Quarterly report pursuant to Section 13 or 15(d)

Derivatives

v2.3.0.15
Derivatives
 9 Months Ended
Sep. 30, 2011
Derivatives [Abstract]  
Derivatives
 
Note 6.  Derivatives
 
A derivative is an instrument whose value is derived from an underlying instrument or index, such as interest rates, equity security prices, currencies, commodity prices or credit spreads. Derivatives include futures, forwards, swaps, option contracts, and other financial instruments with similar characteristics. Derivative contracts often involve future commitments to exchange interest payment streams or currencies based on a notional or contractual amount (e.g., interest rate swaps or currency forwards) or to purchase or sell other financial instruments at specified terms on a specified date (e.g., options to buy or sell securities or currencies).
 
Derivatives Accounting establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (“embedded derivatives”) and for hedging activities. Derivatives Accounting requires that an entity recognize all derivatives as either assets or liabilities and measure those instruments at fair value. The fair value of all derivatives is recorded on a net-by-counterparty basis on the Condensed Consolidated Balance Sheets where Merrill Lynch believes a legal right of setoff exists under an enforceable netting agreement. All derivatives, including bifurcated embedded derivatives within structured notes, are reported on the Condensed Consolidated Balance Sheets as trading assets and liabilities.
 
The accounting for changes in fair value of a derivative instrument depends on its intended use and if it is designated and qualifies as an accounting hedging instrument under Derivatives Accounting.
 
Trading derivatives
 
Merrill Lynch enters into derivatives to facilitate client transactions, for trading and financing purposes, and to manage risk exposures arising from trading assets and liabilities. Changes in fair value for these derivatives are reported in current period earnings as principal transactions revenues.
 
Derivatives that contain a significant financing element
 
In the ordinary course of trading activities, Merrill Lynch enters into certain transactions that are documented as derivatives where a significant cash investment is made by one party. Certain derivative instruments that contain a significant financing element at inception and where Merrill Lynch is deemed to be the borrower are included in financing activities in the Condensed Consolidated Statements of Cash Flows. The cash flows from all other derivative transactions that do not contain a significant financing element at inception are included in operating activities.
 
Non-trading derivatives
 
Merrill Lynch also enters into derivatives in order to manage risk exposures arising from assets and liabilities not carried at fair value as follows:
 
1.  Merrill Lynch’s debt was issued in a variety of maturities and currencies to achieve the lowest cost financing possible. Merrill Lynch enters into derivative transactions to hedge these liabilities. Derivatives used most frequently include swap agreements that:
 
  •  Convert fixed-rate interest payments into variable-rate interest payments;
 
  •  Change the underlying interest rate basis or reset frequency; and
 
  •  Change the settlement currency of a debt instrument.
 
Changes in the fair value of interest rate and foreign currency derivatives are reported in interest expense or other revenues when hedge accounting is applied; otherwise changes in fair value are reported in other revenue.
 
2.  Merrill Lynch uses foreign-exchange forward contracts, foreign-exchange options, and currency swaps to hedge its net investments in foreign operations, as well as other foreign currency exposures (e.g., non-U.S. dollar denominated debt and expenses). These derivatives are used to mitigate the impact of changes in exchange rates. Changes in the fair value of these derivatives are reported in OCI, other revenue and interest expense when net investment hedge accounting is applied; otherwise changes in fair value are reported in other revenues.
 
3.  Merrill Lynch enters into futures, swaps, options and forward contracts to manage the price risk of certain commodity inventory and forecasted commodity purchases and sales. Changes in fair value of these derivatives are reported in principal transaction revenues, unless cash flow hedge accounting is applied.
 
4.  Merrill Lynch enters into CDS to manage the credit risk on certain loans that are not part of trading activities. Changes in the fair value of these derivatives are reported in other revenue.
 
Derivatives that qualify as accounting hedges under the guidance in Derivatives Accounting are designated as one of the following:
 
1.  A hedge of the fair value of a recognized asset or liability (“fair value hedge”). Changes in the fair value of derivatives that are designated and qualify as fair value hedges of interest rate risk, foreign exchange risk and commodity price risk, along with the gain or loss on the hedged asset or liability that is attributable to the hedged risk, are recorded in current period earnings as interest expense, other revenues, or principal transactions.
 
2.  A hedge of the variability of cash flows to be received or paid related to a recognized asset or liability (“cash flow hedge”). Changes in the fair value of derivatives that are designated and qualify as cash flow hedges are recorded in OCI until earnings are affected by the variability of cash flows of the hedged asset or liability or when the forecasted purchase or sale occurs.
 
3.  A hedge of a net investment in a foreign operation (“net investment hedge”). Changes in the fair value of derivatives that are designated and qualify as hedges of a net investment in a foreign operation are recorded in the foreign currency translation adjustment account within OCI. Changes in the fair value of the hedging instruments that are associated with the difference between the spot rate and the contracted forward rate are recorded in current period earnings in other revenues and in interest expense.
 
