Bank of America Corporation Quarterly report pursuant to Section 13 or 15(d)

Quarterly report pursuant to Section 13 or 15(d)

Fair Value Disclosures

Fair Value Disclosures

6 Months Ended

Jun. 30, 2013



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 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 (Level 1 and 2) and unobservable (Level 3). Therefore gains and losses for such assets and liabilities categorized within the Level 3 reconciliation below may include changes in fair value that are attributable to both observable inputs (Levels 1 and 2) and unobservable inputs (Level 3). Further, the following reconciliations do not take into consideration the offsetting effect of Level 1 and 2 financial instruments entered into by Merrill Lynch that economically hedge certain exposures to the Level 3 positions.

A review of fair value hierarchy classifications is conducted on a quarterly basis. Changes in the observability of valuation inputs may result in a reclassification for certain financial assets or liabilities. 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. See 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 second quarter of 2013, 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 2 or 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. 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 June 30, 2013 and December 31, 2012, respectively.



(dollars in millions)
	Fair Value Measurements on a Recurring Basis
	as of June 30, 2013
	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	$	24	$	2,492	$	—	$	—		$	2,516
U.S. Government and agencies	4,976		573		—		—			5,549
Total securities segregated for regulatory purposes or deposited with clearing organizations	5,000		3,065		—		—			8,065
Receivables under resale agreements	—		99,001		—		—			99,001
Receivables under securities borrowed transactions	—		1,954		—		—			1,954
Trading assets, excluding derivative contracts:
Equities	22,323		11,081		216		—			33,620
Convertible debentures	—		3,569		17		—			3,586
Non-U.S. governments and agencies	28,574		2,805		401		—			31,780
Corporate debt	—		15,193		1,764		—			16,957
Preferred stock	—		269		137		—			406
Mortgages, mortgage-backed and asset-backed	—		5,302		4,586		—			9,888
U.S. Government and agencies	23,942		12,098		—		—			36,040
Municipals and money markets	1,333		6,595		204		—			8,132
Physical commodities and other	—		744		—		—			744
Total trading assets, excluding derivative contracts	76,172		57,656		7,325		—			141,153
Derivative contracts⁽²⁾	4,730		484,350		5,592		(467,039		)	27,633
Investment securities available-for-sale:
U.S. Government and agencies	402		—		—		—			402
Securities, mortgage-backed and asset backed
Non-agency MBS	—		1		—		—			1
Corporate ABS	—		201		8		—			209
Total investment securities available-for-sale	402		202		8		—			612
Other debt securities carried at fair value ⁽³⁾
Non-U.S. governments and agencies	8,288		460		—		—			8,748
Total other debt securities carried at fair value	8,288		460		—		—			8,748
Investment securities non-qualifying	1,880		1,115		288		—			3,283
Total investment securities	10,570		1,777		296		—			12,643
Securities received as collateral	11,311		1,271		—		—			12,582
Loans, notes and mortgages	—		486		815		—			1,301
Other	—		—		267		—			267
Liabilities:
Payables under repurchase agreements	—		59,926		—		—			59,926
Short-term borrowings	—		1,389		—		—			1,389
Trading liabilities, excluding derivative contracts:
Equities	19,783		3,112		—		—			22,895
Convertible debentures	—		223		—		—			223
Non-U.S. governments and agencies	22,620		1,670		—		—			24,290
Corporate debt	—		8,483		9		—			8,492
Preferred stock	—		85		—		—			85



U.S. Government and agencies	18,794	411	—	—		19,205
Municipals, money markets and other	482	105	46	—		633
Total trading liabilities, excluding derivative contracts	61,679	14,089	55	—		75,823
Derivative contracts⁽²⁾	4,644	483,697	3,917	(467,085	)	25,173
Obligation to return securities received as collateral	11,311	1,271	—	—		12,582
Other payables — interest and other	—	47	5	—		52
Long-term borrowings	—	26,882	1,082	—		27,964


⁽¹⁾	Represents counterparty and cash collateral netting.


⁽²⁾	See Note 6 for product level detail.


⁽³⁾	Certain assets that are used for liquidity management purposes were reclassified from Trading assets to Other debt securities carried at fair value during the six months ended June 30, 2013. Prior period amounts have been reclassified to conform with the current period presentation.

During the six months ended June 30, 2013, approximately $500 million of assets were transferred from Level 1 to Level 2, primarily due to a restriction that became effective for a non-qualifying investment security.



