Goldman Sachs 2015 Annual Report Download - page 160

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Derivatives with Credit-Related Contingent Features
Certain of the firm’s derivatives have been transacted under
bilateral agreements with counterparties who may require
the firm to post collateral or terminate the transactions
based on changes in the firm’s credit ratings. The firm
assesses the impact of these bilateral agreements by
determining the collateral or termination payments that
would occur assuming a downgrade by all rating agencies.
A downgrade by any one rating agency, depending on the
agency’s relative ratings of the firm at the time of the
downgrade, may have an impact which is comparable to
the impact of a downgrade by all rating agencies.
The table below presents the aggregate fair value of net
derivative liabilities under such agreements (excluding
application of collateral posted to reduce these liabilities),
the related aggregate fair value of the assets posted as
collateral and the additional collateral or termination
payments that could have been called at the reporting date
by counterparties in the event of a one-notch and two-notch
downgrade in the firm’s credit ratings.
As of December
$ in millions 2015 2014
Net derivative liabilities under bilateral
agreements $29,836 $35,764
Collateral posted 26,075 30,824
Additional collateral or termination payments for
a one-notch downgrade 1,061 1,072
Additional collateral or termination payments for
a two-notch downgrade 2,689 2,815
Hedge Accounting
The firm applies hedge accounting for (i) certain interest
rate swaps used to manage the interest rate exposure of
certain fixed-rate unsecured long-term and short-term
borrowings and certain fixed-rate certificates of deposit and
(ii) certain foreign currency forward contracts and foreign
currency-denominated debt used to manage foreign
currency exposures on the firm’s net investment in certain
non-U.S. operations.
To qualify for hedge accounting, the hedging instrument
must be highly effective at reducing the risk from the
exposure being hedged. Additionally, the firm must
formally document the hedging relationship at inception
and test the hedging relationship at least on a quarterly
basis to ensure the hedging instrument continues to be
highly effective over the life of the hedging relationship.
Fair Value Hedges
The firm designates certain interest rate swaps as fair value
hedges. These interest rate swaps hedge changes in fair
value attributable to the designated benchmark interest rate
(e.g., London Interbank Offered Rate (LIBOR) or
Overnight Index Swap Rate (OIS)), effectively converting a
substantial portion of fixed-rate obligations into floating-
rate obligations.
The firm applies a statistical method that utilizes regression
analysis when assessing the effectiveness of its fair value
hedging relationships in achieving offsetting changes in the
fair values of the hedging instrument and the risk being
hedged (i.e., interest rate risk). An interest rate swap is
considered highly effective in offsetting changes in fair value
attributable to changes in the hedged risk when the
regression analysis results in a coefficient of determination
of 80% or greater and a slope between 80% and 125%.
For qualifying fair value hedges, gains or losses on
derivatives are included in “Interest expense.” The change
in fair value of the hedged item attributable to the risk being
hedged is reported as an adjustment to its carrying value
and is subsequently amortized into interest expense over its
remaining life. Gains or losses resulting from hedge
ineffectiveness are included in “Interest expense.” When a
derivative is no longer designated as a hedge, any remaining
difference between the carrying value and par value of the
hedged item is amortized to interest expense over the
remaining life of the hedged item using the effective interest
method. See Note 23 for further information about interest
income and interest expense.
The table below presents the gains/(losses) from interest
rate derivatives accounted for as hedges, the related hedged
borrowings and bank deposits, and the hedge
ineffectiveness on these derivatives, which primarily
consists of amortization of prepaid credit spreads resulting
from the passage of time.
Year Ended December
$ in millions 2015 2014 2013
Interest rate hedges $(1,613) $ 1,936 $(8,683)
Hedged borrowings and bank deposits 898 (2,451) 6,999
Hedge ineffectiveness $ (715) $ (515) $(1,684)
148 Goldman Sachs 2015 Form 10-K