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page 43 GOLDMAN SACHS ANNUAL REPORT 2001
The systems also provide management, including the Firmwide
Risk and Credit Policy Committees, with information regarding
overall credit risk by product, industry sector, country and region.
Derivatives
Derivative contracts are financial instruments, such as futures,
forwards, swaps or option contracts, that derive their value from
underlying assets, indices, reference rates or a combination of
these factors. Derivative instruments may be privately negotiated
contracts, which are often referred to as OTC derivatives, or
they may be listed and traded on an exchange.
Most of our derivative transactions are entered into for trading
purposes. We use derivatives in our trading activities to facilitate
customer transactions, to take proprietary positions and as a
means of risk management. We also enter into derivative con-
tracts to manage the interest rate and currency exposure on our
long-term borrowings.
Derivatives are used in many of our businesses, and we believe
that the associated market risk can only be understood relative to
the underlying assets or risks being hedged, or as part of a broader
trading strategy. Accordingly, the market risk of derivative posi-
tions is managed with all of our other nonderivative risk.
Derivative contracts are reported on a net-by-counterparty basis
on our consolidated statements of financial condition where
management believes a legal right of setoff exists under an
enforceable netting agreement. For an OTC derivative, our
credit exposure is directly with our counterparty and continues
until the maturity or termination of such contract.
The following table sets forth the distribution, by credit rating, of substantially all of our exposure with respect to OTC derivatives
as of November 2001, after taking into consideration the effect of netting agreements. The categories shown reflect our internally
determined public rating agency equivalents.
Over-the-Counter Derivative Credit Exposure
($ IN MILLIONS)
EXPOSURE PERCENTAGE OF
COLLATERAL NET OF EXPOSURE NET
CREDIT RATING EQUIVALENT EXPOSURE HELD(2) COLLATERAL OF COLLATERAL
AAA/Aaa $ 3,604 $ 117 $ 3,487 13%
AA/Aa2 6,651 491 6,160 24
A/A2 9,763 606 9,157 35
BBB/Baa2 5,512 532 4,980 19
BB/Ba2 or lower 2,915 666 2,249 9
Unrated(1) 938 862 76 —
$29,383 $3,274 $26,109 100%
(1) In lieu of making an individual assessment of the credit of unrated counterparties, we make a determination that the collateral held in respect of such obligations is suffi-
cient to cover a substantial portion of our exposure. In making this determination, we take into account various factors, including legal uncertainties and market volatility.
(2) Collateral is usually received under agreements entitling Goldman Sachs to require additional collateral upon specified increases in exposure or the occurrence of adverse
credit events.