(dollars in millions)
	Fair Value Measurements on a Recurring Basis
	as of December 31, 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	$	—	$	1,833	$	—	$	—		$	1,833
U.S. Government and agencies	3,558		250		—		—			3,808
Total securities segregated for regulatory purposes or deposited with clearing organizations	3,558		2,083		—		—			5,641
Receivables under resale agreements	—		93,715		—		—			93,715
Receivables under securities borrowed transactions	—		961		—		—			961
Trading assets, excluding derivative contracts:
Equities	23,813		12,340		178		—			36,331
Convertible debentures	—		4,272		15		—			4,287
Non-U.S. governments and agencies	26,834		2,936		353		—			30,123
Corporate debt	—		16,068		1,900		—			17,968
Preferred stock	—		116		253		—			369
Mortgages, mortgage-backed and asset-backed	—		5,799		4,814		—			10,613
U.S. Government and agencies	26,201		28,363		—		—			54,564
Municipals and money markets	1,292		9,201		1,295		—			11,788
Physical commodities and other	—		692		—		—			692
Total trading assets, excluding derivative contracts	78,140		79,787		8,808		—			166,735
Derivative contracts⁽²⁾	2,691		657,621		5,677		(641,138		)	24,851
Investment securities available-for-sale:
U.S. Government and agencies	390		—		—		—			390
Securities, mortgage-backed and asset backed
Non-agency MBS	—		40		—		—			40
Corporate ABS	—		218		8		—			226
Total investment securities available-for-sale	390		258		8		—			656
Other debt securities carried at fair value ⁽³⁾
Non-U.S. governments and agencies	7,422		300		—		—			7,722



Total other debt securities carried at fair value	7,422	300	—	—		7,722
Investment securities non-qualifying	2,254	1,056	287	—		3,597
Total investment securities	10,066	1,614	295	—		11,975
Securities received as collateral	15,426	587	—	—		16,013
Loans, notes and mortgages	—	1,396	1,681	—		3,077
Other	—	12	1,534	—		1,546
Liabilities:
Payables under repurchase agreements	—	42,639	—	—		42,639
Short-term borrowings	—	3,283	—	—		3,283
Trading liabilities, excluding derivative contracts:
Equities	16,225	2,557	—	—		18,782
Convertible debentures	—	175	—	—		175
Non-U.S. governments and agencies	18,382	1,325	—	—		19,707
Corporate debt	—	7,912	31	—		7,943
Preferred stock	—	83	—	—		83
U.S. Government and agencies	19,276	910	—	—		20,186
Municipals, money markets and other	487	43	32	—		562
Total trading liabilities, excluding derivative contracts	54,370	13,005	63	—		67,438
Derivative contracts⁽²⁾	2,449	659,271	4,133	(645,285	)	20,568
Obligation to return securities received as collateral	15,426	587	—	—		16,013
Other payables — interest and other	—	50	7	—		57
Long-term borrowings	—	29,559	1,316	—		30,875


⁽¹⁾	Represents counterparty and cash collateral netting.


⁽²⁾	See Note 6 for product level detail.


⁽³⁾	Certain assets that are used for liquidity management purposes were reclassified from Trading assets to Other debt securities carried at fair value during the six months ended June 30, 2013. Prior period amounts have been reclassified to conform with the current period presentation.

During the year ended December 31, 2012, $2,040 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, $940 million was due to restrictions that became effective for non-qualifying investment securities during 2012, while $535 million of the asset transfer from Level 2 to Level 1 was due to the lapse of such restrictions during 2012. The remaining transfers were the result of additional information associated with certain equities, derivative contracts and investment securities non-qualifying.

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 six months ended June 30, 2013 and June 30, 2012.



(dollars in millions)
	Level 3 Financial Assets and Liabilities Three Months Ended June 30, 2013
			Total Realized and Unrealized Gains or (Losses) included in Income								Total Realized and Unrealized Gains or (Losses) included in Income			Unrealized Gains or (Losses) to OCI		Sales		Purchases		Issuances		Settlements
	Beginning Balance		Principal Transactions			Other Revenue			Interest					Unrealized Gains or (Losses) to OCI		Sales		Purchases		Issuances		Settlements		Transfers In			Transfers Out			Ending Balance
Assets:
Trading assets, excluding derivative contracts:
Equities	$	175	$	14		$	—		$	—	$	14		$	—	(20	)	27		$	—	—		$	29		$	(9	)	$	216
Convertible debentures	14		(1		)	—			—		(1		)	—		—		6		—		—		—			(2		)	17
Non-U.S. governments and agencies	417		(6		)	—			—		(6		)	—		—		11		—		(22	)	1			—			401
Corporate debt	1,840		10			—			—		10			—		(250	)	176		—		(88	)	202			(126		)	1,764
Preferred stock	208		(3		)	—			—		(3		)	—		(15	)	1		—		—		—			(54		)	137
Mortgages, mortgage-backed and asset-backed	4,368		11			—			—		11			—		(676	)	972		—		(69	)	—			(20		)	4,586
Municipals and money markets	1,079		3			—			—		3			—		(429	)	76		—		—		2			(527		)	204
Total trading assets, excluding derivative contracts	8,101		28			—			—		28			—		(1,390	)	1,269		—		(179	)	234			(738		)	7,325
Derivative contracts, net	1,182		264			—			—		264			—		(143	)	179		—		4		(117		)	306			1,675
Investment securities available-for-sale :
Corporate ABS	8		—			—			—		—			—		—		—		—		—		—			—			8
Total investment securities available-for-sale	8		—			—			—		—			—		—		—		—		—		—			—			8
Investment securities non-qualifying	288		—			(3		)	—		(3		)	—		—		21		—		(18	)	—			—			288
Total investment securities	296		—			(3		)	—		(3		)	—		—		21		—		(18	)	—			—			296
Loans, notes and mortgages	1,436		—			12			7		19			—		(180	)	8		—		(465	)	—			(3		)	815
Other	1,086		—			(6		)			(6		)	—		—		—		—		(813	)	—			—			267
Liabilities:
Trading liabilities, excluding derivative contracts:
Corporate debt	16		2			—			—		2			—		4		(1	)	—		—		1			(9		)	9
Municipals, money markets and other	42		4			—			—		4			—		13		(10	)	5		—		—			—			46
Total trading liabilities, excluding derivative contracts	58		6			—			—		6			—		17		(11	)	5		—		1			(9		)	55
Other payables - interest and other	4		—			—			—		—			—		—		—		—		—		1			—			5
Long-term borrowings	1,285		58			(5		)	—		53			—		—		(154	)	52		(44	)	94			(98		)	1,082

