Quarterly report pursuant to Section 13 or 15(d)

Fair Value Disclosures

v2.4.0.6
Fair Value Disclosures
 9 Months Ended
Sep. 30, 2012
Fair Value Disclosures [Abstract]  
Fair Value Disclosures
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 Condensed Consolidated Balance Sheets are categorized based on the observability of 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 non-U.S. 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 (Levels 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. Reclassifications are reported as transfers in or transfers out of the Level as of the beginning of the quarter in which the reclassifications occur. Therefore, Level 3 gains and losses represent amounts recognized during the period in which the instrument was classified as Level 3. Refer to the recurring and non-recurring sections within this Note for further information on transfers between levels.

Valuation Processes and Techniques

Merrill Lynch has various processes and controls in place to ensure that its fair value measurements are reasonably estimated. A model validation policy governs the use and control of valuation models used to estimate fair value. This policy requires review and approval of models by personnel who are independent of the front office and periodic re-assessments to ensure that models are continuing to perform as designed. In addition, detailed reviews of trading gains and losses are analyzed on a daily basis by personnel who are independent of the front office. A price verification group, which is also independent of the front office, utilizes available market information including executed trades, market prices and market observable valuation model inputs to ensure that fair values are reasonably estimated. Merrill Lynch executes due diligence procedures over third party pricing service providers in order to support their use in the valuation process. Where market information is not available to support internal valuations, independent reviews of the valuations are performed and any material exposures are escalated through a management review process.

While Merrill Lynch believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.

During the third quarter of 2012, there were no changes to Merrill Lynch's valuation techniques that had or are expected to have, a material impact on its condensed consolidated financial position or results of operations.

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. Generally, the fair value of mortgage pass-throughs 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

Non-U.S. government obligations Non-U.S. 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 based 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.


Commercial loans and commitments The fair values of commercial 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. Commercial loans and commitments are generally classified as Level 2 in the fair value hierarchy. Certain commercial 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.

Collateralized loan obligations ("CLO") are valued based upon the present value of expected future cash flows, utilizing yields that are derived from those of comparable securities. CLOs are generally classified as Level 3 in the fair value hierarchy.


Equities

Exchange-Traded Equity Securities Exchange-traded equity securities are generally valued based on quoted prices from the exchange. These securities are classified as either Level 1 or Level 2 in the fair value hierarchy, primarily based on the exchange on which they are traded.

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, other 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 ("EBITDA")) 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 September 30, 2012 and December 31, 2011, respectively.

(dollars in millions)
 
Fair Value Measurements on a Recurring Basis
 
as of September 30, 2012
 
Level 1
 
Level 2
 
Level 3
 
Netting
Adj(1)
 
Total
Assets:
 
 
 
 
 
 
 
 
 
Securities segregated for regulatory purposes or deposited with clearing organizations:
 
 
 
 
 
 
 
 
 
Non-U.S. governments and agencies
$
431

 
$
1,729

 
$
—

 
$
—

 
$
2,160

U.S. Government and agencies
3,347

 
251

 
—

 
—

 
3,598

Total securities segregated for regulatory purposes or deposited with clearing organizations
3,778

 
1,980

 
—

 
—

 
5,758

Receivables under resale agreements
—

 
99,587

 
—

 
—

 
99,587

Receivables under securities borrowed transactions
—

 
1,258

 
—

 
—

 
1,258

Trading assets, excluding derivative contracts:
 
 
 
 
 
 
 
 
 
Equities
21,821

 
10,719

 
120

 
—

 
32,660

Convertible debentures
—

 
4,457

 
33

 
—

 
4,490

Non-U.S. governments and agencies
35,110

 
3,392

 
303

 
—

 
38,805

Corporate debt
—

 
13,895

 
2,002

 
—

 
15,897

Preferred stock
—

 
96

 
267

 
—

 
363

Mortgages, mortgage-backed and asset-backed
—

 
5,231

 
4,738

 
—

 
9,969

U.S. Government and agencies
21,920

 
23,942

 
—

 
—

 
45,862

Municipals and money markets
1,137

 
8,627

 
1,510

 
—

 
11,274

Physical commodities and other
—

 
450

 
—

 
—

 
450

Total trading assets, excluding derivative contracts
79,988

 
70,809

 
8,973

 
—

 
159,770

Derivative contracts(2)
2,448

 
680,484

 
6,875

 
(663,186
)
 
26,621

Investment securities available-for-sale:
 
 
 
 
 
 
 
 
 
U.S. Government and agencies
405

 
—

 
—

 
—

 
405

Securities, mortgage-backed and asset backed
 
 
 
 
 
 
 
 
 
     Non-agency MBS
—

 
45

 
—

 
—

 
45

     Corporate ABS
—

 
364

 
8

 
—

 
372

Total investment securities available-for-sale
405

 
409

 
8

 
—

 
822

Investment securities non-qualifying
2,693

 
711

 
354

 
—

 
3,758

Total investment securities
3,098

 
1,120

 
362

 
—

 
4,580

Securities received as collateral
14,267

 
464

 
—

 
—

 
14,731

Loans, notes and mortgages
—

 
1,001

 
1,679

 
—

 
2,680

   Other assets
—

 
—

 
1,263

 
—

 
1,263

Liabilities:
 
 
 
 
 
 
 
 
 
Payables under repurchase agreements
—

 
53,635

 
—

 
—

 
53,635

Short-term borrowings
—

 
3,309

 
—

 
—

 
3,309

Trading liabilities, excluding derivative contracts:
 
 
 
 
 
 
 
 
 
