Goldman Sachs 2009 Annual Report Download - page 75

credit exposures, we seek to enter into netting agreements with
counterparties thatpermit us to offset receivables and payables
with such counterparties. In addition, we attempt to further
reduce credit risk with certain counterparties by (i)entering
into agreements that enable us to obtain collateral from a
counterparty on an upfront or contingent basis, (ii)seeking
third-party guarantees of the counterparty’s obligations,
and/or (iii)transferring our credit risk to third parties using
credit derivatives and/or other structures and techniques.
To measure and manage our credit exposures, we use a
variety of tools, including credit limits referenced to current
exposure and potential exposure. Potential exposure is an
estimate of exposure, within a speci ed con dence level, that
could be outstanding over the life of a transaction based on
market movements. In addition, as part of our market risk
management process, for positions measured by changes in
credit spreads, we use VaR and other sensitivity measures. To
supplement our primary credit exposure measures, we also use
scenario analyses, such as credit spread widening scenarios,
stress tests and other quantitative tools.
Our global credit management systems monitor credit
exposure to individual counterparties and on an aggregate
basis to counterparties and their subsidiaries. These systems
also provide management, including the Firmwide Risk and
Credit Policy Committees, with information regarding credit
risk by product, industry sector, country and region.
While our activities expose us to many different industries
and counterparties, we routinely execute a high volume of
transactions with counterparties in the  nancial services
industry, including brokers and dealers, commercial banks,
clearing houses, exchanges and investment funds. This has
resulted in signi cant credit concentration with respect to
this industry. In the ordinary course of business, we may also
be subject to a concentration of credit risk to a particular
counterparty, borrower or issuer, including sovereign issuers,
or to a particular clearing house or exchange.
As of December2009 and November2008, we held $83.83billion
(10% of total assets) and $53.98billion (6% of total assets),
respectively, of U.S. government and federal agency obligations
included in “Trading assets, at fair value” and “Cash and securities
segregated for regulatory and other purposes” in the consolidated
statements of  nancial condition. As of December2009 and
November2008, we held $38.61billion (5% of total assets) and
$21.13billion (2% of total assets), respectively, of other sovereign
obligations, principally consisting of securities issued by the
governments of the United Kingdom and Japan. In addition,
as of December2009 and November2008, $87.63billion and
$126.27billion of our securities purchased under agreements
to resell and securities borrowed (including those in “Cash
and securities segregated for regulatory and other purposes”),
respectively, were collateralized by U.S. government and federal
agency obligations. As of December2009 and November2008,
$77.99billion and $65.37billion of our securities purchased under
agreements to resell and securities borrowed, respectively, were
collateralized by other sovereign obligations, principally consisting
of securities issued by the governments of Germany, the United
Kingdom and Japan. As of December2009 and November2008,
we did not have credit exposure to any other counterparty that
exceeded 2% of our total assets.
Derivatives
Derivative contracts are 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.
Substantially all of our derivative transactions are entered into
to facilitate client transactions, to take proprietary positions
or as a means of risk management. In addition to derivative
transactions entered into for trading purposes, we enter into
derivative contracts to manage currency exposure on our net
investment in non-U.S. operations and to manage the interest
rate and currency exposure on our long-term borrowings and
certain short-term borrowings.
Derivatives are used in many of our businesses, and we believe
that the associated market risk can only be understood relative
to all of the underlying assets or risks being hedged, or as
part of a broader trading strategy. Accordingly, the market
risk of derivative positions is managed together with our
nonderivative positions.
The fair value of our derivative contracts is re ected net of
cash paid or received pursuant to credit support agreements
and is reported on a net-by-counterparty basis in our
consolidated statements of  nancial condition when we
believe 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.
Goldman Sachs 2009 Annual Report
73
Management’s Discussion and Analysis