Federal Reserve System Audits

The Board of Governors, the Federal Reserve Banks, and the Federal Reserve System as a whole are all subject to several levels of audit and review.

The Board's financial statements and internal controls over financial reporting are audited annually by an independent outside auditor retained by the Board's Office of Inspector General (OIG). The outside auditor also tests the Board's compliance with certain provisions of laws, regulations, and contracts affecting those statements.

The Reserve Banks' financial statements are audited annually by an independent outside auditor retained by the Board of Governors. In addition, the Reserve Banks are subject to annual examination by the Board. As discussed in section 6, "Federal Reserve Banks," the Board's examination includes a wide range of ongoing oversight activities conducted on site and off site by staff of the Board's Division of Reserve Bank Operations and Payment Systems.

In addition, the OIG conducts audits, investigations, and other reviews relating to the Board's programs and operations as well as to Board functions delegated to the Reserve Banks. Certain aspects of Federal Reserve operations are also subject to review by the Government Accountability Office.

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Board of Governors Financial Statements

The financial statements of the Board of Governors were audited by KPMG LLP, independent auditors, for the year ended December 31, 2015, and by Deloitte & Touche LLP, independent auditors, for the year ended December 31, 2014.

Board of Governors of the Federal Reserve System Balance Sheets

	As of December 31,
	2015	2014
Assets
Current assets:
Cash	$121,678,242	$69,243,271
Accounts receivable - net	3,032,839	4,800,677
Prepaid expenses and other assets	5,261,594	7,043,863
Total current assets	129,972,675	81,087,811
Noncurrent assets:
Property, equipment, and software - net	259,267,021	256,324,432
Other assets	1,184,136	1,484,570
Total noncurrent assets	260,451,157	257,809,002
Total	$390,423,832	$338,896,813
Liabilities and cumulative results of operations
Current liabilities:
Accounts payable and accrued liabilities	$16,314,721	$27,455,677
Accrued payroll and related taxes	29,000,736	22,699,129
Accrued annual leave	36,796,477	34,266,939
Capital lease payable	155,241	323,306
Unearned revenues and other liabilities	2,477,966	1,977,674
Total current liabilities	84,745,141	86,722,725
Long-term liabilities:
Capital lease payable	-	92,204
Retirement benefit obligation	54,691,940	45,461,450
Postretirement benefit obligation	13,291,034	12,969,115
Postemployment benefit obligation	8,620,208	8,850,310
Deferred rent	40,315,439	40,151,309
Other liabilities	-	253,938
Total long-term liabilities	116,918,621	107,778,326
Total liabilities	201,663,762	194,501,051
Cumulative results of operations:
Fund balance	209,353,299	163,920,431
Accumulated other comprehensive loss	(20,593,229)	(19,524,669)
Total cumulative results of operations	188,760,070	144,395,762
Total	$390,423,832	$338,896,813
See notes to financial statements.

Board of Governors of the Federal Reserve System Statements of Operations

	For the years ended December 31,
	2015	2014
Board operating revenues:
Assessments levied on Federal Reserve Banks for Board operating expenses and capital expenditures	$705,000,000	$590,000,000
Other revenues	19,139,153	17,757,157
Total operating revenues	724,139,153	607,757,157
Board operating expenses:
Salaries	385,055,415	351,495,519
Retirement, insurance, and benefits	88,462,323	78,111,357
Contractual services and professional fees	49,570,438	45,252,522
Depreciation, amortization, and net gains or losses on disposals	41,343,515	25,411,096
Travel	16,793,617	15,467,118
Non-capital furniture and equipment, postage, supplies	12,458,662	12,010,066
Data, news, and research	16,839,166	12,755,928
Utilities	10,232,994	10,511,203
Software	14,606,064	13,532,082
Rentals of space	25,227,322	16,518,231
Repairs and maintenance	6,923,745	6,504,496
Other expenses	11,193,024	9,883,686
Total operating expenses	678,706,285	597,453,304
Net income	45,432,868	10,303,853
Currency costs:
Assessments levied or to be levied on Federal Reserve Banks for currency costs	689,198,549	707,402,059
Expenses for costs related to currency	689,198,549	707,402,059
Currency assessments over (under) expenses	-	-
Bureau of Consumer Financial Protection (Bureau):
Assessments levied on the Federal Reserve Banks for the Bureau	489,700,000	563,000,000
Transfers to the Bureau	489,700,000	563,000,000
Bureau assessments over (under) transfers	-	-
Office of Financial Research (Office):
Assessments transferred to the Federal Reserve Banks for the Office	-	1,512,822
Transfers from the Office	-	1,512,822
Office assessments over (under) transfers	-	-
Total net income	45,432,868	10,303,853
Other comprehensive income:
Pension and other postretirement benefit plans:
Amortization of prior service cost	605,483	605,483
Amortization of net actuarial loss	2,046,251	481,850
Net actuarial loss arising during the year	(3,720,294)	(13,361,050)
Total other comprehensive loss	(1,068,560)	(12,273,717)
Comprehensive income (loss)	44,364,308	(1,969,864)
Cumulative results of operations - beginning of year	144,395,762	146,365,626
Cumulative results of operations - end of year	$188,760,070	$144,395,762
See notes to financial statements.

Board of Governors of the Federal Reserve System Statements of Cash Flows

	For the years ended December 31,
	2015	2014
Cash flows from operating activities:
Net income	$45,432,868	$10,303,853
Adjustments to reconcile results of operations to net cash provided by (used in) operating activities:
Depreciation and amortization	34,688,752	25,132,858
Net loss on disposal of property and equipment	6,654,763	278,238
Other additional non-cash adjustments to results of operations	(237,927)	(308,326)
(Increase) decrease in assets:
Accounts receivable	1,767,837	3,110,335
Prepaid expenses	1,782,269	(2,446,206)
Other assets	300,434	498,795
Increase (decrease) in liabilities:
Accounts payable and accrued liabilities	(3,089,920)	(770,233)
Accrued payroll and related taxes	6,301,607	(2,406,461)
Accrued annual leave	2,529,538	2,978,502
Unearned revenues and other liabilities	500,292	(531,528)
Net retirement benefit obligation	8,292,457	4,326,019
Net postretirement benefit obligation	191,392	406,819
Net postemployment benefit obligation	(230,102)	359,389
Deferred rent	(1,316,365)	539,410
Other long-term liabilities	(253,938)	(24,045)
Net cash provided by operating activities	103,313,957	41,447,419
Cash flows from investing activities:
Capital expenditures	(50,591,423)	(62,703,485)
Net cash used in investing activities	(50,591,423)	(62,703,485)
Cash flows from financing activities:
Capital lease payments	(287,563)	(351,980)
Net cash used in financing activities	(287,563)	(351,980)
Net increase (decrease) in cash	52,434,971	(21,608,046)
Cash balance - beginning of year	69,243,271	90,851,317
Cash balance - end of year	$121,678,242	$69,243,271
See notes to financial statements.

Board of Governors of the Federal Reserve System Notes to Financial Statements as of and for the Years Ended December 31, 2015 and 2014

(1) Structure

The Federal Reserve System (the System) was established by Congress in 1913 and consists of the Board of Governors (the Board), the Federal Open Market Committee, the twelve regional Federal Reserve Banks (Reserve Banks), the Federal Advisory Council, and the private commercial banks that are members of the System. The Board, unlike the Reserve Banks, was established as a federal government agency and is located in Washington, D.C. The Board has established two other committees that directly provide perspectives and input from various sectors of the economy: the Community Advisory Council and the Community Depository Institutions Advisory Council.

The Board is required by the Federal Reserve Act (the Act) to report its operations to the Speaker of the House of Representatives. The Act also requires the Board, each year, to order a financial audit of each Reserve Bank and to publish each week a statement of the financial condition of each Reserve Bank and a combined statement for all of the Reserve Banks. Accordingly, the Board believes that the best financial disclosure consistent with law is achieved by issuing separate financial statements for the Board and for the Reserve Banks. Therefore, the accompanying financial statements include only the results of operations and activities of the Board. Combined financial statements for the Reserve Banks are included in the Board's annual report to the Speaker of the House of Representatives and weekly statements are available on the Board's public website.

