Goldman Sachs 2015 Annual Report Download - page 158

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
In the tables above:
‰Tenor is based on expected duration for mortgage-related
credit derivatives and generally on remaining contractual
maturity for other derivatives.
‰Counterparty netting within the same product type and
tenor category is included within such product type and
tenor category.
‰Counterparty netting across product types within the
same tenor category is included in “Counterparty netting
within tenors.” Where the counterparty netting is across
tenor categories, the netting is reflected in “Cross-tenor
counterparty netting.”
Credit Derivatives
The firm enters into a broad array of credit derivatives in
locations around the world to facilitate client transactions
and to manage the credit risk associated with market-
making and investing and lending activities. Credit
derivatives are actively managed based on the firm’s net risk
position.
Credit derivatives are individually negotiated contracts and
can have various settlement and payment conventions.
Credit events include failure to pay, bankruptcy,
acceleration of indebtedness, restructuring, repudiation and
dissolution of the reference entity.
The firm enters into the following types of credit
derivatives:
‰Credit Default Swaps. Single-name credit default swaps
protect the buyer against the loss of principal on one or
more bonds, loans or mortgages (reference obligations) in
the event the issuer (reference entity) of the reference
obligations suffers a credit event. The buyer of protection
pays an initial or periodic premium to the seller and
receives protection for the period of the contract. If there
is no credit event, as defined in the contract, the seller of
protection makes no payments to the buyer of protection.
However, if a credit event occurs, the seller of protection
is required to make a payment to the buyer of protection,
which is calculated in accordance with the terms of the
contract.
‰Credit Indices, Baskets and Tranches. Credit
derivatives may reference a basket of single-name credit
default swaps or a broad-based index. If a credit event
occurs in one of the underlying reference obligations, the
protection seller pays the protection buyer. The payment
is typically a pro-rata portion of the transaction’s total
notional amount based on the underlying defaulted
reference obligation. In certain transactions, the credit
risk of a basket or index is separated into various portions
(tranches), each having different levels of subordination.
The most junior tranches cover initial defaults and once
losses exceed the notional amount of these junior
tranches, any excess loss is covered by the next most
senior tranche in the capital structure.
‰Total Return Swaps. A total return swap transfers the
risks relating to economic performance of a reference
obligation from the protection buyer to the protection
seller. Typically, the protection buyer receives from the
protection seller a floating rate of interest and protection
against any reduction in fair value of the reference
obligation, and in return the protection seller receives the
cash flows associated with the reference obligation, plus
any increase in the fair value of the reference obligation.
‰Credit Options. In a credit option, the option writer
assumes the obligation to purchase or sell a reference
obligation at a specified price or credit spread. The option
purchaser buys the right, but does not assume the
obligation, to sell the reference obligation to, or purchase
it from, the option writer. The payments on credit options
depend either on a particular credit spread or the price of
the reference obligation.
The firm economically hedges its exposure to written credit
derivatives primarily by entering into offsetting purchased
credit derivatives with identical underliers. Substantially all
of the firm’s purchased credit derivative transactions are
with financial institutions and are subject to stringent
collateral thresholds. In addition, upon the occurrence of a
specified trigger event, the firm may take possession of the
reference obligations underlying a particular written credit
derivative, and consequently may, upon liquidation of the
reference obligations, recover amounts on the underlying
reference obligations in the event of default.
As of December 2015, written and purchased credit
derivatives had total gross notional amounts of
$923.48 billion and $968.68 billion, respectively, for total
net notional purchased protection of $45.20 billion. As of
December 2014, written and purchased credit derivatives
had total gross notional amounts of $1.22 trillion and
$1.28 trillion, respectively, for total net notional purchased
protection of $59.35 billion. Substantially all of the firm’s
written and purchased credit derivatives are credit default
swaps.
146 Goldman Sachs 2015 Form 10-K