Merrill Lynch formally assesses, both at the inception of the hedge and on an ongoing basis, whether the hedging derivatives are highly effective in offsetting changes in fair value or cash flows of hedged items. Merrill Lynch uses regression analysis at the hedge’s inception and for each reporting period thereafter to assess whether the derivative used in its hedging transaction is expected to be and has been highly effective in offsetting changes in the fair value or cash flows of the hedged item. When it is determined that a derivative is not highly effective as a hedge, Merrill Lynch discontinues hedge accounting.
 
Hedge accounting activity for 2011 and 2010 included the following:
 
Fair value hedges
 
                                                 
(dollars in millions)
    2011   2010
        Hedged
 		  Hedge
 		      Hedged
 		  Hedge
    Derivative(1)   Item(1)(2)   Ineffectiveness(1)   Derivative(1)   Item(1)(2)   Ineffectiveness(1)
 
 
For the three months ended September 30:
                                               
Interest rate risk on USD denominated long-term debt
  $ 1,555     $ (1,744 )   $ (189 )   $ 843     $ (986 )   $ (143 )
Interest rate risk on foreign currency denominated long-term debt
    (345 )     287       (58 )     1,311       (1,297 )     14  
Commodity price risk on commodity inventory
    16       (16 )     -       25       (23 )     2  
For the nine months ended September 30:
                                               
Interest rate risk on USD denominated long-term debt
    1,700       (2,100 )     (400 )     2,530       (2,913 )     (383 )
Interest rate risk on foreign currency denominated long-term debt
    335       (499 )     (164 )     59       (284 )     (225 )
Commodity price risk on commodity inventory
    -       -       -       66       (69 )     (3 )
 
 
 
                                 
    2011   2010
    Trading
 		  Trading
 		  Trading
 		  Trading
    Assets   Liabilities   Assets   Liabilities
 
 
As of September 30, 2011 and December 31, 2010:
                               
Carrying value of hedging derivatives
                               
Long-term debt
  $ 7,069     $ 609     $ 4,442     $ 484  
Commodity inventory
    -       6       80       6  
Notional amount of hedging derivatives
                               
Long-term debt
    45,584       10,544       43,924       13,967  
Commodity inventory
    1       23       232       14  
 
 
(1) Amounts are recorded in interest expense and other revenues for long-term debt and principal transactions for commodity inventory.
 
(2) Excludes the impact of purchase accounting adjustments made to certain long-term borrowings in connection with the acquisition of Merrill Lynch by Bank of America.
 
Cash flow hedges
 
                                                 
(dollars in millions)
    2011   2010
        Gains
 		          Gains
 		  Hedge
    Gains
 		  (losses) in
 		  Hedge
 		  Gains
 		  (losses) in
 		  Ineffectiveness
    (losses)
 		  Income
  Ineffectiveness
 		  (losses)
 		  Income
 		  and Amounts
    Recognized in
 		  Reclassified
 		  and Amounts
 		  Recognized in
 		  Reclassified
 		  Excluded
    Accumulated
 		  from
 		  Excluded from
 		  Accumulated
 		  from
 		  from
    OCI on
 		  Accumulated
 		  Effectiveness
 		  OCI on
 		  Accumulated
 		  Effectiveness
    derivatives   OCI(1)   Testing(1)   derivatives   OCI(1)   Testing(1)
 
 
For the three months ended September 30:
                                               
Commodity price risk on forecasted purchases and sales(2)
  $ 5     $ 2     $ 2     $ 20     $ 3     $ 4  
For the nine months ended September 30:
                                               
Commodity price risk on forecasted purchases and sales(2)
    (4 )     5       -       47       16       6  
 
 
 
                                 
    2011   2010
    Trading
 		  Trading
 		  Trading
 		  Trading
    Assets   Liabilities   Assets   Liabilities
 
 
As of September 30, 2011 and December 31, 2010:
                               
Carrying value of hedging derivatives
  $ 73     $ 8     $ 109     $ 5  
Notional amount of hedging derivatives
    197       161       255       134  
 
 
(1) Amounts are recorded in principal transactions.
(2) Amount that is expected to be reclassified into earnings in the next 12 months included in principal transactions is $1 million and $22 million at September 30, 2011 and September 30, 2010, respectively.
 
