Goldman Sachs 2013 Annual Report Download - page 101

Management’s Discussion and Analysis
The firm’s credit exposures are described further below.
Cash and Cash Equivalents. Cash and cash equivalents
include both interest-bearing and non-interest-bearing
deposits. To mitigate the risk of credit loss, we place
substantially all of our deposits with highly-rated banks
and central banks.
OTC Derivatives. The firm’s credit exposure on OTC
derivatives arises primarily from our market-making
activities. The firm, as a market maker, enters into
derivative transactions to provide liquidity to clients and to
facilitate the transfer and hedging of their risks. The firm
also enters into derivatives to manage market risk
exposures. We manage our credit exposure on OTC
derivatives using the credit risk process, measures, limits
and risk mitigants described above.
Derivatives are reported on a net-by-counterparty basis
(i.e., the net payable or receivable for derivative assets and
liabilities for a given counterparty) when a legal right of
setoff exists under an enforceable netting agreement.
Derivatives are accounted for at fair value, net of cash
collateral received or posted under enforceable credit
support agreements. We generally enter into OTC
derivatives transactions under bilateral collateral
arrangements with daily exchange of collateral.
As credit risk is an essential component of fair value, the
firm includes a credit valuation adjustment (CVA) in the
fair value of derivatives to reflect counterparty credit risk,
as described in Note 7 to the consolidated financial
statements. CVA is a function of the present value of
expected exposure, the probability of counterparty default
and the assumed recovery upon default.
The tables below present the distribution of our exposure to
OTC derivatives by tenor, based on expected duration for
mortgage-related credit derivatives and generally on
remaining contractual maturity for other derivatives, both
before and after the effect of collateral and netting
agreements. Receivable and payable balances for the same
counterparty across tenor categories are netted under
enforceable netting agreements, and cash collateral received
is netted under enforceable credit support agreements.
Receivable and payable balances with the same
counterparty in the same tenor category are netted within
such tenor category. Net credit exposure in the tables below
represents OTC derivative assets, all of which are included
in “Financial instruments owned, at fair value,” less cash
collateral and the fair value of securities collateral,
primarily U.S. government and federal agency obligations
and non-U.S. government and agency obligations, received
under credit support agreements, which management
considers when determining credit risk, but such collateral
is not eligible for netting under U.S. GAAP. The categories
shown reflect our internally determined public rating
agency equivalents.
As of December 2013
in millions
Credit Rating Equivalent
0-12
Months
1-5
Years
5 Years
or Greater Total Netting
OTC
Derivative
Assets
Net Credit
Exposure
AAA/Aaa $ 473 $ 1,470 $ 2,450 $ 4,393 $ (2,087) $ 2,306 $ 2,159
AA/Aa2 3,463 7,642 29,926 41,031 (27,918) 13,113 8,596
A/A2 12,693 25,666 29,701 68,060 (48,803) 19,257 11,188
BBB/Baa2 4,377 10,112 24,013 38,502 (29,213) 9,289 5,952
BB/Ba2 or lower 2,972 6,188 4,271 13,431 (5,357) 8,074 6,381
Unrated 1,289 45 238 1,572 (9) 1,563 1,144
Total $25,267 $51,123 $ 90,599 $166,989 $(113,387) $53,602 $35,420
As of December 2012
in millions
Credit Rating Equivalent
0-12
Months 1-5 Years 5 Years or Greater Total Netting
OTC
Derivative
Assets Net Credit Exposure
AAA/Aaa $ 494 $ 1,934 $ 2,778 $ 5,206 $ (1,476) $ 3,730 $ 3,443
AA/Aa2 4,631 7,483 20,357 32,471 (16,026) 16,445 10,467
A/A2 13,422 26,550 42,797 82,769 (57,868) 24,901 16,326
BBB/Baa2 7,032 12,173 27,676 46,881 (32,962) 13,919 4,577
BB/Ba2 or lower 2,489 5,762 7,676 15,927 (9,116) 6,811 4,544
Unrated 326 927 358 1,611 (13) 1,598 1,259
Total $28,394 $54,829 $101,642 $184,865 $(117,461) $67,404 $40,616
Goldman Sachs 2013 Annual Report 99