Equities
17,041

 
2,305

 
—

 
—

 
19,346

Convertible debentures
—

 
242

 
—

 
—

 
242

Non-U.S. governments and agencies
20,294

 
1,060

 
—

 
—

 
21,354

Corporate debt
—

 
9,019

 
20

 
—

 
9,039

Preferred stock
—

 
154

 
—

 
—

 
154

U.S. Government and agencies
17,401

 
596

 
—

 
—

 
17,997

Municipals, money markets and other
403

 
74

 
51

 
—

 
528

Total trading liabilities, excluding derivative contracts
55,139

 
13,450

 
71

 
—

 
68,660

 Derivative contracts(2)
2,062

 
681,830

 
4,429

 
(665,750
)
 
22,571

Obligation to return securities received as collateral
14,267

 
464

 
—

 
—

 
14,731

Other payables — interest and other
—

 
80

 
9

 
—

 
89

Long-term borrowings
—

 
30,044

 
1,455

 
—

 
31,499

 
 
 
 
 
 
 
 
 
 

During the nine months ended September 30, 2012, $1,740 million and $350 million of assets and liabilities, respectively, were transferred from Level 1 to Level 2, and $785 million and $40 million of assets and liabilities, respectively, were transferred from Level 2 to Level 1.  Of the asset transfer from Level 1 to Level 2, $640 million was due to a restriction that became effective for a non-qualifying investment security during the first quarter of 2012, while $535 million of the asset transfer from Level 2 to Level 1 was due to the lapse of this restriction during the second quarter of 2012.  The remaining transfers were the result of additional information associated with certain equities, derivative contracts and investment securities non-qualifying.

(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. Government and agencies
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).

Level 3 Financial Instruments
The following tables provide a summary of changes in Merrill Lynch’s Level 3 financial assets and liabilities for the three and nine months ended September 30, 2012 and September 30, 2011.

(dollars in millions)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Level 3 Financial Assets and Liabilities
Three Months Ended September 30, 2012
 
 
 
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
 
 
 
 
 
 
 
Transfers
In
 
Transfers
Out
 
Ending
Balance
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Trading assets, excluding derivative contracts:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equities
$
185

 
$
(5
)
 
$
—

 
$
—

 
$
(5
)
 
$
—

 
(2
)
 
16

 
$
—

 
(9
)
 
$
1

 
$
(66
)
 
$
120

Convertible debentures
34

 
1

 
—

 
—

 
1

 
—

 
(3
)
 
—

 
—

 
—

 
3

 
(2
)
 
33

Non-U.S. governments and agencies
389

 
7

 
—

 
—

 
7

 
—

 
(112
)
 
29

 
—

 
(4
)
 
1

 
(7
)
 
303

Corporate debt
2,106

 
45

 
—

 
—

 
45

 
—

 
(236
)
 
350

 
—

 
(103
)
 
100

 
(260
)
 
2,002

Preferred stock
228

 
18

 
—

 
—

 
18

 
—

 
(10
)
 
27

 
—

 
—

 
4

 
—

 
267

Mortgages, mortgage-backed and asset-backed
4,578

 
106

 
—

 
—

 
106

 
—

 
(228
)
 
380

 
—

 
(97
)
 
—

 
(1
)
 
4,738

Municipals and money markets
1,730

 
10

 
—

 
—

 
10

 
—

 
(361
)
 
150

 
—

 
(15
)
 
—

 
(4
)
 
1,510

Total trading assets, excluding derivative contracts
9,250

 
182

 
—

 
—

 
182

 
—

 
(952
)
 
952

 
—

 
(228
)
 
109

 
(340
)
 
8,973

Derivative contracts, net
3,414

 
(766
)
 
—

 
—

 
(766
)
 
—

 
(41
)
 
56

 
—

 
(24
)
 
(212
)
 
19

 
2,446

Investment securities available-for-sale :
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate ABS
8

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
8

Total investment securities available-for-sale
8

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
8

Investment securities non-qualifying
333

 
—

 
(1
)
 
—

 
(1
)
 
—

 
(6
)
 
41

 
—

 
(13
)
 
—

 
—

 
354

Total investment securities
341

 
—

 
(1
)
 
—

 
(1
)
 
—

 
(6
)
 
41

 
—

 
(13
)
 
—

 
—

 
362

Loans, notes and mortgages
1,776

 
—

 
66

 
8

 
74

 
—

 
(150
)
 
—

 
—

 
(21
)
 
—

 
—

 
1,679

Other assets
1,263

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
1,263

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Trading liabilities, excluding derivative contracts:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate debt
9

 
2

 
—

 
—

 
2

 
—

 
22

 
(8
)
 
—

 
—

 
1

 
(2
)
 
20

Preferred stock
9

 
—

 
—

 
—

 
—

 
—

 
—

 
(9
)
 
—

 
—

 
—

 
—

 
—

Municipals, money markets and other
44

 
2

 
—

 
—

 
2

 
—

 
9

 
—

 
—

 
—

 
—

 
—

 
51

Total trading liabilities, excluding derivative contracts
62

 
4

 
—

 
—

 
4

 
—

 
31

 
(17
)
 
—

 
—

 
1

 
(2
)
 
71

Other payables - interest and other
2

 
—

 
(1
)
 
—

 
(1
)
 
—

 
—

 


 
5

 
—

 
1

 
—

 
9

Long-term borrowings
1,469

 
(45
)
 
(3
)
 
—

 
(48
)
 
—

 
—

 
(11
)
 
16

 
(109
)
 
308

 
(266
)
 
1,455

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


Transfers out for equities primarily relate to increased market liquidity and price observability for certain equity positions. Transfers in and out for corporate debt primarily relate to changes in market liquidity for certain corporate loans. Transfers in for derivative contracts, net primarily relate to decreased price observability for certain long-dated equity derivative liabilities due to a lack of independent pricing. 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
Nine Months Ended September 30, 2012
 
 
 
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
 
 
 
 
 
 
 