Net investment hedges of foreign operations
 
                                                 
(dollars in millions)
    2011   2010
        Gains
  Hedge
 		      Gains
  Hedge
        (losses) in
 		  Ineffectiveness
      (losses) in
 		  Ineffectiveness
    Gains
  Income
  and Amounts
  Gains
  Income
  and Amounts
    (losses)
 		  Reclassified
 		  Excluded
 		  (losses)
 		  Reclassified
 		  Excluded
    Recognized in
 		  from
  from
  Recognized in
 		  from
  from
    Accumulated
  Accumulated
 		  Effectiveness
 		  Accumulated
  Accumulated
 		  Effectiveness
    OCI   OCI(1)   Testing(2)   OCI   OCI(1)   Testing(2)
 
 
For the three months ended September 30:
                                               
Foreign exchange risk
  $ 1,215     $ (18 )   $ (110 )   $ (1,356 )   $ -     $ (49 )
For the nine months ended September 30:
                                               
Foreign exchange risk
    254       (21 )     (267 )     (509 )     -       (138 )
 
 
 
                 
    2011   2010
 
 
As of September 30, 2011 and December 31, 2010:
               
Carrying value of hedging derivatives
               
Trading assets
  $ 1,343     $ 468  
Trading liabilities
    577       930  
Carrying value of non-derivative hedges
               
Long-term borrowings
    64       536  
Notional amount of hedging derivatives
               
in an asset position
    22,954       6,639  
in a liability position
    5,985       19,180  
 
 
 
(1) Amounts are recorded in other revenue.
(2) Amounts are recorded in other revenues and interest expense.
 
Net gains (losses) on economic hedges
 
                 
(dollars in millions)
    2011(1)   2010(1)
 
 
For the three months ended September 30:
               
Interest rate risk
  $ 182     $ 239  
Foreign currency risk
    (2,350 )     4,507  
Credit risk
    65       (29 )
                 
For the nine months ended September 30:
               
Interest rate risk
    178       708  
Foreign currency risk
    796       (1,223 )
Credit risk
    48       (23 )
 
 
 
(1) Amounts are recorded in other revenue.
 
The amounts in the “Net gains (losses) on economic hedges” table above represent net gains (losses) on derivatives that are not used for trading purposes and are not used in accounting hedging relationships. Interest rate risk primarily relates to derivatives used to economically hedge long-term borrowings. Foreign currency risk primarily relates to economic hedges of foreign currency denominated transactions that generate earnings upon remeasurement in accordance with ASC 830-20, Foreign Currency Transactions (“Foreign Currency Transactions”). As both the remeasurement of the foreign currency risk on the transaction and the changes in fair value of the derivative are recorded in earnings, hedge accounting is not applied. Credit risk relates to credit default swaps used to economically manage the credit risk on certain loans not included in trading activities.
 
Derivative balances by primary risk
 
Derivative instruments contain numerous market risks. In particular, most derivatives have interest rate risk, as they contain an element of financing risk that is affected by changes in interest rates. Additionally, derivatives expose Merrill Lynch to counterparty credit risk, although this is generally mitigated by collateral margining and netting arrangements. For disclosure purposes below, the primary risk of a derivative is largely determined by the business that is engaging in the derivative activity. For instance, a derivative that is initiated by an equities derivative business will generally have equity price risk as its primary underlying market risk and is classified as such for the purposes of this disclosure, despite the fact that there may be other market risks that affect the value of the instrument.
 
The following tables identify the primary risk for derivative instruments, which includes trading, non-trading and bifurcated embedded derivatives, at September 30, 2011 and December 31, 2010. The primary risk is provided on a gross basis, prior to the application of the impact of counterparty and cash collateral netting.
 
                                 
(dollars in millions)
    As of September 30, 2011
    Contract/
 		  Trading Assets-
 		  Contract/
 		  Trading Liabilities-
    Notional   Derivative Contracts   Notional   Derivative Contracts
 
 
Interest rate contracts
                               
Swaps
  $ 9,552,280     $ 649,980     $ 9,247,885     $ 648,260  
Futures and forwards
    2,092,306       1,795       2,200,980       1,730  
Written options
    -       -       1,501,666       63,907  
Purchased options
    1,483,887       68,715       -       -  
Foreign exchange contracts
                               
Swaps
    100,834       11,662       123,244       14,160  
Spot, futures and forwards
    109,094       6,182       101,500       5,731  
Written options
    -       -       312,446       10,285  
Purchased options
    294,075       10,156       -       -  
Equity contracts
                               
Swaps
    26,629       1,866       22,791       2,011  
Futures and forwards
    45,805       2,541       56,411       2,319  
Written options
    -       -       341,472       20,749  
Purchased options
    342,128       21,510       -       -  
Commodity contracts
                               
Swaps
    39,138       6,334       39,057       6,844  
Futures and forwards
    277,892       3,756       276,212       2,582  
Written options
    -       -       136,792       8,348  
Purchased options
    137,314       8,314       -       -  
Credit derivatives
                               
Purchased protection:
                               
Credit default swaps
    195,074       23,137       50,789       1,176  
Total return swaps
    2,602       442       2,234       308  
Other Credit Derivatives
    864       17       25       -  
Written protection:
                               
Credit default swaps
    45,458       2,071       202,847       22,085  
Total return swaps
    2,565       235       2,321       632  
Other Credit Derivatives
    -       -       203       8  
                                 