Transfers in and out related to corporate debt reflected changes in third party prices available for certain corporate loans. Transfers out for municipals and money markets reflected increased trading activity for certain ARS. Transfers in for derivative contracts, net were primarily due to additional information related to certain total return swaps ("TRS"). Transfers out for derivative contracts, net related to additional market comparables on certain option contracts. Transfers in and out related to long-term borrowings were 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 Six Months Ended June 30, 2013
			Total Realized and Unrealized Gains or (Losses) included in Income								Total Realized and Unrealized Gains or (Losses) included in Income			Unrealized Gains or (Losses) to OCI		Sales		Purchases		Issuances		Settlements
	Beginning Balance		Principal Transactions			Other Revenue			Interest					Unrealized Gains or (Losses) to OCI		Sales		Purchases		Issuances		Settlements		Transfers In			Transfers Out			Ending Balance
Assets:
Trading assets, excluding derivative contracts:
Equities	$	178	$	34		$	—		$	—	$	34		$	—	(70	)	50		$	—	—		$	36		$	(12	)	$	216
Convertible debentures	15		(1		)	—			—		(1		)	—		(2	)	6		—		—		2			(3		)	17
Non-U.S. governments and agencies	353		45			—			—		45			—		(1	)	26		—		(22	)	1			(1		)	401
Corporate debt	1,900		64			—			—		64			—		(485	)	363		—		(209	)	360			(229		)	1,764
Preferred stock	253		19			—			—		19			—		(74	)	7		—		—		1			(69		)	137
Mortgages, mortgage-backed and asset-backed	4,814		173			—			—		173			—		(1,311	)	1,625		—		(698	)	3			(20		)	4,586
Municipals and money markets	1,295		28			—			—		28			—		(1,080	)	431		—		(1	)	58			(527		)	204
Total trading assets, excluding derivative contracts	8,808		362			—			—		362			—		(3,023	)	2,508		—		(930	)	461			(861		)	7,325
Derivative contracts, net	1,544		78			—			—		78			—		(369	)	271		—		(87	)	(41		)	279			1,675
Investment securities available-for-sale :
Corporate ABS	8		—			—			—		—			—		—		—		—		—		—			—			8
Total investment securities available-for-sale	8		—			—			—		—			—		—		—		—		—		—			—			8
Investment securities non-qualifying	287		—			(6		)	—		(6		)	—		(7	)	32		—		(18	)	—			—			288
Total investment securities	295		—			(6		)	—		(6		)	—		(7	)	32		—		(18	)	—			—			296
Loans, notes and mortgages	1,681		—			(40		)	14		(26		)	—		(366	)	8				(479	)	—			(3		)	815
Other	1,534		—			(454		)	—		(454		)	—		—		—				(813	)	—			—			267
Liabilities:
Trading liabilities, excluding derivative contracts:
Corporate debt	31		2			—			—		2			—		6		(6	)	—		—		9			(29		)	9
Municipals, money markets and other	32		4			—			—		4			—		24		(12	)	6		—		—			—			46
Total trading liabilities, excluding derivative contracts	63		6			—			—		6			—		30		(18	)	6		—		9			(29		)	55
Other payables - interest and other	7		—			—			—		—			—		—		—		—		(2	)	1			(1		)	5
Long-term borrowings	1,316		80			(9		)	—		71			—		4		(223	)	88		(91	)	279			(220		)	1,082