Transfers
In
 
Transfers
Out
 
Ending
Balance
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Trading assets, excluding derivative contracts:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equities
$
179

 
$
(10
)
 
$
—

 
$
—

 
$
(10
)
 
$
—

 
(54
)
 
58

 
$
—

 
(18
)
 
$
33

 
$
(68
)
 
$
120

Convertible debentures
99

 
1

 
—

 
—

 
1

 
—

 
(56
)
 
—

 
—

 
—

 
8

 
(19
)
 
33

Non-U.S. governments and agencies
342

 
5

 
—

 
—

 
5

 
—

 
(357
)
 
337

 
—

 
(5
)
 
1

 
(20
)
 
303

Corporate debt(1)
3,962

 
136

 
—

 
—

 
136

 
—

 
(1,991
)
 
907

 
—

 
(542
)
 
248

 
(718
)
 
2,002

Preferred stock
227

 
29

 
—

 
—

 
29

 
—

 
(102
)
 
109

 
—

 
(1
)
 
5

 
—

 
267

Mortgages, mortgage-backed and asset-backed(1)
3,199

 
158

 
—

 
—

 
158

 
—

 
(621
)
 
1,710

 
—

 
(330
)
 
736

 
(114
)
 
4,738

Municipals and money markets
2,047

 
19

 
—

 
—

 
19

 
—

 
(680
)
 
357

 
—

 
(206
)
 
—

 
(27
)
 
1,510

Total trading assets, excluding derivative contracts
10,055

 
338

 
—

 
—

 
338

 
—

 
(3,861
)
 
3,478

 
—

 
(1,102
)
 
1,031

 
(966
)
 
8,973

Derivative contracts, net
4,495

 
(1,308
)
 
—

 
—

 
(1,308
)
 
—

 
(420
)
 
616

 
—

 
(370
)
 
(191
)
 
(376
)
 
2,446

Investment securities available-for-sale :
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate ABS
47

 
—

 
(2
)
 
—

 
(2
)
 
—

 
—

 
—

 
—

 
(37
)
 
—

 
—

 
8

Total investment securities available-for-sale
47

 
—

 
(2
)
 
—

 
(2
)
 
—

 
—

 
—

 
—

 
(37
)
 
—

 
—

 
8

Investment securities non-qualifying
574

 
—

 
(7
)
 
—

 
(7
)
 
—

 
(96
)
 
50

 
—

 
(167
)
 
—

 
—

 
354

Total investment securities
621

 
—

 
(9
)
 
—

 
(9
)
 
—

 
(96
)
 
50

 
—

 
(204
)
 
—

 
—

 
362

Loans, notes and mortgages
1,726

 
—

 
180

 
23

 
203

 
—

 
(166
)
 
7

 
—

 
(91
)
 
—

 
—

 
1,679

Other assets
1,349

 
—

 
(86
)
 
—

 
(86
)
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
1,263

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Trading liabilities, excluding derivative contracts:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate debt
52

 
2

 
—

 
—

 
2

 
—

 
57

 
(52
)
 
—

 
1

 
3

 
(39
)
 
20

Preferred stock
16

 
(2
)
 
—

 
—

 
(2
)
 
—

 
9

 
(14
)
 
—

 
—

 
—

 
(13
)
 
—

Municipals, money markets and other
45

 
7

 
—

 
—

 
7

 
—

 
18

 
(6
)
 
1

 
—

 
—

 
—

 
51

Total trading liabilities, excluding derivative contracts
113

 
7

 
—

 
—

 
7

 
—

 
84

 
(72
)
 
1

 
1

 
3

 
(52
)
 
71

Other payables - interest and other
10

 
—

 
3

 
—

 
3

 
—

 
—

 
(1
)
 
5

 
—

 
1

 
(3
)
 
9

Long-term borrowings
2,186

 
(104
)
 
(38
)
 
—

 
(142
)
 
—

 
33

 
(109
)
 
97

 
(738
)
 
749

 
(905
)
 
1,455

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1)
During the nine months ended September 30, 2012, approximately $900 million was reclassified from Corporate debt to Mortgages, mortgage-backed and asset-backed.  In the table above, this reclassification is presented as a sale of Corporate debt and as a purchase of Mortgages, mortgage-backed and asset-backed trading assets.

Transfers in and out for corporate debt primarily relate to changes in market liquidity for certain corporate loans. Transfers in for mortgages, mortgage-backed and asset-backed is primarily the result of additional information related to certain CLOs. Transfers out for mortgages, mortgage-backed and asset-backed relates to increased market activity (i.e., executed trades) for certain loans backed by commercial real estate. Transfers in for derivative contracts, net primarily relate to decreased price observability for certain long-dated equity derivative liabilities due to lack of independent pricing. Transfers out for derivative contracts, net primarily relates to increased price observability (i.e., market comparables for referenced instruments) for certain total return swaps ("TRS") and foreign exchange swaps. 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
Three Months Ended September 30, 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
 
 
 
 
 
 
 
Transfers
In
 
Transfers
Out
 
Ending
Balance
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Trading assets, excluding derivative contracts:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equities
163

 
(9
)
 
—

 
—

 
(9
)
 
—

 
(73
)
 
73

 
—

 
(1
)
 
11

 
—

 
164

Convertible debentures
152

 
—

 
—

 
—

 
—

 
—

 
(13
)
 
9

 
—

 
—

 
18

 
(12
)
 
154

Non-U.S. governments and agencies
391

 
(17
)
 
—

 
—

 
(17
)
 
—

 
(3
)
 
3

 
—

 
—

 
1

 
—

 
375

Corporate debt
3,846

 
(199
)
 
—

 
—

 
(199
)
 
—

 
(433
)
 
925

 
—

 
(238
)
 
516

 
(103
)
 
