Quarterly report pursuant to Section 13 or 15(d)

Fair Value of Financial Instruments

v2.4.0.6
Fair Value of Financial Instruments
3 Months Ended
Mar. 31, 2013
Investments, All Other Investments [Abstract]  
Fair Value of Financial Instruments
Note 5.  
Fair Value of Financial Instruments
The fair values of financial instruments have been derived, in part, by management’s assumptions, the estimated amount and timing of future cash flows and estimated discount rates. Different assumptions could significantly affect these estimated fair values. Accordingly, the net realizable values could be materially different from the estimates presented below. In addition, the estimates are only indicative of the value of individual financial instruments and should not be considered an indication of the fair value of Merrill Lynch.
The classifications of financial instruments within the fair value hierarchy have been derived using methodologies described in Note 4.
The following disclosures relate to financial instruments for which the ending balances at March 31, 2013 and December 31, 2012 are not carried at fair value in their entirety on Merrill Lynch’s Condensed Consolidated Balance Sheets.
Short-term Financial Instruments
The carrying value of short-term financial instruments, including cash and cash equivalents, cash and securities segregated for regulatory purposes or deposited with clearing organizations, certain securities financing transactions, customer and broker-dealer receivables and payables, and commercial paper and other short-term borrowings, approximates the fair value of these instruments. These financial instruments generally expose Merrill Lynch to limited credit risk and have no stated maturities or have short-term maturities and carry interest rates that approximate market interest rates.
For purposes of the fair value hierarchy, cash is classified as Level 1. Cash equivalents (including time deposits placed and other short-term investments) and securities segregated for regulatory purposes or deposited with clearing organizations are classified as Level 1 and Level 2. Securities financing transactions are classified as Level 2. Customer receivables and payables are primarily classified as Level 2. Broker-dealer receivables and payables, and commercial paper and other short-term borrowings are classified as Level 2.
Loans, Notes and Mortgages
The fair values for commercial and consumer loans are generally determined by discounting both principal and interest cash flows expected to be collected using a discount rate for similar instruments with adjustments that Merrill Lynch believes a market participant would consider in determining fair value. Merrill Lynch estimates the cash flows expected to be collected using internal credit risk, interest rate and prepayment risk models that incorporate its best estimate of current key assumptions, such as default rates, loss severity and prepayment speeds for the life of the loan. Merrill Lynch elected the fair value option for certain loans and loan commitments. See Note 4 for additional information.
Deposits
The fair value for certain deposits with stated maturities was determined by discounting contractual cash flows using current market rates for instruments with similar maturities. For deposits with no stated maturities, the carrying amount was considered to approximate fair value and does not take into account the significant value of the cost advantage and stability of Merrill Lynch’s long-term relationships with depositors.
Long-term Borrowings
Merrill Lynch uses quoted market prices, when available, to estimate the fair value of its long-term borrowings. When quoted market prices are not available, fair value is estimated based on current market interest rates and credit spreads for debt with similar terms and maturities. Merrill Lynch elected the fair value option for certain long-term borrowings, including structured notes. See Note 4 for additional information.

The following table presents the carrying value and fair value, by fair value hierarchy, of Merrill Lynch's loans, notes and mortgages, deposits and long-term borrowings at March 31, 2013. See Note 4 for further information regarding the fair value hierarchy:
(dollars in millions)
 
 
 
 
 
 
 
 
 
 
Fair Value Measurement
 
 
 
As of March 31, 2013
 
Carrying Value
 
Level 2
 
Level 3
 
Total
Financial assets
 
 
 
 
 
 
 
Loans, notes and mortgages (1)
$
20,105

 
$
514

 
$
19,673

 
$
20,187

Financial liabilities
 
 
 
 
 
 
 
Deposits
11,802

 
11,802

 

 
11,802

Long-term borrowings (2)
93,920

 
98,823

 
1,285

 
100,108

(1) 
Loans are presented net of the allowance for loan losses.
(2) 
Includes junior subordinated notes (related to trust preferred securities).

The following table presents the carrying value and fair value of loans, notes and mortgages, deposits and long-term borrowings at December 31, 2012:
(dollars in millions)
 
 
 
 
 
 
 
 
 
 
Fair Value Measurement
 
 
 
As of December 31, 2012
 
Carrying Value
 
Level 2
 
Level 3
 
Total
Financial assets
 

 
 
 
 
 
 

Loans, notes and mortgages(1)
$
19,545

 
$
896

 
$
18,721

 
$
19,617

Financial liabilities
 

 
 
 
 
 
 

Deposits
12,873

 
12,873

 

 
12,873

Long-term borrowings (2)
96,058

 
99,528

 
1,316

 
100,844

(1) 
Loans are presented net of the allowance for loan losses.
(2) 
Includes junior subordinated notes (related to trust preferred securities).

Commercial Unfunded Lending Commitments

The carrying values and fair values of Merrill Lynch's commercial unfunded lending commitments were $46 million and $82 million, respectively, at March 31, 2013 and $60 million and $104 million, respectively, at December 31, 2012. Commercial unfunded lending commitments, which are included in Other payables - Interest and other on the Condensed Consolidated Balance Sheet, are primarily classified as Level 2 or Level 3.

Fair values were generally determined using a discounted cash flow valuation approach, which is applied using market-based CDS or internally-developed benchmark credit curves. The fair value option was elected for certain loan commitments. See Note 4 for additional information.

Merrill Lynch does not estimate the fair values of consumer unfunded lending commitments because, in many instances, Merrill Lynch can reduce or cancel these commitments by providing notice to the borrower. See Note 14 for additional information on commitments.