presentationRef

-Publisher FASB

-Name Statement of Financial Accounting Standard (FAS)

-Number 107

-Paragraph 15B

-Subparagraph a, b

-LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy.

Reference 14: http://www.xbrl.org/2003/role/presentationRef

-Publisher FASB

-Name Statement of Financial Accounting Standard (FAS)

-Number 157

-Paragraph 32, 33, 34

-LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy.

+ Details