4,314

Preferred stock
307

 
1

 
—

 
—

 
1

 
—

 
(17
)
 
30

 
—

 
(24
)
 
—

 
—

 
297

Mortgages, mortgage-backed and asset-backed
4,848

 
(98
)
 
—

 
—

 
(98
)
 
—

 
(1,281
)
 
83

 
—

 
(51
)
 
—

 
(281
)
 
3,220

Municipals and money markets
2,486

 
22

 
—

 
—

 
22

 
—

 
(158
)
 
52

 
—

 
(189
)
 
54

 
(1
)
 
2,266

Total trading assets, excluding derivative contracts
12,193

 
(300
)
 
—

 
—

 
(300
)
 
—

 
(1,978
)
 
1,175

 
—

 
(503
)
 
600

 
(397
)
 
10,790

Derivative contracts, net
5,101

 
988

 
—

 
—

 
988

 
—

 
(114
)
 
109

 
—

 
(1,912
)
 
285

 
(4
)
 
4,453

Investment securities available-for-sale :
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities — agency CMOs
55

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
55

Mortgage-backed securities — non-agency MBSs
96

 
—

 
(5
)
 
—

 
(5
)
 
(13
)
 
(1
)
 
9

 
—

 
—

 
—

 
—

 
86

Corporate ABS
86

 
—

 
(6
)
 
—

 
(6
)
 
—

 
—

 
162

 
—

 
—

 
—

 
—

 
242

Total investment securities available-for-sale
237

 
—

 
(11
)
 
—

 
(11
)
 
(13
)
 
(1
)
 
171

 
—

 
—

 
—

 
—

 
383

Investment securities non-qualifying
1,571

 
—

 
106

 
—

 
106

 
—

 
(286
)
 
6

 
—

 
(109
)
 
—

 
—

 
1,288

Total investment securities
1,808

 
—

 
95

 
—

 
95

 
(13
)
 
(287
)
 
177

 
—

 
(109
)
 
—

 
—

 
1,671

Loans, notes and mortgages
1,940

 
—

 
(61
)
 
8

 
(53
)
 
—

 
(154
)
 
2

 
450

 
(20
)
 
—

 
(326
)
 
1,839

    Other Assets

 
—

 
—

 
—

 
—

 
—

 
—

 
1,578

 
—

 
—

 
—

 
—

 
1,578

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Trading liabilities, excluding derivative contracts:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate debt
28

 
1

 
—

 
—

 
1

 
—

 
12

 
(10
)
 
—

 
—

 
24

 
—

 
53

Preferred stock
23

 
2

 
—

 
—

 
2

 
—

 
—

 
(7
)
 
—

 
—

 
—

 
—

 
14

Municipals, money markets and other
3

 
(1
)
 
—

 
—

 
(1
)
 
—

 
—

 
(1
)
 
—

 
—

 
—

 
—

 
3

Total trading liabilities, excluding derivative contracts
54

 
2

 
—

 
—

 
2

 
—

 
12

 
(18
)
 
—

 
—

 
24

 
—

 
70

Other payables - interest and other
108

 
—

 
1

 
—

 
1

 
—

 
—

 
—

 
—

 
—

 
—

 
(100
)
 
7

Long-term borrowings
2,532

 
344

 
18

 
—

 
362

 
—

 
17

 
(120
)
 
164

 
(173
)
 
326

 
(240
)
 
2,144

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Net gains in principal transactions related to derivative contracts, net were primarily due to credit spreads widening on short CDS baskets.

Sales of mortgages, mortgage-backed and asset-backed securities primarily relates to the sale of CDO and CLO positions.

Purchases of corporate debt primarily relates to purchases of non-investment grade and distressed corporate loans and bonds.

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 in for corporate debt are primarily due to decreased observability (i.e., decreased market liquidity) for certain corporate loans and bonds. Transfers out for mortgages, mortgage-backed and asset-backed securities primarily relates to increased observability (i.e., trading activity) for certain CMBS positions. Transfers in for derivative contracts, net are primarily due to certain equity derivative positions with unobservable correlation. Transfers out for loans, notes and mortgages and other payables - interest and other primarily relates to increased observability (i.e., liquid 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
Nine Months Ended September 30, 2011
 
 
 
Total Realized and Unrealized
Gains or (Losses) included in Income
 
Total Realized
and Unrealized Gains
or (Losses)
included in Income
 
Unrealized
Gains to
OCI
 
Sales
 
Purchases
 
Issuances
 
Settlements
 
 
 
 
 
 
 
Beginning
Balance
 
Principal
Transactions
 
Other
Revenue
 
Interest
 
 
 
 
 
 
 
Transfers
In
 
Transfers
Out
 
Ending
Balance
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Trading assets, excluding derivative contracts:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equities
$
170

 
$
26

 
$
—

 
$
—

 
$
26

 
$
—

 
$
(159
)
 
$
181

 
$
—

 
$
(64
)
 
$
11

 
$
(1
)
 
$
164

Convertible debentures
—

 
7

 
—

 
—

 
7

 
—

 
(97
)
 
238

 
—

 
—

 
18

 
(12
)
 
154

Non-U.S. governments and agencies
243

 
68

 
—

 
—

 
68

 
—

 
(18
)
 
125

 
—

 
(3
)
 
4

 
(44
)
 
375

Corporate debt
4,605

 
128

 
—

 
—

 
128

 
—

 
(2,529
)
 
2,043

 
—

 
(346
)
 
763

 
(350
)
 
4,314

Preferred stock
287

 
29

 
—

 
—

 
29

 
—

 
(123
)
 
60

 
—

 
(76
)
 
120

 
—

 
297

Mortgages, mortgage-backed and asset-backed
5,747

 
286

 
—

 
—

 
286

 
—

 
(3,689
)
 
1,596

 
—

 
(90
)
 
