Note 6. Fair Value Information and Non-Trading Derivatives
Fair Value Information
The following information is presented to help the reader gain an understanding of the relationship between the amounts reported in Merrill Lynch's financial statements and the related fair values. Specific accounting policies are discussed in Note 1.At December 29, 2000, $371 billion or 91% of Merrill Lynch's total assets and $298 billion or 77% of Merrill Lynch's total liabilities were carried at fair value or at amounts that approximate fair value. At December 31, 1999, $281 billion, or 91%, of Merrill Lynch's total assets and $224 billion, or 76%, of Merrill Lynch's total liabilities were carried at fair value or at amounts that approximate such values. Financial instruments that are carried at fair value include cash and cash equivalents, cash segregated for regulatory purposes or deposited with clearing organizations, trading assets and liabilities, available-for-sale and trading securities included in marketable investment securities, certain investments of insurance subsidiaries and certain other investments (see Notes 3 and 4 for information related to these instruments).
Financial instruments recorded at amounts that approximate fair value include receivables under resale agreements and securities borrowed transactions, receivables, payables under repurchase agreements and securities loaned, commercial paper and other short-term borrowings, demand and time deposits, and other payables. The fair value of these items is not materially sensitive to shifts in market interest rates because of the limited term to maturity of many of these instruments and/or their variable interest rates.
The following table shows financial instruments with carrying values that differ from their fair values.
- Merchant banking equity investments are non-qualifying for SFAS No. 115 purposes.
Fair value for merchant banking equity investments, including partnership interests (both included in Other investments on the Consolidated Balance Sheets), is estimated using a number of methods, including earnings multiples, cash flow analyses, and review of underlying financial conditions and other market factors. These instruments may be subject to restrictions (e.g., consent of other investors) that may limit Merrill Lynch's ability to realize currently the estimated fair value. Accordingly, Merrill Lynch's current estimate of fair value and the ultimate realization on these instruments may differ.
Fair value for loans made in connection with merchant banking activities, consisting primarily of senior and subordinated debt, is estimated using discounted cash flows. Merrill Lynch's estimate of fair value for other loans, notes, and mortgages is determined based on loan characteristics. For certain homogeneous categories of loans, including residential mortgages and home equity loans, fair value is estimated using market price quotations or previously executed transactions for securities backed by similar loans, adjusted for credit risk and other individual loan characteristics. For Merrill Lynch's variable-rate loan receivables, carrying value approximates fair value.
The fair values of long-term borrowings and related hedges are estimated using current market prices and pricing models.
The fair value of outstanding third party guarantees was $25 million and $41 million at December 29, 2000 and December 31, 1999, respectively.
Non-Trading Derivatives
The notional or contractual amounts of non-trading derivatives used to hedge market risk exposures on non-trading assets and liabilities at December 29, 2000 and December 31, 1999 follow:
- Includes $8 billion and $10 billion of instruments that also hedge currency risk and $3 billion and $4 billion of instruments that also hedge equity risk at year-end 2000 and 1999, respectively.
- Primarily hedging interest rate risk.
- Hedging currency risk.
The combined fair value of hedged items and related derivative hedges approximates their combined carrying value at year-end 2000 and 1999. Most of these derivatives are entered into with Merrill Lynch's derivative dealer subsidiaries. These derivatives are entered into in order to hedge interest rate, currency, and equity risks in the normal course of trading activities and have been appropriately match-transacted with third parties.