Transfers in and out related to corporate debt reflected changes in third party prices available for certain corporate loans. Transfers out for municipals and money markets reflected increased trading activity for certain ARS. Transfers out for derivative contracts, net related to additional market comparables on certain option contracts. Transfers in and out related to long-term borrowings were 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 June 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	$	178	$	(6	)	$	—		$	—	$	(6	)	$	—	$	(13	)	$	1		$	—	$	—		$	25		$	—		$	185
Convertible debentures	43		(2		)	—			—		(2		)	—		—			—			—		—			—			(7		)	34
Non-U.S. governments and agencies	546		(26		)	—			—		(26		)	—		(164		)	35			—		(1		)	—			(1		)	389
Corporate debt ⁽¹⁾	3,418		6			—			—		6			—		(1,232		)	189			—		(285		)	92			(82		)	2,106
Preferred stock	207		(1		)	—			—		(1		)	—		(22		)	44			—		—			—			—			228
Mortgages, mortgage-backed and asset-backed ⁽¹⁾	3,768		(38		)	—			—		(38		)	—		(163		)	1,164			—		(153		)	—			—			4,578
Municipals and money markets	2,009		15			—			—		15			—		(187		)	73			—		(180		)	—			—			1,730
Total trading assets, excluding derivative contracts	10,169		(52		)	—			—		(52		)	—		(1,781		)	1,506			—		(619		)	117			(90		)	9,250
Derivative contracts, net	3,207		159			—			—		159			—		(121		)	207			—		29			(38		)	(29		)	3,414
Investment securities available-for-sale :
Corporate ABS	45		—			—			—		—			—		—			—			—		(37		)	—			—			8
Total investment securities available-for-sale	45		—			—			—		—			—		—			—			—		(37		)	—			—			8
Investment securities non-qualifying	421		—			1			—		1			—		(77		)	—			—		(12		)	—			—			333
Total investment securities	466		—			1			—		1			—		(77		)	—			—		(49		)	—			—			341
Loans, notes and mortgages	1,809		—			19			8		27			—		(16		)	3			—		(47		)	—			—			1,776
Other assets	1,302		—			(39		)	—		(39		)	—		—			—			—		—			—			—			1,263
Liabilities:
Trading liabilities, excluding derivative contracts:
Corporate debt	—		—			—			—		—			—		16			(6		)	—		1			1			(3		)	9
Preferred stock	14		—			—			—		—			—		9			(1		)	—		—			—			(13		)	9
Municipals, money markets and other	45		4			—			—		4			—		3			—			—		—			—			—			44
Total trading liabilities, excluding derivative contracts	59		4			—			—		4			—		28			(7		)	—		1			1			(16		)	62
Other payables - interest and other	3		—			1			—		1			—		—			—			—		—			—			—			2
Long-term borrowings	1,743		80			9			—		89			—		—			(30		)	53		(252		)	219			(175		)	1,469

⁽¹⁾ During the second quarter of 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 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 Six Months Ended June 30, 2012
			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	$	179	$	(5	)	$	—		$	—	$	(5	)	$	—	$	(52	)	$	42		$	—	$	(9	)	$	32	$	(2	)	$	185
Convertible debentures	99		—			—			—		—			—		(53		)	—			—		—			5		(17		)	34
Non-U.S. governments and agencies	342		(2		)	—			—		(2		)	—		(245		)	308			—		(1		)	—		(13		)	389
Corporate debt ⁽¹⁾	3,962		91			—			—		91			—		(1,755		)	557			—		(439		)	148		(458		)	2,106
Preferred stock	227		11			—			—		11			—		(92		)	82			—		(1		)	1		—			228
Mortgages, mortgage-backed and asset-backed ⁽¹⁾	3,199		52			—			—		52			—		(393		)	1,330			—		(233		)	736		(113		)	4,578
Municipals and money markets	2,047		9			—			—		9			—		(319		)	207			—		(191		)	—		(23		)	1,730
Total trading assets, excluding derivative contracts	10,055		156			—			—		156			—		(2,909		)	2,526			—		(874		)	922		(626		)	9,250
Derivative contracts, net	4,495		(542		)	—			—		(542		)	—		(379		)	560			—		(346		)	21		(395		)	3,414
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		—			(6		)	—		(6		)	—		(90		)	9			—		(154		)	—		—			333
Total investment securities	621		—			(8		)	—		(8		)	—		(90		)	9			—		(191		)	—		—			341
Loans, notes and mortgages	1,726		—			114			15		129			—		(16		)	7			—		(70		)	—		—			1,776
Other Assets	1,349		—			(86		)	—		(86		)	—		—			—			—		—			—		—			1,263
Liabilities:
Trading liabilities, excluding derivative contracts:
Corporate debt	52		—			—			—		—			—		35			(44		)	—		1			2		(37		)	9
Preferred stock	16		(2		)	—			—		(2		)	—		9			(5		)	—		—			—		(13		)	9
Municipals, money markets and other	45		5			—			—		5			—		9			(6		)	1		—			—		—			44
Total trading liabilities, excluding derivative contracts	113		3			—			—		3			—		53			(55		)	1		1			2		(50		)	62
Other payables - interest and other	10		—			4			—		4			—		—			(1		)	—		—			—		(3		)	2
Long-term borrowings	2,186		(59		)	(35		)	—		(94		)	—		33			(98		)	81		(629		)	441		(639		)	1,469

⁽¹⁾ During the six months ended June 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 out for derivative contracts, net primarily relates to increased price observability (i.e., market comparables) for certain 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.