1

 
(631
)
 
3,220

Municipals and money markets
2,327

 
53

 
—

 
—

 
53

 
—

 
(1,810
)
 
1,936

 
—

 
(361
)
 
126

 
(5
)
 
2,266

Total trading assets, excluding derivative contracts
13,379

 
597

 
—

 
—

 
597

 
—

 
(8,425
)
 
6,179

 
—

 
(940
)
 
1,043

 
(1,043
)
 
10,790

Derivative contracts, net
6,368

 
1,015

 
—

 
—

 
1,015

 
—

 
(796
)
 
742

 
—

 
(2,774
)
 
584

 
(686
)
 
4,453

Investment securities available-for-sale :
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities — agency CMOs
—

 
—

 
—

 
—

 
—

 
—

 
—

 
56

 
—

 
(1
)
 
—

 
—

 
55

Mortgage-backed securities — non-agency MBSs
213

 
—

 
(20
)
 
—

 
(20
)
 
(35
)
 
(83
)
 
11

 
—

 
—

 
—

 
—

 
86

Corporate ABS
—

 
—

 
(6
)
 
—

 
(6
)
 
—

 
—

 
248

 
—

 
—

 
—

 
—

 
242

Total investment securities available-for-sale
213

 
—

 
(26
)
 
—

 
(26
)
 
(35
)
 
(83
)
 
315

 
—

 
(1
)
 
—

 
—

 
383

Investment securities non-qualifying
3,394

 
—

 
451

 
—

 
451

 
—

 
(1,138
)
 
52

 
—

 
(298
)
 
375

 
(1,548
)
 
1,288

Total investment securities
3,607

 
—

 
425

 
—

 
425

 
(35
)
 
(1,221
)
 
367

 
—

 
(299
)
 
375

 
(1,548
)
 
1,671

Loans, notes and mortgages
1,891

 
—

 
168

 
25

 
193

 
—

 
(650
)
 
146

 
665

 
(175
)
 
135

 
(366
)
 
1,839

Other Assets
—

 
—

 
—

 
—

 
—

 
—

 
—

 
1,578

 
—

 
—

 
—

 
—

 
1,578

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Trading liabilities, excluding derivative contracts:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate debt
—

 
—

 
—

 
—

 
—

 
—

 
84

 
(55
)
 
—

 
—

 
24

 
—

 
53

Preferred stock
—

 
2

 
—

 
—

 
2

 
—

 
23

 
(7
)
 
—

 
—

 
—

 
—

 
14

Municipals, money markets and other
—

 
(1
)
 
—

 
—

 
(1
)
 
—

 
22

 
(20
)
 
—

 
—

 
—

 
—

 
3

Total trading liabilities, excluding derivative contracts
—

 
1

 
—

 
—

 
1

 
—

 
129

 
(82
)
 
—

 
—

 
24

 
—

 
70

Other payables - interest and other
126

 
—

 
26

 
—

 
26

 
—

 
4

 
(6
)
 
9

 
—

 
—

 
(100
)
 
7

Long-term borrowings
2,396

 
242

 
3

 
—

 
245

 
—

 
72

 
(232
)
 
412

 
(499
)
 
855

 
(615
)
 
2,144

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Net gains in principal transactions related to derivative contracts, net were primarily due to credit spreads widening on short CDS baskets in the third quarter of 2011.

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 CLO positions due to the unwind 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 a private equity investment during the first quarter of 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 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 (e.g., trading 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 CDO positions, 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 in for investment securities non-qualifying are due to a change in the valuation methodology for a private equity fund. Transfers out related to investment securities non-qualifying are 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., liquid 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.
The following tables provide the portion of gains or losses included in income for the three and nine months ended September 30, 2012 and September 30, 2011 attributable to unrealized gains or losses relating to those Level 3 assets and liabilities held at September 30, 2012 and September 30, 2011, respectively.


(dollars in millions)
 
Unrealized Gains or (Losses) for Level 3
Assets and Liabilities Still Held
 
Three Months ended September 30, 2012
 
Nine Months ended September 30, 2012
 
Principal
Transactions
 
Other
Revenue
 
Interest
 
Total
 
Principal
Transactions
 
Other
Revenue
 
Interest
 
Total
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Trading assets, excluding derivative contracts:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equities
$
(6
)
 
$
—

 
$
—

 
$
(6
)
 
$
(4
)
 
$
—

 
$
—

 
$
(4
)
Convertible debentures
1

 
—

 
—

 
1

 
1

 
—

 
—

 
1

Non-U.S. governments and agencies
8

 
—

 
—

 
8

 
16

 
—

 
—

 
16

Corporate debt
27

 
—

 
—

 
27

 
(8
)
 
—

 
—

 
(8
)
Preferred stock
17

 
—

 
—

 
17

 
23

 
—

 
—

 
23

Mortgages, mortgage-backed and asset-backed
88

 
—

 
—

 
88

 
95

 
—

 
—

 
95

Municipals and money markets
1

 
—

 
—

 
1

 
—

 
—

 
—

 
—

Total trading assets, excluding derivative contracts
136

 
—

 
—

 
136

 
123

 
—

 
—

 
123

Derivative contracts, net
(764
)
 
—

 
—

 
(764
)
 
(1,253
)
 
—

 
—

 
(1,253
)
Investment securities non-qualifying
—

 
(1
)
 
—

 
(1
)
 
—

 
(28
)
 
—

 
(28
)
Loans, notes and mortgages
—

 
66

 
—

 
66

 
—

 
129

 
—

 
129

Other assets
—

 
—

 
—

 
—

 
—

 
(86
)
 
—

 
(86
)
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Trading liabilities, excluding derivative contracts:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Municipals, money markets and other
1