The Dodd-Frank Wall Street Reform and Consumer Financial Protection Act of 2010 (Dodd-Frank Act) established the Bureau of Consumer Financial Protection (Bureau) as an independent bureau within the System and designated the Board's Office of Inspector General (OIG) as the OIG for the Bureau. As required by the Dodd-Frank Act, the Board transferred certain responsibilities to the Bureau. The Dodd-Frank Act requires the Board to fund the Bureau from the combined earnings of the System. The Dodd-Frank Act also created the Financial Stability Oversight Council (FSOC), of which the Chairman of the Board is a member, as well as the Office of Financial Research (Office) within the U.S. Department of Treasury (Treasury) to provide support to the FSOC and the member agencies. The Dodd-Frank Act required that the Board provide funding for the FSOC and the Office until July 2012. Section 1017 of the Dodd-Frank Act provides that the financial statements of the Bureau are not to be consolidated with those of the Board or the System; the Board has also determined that neither the FSOC nor the Office should be consolidated in the Board's financial statements. Accordingly, the Board's financial statements do not include financial data of the Bureau, the FSOC, or the Office other than the funding that the Board is required by the Dodd-Frank Act to provide.

(2) Operations and Services

The Board's responsibilities require thorough analysis of domestic and international financial and economic developments. The Board carries out those responsibilities in conjunction with the Reserve Banks and the Federal Open Market Committee. The Board also exercises general oversight of the operations of the Reserve Banks and exercises broad responsibility in the nation's payments system. Policy regarding open market operations is established by the Federal Open Market Committee. However, the Board has sole authority over changes in reserve requirements, and it must approve any change in the discount rate initiated by a Reserve Bank. The Board also plays a major role in the supervision and regulation of the U.S. financial system. It has supervisory responsibilities for state-chartered banks that are members of the System, bank holding companies, savings and loan holding companies, foreign activities of member banks, U.S. activities of foreign banks, and any nonbank financial companies the FSOC has determined should be supervised by the Board. Although the Dodd-Frank Act gave the Bureau general rule-writing responsibility for federal consumer financial laws, the Board retains rule-writing responsibility under the Community Reinvestment Act and other specific statutory provisions. The Board also enforces the requirements of federal consumer financial laws for state member banks with assets of $10 billion or less. In addition, the Board enforces certain other consumer laws at all state member banks, regardless of size.

(3) Significant Accounting Policies

Basis of Accounting -- The Board prepares its financial statements in accordance with accounting principles generally accepted in the United States (GAAP).

Revenues -- The Federal Reserve Act authorizes the Board to levy an assessment on the Reserve Banks to fund its operations. The Board allocates the assessment to each Reserve Bank based on the Reserve Bank's capital and surplus balances. The Board recognizes the assessment in the period in which it is assessed.

Assessments to Fund the Bureau -- The Board assesses the Reserve Banks for the funds transferred to the Bureau based on each Reserve Bank's capital and surplus balances. The Board recognizes the assessment in the period in which it is assessed. These assessments and transfers are reported separately from the Board's operating activities in the Board's Statements of Operations.

Assessments for Supervision and Regulation (S&R) -- The Dodd-Frank Act directs the Board to collect assessments, fees, or other charges equal to the total expenses the Board estimates are necessary or appropriate to carry out the supervisory and regulatory responsibilities of the Board for bank holding companies and savings and loan holding companies with total consolidated assets of $50 billion or more and nonbank financial companies designated for Board supervision by the FSOC. As a collecting entity, the Board does not recognize the S&R assessments as revenue nor does the Board use the collections to fund Board expenses; the funds are transferred to the Treasury.

System Earning Remittances to the Treasury -- Beginning in December 2015, the Fixing America's Surface Transportation Act (FAST Act) requires that any amount of surplus funds of the Reserve Banks that exceed or would exceed $10 billion be transferred to the United States Treasury (Treasury) via the Board. As an intermediary transfer agent, the Board does not recognize the remittances as revenue nor does the Board use the remittances to fund Board expenses. Additional information and disclosures regarding these remittances to the Treasury can be found in the combined financial statements of the Federal Reserve Banks.

Civil Money Penalties -- The Board has enforcement authority over the financial institutions it supervises and their affiliated parties, including the authority to assess civil money penalties. As directed by statute, all civil money penalties that are assessed and collected by the Board are remitted to either the Treasury or Federal Emergency Management Agency (FEMA). As a collecting entity, the Board does not recognize civil money penalties as revenue nor does the Board use civil money penalties to fund Board expenses. Civil money penalties whose collection is contingent upon fulfillment of certain conditions in the enforcement action are not recorded in the Board's financial records. Checks for civil money penalties made payable to the National Flood Insurance Program are forwarded to FEMA and are not recorded in the Board's financial records.

Currency Costs -- The Board issues the nation's currency (in the form of Federal Reserve notes), and the Reserve Banks distribute currency through depository institutions. The Board incurs expenses and assesses the Reserve Banks for the expenses related to producing, issuing, and retiring Federal Reserve notes as well as providing educational services. The assessment is allocated based on each Reserve Bank's share of the number of notes comprising the System's net liability for Federal Reserve notes on December 31 of the prior year. The Board recognizes the assessment in the period in which it is assessed. These expenses and assessments are reported separately from the Board's operating activities in the Board's Statements of Operations.

Accounts Receivable and Allowance for Doubtful Accounts -- Accounts receivable are recorded when amounts are billed but not yet received and are shown net of the allowance for doubtful accounts. Accounts receivable considered uncollectible are charged against the allowance account in the year they are deemed uncollectible. The allowance for doubtful accounts is adjusted monthly, based upon a review of outstanding receivables.

Prepaid Expenses -- The Board books expenses as prepaid for costs paid in advance that will be expensed with the passage of time or upon the occurrence of a triggering event in future periods.

Property, Equipment, and Software -- The Board's property, equipment, and software are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are calculated on a straight-line basis over the estimated useful lives of the assets, which range from three to ten years for furniture and equipment, ten to fifty years for building equipment and structures, and two to five years for software. Upon the sale or other disposition of a depreciable asset, the cost and related accumulated depreciation or amortization are removed and any gain or loss is recognized. Construction in process includes costs incurred for short-term and long-term projects that have not been placed into service; the majority of the balance represents long-term building enhancement projects.

Art Collections -- The Board has collections of works of art, historical treasures, and similar assets. These collections are maintained and held for public exhibition in furtherance of public service. Proceeds from any sales of collections are used to acquire other items for collections. The cost of collections purchased by the Board is charged to expense in the year purchased and donated collection items are not recorded. The value of the Board's collections has not been determined.

Deferred Rent -- Leases for certain space contain scheduled rent increases over the term of the lease. Rent abatements, lease incentives, and scheduled rent increases must be considered in determining the annual rent expense to be recognized. The deferred rent represents the difference between the actual lease payments and the rent expense recognized. Lease incentives impact deferred rent and are non-cash transactions.

Estimates -- The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant items subject to such estimates include useful lives of property, equipment, and software; allowance for doubtful accounts receivable; accounts payable; retirement benefit obligation; postretirement benefit obligation; postemployment obligation; and commitments and contingencies.

Benefit Obligations -- The Board records annual amounts relating to its pension, postretirement, and postemployment plans based on calculations that incorporate various actuarial and other assumptions, including discount rates, mortality, compensation increases, and health-care cost trends rates. The Board reviews the assumptions on an annual basis and makes modifications to the assumptions based on a variety of factors. The effect of the modifications to the assumptions is recorded in accumulated other comprehensive income and amortized to net periodic cost over future periods, which is presented in the accumulated other comprehensive income (loss) footnote.

Commitments and Contingencies -- Liabilities for loss contingencies arising from claims, assessments, litigation, and other sources are recorded when it is probable that a liability has been incurred and the amount can be reasonably estimated. Legal costs incurred in connection with loss contingencies are expensed as incurred.

Tax Exempt Status -- The Board, as a federal government entity, is not subject to state or local income taxes. Federal income tax on corporations does not apply to the Board.

Recently Issued Accounting Standards -- In April 2015, the Financial Accounting Standards Board (FASB) issued ASU 2015-05, Intangibles--Goodwill and Other--Internal-Use Software(Subtopic 350-40): Customer's Accounting for Fees Paid in a Cloud Computing Arrangement. This update provides guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. This update is effective for the Board for the year ending December 31, 2016, and is not expected to have a material effect on the Board's financial statements.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). The guidance is applicable to all contracts for the transfer of goods or services regardless of industry or type of transaction. This update requires recognition of revenue in a manner that reflects the consideration that the entity expects to receive in return for the transfer of goods or services to customers. In August 2015, the FASB issued 2015-14, Revenue from Contracts with Customers(Topic 606): Deferral of the Effective Date. This update is effective for the Board for the year ending December 31, 2019, and is not expected to have a material effect on the Board's financial statements since the Board reports annually and satisfies all material performance obligations prior to year-end.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). This update revises the model to assess how a lease should be classified and provides guidance for lessees, requiring lessees to present right-of-use assets and lease liabilities on the balance sheet. The update is effective no later than the year ended December 31, 2020, although earlier adoption is permitted. The Board is continuing to evaluate the effect of this new guidance on its consolidated financial statements.