The following tables provide the portion of gains or losses included in income for the three and six months ended June 30, 2013 and June 30, 2012 attributable to unrealized gains or losses relating to those Level 3 assets and liabilities held at June 30, 2013 and June 30, 2012, respectively.



(dollars in millions)
	Unrealized Gains or (Losses) for Level 3 Assets and Liabilities Still Held
	Three Months Ended June 30, 2013									Six Months Ended June 30, 2013
	Principal Transactions			Other Revenue			Total			Principal Transactions			Other Revenue			Total
Assets:
Trading assets, excluding derivative contracts:
Equities	$	10		$	—		$	10		$	(13	)	$	—		$	(13	)
Convertible debentures	(1		)	—			(1		)	(2		)	—			(2		)
Non-U.S. governments and agencies	(18		)	—			(18		)	63			—			63
Corporate debt	(11		)	—			(11		)	25			—			25
Preferred stock	(3		)	—			(3		)	8			—			8
Mortgages, mortgage-backed and asset-backed	(8		)	—			(8		)	61			—			61
Municipals and money markets	1			—			1			9			—			9
Total trading assets, excluding derivative contracts	(30		)	—			(30		)	151			—			151
Derivative contracts, net	188						188			(35		)	—			(35		)
Investment securities non-qualifying	—			(3		)	(3		)	—			(8		)	(8		)
Loans, notes and mortgages	—			12			12			—			(32		)	(32		)
Other	—			(6		)	(6		)	—			(4		)	(4		)
Liabilities:
Trading liabilities, excluding derivative contracts:
Corporate debt	2			—			2			1			—			1
Total trading liabilities, excluding derivative contracts	2			—			2			1			—			1
Long-term borrowings	58			(5		)	53			55			(9		)	46



(dollars in millions)
	Unrealized Gains or (Losses) for Level 3 Assets and Liabilities Still Held
	Three Months Ended June 30, 2012									Six Months Ended June 30, 2012
	Principal Transactions			Other Revenue			Total			Principal Transactions			Other Revenue			Total
Assets:
Trading assets, excluding derivative contracts:
Equities	$	(6	)	$	—		$	(6	)	$	1		$	—		$	1
Convertible debentures	(2		)	—			(2		)	—			—			—
Non-U.S. governments and agencies	(25		)	—			(25		)	—			—			—
Corporate debt	(35		)	—			(35		)	3			—			3
Preferred stock	(1		)	—			(1		)	2			—			2
Mortgages, mortgage-backed and asset-backed	(45		)	—			(45		)	(7		)	—			(7		)
Municipals and money markets	6			—			6			(3		)	—			(3		)
Total trading assets, excluding derivative contracts	(108		)	—			(108		)	(4		)	—			(4		)
Derivative contracts, net	173			—			173			(429		)	—			(429		)
Investment securities non-qualifying	—			1			1			—			(10		)	(10		)
Loans, notes and mortgages	—			13			13			—			110			110
Other assets	—			(39		)	(39		)	—			(86		)	(86		)

Liabilities:
Trading liabilities, excluding derivative contracts:
Preferred stock	—			—			—			(2		)	—			(2		)
Municipals, money markets and other	3			—			3			3			—			3
Total trading liabilities, excluding derivative contracts	3			—			3			1			—			1
Other payables — interest and other	—			1			1			—			—			—
Long-term borrowings	82			9			91			(12		)	—			(12		)

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 at June 30, 2013 and December 31, 2012.

Quantitative Information about Level 3 Fair Value Measurements at June 30, 2013



(dollars in millions)
Financial Instrument	Fair Value		Valuation Techniques	Significant Unobservable Inputs	Ranges of Inputs	Weighted Average
Loans and Securities
Instruments backed by residential real estate assets	$	1,075	Discounted Cash Flow, Market Comparables	Yield	4% to 25%	8	%
Loans, notes and mortgages	641			Prepayment Speeds (CPR)	3% to 10%	7	%
Trading assets - Mortgages, mortgage-backed and asset-backed	434			Default Rates (CDR)	1% to 3%	2	%
				Loss Severities	35% to 45%	41	%
Commercial loans, debt securities and other	$	6,090	Discounted Cash Flow, Market Comparables	Yield	0% to 35%	7	%
Loans, notes and mortgages	174			Enterprise Value/EBITDA multiple	0x to 18x	7	x
Trading assets - Mortgages, mortgage-backed and asset-backed	4,152			Prepayment Speed	5% to 40%	20	%
Trading assets - Corporate debt	1,764			Default Rates	1% to 4%	4	%
				Loss Severity	25% to 40%	35	%
Long-term borrowings	$	1,082	Industry Standard Derivative Pricing ⁽¹⁾	Equity Correlation	30% to 100%	63	%
			Industry Standard Derivative Pricing ⁽¹⁾	Long- Dated Volatilities	4% to 70%	24	%