 
—

 
—

 
1

 
3

 
—

 
—

 
3

Total trading liabilities, excluding derivative contracts
1

 
—

 
—

 
1

 
3

 
—

 
—

 
3

Other payables — interest and other
—

 
(2
)
 
—

 
(2
)
 
—

 
—

 
—

 
—

Long-term borrowings
(46
)
 
(3
)
 
—

 
(49
)
 
(105
)
 
(37
)
 
—

 
(142
)


(dollars in millions)
 
Unrealized Gains or (Losses) for Level 3
Assets and Liabilities Still Held
 
Three Months ended September 30, 2011
 
Nine Months ended September 30, 2011
 
Principal
Transactions
 
Other
Revenue
 
Interest
 
Total
 
Principal
Transactions
 
Other
Revenue
 
Interest
 
Total
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Trading assets, excluding derivative contracts:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equities
$
(9
)
 
$
—

 
$
—

 
$
(9
)
 
$
(55
)
 
$
—

 
$
—

 
$
(55
)
Convertible debentures
—

 
—

 
—

 
—

 
3

 
—

 
—

 
3

Non-U.S. governments and agencies
16

 
—

 
—

 
16

 
86

 
—

 
—

 
86

Corporate debt
(206
)
 
—

 
—

 
(206
)
 
(52
)
 
—

 
—

 
(52
)
Preferred stock
(11
)
 
—

 
—

 
(11
)
 
12

 
—

 
—

 
12

Mortgages, mortgage-backed and asset-backed
(116
)
 
—

 
—

 
(116
)
 
85

 
—

 
—

 
85

Municipals and money markets
1

 
—

 
—

 
1

 
17

 
—

 
—

 
17

Total trading assets, excluding derivative contracts
(325
)
 
—

 
—

 
(325
)
 
96

 
—

 
—

 
96

Derivative contracts, net
875

 
—

 
—

 
875

 
1,144

 
—

 
—

 
1,144

Investment securities available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities - non-agency MBSs
—

 
(5
)
 
—

 
(5
)
 
—

 
(30
)
 
—

 
(30
)
Corporate/Agency bonds
—

 
(6
)
 
—

 
(6
)
 
—

 
(6
)
 
—

 
(6
)
Total investment securities available-for-sale
—

 
(11
)
 
—

 
(11
)
 
—

 
(36
)
 
—

 
(36
)
Investment securities non-qualifying
—

 
(54
)
 
—

 
(54
)
 
—

 
38

 
—

 
38

Total investment securities
—

 
(65
)
 
—

 
(65
)
 
—

 
2

 
—

 
2

Loans, notes and mortgages
—

 
(61
)
 
—

 
(61
)
 
—

 
124

 
—

 
124

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Trading liabilities, excluding derivative contracts:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate debt
1

 
—

 
—

 
1

 
—

 
—

 
—

 
—

Preferred Stock
2

 
—

 
—

 
2

 
2

 
—

 
—

 
2

Municipals, money markets and other
(1
)
 
—

 
—

 
(1
)
 
(1
)
 
—

 
—

 
(1
)
Total trading liabilities, excluding derivative contracts
2

 
—

 
—

 
2

 
1

 
—

 
—

 
1

Other payables — interest and other
—

 
(1
)
 
—

 
(1
)
 
—

 
1

 
—

 
1

Long-term borrowings
331

 
18

 
—

 
349

 
229

 
(9
)
 
—

 
220





Level 3 Significant Inputs
The following tables present information about significant unobservable inputs related to material components of Merrill Lynch's Level 3 financial assets and liabilities as of September 30, 2012.
Quantitative Information about Level 3 Fair Value Measurements
(dollars in millions)
 
 
Inputs
 
Financial Instrument
Fair Value
Valuation Techniques
Unobservable Inputs
Ranges of Inputs
Loans and Securities

 


Instruments backed by residential real estate assets
$
1,699

Discounted Cash Flow
Yield
5% to 25%
Loans, notes and mortgages
1,015

Prepayment Speeds (CPR)
3% to 10%
Trading assets - Mortgages, mortgage-backed and asset-backed
684

Default Rates (CDR)
1% to 3%
 


Loss Severities
35% to 45%
Instruments backed by commercial real estate assets
$
1,723

Discounted Cash Flow
Yield
5% to 7%
Loans, notes and mortgages
214

Loss Severities
31% to 100%
Other assets
1,263



Trading assets - Mortgages, mortgage-backed and asset-backed
246



Commercial loans, debt securities and other
$
6,260

Discounted Cash Flow, Market Comparables
Yield
0% to 20%
Loans, notes and mortgages
450

Enterprise Value/EBITDA multiple
3x to 7x
Trading assets - Mortgages, mortgage-backed and asset-backed
3,808

Prepayment Speed
5% to 25%
Trading assets - Corporate debt
2,002

Default Rates
1% to 5%
 


Loss Severity
25% to 40%
Auction Rate Securities


Discounted Cash Flow, Market Comparables
Projected tender price / re-financing level
50% to 100%
Trading assets - Municipals and money markets
$
1,510



 


 
 
 
Long-term borrowings (structured notes)
 
 
 
 
Long-term borrowings
$
1,455

Industry Standard Derivative Pricing (1)
Equity Correlation
30% to 97%
 


Long- Dated Volatilities
20% to 70%

(1)
Includes models such as Monte Carlo simulation and Black-Scholes.