Gross derivative assets/liabilities
  $ 14,747,945     $ 818,713     $ 14,618,875     $ 811,135  
                                 
Less: Legally enforceable master netting
            (747,835 )             (747,835 )
Less: Cash collateral applied
            (31,645 )             (33,762 )
                                 
Total derivative assets and liabilities
          $ 39,233             $ 29,538  
                                 
 
 
 
                                 
(dollars in millions)
    As of December 31, 2010
    Contract/
 		  Trading Assets-
 		  Contract/
 		  Trading Liabilities-
    Notional   Derivative Contracts   Notional   Derivative Contracts
 
 
Interest rate contracts
                               
Swaps
  $ 8,492,025     $ 452,115     $ 8,333,391     $ 452,564  
Futures and forwards
    1,916,110       1,549       1,955,861       1,608  
Written options
    -       -       1,708,493       46,064  
Purchased options
    1,836,089       48,185       -       -  
Foreign exchange contracts
                               
Swaps
    93,721       10,396       98,987       11,947  
Spot, futures and forwards
    118,363       5,637       105,671       5,702  
Written options
    -       -       280,290       10,673  
Purchased options
    273,375       10,501       -       -  
Equity contracts
                               
Swaps
    17,411       1,622       20,764       1,871  
Futures and forwards
    35,483       2,897       43,257       2,122  
Written options
    -       -       221,791       15,677  
Purchased options
    174,313       15,338       -       -  
Commodity contracts
                               
Swaps
    39,284       8,872       50,710       9,158  
Futures and forwards
    215,588       4,122       198,130       2,817  
Written options
    -       -       86,241       6,628  
Other Credit Derivatives
    84,554       6,565       -       -  
Credit derivatives
                               
Purchased protection:
                               
Credit default swaps
    322,230       29,670       251,679       8,001  
Total return swaps
    2,127       301       3,243       208  
Other Credit Derivatives
    440       8       47       -  
Written protection:
                               
Credit default swaps
    248,509       7,978       326,448       23,755  
Total return swaps
    3,802       245       1,607       475  
Other Credit Derivatives
    -       -       214       1  
                                 
Gross derivative assets/liabilities
  $ 13,873,424     $ 606,001     $ 13,686,824     $ 599,271  
                                 
Less: Legally enforceable master netting
            (538,055 )             (538,055 )
Less: Cash collateral applied
            (28,575 )             (29,019 )
                                 
Total derivative assets and liabilities
          $ 39,371             $ 32,197  
                                 
 
 
 
Trading revenues
 
Merrill Lynch enters into trading derivatives and non-derivative cash instruments to facilitate client transactions, for trading and financing purposes, and to manage risk exposures arising from trading assets and liabilities. The resulting risk from derivatives and non-derivative cash instruments is managed on a portfolio basis as part of Merrill Lynch’s sales and trading activities and the related revenue is recorded on different income statement line items, including principal transactions, commissions, other revenues and net interest income (expense).
 
Sales and trading revenue includes changes in fair value and realized gains and losses on the sales of trading and other assets, which are included in principal transactions and other revenues, net interest income, and commissions. Initial trading related revenue is generated by the difference in the client price for an instrument and the price at which the trading desk can execute the trade in the dealer market. That revenue is included within principal transactions on the Condensed Consolidated Statement of Earnings (Loss). For equity securities, commissions related to purchases and sales are recorded in commissions on the Condensed Consolidated Statement of Earnings (Loss). Changes in the fair value of these equity securities are included in principal transactions. These amounts are reflected in equity risk in the tables below. For debt securities, revenue, with the exception of interest, is typically included in principal transactions. Unlike commissions for equity securities, the initial revenue related to broker/dealer services for debt securities is included in the pricing of the instrument rather than charged through separate fee agreements. Therefore, this revenue is recorded in principal transactions as part of the initial mark to fair value. In transactions where Merrill Lynch acts as an agent, fees are earned and recorded in commissions. In the tables below, most sovereign government debt securities are reflected in interest rate risk. All other government debt securities (including, for example, municipal bonds and emerging markets sovereign debt) and corporate debt securities are included in credit risk.
 
For derivatives, revenue is typically included in principal transactions. Similar to debt securities, the initial revenue related to dealer services is included in the initial pricing of the instrument rather than charged through separate fee agreements. Therefore, this revenue is recorded in principal transactions as part of the initial mark to fair value. In transactions where Merrill Lynch acts as agent, which includes exchange traded futures and options, fees are earned and recorded in commissions. Derivatives are included in the tables below based on their predominant risk (e.g., credit default swaps are included in credit risk.)
 
Certain instruments, primarily available-for-sale securities and loans, are not considered trading assets or liabilities. Gains/losses on sales and changes in fair value of these instruments, where applicable (e.g., the fair value option has been elected), are recorded in other revenues. These instruments are typically reflected in credit risk.
 