⁽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 at June 30, 2013



(dollars in millions)
Financial Instrument	Fair Value			Valuation Techniques	Significant Unobservable Inputs	Ranges of Inputs	Weighted Average
Net Derivative Contracts
Credit derivatives	$	1,399		Discounted Cash Flow, Stochastic Recovery Correlation Model	Yield	4% to 25%	15	%
					Credit spreads	56 bps to 184 bps	173 bps
					Upfront points	0 to 100 points	53 points
					Spread to index	-1,745 bps to 1,852 bps	208 bps
					Credit correlation	28% to 81%	52	%
					Prepayment speed (CPR)	3% to 20%	9	%
					Default rates (CDR)	1% to 4%	3	%
					Loss severity	20% to 35%	35	%
Equity derivatives	$	(223	)	Industry Standard Derivative Pricing ⁽¹⁾	Equity Correlation	30% to 100%	63	%
				Industry Standard Derivative Pricing ⁽¹⁾	Long-Dated Volatilities	4% to 70%	24	%
Commodity derivatives	$	5		Discounted Cash Flow, Industry Standard Derivative Pricing ⁽¹⁾	Natural gas forward price	$3/MMBtu to $12/MMBtu	$7/MMBtu
					Correlation	47% to 95%	79	%
					Volatilities	9% to 301%	34	%
Interest rate derivatives	$	494		Industry Standard Derivative Pricing ⁽¹⁾	Correlation (IR/IR)	24% to 99%	51	%
					Correlation (FX/IR)	-65% to 50%	-12	%
					Long-Dated Inflation Rates	1% to 3%	2	%
					Long-Dated Inflation Volatilities	0% to 2%	1	%
Total net derivative contracts	$	1,675


⁽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

MMBtu = Million British thermal units

Quantitative Information about Level 3 Fair Value Measurements at December 31, 2012



(dollars in millions)
Financial Instrument	Fair Value		Valuation Techniques	Significant Unobservable Inputs	Ranges of Inputs	Weighted Average
Loans and Securities
Instruments backed by residential real estate assets	$	1,608	Discounted Cash Flow	Yield	4% to 25%	7	%
Loans, notes and mortgages	1,231			Prepayment Speeds (CPR)	3% to 10%	7	%
Trading assets - Mortgages, mortgage-backed and asset-backed	377			Default Rates (CDR)	1% to 3%	2	%
				Loss Severities	35% to 45%	41	%
Instruments backed by commercial real estate assets			Discounted Cash Flow	Yield	5%	5	%
Other	$	1,534	Discounted Cash Flow	Loss Severities	51% to 100%	88	%

Commercial loans, debt securities and other	$	6,787	Discounted Cash Flow, Market Comparables	Yield	0% to 25%	5	%
Loans, notes and mortgages	450			Enterprise Value/EBITDA multiple	2x to 11x	6	x
Trading assets - Mortgages, mortgage-backed and asset-backed	4,437			Prepayment Speed	5% to 30%	20	%
Trading assets - Corporate debt	1,900			Default Rates	1% to 5%	4	%
				Loss Severity	25% to 40%	35	%
Auction Rate Securities			Market Comparables
Trading assets - Municipals and money markets	$	1,295	Market Comparables	Projected tender price / re-financing level	50% to 100%	90	%

Long-term borrowings	$	1,316	Industry Standard Derivative Pricing ⁽¹⁾	Equity Correlation	30% to 97%	₍₂₎
			Industry Standard Derivative Pricing ⁽¹⁾	Long- Dated Volatilities	20% to 70%	₍₂₎

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

⁽²⁾ For further information on the ranges of inputs for equity correlation and long-dated volatilities, see the qualitative equity derivatives disclosure below.

CPR = Constant Prepayment Rate

CDR = Constant Default Rate

Quantitative Information about Level 3 Fair Value Measurements at December 31, 2012



(dollars in millions)
Financial Instrument	Fair Value			Valuation Techniques	Significant Unobservable Inputs	Ranges of Inputs
Net Derivative Contracts
Credit derivatives	$1,632			Discounted Cash Flow, Stochastic Recovery Correlation Model	Yield	2% to 25%
					Credit spreads	58bps to 615bps
					Upfront points	25 to 99 points
					Spread to index	-2,080bps to 1,972bps
					Credit correlation	19% to 75%
					Prepayment speed (CPR)	3% to 30%
					Default rates (CDR)	1% to 5%
					Loss severity	25% to 40%
Equity derivatives	$	(814	)	Industry Standard Derivative Pricing ⁽¹⁾	Equity Correlation	30% to 97%
				Industry Standard Derivative Pricing ⁽¹⁾	Long-Dated Volatilities	20% to 70%
Commodity derivatives	$	(5	)	Discounted Cash Flow	Natural gas forward price	$3/MMBtu to $12/MMBtu
Interest rate derivatives	$	731		Industry Standard Derivative Pricing ⁽¹⁾	Correlation (IR/IR)	15% to 99%
					Correlation (FX/IR)	-65% to 50%
					Long-Dated Inflation Rates	2% to 3%
					Long-Dated Inflation Volatilities	0% to 1%
					Long-Dated Volatilities (FX)	5% to 36%
					Long-Dated Swap Rates	8% to 10%
Total net derivative contracts	$	1,544


⁽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

MMBtu = Million British thermal units

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 $288 million and $287 million of Investment securities non-qualifying as of June 30, 2013 and December 31, 2012, respectively, 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. Weighted averages have been provided for all ranges of inputs as of June 30, 2013. At December 31, 2012, weighted averages were provided for all ranges of inputs except for those related to long-term borrowings and derivative contracts, for which a qualitative discussion is presented below.