(4) Property, Equipment, and Software

The following is a summary of the components of the Board's property, equipment, and software, at cost, less accumulated depreciation and amortization as of December 31, 2015 and 2014:

	As of December 31,
	2015	2014
Land	$18,640,314	$18,640,314
Buildings and improvements	300,166,433	282,596,215
Construction in process	10,920,879	12,225,222
Furniture and equipment	82,888,372	79,542,184
Software in use	40,987,546	38,309,794
Software in process	5,275,429	1,040,801
Vehicles	2,098,155	1,835,191
Subtotal	460,977,128	434,189,721
Less accumulated depreciation and amortization	(201,710,107)	(177,865,292)
Property, equipment, and software - net	$259,267,021	$256,324,429

Construction in process include costs incurred in the current or prior years for long-term projects and building enhancements. In 2015, the Board recognized a loss of $6 million related to changes in an ongoing capital project; the loss is reflected on the Statements of Operations and the Statements of Cash Flows.

(5) Leases

Capital Leases -- The Board entered into capital leases for copier equipment in 2012; the lease terms extend through 2016. In 2014, the Board terminated a portion of those leases of $313,000, which is a non-cash event excluded from the Statements of Cash Flows. Furniture and equipment includes capitalized leases of $1,258,000 as of 2015 and 2014. Accumulated depreciation includes $1,170,000 and $855,000 related to assets under capital leases as of 2015 and 2014, respectively. The depreciation expense for leased equipment is $315,000 and $339,000 for 2015 and 2014, respectively.

The future minimum lease payments required under the capital leases and the present value of the net minimum lease payments as of December 31, 2015, are as follows:

Year Ended December 31,	Amount
2016	197,004
Total minimum lease payments	197,004
Less amount representing maintenance	(41,428)
Net minimum lease payments	155,576
Less amount representing interest	(335)
Present value of net minimum lease payments	155,241
Less current maturities of capital lease payments	(155,241)
Long-term capital lease obligations	$-

Operating Leases -- The Board has entered into operating leases to secure office, training, data center, and warehouse space. Several of the leases are with Reserve Banks and other governmental agencies. Minimum annual payments under the multiyear operating leases having an initial or remaining noncancelable lease term in excess of one year at December 31, 2015, are as follows:

Years Ended December 31,
2016	$27,324,938
2017	28,323,075
2018	29,002,059
2019	28,358,534
After 2019	95,014,040
	$208,022,646

Rental expenses under the multiyear operating leases were $24,291,000 and $15,854,000 for the years ended December 31, 2015 and 2014, respectively.

Deferred Rent -- The Board recorded non-cash lease incentives of $1,480,000 and $17,829,000 for the years ended December 31, 2015 and 2014, respectively.

(6) Retirement Benefits

Substantially all of the Board's employees participate in the Retirement Plan for Employees of the Federal Reserve System (the System Plan). The System Plan provides retirement benefits to employees of the Board, the Reserve Banks, the Office of Employee Benefits of the Federal Reserve System (OEB), and certain employees of the Bureau. The Federal Reserve Bank of New York (FRBNY), on behalf of the System, recognizes the net assets and costs associated with the System Plan in its financial statements. Costs associated with the System Plan were not redistributed to the Board during the years ended December 31, 2015 and 2014.

Employees of the Board who became employed prior to 1984 are covered by a contributory defined benefits program under the System Plan. Employees of the Board who became employed after 1983 are covered by a non-contributory defined benefits program under the System Plan. FRBNY, on behalf of the System, funded $480 million during each of the years ended December 31, 2015 and 2014. The Board was not assessed a contribution for 2015 or 2014.

In October 2014, the Society of Actuaries released new mortality tables (RP-2014) and in October 2015 and 2014 released new mortality projection scales (MP-2015 and MP-2014, respectively) for use in valuations of benefits liabilities. The Board adopted the new RP-2014 mortality tables and MP-2014 mortality projection scales, adjusted based on the System's recent mortality experience and retirement rates of System retirees, which included the Board's workforce.

Benefits Equalization Plan -- Board employees covered under the System Plan are also covered under a Benefits Equalization Plan (BEP). Benefits paid under the BEP are limited to those benefits that cannot be paid from the System Plan due to limitations imposed by the Internal Revenue Code. Activity for the BEP as of December 31, 2015 and 2014, is summarized in the following tables:

	2015	2014
Change in projected benefit obligation:
Benefit obligation - beginning of year	$20,727,400	$12,673,892
Service cost	2,409,059	1,125,134
Interest cost	1,245,933	705,339
Plan participants' contributions	-	-
Actuarial loss	3,653,624	6,238,231
Gross benefits paid	(40,388)	(15,196)
Benefit obligation - end of year	$27,995,628	$20,727,400
Accumulated benefit obligation - end of year	$3,651,148	$2,327,825
Weighted-average assumptions used to determine benefit obligation as of December 31:
Discount rate	4.67%	4.25%
Rate of compensation increase	4.00%	4.00%
Change in plan assets:
Fair value of plan assets - beginning of year	$-	$-
Employer contributions	40,388	15,196
Plan participants' contributions	-	-
Gross benefits paid	(40,388)	(15,196)
Fair value of plan assets - end of year	$-	$-
Funded status:
Reconciliation of funded status - end of year:
Fair value of plan assets	$-	$-
Benefit obligation (current)	55,947	31,281
Benefit obligation (noncurrent)	27,939,681	20,696,119
Funded status	(27,995,628)	(20,727,400)
Amount recognized - end of year	$(27,995,628)	$(20,727,400)
Amounts recognized in the balance sheets consist of:
Asset	$-	$-
Liability - current	(55,947)	(31,281)
Liability - noncurrent	(27,939,681)	(20,696,119)
Net amount recognized	$(27,995,628)	$(20,727,400)
Amounts recognized in accumulated other comprehensive income consist of:
Net actuarial loss	$7,727,778	$4,769,469
Prior service cost	322,032	421,610
Net amount recognized	$8,049,810	$5,191,079

Expected cash flows:
Expected employer contributions - 2016	$55,947
Expected benefit payments: *
2016	$55,947
2017	$147,044
2018	$175,007
2019	$206,773
2020	$245,437
2021-2025	$2,215,387

*.Expected benefit payments to be made by the Board. Return to table

	2015	2014
Components of net periodic benefit cost:
Service cost	$2,409,059	$1,125,134
Interest cost	1,245,933	705,339
Expected return on plan assets	-	-
Amortization:
Actuarial (gain) loss	$695,315	$(65,534)
Prior service cost	99,578	99,578
Net periodic benefit cost	$4,449,885	$1,864,517
Weighted-average assumptions used to determine net periodic benefit cost:
Discount rate	4.25%	5.26%
Rate of compensation increase	4.00%	4.50%
Other changes in plan assets and benefit obligations recognized in other comprehensive income:
Current year actuarial loss	$3,653,624	$6,238,231
Amortization of prior service cost	(99,578)	(99,578)
Amortization of actuarial gain (loss)	(695,315)	65,534
Total recognized in other comprehensive loss	$2,858,731	$6,204,187
Total recognized in net periodic benefit cost and other comprehensive income	$7,308,616	$8,068,704

Estimated amounts that will be amortized from accumulated other comprehensive income into net periodic benefit cost (credit) in 2016 are shown below:

Net actuarial loss	$382,763
Prior service cost	99,578
Total	$482,341

Pension Enhancement Plan -- The Board also provides another non-qualified plan for officers of the Board. The retirement benefits covered under the Pension Enhancement Plan (PEP) increase the pension benefit calculation from 1.8 percent above the Social Security integration level to 2.0 percent. Activity for the PEP as of December 31, 2015 and 2014, is summarized in the following tables:

	2015	2014
Change in projected benefit obligation:
Benefit obligation - beginning of year	$24,857,488	$17,593,667
Service cost	1,037,235	676,722
Interest cost	1,178,955	961,720
Plan participants' contributions	-	-
Actuarial loss	22,672	5,824,802
Gross benefits paid	(220,089)	(199,423)
Benefit obligation - end of year	$26,876,261	$24,857,488
Accumulated benefit obligation - end of year	$21,116,567	$20,463,136
Weighted-average assumptions used to determine benefit obligation as of December 31:
Discount rate	4.52%	4.12%
Rate of compensation increase	4.00%	4.00%
Change in plan assets:
Fair value of plan assets - beginning of year	$-	$-
Employer contributions	220,089	199,423
Plan participants' contributions	-	-
Gross benefits paid	(220,089)	(199,423)
Fair value of plan assets - end of year	$-	$-
Funded status:
Reconciliation of funded status - end of year:
Fair value of plan assets	$-	$-
Benefit obligation - current	316,841	279,260
Benefit obligation - noncurrent	26,559,420	24,578,228
Funded status	(26,876,261)	(24,857,488)
Amount recognized - end of year	$ (26,876,261)	$ (24,857,488)
Amounts recognized in the balance sheets consist of:
Asset	$-	$-
Liability - current	(316,841)	(279,260)
Liability - noncurrent	(26,559,420)	(24,578,228)
Net amount recognized	$(26,876,261)	$(24,857,488)
Amounts recognized in accumulated other comprehensive income consist of:
Net actuarial loss	$9,519,292	$10,647,540
Prior service cost	586,303	1,117,698
Net amount recognized	$10,105,595	$11,765,238

Expected cash flows:
Expected employer contributions - 2016	$316,841
Expected benefit payments: *
2016	$316,841
2017	$400,581
2018	$501,407
2019	$617,820
2020	$741,206
2021-2025	$5,793,388

*.Expected benefit payments to be made by the Board. Return to table

	2015	2014
Components of net periodic benefit cost:
Service cost	$1,037,235	$676,722
Interest cost	1,178,955	961,720
Expected return on plan assets	-	-
Amortization:
Actuarial loss	1,150,920	491,730
Prior service cost	531,395	531,395
Net periodic benefit cost	$3,898,505	$2,661,567
Weighted-average assumptions used to determine net periodic benefit cost:
Discount rate	4.12%	5.06%
Rate of compensation increase	4.00%	4.50%
Other changes in plan assets and benefit obligations recognized in other comprehensive income:
Current year actuarial loss	$22,672	$5,824,802
Amortization of prior service cost	(531,395)	(531,395)
Amortization of actuarial loss	(1,150,920)	(491,730)
Total recognized in other comprehensive (income) loss	$(1,659,643)	$4,801,677
Total recognized in net periodic benefit cost and other comprehensive income	$2,238,862	$7,463,244

Estimated amounts that will be amortized from accumulated other comprehensive income into net periodic benefit cost (credit) in 2016 are shown below:

Net actuarial loss	$710,100
Prior service cost	531,395
Total	$1,241,495

The total accumulated retirement benefit obligation includes a liability for a supplemental retirement agreement and a benefits equalization plan under the System's Thrift Plan. The total obligation as of December 31, 2015 and 2014, is summarized in the following table:

	2015	2014
Retirement benefit obligation:
Benefit obligation - BEP	$27,995,628	$20,727,400
Benefit obligation - PEP	26,876,261	24,857,488
Additional benefit obligations	192,839	187,103
Total accumulated retirement benefit obligation	$55,064,728	$45,771,991

A relatively small number of Board employees participate in the Civil Service Retirement System or the Federal Employees' Retirement System. These defined benefit plans are administered by the U.S. Office of Personnel Management, which determines the required employer contribution levels. The Board's contributions to these plans totaled $913,000 and $891,000 in 2015 and 2014, respectively. The Board has no liability for future payments to retirees under these programs and is not accountable for the assets of the plans.

Employees of the Board may also participate in the System's Thrift Plan or Roth 401(k). Board contributions to members' accounts were $24,170,000 and $21,982,000 in 2015 and 2014, respectively.

(7) Postretirement Benefits

The Board provides certain life insurance programs for its active employees and retirees. Activity as of December 31, 2015 and 2014, is summarized in the following tables:

	2015	2014
Change in benefit obligation:
Benefit obligation - beginning of year	$13,384,294	$11,693,311
Service cost	177,332	163,420
Interest cost	549,919	582,779
Plan participants' contributions	-	-
Actuarial loss	43,998	1,298,018
Gross benefits paid	(377,997)	(353,234)
Benefit obligation - end of year	$13,777,546	$13,384,294
Weighted-average assumptions used to determine benefit obligation as of December 31 - discount rate	4.41%	4.05%
Change in plan assets:
Fair value of plan assets - beginning of year	$-	$-
Employer contributions	377,977	353,234
Gross benefits paid	(377,997)	(353,234)
Fair value of plan assets - end of year	$-	$-
Funded status:
Reconciliation of funded status - end of year:
Fair value of plan assets	$-	$-
Benefit obligation - current	486,512	415,179
Benefit obligation - noncurrent	13,291,034	12,969,115
Funded status	(13,777,546)	(13,384,294)
Amount recognized - end of year	$(13,777,546)	$(13,384,294)
Amounts recognized in the balance sheets consist of:
Asset	$-	$-
Liability - current	(486,512)	(415,179)
Liability - noncurrent	(13,291,034)	(12,969,115)
Net amount recognized	$(13,777,546)	$(13,384,294)
Amounts recognized in accumulated other comprehensive income consist of:
Net actuarial loss	$2,586,908	$2,742,925
Prior service credit	(149,084)	(174,574)
Net amount recognized	$2,437,824	$2,568,351

Expected cash flows:
Expected employer contributions - 2016	$486,512
Expected benefit payments: *
2016	$ 486,512
2017	$515,391
2018	$540,539
2019	$560,776
2020	$585,513
2021-2025	$3,381,199

*. Expected benefit payments to be made by the Board. Return to table

	2015	2014
Components of net periodic benefit cost:
Service cost	$177,332	$163,420
Interest cost	549,919	582,779
Expected return on plan assets	-	-
Amortization:
Actuarial loss	200,016	55,654
Prior service credit	(25,490)	(25,490)
Net periodic benefit cost	$901,777	$776,363
Weighted-average assumptions used to determine net periodic benefit cost - discount rate	4.05%	4.97%
Other changes in plan assets and benefit obligations recognized in other comprehensive income:
Current year actuarial loss	$43,998	$1,298,017
Amortization of prior service credit	25,490	25,490
Amortization of actuarial loss	(200,016)	(55,654)
Total recognized in other comprehensive (income) loss	$(130,528)	$1,267,853
Total recognized in net periodic benefit cost and other comprehensive income	$771,249	$2,044,216

Estimated amounts that will be amortized from accumulated other comprehensive income into net periodic benefit cost (credit) in 2016 are shown below:

Net actuarial loss	$164,632
Prior service credit	(25,490)
Total	$139,142

(8) Postemployment Benefits

The Board provides certain postemployment benefits to eligible former or inactive employees and their dependents during the period subsequent to employment but prior to retirement. Postemployment costs were actuarially determined using a December 31 measurement date and discount rates of 2.70 percent and 2.47 percent as of December 31, 2015 and 2014, respectively. The net periodic postemployment benefit cost recognized by the Board as of December 31, 2015 and 2014, was $740,000 and $1,448,000, respectively.

(9) Accumulated Other Comprehensive Income (Loss)

A reconciliation of beginning and ending balances of accumulated other comprehensive income (loss) for the years ended December 31, 2015 and 2014, is as follows:

	Amount Related to Defined Benefit Retirement Plans	Amount Related to Postretirement Benefits Other Than Pensions	Total Accumulated Other Comprehensive Income (Loss)
Balance - January 1, 2014	$(5,950,453)	$(1,300,499)	$(7,250,952)
Change in accumulated other comprehensive income (loss):
Net actuarial loss arising during the year	(12,063,033)	(1,298,017)	(13,361,050)
Other comprehensive income before reclassifications	(12,063,033)	(1,298,017)	(13,361,050)
Amortization of prior service (credit) costs (a)(b) (a) (b)	630,973	(25,490)	605,483
Amortization of net actuarial loss (a)(b)	426,196	55,654	481,850
Amounts reclassified from accumulated other comprehensive income	1,057,169	30,164	1,087,333
Change in accumulated other comprehensive loss	(11,005,864)	(1,267,853)	(12,273,717)
Balance - December 31, 2014	(16,956,317)	(2,568,352)	(19,524,669)
Change in accumulated other comprehensive income (loss):
Net actuarial loss arising during the year (a)	(3,676,296)	(43,998)	(3,720,294)
Other comprehensive income before reclassifications	(3,676,296)	(43,998)	(3,720,294)
Amortization of prior service (credit) costs (a)(b)	630,973	(25,490)	605,483
Amortization of net actuarial loss (a)(b)	1,846,235	200,016	2,046,251
Amounts reclassified from accumulated other comprehensive income	2,477,208	174,526	2,651,734
Change in accumulated other comprehensive income (loss)	(1,199,088)	130,528	(1,068,560)
Balance - December 31, 2015	$(18,155,405)	$(2,437,824)	$(20,593,229)