Interest revenue for debt securities and loans is included in net interest income (expense).
 
The following tables identify the amounts in the income statement line items attributable to trading and non-trading activities, including both derivatives and non-derivative cash instruments categorized by primary risk for the three and nine months ended September 30, 2011 and September 30, 2010.
 
Non-trading related amounts include activities in connection with principal investment, wealth management, and certain lending activities; economic hedging activity discussed in the Non-trading derivatives section above; and the impact of changes in Merrill Lynch’s own creditworthiness on borrowings accounted for at fair value.
 
Trading and Non-Trading Related Revenue for Derivatives and Non-Derivative Cash Instruments
 
                                         
(dollars in millions)
For the Three Months
 		  Principal
 		      Other
  Net Interest
 		   
Ended September 30, 2011   Transactions   Commissions   Revenues(1)   Income (Expense)   Total
 
 
Interest Rate Risk
  $ 396     $ 21     $ -     $ 205     $ 622  
Foreign Exchange Risk
    24       -       -       1       25  
Equity Risk
    132       792       36       104       1,064  
Commodity Risk
    216       -       1       (29 )     188  
Credit Risk
    (829 )     16       33       634       (146 )
                                         
Total trading — related
    (61 )     829       70       915       1,753  
Non-trading related
    2,842       612       (974 )     (803 )     1,677  
                                         
Total
  $ 2,781     $ 1,441     $ (904 )   $ 112     $ 3,430  
                                         
 
 
 
Trading and Non-Trading Related Revenue for Derivatives and Non-Derivative Cash Instruments
 
                                         
(dollars in millions)
For the Nine Months
 		  Principal
 		      Other
  Net Interest
 		   
Ended September 30, 2011   Transactions   Commissions   Revenues(1)   Income (Expense)   Total
 
 
Interest Rate Risk
  $ 746     $ 64     $ 19     $ 585     $ 1,414  
Foreign Exchange Risk
    72       -       -       6       78  
Equity Risk
    2,020       2,458       94       (715 )     3,857  
Commodity Risk
    523       -       -       (86 )     437  
Credit Risk
    62       44       390       2,028       2,524  
                                         
Total trading — related
    3,423       2,566       503       1,818       8,310  
Non-trading related
    2,702       1,912       1,785       (2,543 )     3,856  
                                         
Total
  $ 6,125     $ 4,478     $ 2,288     $ (725 )   $ 12,166  
                                         
 
 
 
Trading and Non-Trading Related Revenue for Derivatives and Non-Derivative Cash Instruments
 
                                         
(dollars in millions)
For the Three Months
 		  Principal
 		      Other
  Net Interest
 		   
Ended September 30, 2010   Transactions   Commissions   Revenues(1)   Income (Expense)   Total
 
 
Interest Rate Risk
  $ 136     $ 19     $ 7     $ 188     $ 350  
Foreign Exchange Risk
    (28 )     -       -       -       (28 )
Equity Risk
    384       716       42       2       1,144  
Commodity Risk
    138       -       5       (30 )     113  
Credit Risk
    912       12       283       815       2,022  
                                         
Total trading — related
    1,542       747       337       975       3,601  
Non-trading related
    (299 )     604       99       (990 )     (586 )
                                         
Total
  $ 1,243     $ 1,351     $ 436     $ (15 )   $ 3,015  
                                         
 
 
 
Trading and Non-Trading Related Revenue for Derivatives and Non-Derivative Cash Instruments
 
                                         
(dollars in millions)
For the Nine Months
 		  Principal
 		      Other
  Net Interest
 		   
Ended September 30, 2010   Transactions   Commissions   Revenues(1)   Income (Expense)   Total
 
 
Interest Rate Risk
  $ 1,066     $ 60     $ 49     $ 538     $ 1,713  
Foreign Exchange Risk
    44       -       -       (1 )     43  
Equity Risk
    1,660       2,323       210       (459 )     3,734  
Commodity Risk
    200       -       6       (93 )     113  
Credit Risk
    3,612       32       615       2,480       6,739  
                                         
Total trading — related
    6,582       2,415       880       2,465       12,342  
Non-trading related
    799       1,902       1,713       (2,715 )     1,699  
                                         
Total
  $ 7,381     $ 4,317     $ 2,593     $ (250 )   $ 14,041  
                                         
 
 
(1) Includes other income and OTTI losses on available-for-sale debt securities.
 