For credit derivatives at December 31, 2012, the range of credit spreads represented positions with varying levels of default risk to the underlying instruments. The lower end of the credit spread range typically represented shorter-dated instruments and those with better perceived credit risk. The higher end of the range comprised longer-dated instruments and those referencing debt issuances which were more likely to be impaired or non-performing. At December 31, 2012, the majority of inputs were concentrated in the lower end of the range. Similarly, the spread to index could vary significantly based on the risk of the instrument. The spread was positive for instruments that had a higher risk of default than the index (which was based on a weighted average of its components) and negative for instruments that had a lower risk of default than the index. At December 31, 2012, inputs were distributed evenly throughout the range for spread to index. In addition, for yield and credit correlation, the majority of the inputs were concentrated in the center of the range. Inputs were concentrated in the middle to lower end of the range for upfront points. The range for loss severity reflected exposures that were concentrated in the middle to upper end of the range, while the ranges for prepayment speed and default rates reflected exposures that were concentrated in the lower end of the range.

For equity derivatives at December 31, 2012, including those embedded in long-term debt, the range for equity correlation represented exposure primarily concentrated toward the upper end of the range. The range for long-dated volatilities represented exposure primarily concentrated toward the lower end of the range.

For interest rate derivatives at December 31, 2012, the diversity in the portfolio was reflected in wide ranges of inputs because the variety of currencies and tenors of the transactions required the use of numerous foreign exchange and interest rate curves. Since foreign exchange and interest rate correlations were measured between curves and across the various tenors on the same curve, the range of potential values could include both negative and positive values. For the correlation (IR/IR) range, the exposure represented the valuation of interest rate correlations on less liquid pairings and was concentrated at the upper end of the range at December 31, 2012. For the correlation (FX/IR) range, the exposure was the sensitivity to a broad mix of interest rate and foreign exchange correlations and was distributed evenly throughout the range as of December 31, 2012. For long-dated inflation rates and volatilities as well as long-dated volatilities (FX), the inputs were concentrated in the middle of the range.

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. The tables below show the fair value hierarchy for assets and liabilities measured at fair value on a non-recurring basis as of June 30, 2013 and December 31, 2012.



(dollars in millions)
	Non-Recurring Basis							Gains/(Losses)			Gains/(Losses)			Gains/(Losses)			Gains/(Losses)
	as of June 30, 2013							Three Months Ended			Six Months Ended			Three Months Ended			Six Months Ended
		Level 2		Level 3		Total		June 30, 2013			June 30, 2013			June 30, 2012			June 30, 2012
Assets:
Loans, notes and mortgages		$	1	$	132	$	133	$	(1	)	$	(2	)	$	(53	)	$	(40	)
Other		—		2		2		—			—			—			—
Liabilities:
Other payables — interest and other		—		—		—		—			—			4			3



(dollars in millions)
	Non-Recurring Basis
	as of December 31, 2012
		Level 2		Level 3		Total
Assets:
Loans, notes and mortgages		$	1	$	221	$	222
Other		—		2		2

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 June 30, 2013 and December 31, 2012. 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 June 30, 2013 and December 31, 2012 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.

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 Earnings (Loss) 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 six months ended June 30, 2013 and June 30, 2012.



(dollars in millions)
	Changes in Fair Value For the Three Months Ended June 30, 2013, for Items Measured at Fair Value Pursuant to the Fair Value Option Election									Changes in Fair Value For the Six Months Ended June 30, 2013, 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	$	(8	)	$	—		$	(8	)	$	30		$	—		$	30
Investment securities	—			(3		)	(3		)	—			(3		)	(3		)
Loans	11			14			25			26			(42		)	(16		)
Other	—			(6		)	(6		)	—			(3		)	(3		)
Liabilities:
Payables under repurchase agreements	4			—			4			(16		)	—			(16		)
Short-term borrowings	11			—			11			(28		)	—			(28		)
Other payables — interest and other	—			4			4			—			17			17
Long-term borrowings	903			—			903			(29		)	—			(29		)




(dollars in millions)
	Changes in Fair Value For the Three Months Ended June 30, 2012, for Items Measured at Fair Value Pursuant to the Fair Value Option Election								Changes in Fair Value For the Six Months Ended June 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	$	5	$	—		$	5		$	(29	)	$	—		$	(29	)
Investment securities	—		(3		)	(3		)	—			2			2
Loans	3		(15		)	(12		)	29			77			106
Liabilities:
Payables under repurchase agreements	9		—			9			(25		)	—			(25		)
Short-term borrowings	12		—			12			19			—			19
Other payables — interest and other	—		(18		)	(18		)	—			31			31
Long-term borrowings	592		(21		)	571			(1,841		)	(21		)	(1,862		)

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 six months ended June 30, 2013 and June 30, 2012.