(a).These components of accumulated other comprehensive income are included in the computation of net periodic pension cost (see Notes 6 and 7 for additional details). Return to table

(b).These components of accumulated other comprehensive income are reflected in the "Retirement, insurance, and benefits" line on the Statements of Operations. Return to table

(10) Selected Transactions with the Reserve Banks

The Board performs certain functions for the Reserve Banks in conjunction with its responsibilities for the System, and the Reserve Banks provide certain administrative functions for the Board. The Board assesses the Reserve Banks for its operations, to include expenses related to its currency responsibilities, as well as for the funding the Board is required to provide to the Bureau and the Office. Activity related to the Board and Reserve Banks is summarized in the following table:

	2015	2014
For the years ended December 31:
Assessments levied or to be levied on Reserve Banks for:
Currency expenses	$689,198,549	$707,402,059
Board operations	705,000,000	590,000,000
Transfers of funds to the Bureau	489,700,000	563,000,000
Total assessments levied or to be levied on Reserve Banks	$1,883,898,549	$1,860,402,059
Funds returned from the Office and transferred to the Reserve Banks	$-	$1,512,822
Board expenses charged to the Reserve Banks for data processing and office space	$326,953	$364,165
Reserve Bank expenses charged to the Board:
Data processing and communication	$1,226,875	$1,250,884
Data center	858,985	$412,365
Office space	206,167	468,463
Contingency site	1,281,688	1,247,766
Total Reserve Bank expenses charged to the Board	$3,573,715	$3,379,478
As of December 31:
Accounts receivable due from the Reserve Banks	$283,072	$495,018
Accounts payable due to the Reserve Banks	$356,937	$415,314

The Board contracted for audit services on behalf of entities that are included in the combined financial statements of the Reserve Banks. The entities reimburse the Board for the cost of the audit services. The Board accrued liabilities of $39,000 in audit services and recorded net receivables of $39,000 December 31, 2014. The Board did not have accrued liabilities in audit services or recorded net receivables as of December 31, 2015.

The OEB administers certain System benefit plans on behalf of the Board and the Reserve Banks, and costs associated with the OEB's activities are assessed to the Board and Reserve Banks. The Board was assessed $2,615,000 and $2,503,000 for the years ended December 31, 2015 and 2014, respectively. Activity related to the Board and the OEB is summarized in the following table:

	2015	2014
As of December 31:
Accounts receivable due from the Office of Employee Benefits	$1,068,126	$1,338,349
Accounts payable due to the Office of Employee Benefits	$110,659	$79,528

(11) Federal Financial Institutions Examination Council

The Board is one of the five member agencies of the Federal Financial Institutions Examination Council (the Council), and currently performs certain administrative functions for the Council. The five agencies that are represented on the Council are the Board, Federal Deposit Insurance Corporation, National Credit Union Administration, Office of the Comptroller of the Currency, and the Bureau.

The Board's financial statements do not include financial data for the Council. Activity related to the Board and Council is summarized in the following table:

	2015	2014
For the years ended December 31:
Council expenses charged to the Board:
Assessments for operating expenses	$163,987	$154,633
Assessments for examiner education	1,228,101	1,047,803
Central Data Repository	1,049,087	1,197,920
Home Mortgage Disclosure Act/Community Reinvestment Act	874,584	882,464
Uniform Bank Performance Report	211,247	224,797
Total Council expenses charged to the Board	$3,527,006	$3,507,617
Board expenses charged to the Council:
Data processing related services	$3,997,421	$4,611,282
Other administrative services	303,000	245,000
Total Board expenses charged to the Council	$4,300,421	$4,856,282
As of December 31:
Accounts receivable due from the Council	$223,553	$221,749
Accounts payable due to the Council	$297,539	$132,125

(12) The Bureau of Consumer Financial Protection

Beginning July 2011, section 1017 of the Dodd-Frank Act requires the Board to fund the Bureau from the combined earnings of the System, in an amount determined by the Director of the Bureau to be reasonably necessary to carry out the authorities of the Bureau under federal consumer financial law, taking into account such other sums made available to the Bureau from the preceding year (or quarter of such year). The Dodd-Frank Act limits the amount to be transferred each fiscal year to a fixed percentage of the System's total operating expenses. The Bureau, in turn, transfers funds to the Board to fund their share of OIG operations. These transactions resulted in net amounts to the Bureau of $12,900,000 and $11,000,000 during calendar years 2015 and 2014, respectively.

(13) The Office of Financial Research

Section 155(c) of the Dodd-Frank Act requires the Board to provide an amount sufficient to cover the expenses of the Office for the two-year period following the date of the enactment (July 21, 2010). The expenses of the FSOC are included in the expenses of the Office. Over the two-year period, the Board provided $91,515,944 to cover the Office's expenses. In 2012, based on its review of actual expenditures and accruals through the end of the two-year period, the Office determined that $39,921,702 should be returned to the Board; the Board subsequently received and returned that amount to the Reserve Banks. At that time, the Office noted that an additional adjustment may be needed based upon the actual expenses incurred for work under the Dodd-Frank Act. In 2014, the Office performed its final review and determined that an additional $1,512,822 should be returned to the Board. That amount was returned to the Board and transferred to the Reserve Banks in September 2014 and no further financial activity is expected.

(14) Currency Costs

The Bureau of Engraving and Printing (BEP) is the sole supplier for currency printing and also provides currency retirement and meaningful access services. The Board provides or contracts for other services associated with currency, such as shipping, education, and quality assurance. The currency costs incurred by the Board for the years ended December 31, 2015 and 2014, are reflected in the following table:

	2015	2014
Expenses related to BEP services:
Printing	$637,346,480	$656,810,224
Retirement	3,922,414	3,500,408
Meaningful access program	2,679,698	808,017
Subtotal related to BEP services	$643,948,592	$661,118,649
Other currency expenses:
Shipping	$23,357,229	$27,460,180
Research and development	4,988,654	5,096,781
Quality assurance services	14,575,554	11,690,796
Education services	2,328,520	2,035,653
Subtotal other currency expenses	$45,249,957	$46,283,410
Total currency expenses	$689,198,549	$707,402,059

(15) Commitments and Contingencies

Commitments -- The Board has entered into an agreement with the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency, through the Council, to fund a portion of the enhancements and maintenance fees for a central data repository project that requires maintenance through 2019 and one two-year option period. The estimated Board expense to support this effort is $5 million.

Litigation and Contingent Liabilities -- The Board is subject to contingent liabilities which arise from litigation cases and various business contracts. These contingent liabilities arise in the normal course of operations and their ultimate disposition is unknown. Based on information currently available to management, it is management's opinion that the expected outcome of these matters, in the aggregate, will not have a material adverse effect on the financial statements.

(16) Subsequent Events

There were no subsequent events that require adjustments to or disclosures in the financial statements as of December 31, 2015. Subsequent events were evaluated through March 7, 2016, which is the date the financial statements were available to be issued.

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Federal Reserve Banks Combined Financial Statements

The combined financial statements of the Federal Reserve Banks were audited by KPMG LLP, independent auditors, for the year ended December 31, 2015, and by Deloitte & Touche LLP, independent auditors, for the year ended December 31, 2014.

Federal Reserve Banks

Abbreviations

ABS

Asset-backed securities

ACH

Automated clearinghouse

AIG

American International Group, Inc.

AIGFP

American International Group, Inc. Financial Products Corp.

ASC

Accounting Standards Codification

ASU

Accounting Standards Update

BEP

Benefit Equalization Retirement Plan

Bureau

Bureau of Consumer Financial Protection

CDO

Collateralized debt obligation

CDS

Credit default swaps

CFE

Collateralized financing entity

CIP

Committee on Investment Performance (related to System Retirement Plan)

CMBS

Commercial mortgage-backed securities

FAM

Financial Accounting Manual for Federal Reserve Banks

FASB

Financial Accounting Standards Board

FAST Act

Fixing America's Surface Transportation Act

FOMC

Federal Open Market Committee

FRBC

Federal Reserve Bank of Cleveland

FRBKC

Federal Reserve Bank of Kansas City

FRBNY

Federal Reserve Bank of New York

FRBSL

Federal Reserve Bank of St. Louis

GAAP

Accounting principles generally accepted in the United States of America

GSE

Government-sponsored enterprise

IMF

International Monetary Fund

JPMC

JPMorgan Chase & Co.