Derivatives as guarantees
 
Merrill Lynch enters into certain derivative contracts that meet the definition of a guarantee under ASC 460, Guarantees (“Guarantees Accounting”). Guarantees are defined to include derivative contracts that contingently require a guarantor to make payment to a guaranteed party based on changes in an underlying (such as changes in the value of interest rates, security prices, currency rates, commodity prices, indices, etc.) that relate to an asset, liability or equity security of a guaranteed party. Derivatives that meet the accounting definition of a guarantee include certain OTC written options (e.g., written interest rate and written currency options). Merrill Lynch does not track, for accounting purposes, whether its clients enter into these derivative contracts for speculative or hedging purposes. Accordingly, Merrill Lynch has disclosed information about all credit derivatives, credit-related notes and certain types of written options that can potentially be used by clients to protect against changes in an underlying, regardless of how the contracts are actually used by the client.
 
Merrill Lynch’s derivatives that act as guarantees at September 30, 2011 and December 31, 2010 are summarized below:
 
                                                 
(dollars in millions)
    Maximum
 		                   
    Payout/
 		  Less than
 		              Carrying
    Notional   1 year   1 - 3 years   3 - 5 years   Over 5 years   Value(1)
 
 
At September 30, 2011:
                                               
Derivative contracts:
                                               
Credit derivatives:
                                               
Investment grade(2)
  $ 82,461     $ 9,330     $ 27,980     $ 24,287     $ 20,864     $ 4,601  
Non-investment grade(2)
    170,933       20,346       47,918       50,874       51,795       18,124  
                                                 
Total credit derivatives
    253,394       29,676       75,898       75,161       72,659       22,725  
Credit related notes:
                                               
Investment grade(2)
    2,297       138       6       214       1,939       2,297  
Non-investment grade(2)
    918       -       67       98       753       918  
                                                 
Total credit related notes
    3,215       138       73       312       2,692       3,215  
Other derivatives
    1,680,963       456,047       373,141       197,554       654,221       80,848  
                                                 
Total derivative contracts
  $ 1,937,572     $ 485,861     $ 449,112     $ 273,027     $ 729,572     $ 106,788  
                                                 
At December 31, 2010:
                                               
Derivative contracts:
                                               
Credit derivatives:
                                               
Investment grade(2)
  $ 394,704     $ 35,231     $ 138,666     $ 98,617     $ 122,190     $ 13,742  
Non-investment grade(2)
    185,876       23,272       61,365       49,556       51,683       10,489  
                                                 
Total credit derivatives
    580,580       58,503       200,031       148,173       173,873       24,231  
Credit related notes:
                                               
Investment grade(2)
    3,580       -       132       -       3,448       3,580  
Non-investment grade(2)
    1,358       9       20       156       1,173       1,358  
                                                 
Total credit related notes(3)
    4,938       9       152       156       4,621       4,938  
Other derivatives
    1,379,874       421,080       296,885       190,062       471,847       50,505  
                                                 
Total derivative contracts
  $ 1,965,392     $ 479,592     $ 497,068     $ 338,391     $ 650,341     $ 79,674  
                                                 
 
 
(1) Derivative contracts are shown on a gross basis prior to cash collateral or counterparty netting.
(2) Refers to the creditworthiness of the underlying reference obligations.
(3) Total credit related note amounts have been revised from approximately $2.4 billion (as previously reported) to approximately $4.9 billion to reflect CDOs and CLOs held by certain consolidated VIEs.
 
Credit derivatives
 
Credit derivatives derive value based on an underlying third party referenced obligation or a portfolio of referenced obligations. Merrill Lynch is both a seller and a buyer of credit protection. A seller of credit protection is required to make payments to a buyer upon the occurrence of a predefined credit event. Such credit events generally include bankruptcy of the referenced credit entity and failure to pay under their credit obligations, as well as acceleration of indebtedness and payment repudiation or moratorium. Merrill Lynch considers credit derivatives to be guarantees where it is the seller of credit protection. For credit derivatives based on a portfolio of referenced credits or credit indices, Merrill Lynch as a seller of credit protection may not be required to make payment until a specified amount of loss has occurred and/or may only be required to make payment up to a specified amount.
 
For most credit derivatives, the notional value represents the maximum amount payable by Merrill Lynch as a seller of credit protection. However, Merrill Lynch does not exclusively monitor its exposure to credit derivatives based on notional value. Instead, a risk framework is used to define risk tolerances and establish limits to help to ensure that certain credit risk-related losses occur within acceptable, predefined limits. Merrill Lynch discloses internal categorizations (i.e., investment grade, non-investment grade) consistent with how risk is managed to evaluate the payment status of its freestanding credit derivative instruments.
 