CPR = Constant Prepayment Rate
CDR = Constant Default Rate







Quantitative Information about Level 3 Fair Value Measurements
(dollars in millions)
 
Inputs
Financial Instrument
Fair Value
Valuation Techniques
Unobservable Inputs
Ranges of Inputs
Net Derivative Contracts
 
 


   Credit derivatives
2,655

Discounted Cash Flow, Stochastic Recovery Correlation Model
Yield
2% to 25%
 


Credit spreads
71bps to 600bps
 


Upfront points
30 to 99
 


Spread to index
-1,874bps to 2,708bps
 


Credit correlation
30% to 80%
 


Prepayment speed (CPR)
5% to 25%
 


Default rates (CDR)
1% to 5%
 


Loss severity
25% to 40%
   Equity derivatives
(723
)
Industry Standard Derivative Pricing (1)
Equity Correlation
30% to 97%
 


Long-Dated Volatilities
20% to 70%
   Commodity derivatives
(1
)
Discounted Cash Flow
Long-term Natural Gas Basis
-$0.270 to $0.314
   Interest rate derivatives
515

Industry Standard Derivative Pricing (1)
Correlation (IR/IR)
15% to 100%
 


Correlation (FX/IR)
-65% to 50%
 


Long Dated Inflation Rates
1.8% to 2.9%
 


Long Dated Inflation Volatilities
0.2% to 1.3%
 


Long Dated Volatilities (FX)
5% to 36%
 


Long Dated Swap Rates
3% to 10%
Total net derivative contracts
$
2,446

 
 
 
(1) 
Includes models such as Monte Carlo simulation, Black-Scholes and other methods that model the joint dynamics of interest, inflation and foreign exchange rates.
IR = Interest Rate
FX = Foreign Exchange
CPR = Constant Prepayment Rate
CDR = Constant Default Rate
In the tables above, instruments backed by residential and commercial real estate assets include RMBS, CMBS, whole loans, mortgage CDOs and net monoline exposure. Commercial loans, debt securities and other include corporate CLOs and CDOs, commercial loans and bonds, and securities backed by non-real estate assets. Structured notes primarily include equity-linked notes that are accounted for under the fair value option.

In addition to the instruments disclosed in the tables above, Merrill Lynch holds $354 million of Investment securities non-qualifying that are primarily comprised of certain direct private equity investments and private equity funds that are classified as Level 3.  Valuations of direct private equity investments are prepared internally based on the most recent portfolio company financial information. Inputs generally include market and acquisition comparables, entry level multiples, as well as other variables.  Merrill Lynch selects a valuation methodology (e.g., market comparables) for each investment and, in certain instances, multiple inputs are weighted to derive the most representative value.  Discounts are applied as appropriate to consider the lack of liquidity and marketability versus publicly traded companies.  For private equity funds, fair value is generally determined using the net asset value as provided by the individual fund's general partner.
Merrill Lynch uses multiple market approaches in valuing certain of its Level 3 financial instruments. For example, market comparables and discounted cash flows are used together. For a given product, such as corporate debt securities, market comparables may be used to estimate some of the unobservable inputs and then these inputs are incorporated into a discounted cash flow model. Therefore, the balances disclosed encompass both of these techniques.

The level of aggregation and diversity within the products disclosed in the tables above result in certain ranges of inputs being wide and unevenly distributed across asset and liability categories. For credit derivatives, for example, the range of credit spreads represents positions with varying levels of risk. The lower end of the credit spread range typically represents shorter-dated instruments and those with better perceived credit risk. The higher end of the range comprises longer-dated instruments and those referencing non-performing or impaired reference issuers. Similarly, the spread to index can vary significantly based on the risk of the instrument.  The spread will be positive for instruments that have a higher risk of default than the index (which is based on a weighted-average of its components) and negative for instruments that have a lower risk of default than the index.

For interest rate derivatives, the diversity in the portfolio is reflected in wide ranges of inputs because varying currencies and tenors result in the use of numerous foreign exchange and interest rate curves. Since foreign exchange and interest rate correlations are measured between curves and across the various tenors on the same curve, the range of potential values can include both significantly negative and positive values.

Sensitivity of Fair Value Measurements to Changes in Unobservable Inputs

Loans and Securities

For instruments backed by residential real estate assets, commercial real estate assets, and commercial loans, debt securities and other, a significant increase in market yields, default rates or loss severities would result in a significantly lower fair value for long positions. Short positions would be impacted in a directionally opposite way. The impact of changes in prepayment speeds would have differing impacts depending on the seniority of the instrument and, in the case of CLOs, whether prepayments can be reinvested.

For student loan and municipal auction rate securities, a significant increase in projected tender price/refinancing levels would result in a significantly higher fair value.

Structured Notes and Derivatives

For credit derivatives, a significant increase in market yield, including spreads to indices, upfront points (i.e., a single upfront payment made by a protection buyer at inception) or credit spreads, default rates or loss severities would result in a significantly lower fair value for protection sellers and higher fair value for protection buyers. The impact of changes in prepayment speeds would have differing impacts depending on the seniority of the instrument and, in the case of CLOs, whether prepayments can be reinvested.

Structured credit derivatives, which include tranched portfolio CDS and derivatives with derivative product company ("DPC") and monoline counterparties, are impacted by credit correlation, including default and wrong way correlation. Default correlation is a parameter that describes the degree of dependence between credit default rates within a credit portfolio that underlies a credit derivative instrument. The sensitivity of this input on the fair value varies depending on the level of subordination of the tranche. For senior tranches that are net purchases of protection, a significant increase in default correlation would result in a significantly higher fair value. Net short protection positions would be impacted in a directionally opposite way. Wrong-way correlation is a parameter that describes the probability that as exposure to a counterparty increases, the credit quality of the counterparty decreases. A significantly higher degree of wrong-way correlation between a DPC counterparty and underlying derivative exposure would result in a significantly lower fair value.

For equity derivatives, equity-linked long-term debt (structured notes) and interest rate derivatives, a significant change in long-dated rates and volatilities and correlation inputs (e.g., the degree of correlation between an equity security to an index, between two different interest rates, or between interest rates and foreign exchange rates) would result in a significant impact to the fair value. However, the magnitude and direction of the impact depends on whether Merrill Lynch is long or short the exposure.