LLC

Limited liability company

MBS

Mortgage-backed securities

ML

Maiden Lane LLC

ML II

Maiden Lane II LLC

ML III

Maiden Lane III LLC

MTM

Mark-to-market

RMBS

Residential mortgage-backed securities

OEB

Office of Employee Benefits of the Federal Reserve System

SBA

Small Business Administration

SDR

Special drawing rights

SERP

Supplemental Retirement Plan for Select Officers of the Federal Reserve Banks

SOMA

System Open Market Account

STRIPS

Separate Trading of Registered Interest and Principal of Securities

TALF

Term Asset-Backed Securities Loan Facility

TBA

To be announced

TDF

Term Deposit Facility

TRS

Total return swap

VIE

Variable interest entity

Combined Statements of Condition
As of December 31, 2015 and December 31, 2014
(in millions)

		2015	2014
ASSETS
Gold certificates		$ 11,037	$ 11,037
Special drawing rights certificates		5,200	5,200
Coin		1,890	1,873
Loans	Note 4	115	145
System Open Market Account:	Note 5
Treasury securities, net (of which $18,960 and $11,144 is lent as of December 31, 2015 and 2014, respectively)		2,580,676	2,596,241
Government-sponsored enterprise debt securities, net (of which $146 and $633 is lent as of December 31, 2015 and 2014, respectively)		33,748	39,990
Federal agency and government-sponsored enterprise mortgage-backed securities, net		1,800,449	1,789,083
Foreign currency denominated investments, net		19,567	20,900
Central bank liquidity swaps		997	1,528
Accrued interest receivable		25,418	25,644
Other assets		14	29
Investments held by consolidated variable interest entities (of which $1,778 and $1,808 is measured at fair value as of December 31, 2015 and 2014, respectively)	Note 6	1,778	1,811
Bank premises and equipment, net	Note 7	2,603	2,630
Items in process of collection		210	86
Deferred asset - remittances to the Treasury		-	667
Other assets		1,063	910
Total assets		$ 4,484,765	$ 4,497,774
LIABILITIES AND CAPITAL
Federal Reserve notes outstanding, net		$ 1,379,551	$ 1,298,725
System Open Market Account:	Note 5
Securities sold under agreements to repurchase		712,401	509,837
Other liabilities		508	830
Liabilities of consolidated variable interest entities (of which $21 and $41 is measured at fair value as of December 31, 2015 and 2014, respectively)	Note 6	57	127
Deposits:
Depository institutions		1,977,166	2,377,996
Treasury, general account		333,447	223,452
Other deposits		36,532	25,560
Interest payable to depository institutions		252	124
Accrued benefit costs	Notes 9 and 10	2,892	3,089
Deferred credit items		246	641
Accrued remittances to the Treasury		1,953	-
Other liabilities		252	249
Total liabilities		4,445,257	4,440,630
Capital paid-in		29,508	28,572
Surplus (including accumulated other comprehensive loss of $3,802 and $4,168 at December 31, 2015 and 2014, respectively)		10,000	28,572
Total capital		39,508	57,144
Total liabilities and capital		$ 4,484,765	$ 4,497,774

The accompanying notes are an integral part of these combined financial statements.

Combined Statements of Income and Comprehensive Income

For the years ended December 31, 2015 and December 31, 2014
(in millions)

		2015	2014
INTEREST INCOME
Loans	Note 4	$ -	2
System Open Market Account:	Note 5
Treasury securities, net		63,317	63,011
Government-sponsored enterprise debt securities, net		1,330	1,579
Federal agency and government-sponsored enterprise mortgage-backed securities, net		48,931	51,264
Foreign currency denominated investments, net		31	78
Central bank liquidity swaps		1	1
Investments held by consolidated variable interest entities	Note 6	4	77
Total interest income		113,614	116,012
INTEREST EXPENSE
System Open Market Account:	Note 5
Securities sold under agreements to repurchase		248	112
Other		2	2
Deposits:
Depository institutions		6,846	6,705
Term Deposit Facility		89	156
Total interest expense		7,185	6,975
Net interest income		106,429	109,037
NON-INTEREST INCOME (LOSS)
System Open Market Account:	Note 5
Federal agency and government-sponsored enterprise mortgage-backed securities gains, net		43	81
Foreign currency translation losses, net		(1,382)	(2,907)
Other		16	14
Investments held by consolidated variable interest entities gains, net	Note 6	35	37
Income from services		429	433
Reimbursable services to government agencies		650	570
Other		63	59
Total non-interest loss		(146)	(1,713)
OPERATING EXPENSES
Salaries and benefits		2,847	2,721
Occupancy		326	314
Equipment		182	175
Net periodic pension expense	Note 9	563	383
Other		577	602
Assessments:
Board of Governors operating expenses and currency costs		1,394	1,301
Bureau of Consumer Financial Protection		490	563
Total operating expenses		6,379	6,059
Net income before providing for remittances to the Treasury		99,904	101,265
Earnings remittances to the Treasury:	Note 13
Interest on Federal Reserve notes		91,143	96,902
Required by the Federal Reserve Act, as amended by the FAST Act	Note 3	25,956	-
Total earnings remittances to the Treasury		117,099	96,902
Net (loss) income after providing for remittances to the Treasury		(17,195)	4,363
Change in prior service costs related to benefit plans	Note 10	86	97
Change in actuarial (losses) gains related to benefit plans	Note 10	280	(1,709)
Total other comprehensive income (loss)		366	(1,612)
Comprehensive (loss) income		$ (16,829)	$ 2,751

The accompanying notes are an integral part of these combined financial statements.

Combined Statements of Changes in Capital

For the years ended December 31, 2015 and December 31, 2014
(in millions, except share data)

	Capital paid-in	Surplus			Total capital
		Net income retained	Accumulated other comprehensive ( loss)	Total surplus
Balance at December 31, 2013 (550,136,936 shares)	$ 27,507	$ 30,063	$ (2,556)	$ 27,507	$ 55,014
Net change in capital stock issued (21,299,030 shares)	1,065	-	-	-	1,065
Comprehensive income:
Net income	-	4,363	-	4,363	4,363
Other comprehensive loss	-	-	(1,612)	(1,612)	(1,612)
Dividends on capital stock	-	(1,686)	-	(1,686)	(1,686)
Net change in capital	1,065	2,677	(1,612)	1,065	2,130
Balance at December 31, 2014 (571,435,966 shares)	$ 28,572	$ 32,740	$ (4,168)	$ 28,572	$ 57,144
Net change in capital stock issued (18,730,089 shares)	936	-	-	-	936
Comprehensive income:
Net income (loss)	-	(17,195)	-	(17,195)	(17,195)
Other comprehensive income	-	-	366	366	366
Dividends on capital stock	-	(1,743)	-	(1,743)	(1,743)
Net change in capital	936	(18,938)	366	(18,572)	(17,636)
Balance at December 31, 2015 (590,166,055 shares)	$ 29,508	$ 13,802	$ (3,802)	$ 10,000	$ 39,508

The accompanying notes are an integral part of these combined financial statements.

(1) Structure

The Federal Reserve Banks (Reserve Banks) are part of the Federal Reserve System (System) created by Congress under the Federal Reserve Act of 1913 (Federal Reserve Act), which established the central bank of the United States. The Reserve Banks are chartered by the federal government and possess a unique set of governmental, corporate, and central bank characteristics.

In accordance with the Federal Reserve Act, supervision and control of each Reserve Bank is exercised by a board of directors. The Federal Reserve Act specifies the composition of the board of directors for each of the Reserve Banks. Each board is composed of nine members serving three-year terms: three directors, including those designated as chairman and deputy chairman, are appointed by the Board of Governors of the Federal Reserve System (Board of Governors) to represent the public, and six directors are elected by member banks. Banks that are members of the System include all nationally-chartered banks and any state-chartered banks that apply and are approved for membership. Member banks are divided into three classes according to size. Member banks in each class elect one director representing member banks and one representing the public. In any election of directors, each member bank receives one vote, regardless of the number of shares of Reserve Bank stock it holds.

In addition to the 12 Reserve Banks, the System also consists, in part, of the Board of Governors and the Federal Open Market Committee (FOMC). The Board of Governors, an independent federal agency, is charged by the Federal Reserve Act with a number of specific duties, including general supervision over the Reserve Banks. The FOMC is composed of members of the Board of Governors, the president of the Federal Reserve Bank of New York (FRBNY), and, on a rotating basis, four other Reserve Bank presidents.