Merrill Lynch economically hedges its exposure to credit derivatives by entering into a variety of offsetting derivative contracts and security positions. For example, in certain instances, Merrill Lynch purchases credit protection with identical underlying referenced names to offset its exposure. At September 30, 2011 and December 31, 2010, the notional value and carrying value of credit protection purchased and credit protection sold by Merrill Lynch with identical underlying referenced names was:
 
                                                 
(dollars in millions)
    Maximum
 		                   
    Payout/
 		  Less than
 		              Carrying
    Notional   1 year   1 - 3 years   3 - 5 years   Over 5 years   Value(1)
 
 
At September 30, 2011:
                                               
Credit derivatives purchased
  $ 224,462     $ 26,632     $ 65,461     $ 68,785     $ 63,584     $ 19,938  
Credit derivatives sold
    227,788       28,282       63,095       71,526       64,885       19,713  
At December 31, 2010:
                                               
Credit derivatives purchased
  $ 543,233     $ 53,741     $ 179,809     $ 140,764     $ 168,919     $ 17,875  
Credit derivatives sold
    567,828       57,954       198,656       147,121       164,097       21,600  
 
 
(1) Derivative contracts are shown on a gross basis prior to cash collateral or counterparty netting.
 
Credit related notes
 
Credit related notes in the guarantees table above include investments in securities issued by CDO, CLO and credit linked note vehicles. These instruments are classified as trading securities. Most of the entities that issue these instruments have either the ability to enter into credit derivatives or have entered into credit derivatives that meet the definition of a guarantee (in this case, the sale of credit protection). Since most of these securities could potentially have embedded credit derivatives that would meet the definition of a guarantee, Merrill Lynch includes all of its investments in these securities above.
 
The carrying value of these instruments equals Merrill Lynch’s maximum exposure to loss. Merrill Lynch is not obligated to make any payments to the entities under the terms of the securities owned. Merrill Lynch discloses internal categorizations (i.e., investment grade, non-investment grade) consistent with how risk is managed for these instruments.
 
Other derivative contracts
 
Other derivative contracts in the guarantees table above primarily include OTC written interest rate options and written currency options. For such contracts the maximum payout could theoretically be unlimited, because, for example, the rise in interest rates or changes in foreign exchange rates could theoretically be unlimited. Merrill Lynch does not monitor its exposure to derivatives based on the theoretical maximum payout because that measure does not take into consideration the probability of the occurrence. As such, rather than including the maximum payout, the notional value of these contracts has been included to provide information about the magnitude of involvement with these types of contracts. However, it should be noted that the notional value is not a reliable indicator of Merrill Lynch’s exposure to these contracts. Instead, as previously noted, a risk framework is used to define risk tolerances and establish limits to help ensure that certain risk-related losses occur within acceptable, predefined limits.
 
As the fair value and risk of payment under these derivative contracts are based upon market factors, such as changes in interest rates or foreign exchange rates, the carrying values in the table above reflect the best estimate of Merrill Lynch’s performance risk under these transactions at September 30, 2011 and December 31, 2010. Merrill Lynch economically hedges its exposure to these contracts by entering into a variety of offsetting derivative contracts and security positions.
 
Credit risk management of derivatives
 
Merrill Lynch defines counterparty credit risk as the potential for loss that can occur as a result of an individual, counterparty, or issuer being unable or unwilling to honor its contractual obligations. Merrill Lynch mitigates its credit risk to counterparties through a variety of techniques, including, where appropriate, the right to require initial collateral or margin, the right to terminate transactions or to obtain collateral should unfavorable events occur, the right to call for collateral when certain exposure thresholds are exceeded, the right to call for third party guarantees, and the purchase of credit default protection.
 
Merrill Lynch enters into International Swaps and Derivatives Association, Inc. (“ISDA”) master agreements or their equivalent (“master netting agreements”) with almost all derivative counterparties. Master netting agreements provide protection in bankruptcy in certain circumstances and, where legally enforceable, enable receivables and payables with the same counterparty to be offset for accounting and risk management purposes. Netting agreements are generally negotiated bilaterally and can require complex terms. While Merrill Lynch makes reasonable efforts to execute such agreements, it is possible that a counterparty may be unwilling to sign such an agreement and, as a result, would subject Merrill Lynch to additional credit risk.
 
Where Merrill Lynch has entered into legally enforceable netting agreements with counterparties, it reports derivative assets and liabilities, and any related cash collateral, net in the Condensed Consolidated Balance Sheets in accordance with ASC 210-20, Balance Sheet-Offsetting. At September 30, 2011 and December 31, 2010, cash collateral received of $31.6 billion and $28.6 billion, respectively, and cash collateral paid of $33.8 billion and $29.0 billion, respectively, was netted against derivative assets and liabilities. The enforceability of master netting agreements under bankruptcy laws in certain countries or in certain industries is not free from doubt, and receivables and payables with counterparties in these countries or industries are accordingly reported on a gross basis.
 