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 September 30, 2012 and December 31, 2011, and related gains (losses) for the three and nine month periods ended September 30, 2012 and September 30, 2011.
(dollars in millions)
 
 
 
 
 
 
 
Non-Recurring Basis
 
Gains/(Losses)
 
Gains/(Losses)
 
Gains/(Losses)
 
Gains/(Losses)
 
as of September 30, 2012
 
Three Months Ended
 
Nine Months Ended
 
Three Months Ended
 
Nine Months Ended
 
 
Level 2
 
Level 3
 
Total
 
September 30, 2012
 
September 30, 2012
 
September 30, 2011
 
September 30, 2011
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Investment securities non-qualifying
 
$
—

 
$
4

 
$
4

 
$
—

 
$
—

 
$
—

 
$
(5
)
Loans, notes and mortgages
 
11

 
247

 
258

 
(9
)
 
(49
)
 
(43
)
 
1

Other assets
 
2

 
97

 
99

 
(1
)
 
(1
)
 
—

 
(7
)
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other payables — interest and other
 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
(1
)

(dollars in millions)
 
Non-Recurring Basis
 
as of December 31, 2011
 
 
Level 2
 
Level 3
 
Total
Assets:
 
 

 
 

 
 

Investment securities non-qualifying
 
$
—

 
$
5

 
$
5

Loans, notes and mortgages
 
298

 
245

 
543

Other assets
 
—

 
19

 
19

 
 
 
 
 
 
 


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 September 30, 2012 and December 31, 2011. 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 September 30, 2012 and December 31, 2011 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 Condensed 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 three and nine months ended September 30, 2012 and September 30, 2011.

(dollars in millions)
 
Changes in Fair Value For the Three Months Ended September 30, 2012, for Items Measured at Fair Value Pursuant to the Fair Value Option Election
 
 
Changes in Fair Value For the Nine Months Ended September 30, 2012, 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
$
(44
)
 
$
—

 
$
(44
)
 
 
$
(73
)
 
$
—

 
$
(73
)
Investment securities
—

 
(2
)
 
(2
)
 
 
—

 
—

 
—

Loans
27

 
74

 
101

 
 
56

 
151

 
207

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Payables under repurchase agreements
40

 
—

 
40

 
 
15

 
—

 
15

Short-term borrowings
(1
)
 
—

 
(1
)
 
 
18

 
—

 
18

Other payables — interest and other
—

 
44

 
44

 
 
—

 
75

 
75

Long-term borrowings
(1,476
)
 
(6
)
 
(1,482
)
 
 
(3,317
)
 
(27
)
 
(3,344
)


(dollars in millions)
 
Changes in Fair Value For the Three Months Ended September 30, 2011, for Items Measured at Fair Value Pursuant to the Fair Value Option Election
 
 
Changes in Fair Value For the Nine Months Ended September 30, 2011, 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
$
169

 
$
—

 
$
169

 
 
$
197

 
$
—

 
$
197

Investment securities
—

 
(26
)
 
(26
)
 
 
—

 
4

 
4

Loans
(23
)
 
(114
)
 
(137
)
 
 
(23
)
 
25

 
2

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Payables under repurchase agreements
(16
)
 
—

 
(16
)
 
 
(13
)
 
—

 
(13
)
Short-term borrowings
214

 
—

 
214

 
 
307

 
—

 
307

Other payables — interest and other
—

 
(65
)
 
(65
)
 
 
—

 
(49
)
 
(49
)
Long-term borrowings
4,568

 
134

 
4,702

 
 
4,062

 
134

 
4,196



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 borrowing agreements. 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 was 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 elected the fair value option 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 elected the fair value option for certain mortgage, commercial, and leveraged loans and loan commitments. The changes in the fair value of loans and loan commitments, for which the fair value option was elected, that were attributable to changes in borrower-specific credit risk were not material for the three and nine months ended September 30, 2012 and September 30, 2011.
As of September 30, 2012 and December 31, 2011, 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 $14 million and $28 million, respectively, and the aggregate fair value of loans that were in non-accrual status was $24 million and $117 million at September 30, 2012 and December 31, 2011, respectively. As of September 30, 2012 and December 31, 2011, 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 $147 million and $172 million, respectively.
Short-term and long-term borrowings

Merrill Lynch elected the fair value option 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 periods 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 net losses of approximately $(0.8) billion and $(3.0) billion for the three and nine months ended September 30, 2012, respectively, and net gains of approximately $2.9 billion and $2.7 billion for the three and nine months ended September 30, 2011, 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 was also elected for certain non-recourse short-term and 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 September 30, 2012 and December 31, 2011.

(dollars in millions)
 
 
 
 
 
 
Fair Value at
 
Principal
Amount
Due Upon
Maturity
 
 
 
September 30, 2012
 
 
Difference
Assets:
 

 
 

 
 

Receivables under resale agreements
$
99,587

 
$
99,200

 
$
387

Receivables under securities borrowed transactions
1,258

 
1,281

 
(23
)
Loans (1)
3,193

 
3,848

 
(655
)
Liabilities:
 
 
 
 
 
Long-term borrowings (2)
31,499

 
33,770

 
(2,271
)
(1)
Includes trading loans with a fair value of $513 million.
(2)
The difference between the fair value and principal amount due upon maturity at September 30, 2012 relates to the impact of changes in 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, 2011
 
 
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 loans held for sale with a fair value of $420 million, accounted for under the fair value option, which were reclassified to trading assets because they are risk managed on that basis.
(2)
The difference between the fair value and principal amount due upon maturity at December 31, 2011 relates to the impact of changes in Merrill Lynch's credit spreads, as well as the fair value of the embedded derivative, where applicable.