(2) Operations and Services

The Reserve Banks perform a variety of services and operations. These functions include participating in formulating and conducting monetary policy; participating in the payment system, including transfers of funds, automated clearinghouse (ACH) operations, and check collection; distributing coin and currency; performing fiscal agency functions for the U.S. Department of the Treasury (Treasury), certain federal agencies, and other entities; serving as the federal government's bank; providing short-term loans to depository institutions; providing loans to participants in programs or facilities with broad-based eligibility in unusual and exigent circumstances; serving consumers and communities by providing educational materials and information regarding financial consumer protection rights and laws and information on community development programs and activities; and supervising bank holding companies, state member banks, savings and loan holding companies, U.S. offices of foreign banking organizations, and designated financial market utilities pursuant to authority delegated by the Board of Governors. Certain services are provided to foreign and international monetary authorities, primarily by the FRBNY.

The FOMC, in conducting monetary policy, establishes policy regarding domestic open market operations, oversees these operations, and issues authorizations and directives to the FRBNY to execute transactions. The FOMC authorizes and directs the FRBNY to conduct operations in domestic markets, including the direct purchase and sale of Treasury securities, government-sponsored enterprise (GSE) debt securities, and federal agency and GSE mortgage-backed securities (MBS); the purchase of these securities under agreements to resell; and the sale of these securities under agreements to repurchase. The FRBNY holds the resulting securities and agreements in a portfolio known as the System Open Market Account (SOMA). The FRBNY is authorized and directed to lend the Treasury securities and GSE debt securities that are held in the SOMA.

To be prepared to counter disorderly conditions in foreign exchange markets or to meet other needs specified by the FOMC to carry out the System's central bank responsibilities, the FOMC has authorized and directed the FRBNY to execute spot and forward foreign exchange transactions in 14 foreign currencies, to hold balances in those currencies, and to invest such foreign currency holdings, while maintaining adequate liquidity. The FRBNY holds these securities and obligations in the SOMA. The FOMC has also authorized the FRBNY to maintain reciprocal currency arrangements with the Bank of Canada and the Bank of Mexico in the maximum amounts of $2 billion and $3 billion, respectively, and to warehouse foreign currencies for the Treasury and the Exchange Stabilization Fund in the maximum amount of $5 billion.

Because of the global character of bank funding markets, the System has at times coordinated with other central banks to provide liquidity. The FOMC authorized and directed the FRBNY to establish U.S. dollar liquidity and reciprocal foreign currency liquidity swap lines with the Bank of Canada, the Bank of England, the European Central Bank, the Bank of Japan, and the Swiss National Bank. The FRBNY holds amounts outstanding under these swap lines in the SOMA. These swap lines, which were originally established as temporary arrangements, were converted to standing arrangements on October 31, 2013, and will remain in place until further notice.

Although the Reserve Banks are separate legal entities, they collaborate on the delivery of certain services to achieve greater efficiency and effectiveness. This collaboration takes the form of centralized operations and product or function offices that have responsibility for the delivery of certain services on behalf of the Reserve Banks. Various operational and management models are used and are supported by service agreements between the Reserve Banks. In some cases, costs incurred by a Reserve Bank for services provided to other Reserve Banks are not shared; in other cases, the Reserve Banks are reimbursed for costs incurred in providing services to other Reserve Banks.

(3) Significant Accounting Policies

Accounting principles for entities with the unique powers and responsibilities of the nation's central bank have not been formulated by accounting standard-setting bodies. The Board of Governors has developed specialized accounting principles and practices that it considers to be appropriate for the nature and function of a central bank. These accounting principles and practices are documented in the Financial Accounting Manual for Federal Reserve Banks (FAM), which is issued by the Board of Governors. The Reserve Banks are required to adopt and apply accounting policies and practices that are consistent with the FAM. The combined financial statements and associated disclosures have been prepared in accordance with the FAM.

Limited differences exist between the accounting principles and practices in the FAM and accounting principles generally accepted in the United States of America (GAAP), due to the unique nature of the Reserve Banks' powers and responsibilities as part of the nation's central bank and given the System's unique responsibility to conduct monetary policy. The primary differences are the presentation of all SOMA securities holdings at amortized cost, adjusted for credit impairment, if any, the recording of all SOMA securities on a settlement-date basis, and the use of straight-line amortization for Treasury securities, GSE debt securities, and foreign currency denominated investments. Amortized cost, rather than the fair value presentation, more appropriately reflects the financial position associated with the Reserve Banks' securities holdings given the System's unique responsibility to conduct monetary policy. Although the application of fair value measurements to the securities holdings may result in values substantially greater or less than their carrying values, these unrealized changes in value have no direct effect on the quantity of reserves available to the banking system or on the ability of the Reserve Banks, as the central bank, to meet their financial obligations and responsibilities. Both the domestic and foreign components of the SOMA portfolio may involve transactions that result in gains or losses when holdings are sold before maturity. Decisions regarding securities and foreign currency transactions, including their purchase and sale, are motivated by monetary policy objectives rather than profit. Accordingly, fair values, earnings, and gains or losses resulting from the sale of such securities and currencies are incidental to open market operations and do not motivate decisions related to policy or open market activities. Accounting for these securities on a settlement-date basis, rather than the trade-date basis required by GAAP, better reflects the timing of the transaction's effect on the quantity of reserves in the banking system. The cost bases of Treasury securities, GSE debt securities, and foreign government debt instruments are adjusted for amortization of premiums or accretion of discounts on a straight-line basis, rather than using the interest method required by GAAP.

In addition, the Reserve Banks do not present a Combined Statement of Cash Flows as required by GAAP because the liquidity and cash position of the Reserve Banks are not a primary concern given the Reserve Banks' unique powers and responsibilities as a central bank. Other information regarding the Reserve Banks' activities is provided in, or may be derived from, the Combined Statements of Condition, Income and Comprehensive Income, and Changes in Capital, and the accompanying notes to the combined financial statements. Other than those described above, there are no significant differences between the policies outlined in the FAM and GAAP.

Preparing the combined financial statements in conformity with the FAM requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent liabilities at the date of the combined financial statements, and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates.

Certain amounts relating to the prior year have been reclassified in the Combined Statements of Income and Comprehensive Income to conform to current year presentation. An amount, $383 million, previously reported for the year ended December 31, 2014 as a component of "Operating Expense: Salaries and benefits" has been reclassified into a new line titled "Operating Expense: Net periodic pension expense."

Significant accounts and accounting policies are explained below.

a. Consolidation

The combined financial statements include the accounts and results of operations of the Reserve Banks as well as several variable interest entities (VIEs), which include Maiden Lane Limited Liability Company (LLC) (ML), Maiden Lane II LLC (ML II), Maiden Lane III LLC (ML III), and Term Asset-Backed Securities Loan Facility (TALF) LLC. The consolidation of the VIEs was assessed in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 810 (ASC 810), Consolidation, which requires a VIE to be consolidated by its controlling financial interest holder. Intercompany balances and transactions have been eliminated in consolidation. See Note 6 for additional information on the VIEs. The combined financial statements of the Reserve Banks also include accounts and results of operations of Maiden and Nassau LLC, a Delaware limited liability company (LLC) wholly-owned by the FRBNY, which was formed to own and operate the FRBNY-owned 33 Maiden Lane building.

A Reserve Bank consolidates a VIE if it has a controlling financial interest, which is defined as the power to direct the significant economic activities of the entity and the obligation to absorb losses or the right to receive benefits of the entity that could potentially be significant to the VIE. To determine whether it is the controlling financial interest holder of a VIE, the Reserve Bank evaluates the VIE's design, capital structure, and relationships with the variable interest holders. The Reserve Bank reconsiders whether it has a controlling financial interest in a VIE, as required by ASC 810, at each reporting date or if there is an event that requires consideration.