Merrill Lynch considers the impact of counterparty credit risk on the valuation of derivative contracts. Factors used to determine the credit valuation adjustments on the derivatives portfolio include current exposure levels (i.e., fair value prior to credit valuation adjustments) and expected exposure levels profiled over the maturity of the contracts. CDS market information, including either quoted single name CDS or index or other proxy CDS, is also considered. In addition, the credit valuation adjustments also take into account the netting and credit provisions of relevant agreements including collateral margin agreements and master netting agreements. During the three and nine months ended September 30, 2011 and September 30, 2010, valuation adjustments (net of hedges) of approximately $0.4 billion and $1.1 billion of losses and $0.2 billion and $0.1 billion of gains, respectively, were recognized in principal transactions for counterparty credit risk. At September 30, 2011 and December 31, 2010, the cumulative counterparty credit risk valuation adjustment that was reflected in derivative assets was $1.6 billion and $5.9 billion, respectively. In addition, the fair value of derivative liabilities is adjusted to reflect the impact of Merrill Lynch’s credit quality. During the three and nine months ended September 30, 2011, valuation adjustments (net of hedges) of approximately $0.7 billion and $0.6 billion in gains were recognized in principal transactions for changes in Merrill Lynch’s credit risk. During the three months ended September 30, 2010, valuation adjustments of approximately $0.1 billion were recognized as losses in principal transactions for changes in Merrill Lynch’s credit risk. For the nine months ended September 30, 2010, valuation adjustments were not material for changes in Merrill Lynch’s credit risk. At September 30, 2011 and December 31, 2010, the cumulative credit risk valuation adjustment that was reflected in the derivative liabilities balance was $1.2 billion and $0.6 billion, respectively.
 
Monoline derivative credit exposure at September 30, 2011 had a notional value of $16.8 billion compared with $32.0 billion at December 31, 2010. Mark-to-market monoline derivative credit exposure was $1.8 billion at September 30, 2011 compared with $8.8 billion at December 31, 2010. This decrease was driven by terminated monoline contracts and the reclassification of certain exposures. During the three months ended September 30, 2011, Merrill Lynch terminated all of its monoline contracts referencing super senior ABS CDOs. In addition, Merrill Lynch reclassified approximately $1.6 billion ($4.3 billion gross receivable less impairment) of net monoline exposure from trading assets-derivative contracts to other assets, because of the inherent default risk and given that these contracts no longer provide a hedge benefit, they are no longer considered derivative trading instruments. This monoline exposure relates to a single counterparty and is recorded at fair value based on current net recovery projections. The net recovery projections take into account the present value of projected payments expected to be received from the counterparty. At September 30, 2011, the counterparty credit valuation adjustment related to monoline derivative exposure was $442 million compared with $5.0 billion at December 31, 2010, which reduced Merrill Lynch’s net mark-to-market exposure to $1.3 billion at September 30, 2011. Monoline related mark-to-market losses for the three and nine months ended September 30, 2011 were $205 million and $83 million, respectively, which consist of changes in valuation adjustments as well as hedge losses due to a breakdown in correlations during the periods.
 
Bank of America has guaranteed the performance of Merrill Lynch on certain derivative transactions. The aggregate amount of such derivative liabilities was approximately $3.0 billion and $2.1 billion at September 30, 2011 and December 31, 2010, respectively.
 
Credit-risk related contingent features
 
Most of Merrill Lynch’s derivative contracts contain credit risk related contingent features, primarily in the form of ISDA master netting agreements and credit support documentation that enhance the creditworthiness of these instruments compared to other obligations of the respective counterparty with whom Merrill Lynch has transacted (e.g., other debt or equity). These contingent features may be for the benefit of Merrill Lynch as well as its counterparties with respect to changes in Merrill Lynch’s creditworthiness and the mark-to-market exposure under the derivative transactions. At September 30, 2011 and December 31, 2010, Merrill Lynch held cash and securities collateral of $44.9 billion and $44.0 billion, and posted collateral of $44.9 billion and $38.2 billion in the normal course of business under derivative agreements.
 
At September 30, 2011, the amount of collateral, calculated based on the terms of the contracts that Merrill Lynch could be required to post to counterparties but had not yet posted to counterparties was approximately $3.6 billion. That amount included $2.9 billion in collateral that could be required to be posted as a result of the downgrade by Moody’s Investors Service, Inc. (“Moody’s”) on September 21, 2011.
 
Some counterparties are able to unilaterally terminate certain contracts, or Merrill Lynch may be required to take other action such as find a suitable replacement or obtain a guarantee. At September 30, 2011, the current liability for these derivative contracts was $3.1 billion, against which Merrill Lynch had posted $1.6 billion of collateral for these contracts, resulting in a net uncollateralized liability of approximately $1.5 billion. The amount of additional collateral calculated based on the terms of the contracts Merrill Lynch could be required to post is approximately $2.3 billion, all of which is included in the $3.6 billion figure discussed above.
 
In addition, if at September 30, 2011, the ratings agencies had downgraded their long-term senior debt ratings for ML & Co. by one incremental notch, the amount of additional collateral and termination payments contractually required by such derivative contracts and other trading agreements would have been up to approximately $1.7 billion. If the ratings agencies had downgraded their long-term senior debt ratings for ML & Co. by a second incremental notch, approximately $0.5 billion in additional collateral and termination payments would have been required.