As of June 30, 2013 and December 31, 2012, 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 $6 million and $115 million, respectively, and the aggregate fair value of loans that were in non-accrual status was $19 million and $25 million at June 30, 2013 and December 31, 2012, respectively. As of June 30, 2013 and December 31, 2012, 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 $36 million and $153 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 gains of approximately $46 million and $12 million for the three and six months ended June 30, 2013, respectively, and net losses of approximately $36 million and $2.2 billion for the three and six months ended June 30, 2012, respectively. Changes in Merrill Lynch specific credit risk are derived by isolating fair value changes due to changes in Merrill Lynch's credit spreads as observed in the secondary cash market.

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

The following tables present the difference between fair values and the aggregate contractual principal amounts of receivables under resale agreements, receivables under securities borrowed transactions, loans and long-term borrowings for which the fair value option election has been made as of June 30, 2013 and December 31, 2012.



(dollars in millions)
	Fair Value at		Principal Amount Due Upon Maturity
	June 30, 2013				Difference
Assets:
Receivables under resale agreements	$	99,001	$	98,704	$	297
Receivables under securities borrowed transactions	1,954		1,980		(26		)
Loans ⁽¹⁾	2,472		3,163		(691		)

Liabilities:
Long-term borrowings ^{(2) (3)}	27,964		28,629		(665		)


⁽¹⁾	Includes trading loans with a fair value of $904 million and margin loans with a fair value of $267 million.


⁽²⁾	The majority of the difference between the fair value and principal amount due upon maturity at June 30, 2013 relates to the impact of changes in Merrill Lynch's credit spreads, as well as the fair value of the embedded derivative, where applicable.


⁽³⁾	Includes structured liabilities with a fair value of $18.6 billion and principal amount due upon maturity of $19.0 billion as of June 30, 2013.



(dollars in millions)
	Fair Value at		Principal Amount Due Upon Maturity
	December 31, 2012		Principal Amount Due Upon Maturity		Difference
Assets:
Receivables under resale agreements	$	93,715	$	93,433	$	282
Receivables under securities borrowed transactions	961		892		69
Loans ⁽¹⁾	4,063		4,835		(772		)
Liabilities:
Long-term borrowings^{(2) (3)}	30,875		32,151		(1,276		)


⁽¹⁾	Includes trading loans with a fair value of $715 million and margin loans with a fair value of $271 million.


⁽²⁾	The difference between the fair value and principal amount due upon maturity at December 31, 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.


⁽³⁾	Includes structured liabilities with a fair value of $22.0 billion and principal amount due upon maturity of $22.7 billion as of December 31, 2012.

- Definition

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

+ References

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

-Publisher FASB

-Name Statement of Financial Accounting Standard (FAS)

-Number 107

-Paragraph 15A

-Subparagraph a-d

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

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

-Publisher FASB

-Name Statement of Financial Accounting Standard (FAS)

-Number 107

-Paragraph 15C, 15D

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

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

-Publisher FASB

-Name Statement of Financial Accounting Standard (FAS)

-Number 107

-Paragraph 3, 10, 14, 15

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

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

-Publisher FASB

-Name Statement of Financial Accounting Standard (FAS)

-Number 157

-Paragraph 32, 33, 34

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

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

-Publisher FASB

-Name Accounting Standards Codification

-Topic 825

-SubTopic 10

-Section 50

-Paragraph 21

-URI http://asc.fasb.org/extlink&oid=7491637&loc=d3e13537-108611

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

-Publisher FASB

-Name Statement of Financial Accounting Standard (FAS)

-Number 133

-Paragraph 44A, 44B

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

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

-Publisher FASB

-Name Accounting Standards Codification

-Topic 825

-SubTopic 10

-Section 50

-Paragraph 10

-URI http://asc.fasb.org/extlink&oid=7491637&loc=d3e13433-108611

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

-Publisher FASB

-Name Accounting Standards Codification

-Topic 825

-SubTopic 10

-Section 50

-Paragraph 28

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

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

-Publisher FASB

-Name Accounting Standards Codification

-Topic 820

-SubTopic 10

-Section 50

-Paragraph 2

-URI http://asc.fasb.org/extlink&oid=7578670&loc=d3e19207-110258

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

-Publisher FASB

-Name Accounting Standards Codification

-Topic 825

-SubTopic 10

-Section 50

-Paragraph 30

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

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

-Publisher FASB

-Name Accounting Standards Codification

-Topic 825

-SubTopic 10

-Section 50

-Paragraph 16

-URI http://asc.fasb.org/extlink&oid=7491637&loc=d3e13504-108611

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

-Publisher FASB

-Name Statement of Financial Accounting Standard (FAS)

-Number 107

-Paragraph 15B

-Subparagraph a, b

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

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

-Publisher FASB

-Name Statement of Financial Accounting Standard (FAS)

-Number 159

-Paragraph 17-22, 27, 28

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

+ Details