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act) established the Bureau of Consumer Financial Protection (Bureau) as an independent bureau within the System that has supervisory authority over some institutions previously supervised by the Reserve Banks in connection with those institutions' compliance with consumer protection statutes. Section 1017 of the Dodd-Frank Act provides that the financial statements of the Bureau are not to be consolidated with those of the Board of Governors or the System. The Board of Governors funds the Bureau through assessments on the Reserve Banks as required by the Dodd-Frank Act. The Reserve Banks reviewed the law and evaluated the design of and their relationship to the Bureau and determined that it should not be consolidated in the Banks' combined financial statements.

b. Gold and Special Drawing Rights Certificates

The Secretary of the Treasury is authorized to issue gold certificates to the Reserve Banks. Upon authorization, the Reserve Banks acquire gold certificates by crediting equivalent amounts in dollars to the account established for the Treasury. The gold certificates held by the Reserve Banks are required to be backed by the gold owned by the Treasury. The Treasury may reacquire the gold certificates at any time, and the Reserve Banks must deliver them to the Treasury. At such time, the Treasury's account is charged, and the Reserve Banks' gold certificate accounts are reduced. The value of gold for purposes of backing the gold certificates is set by law at $42 2/9 per fine troy ounce. Gold certificates are recorded by the Banks at original cost. The Board of Governors allocates the gold certificates among the Reserve Banks once a year based on each Reserve Bank's average Federal Reserve notes outstanding during the preceding 12 months.

Special drawing rights (SDR) are issued by the International Monetary Fund (IMF) to its members in proportion to each member's quota in the IMF at the time of issuance. SDRs serve as a supplement to international monetary reserves and may be transferred from one national monetary authority to another. Under the law providing for U.S. participation in the SDR system, the Secretary of the Treasury is authorized to issue SDR certificates to the Reserve Banks. When SDR certificates are issued to the Reserve Banks, equivalent amounts in U.S. dollars are credited to the account established for the Treasury and the Reserve Banks' SDR certificate accounts are increased. The Reserve Banks are required to purchase SDR certificates, at the direction of the Treasury, for the purpose of financing SDR acquisitions or for financing exchange-stabilization operations. At the time SDR certificate transactions occur, the Board of Governors allocates the SDR certificates among the Reserve Banks based upon each Reserve Bank's Federal Reserve notes outstanding at the end of the preceding calendar year. SDR certificates are recorded by the Banks at original cost.

c. Coin

The amount reported as coin in the Combined Statements of Condition represents the face value of all United States coin held by the Reserve Banks. The Reserve Banks buy coin at face value from the U.S. Mint in order to fill depository institution orders.

d. Loans

Loans to depository institutions are reported at their outstanding principal balances and interest income is recognized on an accrual basis.

The interest income on TALF loans was recognized based on the contracted rate and is reported as a component of "Interest Income: Loans" in the Combined Statements of Income and Comprehensive Income.

Loans are impaired when current information and events indicate that it is probable that the Reserve Bank will not receive the principal and interest that are due in accordance with the contractual terms of the loan agreement. Impaired loans are evaluated to determine whether an allowance for loan loss is required. The Reserve Banks have developed procedures for assessing the adequacy of any allowance for loan losses using all available information to identify incurred losses. This assessment includes monitoring information obtained from banking supervisors, borrowers, and other sources to assess the credit condition of the borrowers and, as appropriate, evaluating collateral values. Generally, the Reserve Banks would discontinue recognizing interest income on impaired loans until the borrower's repayment performance demonstrates principal and interest would be received in accordance with the terms of the loan agreement. If the Reserve Banks discontinue recording interest on an impaired loan, cash payments are first applied to principal until the loan balance is reduced to zero; subsequent payments are applied as recoveries of amounts previously deemed uncollectible, if any, and then as interest income.

e. Securities Purchased Under Agreements to Resell, Securities Sold Under Agreements to Repurchase, and Securities Lending

The FRBNY may engage in purchases of securities with primary dealers under agreements to resell (repurchase transactions). These repurchase transactions are typically settled through a tri-party arrangement. In the United States, there are two commercial custodial banks that provide these services. In a tri-party arrangement, a commercial custodial bank manages the collateral clearing, settlement, pricing, and pledging, and provides cash and securities custodial services for and on behalf of the FRBNY and counterparty. The collateral pledged must exceed the principal amount of the transaction by a margin determined by the FRBNY for each class and maturity of acceptable collateral. Collateral designated by the FRBNY as acceptable under repurchase transactions primarily includes Treasury securities (including Treasury Inflation-Protected Securities, Separate Trading of Registered Interest and Principal of Securities (STRIPS) Treasury securities, and Treasury Floating Rate Notes); direct obligations of several federal and GSE-related agencies, including Federal National Mortgage Association, Federal Home Loan Mortgage Corporation, and Federal Home Loan Banks; and pass-through federal agency and GSE MBS. The repurchase transactions are accounted for as financing transactions with the associated interest income recognized over the life of the transaction. These transactions are reported at their contractual amounts as "System Open Market Account: Securities purchased under agreements to resell" and the related accrued interest receivable is reported as a component of "System Open Market Account: Accrued interest receivable" in the Combined Statements of Condition.

The FRBNY may engage in sales of securities under agreements to repurchase with primary dealers and with a set of expanded counterparties that includes banks, savings associations, GSEs, and domestic money market funds (Primary dealer and expanded counterparties reverse repurchase agreements). These reverse repurchase transactions are designed to have a margin of zero and are settled through a tri-party arrangement, similar to repurchase transactions. Reverse repurchase transactions may also be executed with foreign official and international account holders as part of a service offering. Reverse repurchase agreements are collateralized by a pledge of an amount of Treasury securities, GSE debt securities, or federal agency and GSE MBS that are held in the SOMA. Reverse repurchase transactions are accounted for as financing transactions, and the associated interest expense is recognized over the life of the transaction. These transactions are reported at their contractual amounts as "System Open Market Account: Securities sold under agreements to repurchase" and the related accrued interest payable is reported as a component of "System Open Market Account: Other liabilities" in the Combined Statements of Condition.

Treasury securities and GSE debt securities held in the SOMA may be lent to primary dealers, typically overnight, to facilitate the effective functioning of the domestic securities markets. The amortized cost basis of securities lent continues to be reported as "System Open Market Account: Treasury securities, net" and "System Open Market Account: Government-sponsored enterprise debt securities, net," as appropriate, in the Combined Statements of Condition. Securities lending transactions are fully collateralized by Treasury securities based on the fair values of the securities lent increased by a margin determined by the FRBNY. The FRBNY charges the primary dealer a fee for borrowing securities, and these fees are reported as a component of "Non-interest income (loss): System Open Market Account: Other" in the Combined Statements of Income and Comprehensive Income.

Activity related to securities purchased under agreements to resell, securities sold under agreements to repurchase, and securities lending is allocated to each of the Reserve Banks on a percentage basis derived from an annual settlement of the interdistrict settlement account that occurs in the second quarter of each year.

f. Treasury Securities, Government-Sponsored Enterprise Debt Securities, Federal Agency and Government-Sponsored Enterprise Mortgage-Backed Securities, and Foreign Currency Denominated Investments

Interest income on Treasury securities, GSE debt securities, and foreign currency denominated investments included in the SOMA is accrued using the straight-line method. Interest income on federal agency and GSE MBS is accrued using the interest method and includes amortization of premiums, accretion of discounts, and gains or losses associated with principal paydowns. Premiums and discounts related to federal agency and GSE MBS are amortized or accreted over the term of the security to stated maturity, and the amortization of premiums and accretion of discounts are accelerated when principal payments are received. Gains and losses resulting from sales of securities are determined by specific issue based on average cost. Treasury securities, GSE debt securities, and federal agency and GSE MBS are reported net of premiums and discounts in the Combined Statements of Condition and interest income on those securities is reported net of the amortization of premiums and accretion of discounts in the Combined Statements of Income and Comprehensive Income.

In addition to outright purchases of federal agency and GSE MBS that are held in the SOMA, the FRBNY enters into dollar roll transactions (dollar rolls), which primarily involve an initial transaction to purchase or sell "to be announced" (TBA) MBS for delivery in the current month combined with a simultaneous agreement to sell or purchase TBA MBS on a specified future date. During the years ended December 31, 2015 and 2014, the FRBNY executed dollar rolls to facilitate settlement of outstanding purchases of federal agency and GSE MBS. The FRBNY accounts for dollar rolls as individual purchases and sales, on a settlement-date basis. Accounting for these transactions as purchases and sales, rather than as financing transactions, is appropriate because the purchase or sale component of the MBS TBA dollar roll is paired off or assigned prior to settlement and, as a result, there is no transfer and return of securities. The FRBNY also conducts small-value exercises from time to time for the purpose of testing operational readiness. Small-value exercises may include sales of federal agency and GSE MBS. Net gains (losses) resulting from MBS transactions are reported as a component of "Non-interest income (loss): System Open Market Account: Federal agency and government-sponsored enterprise mortgage-backed securities gains, net" in the Combined Statements of Income and Comprehensive Income.

Foreign currency denominated investments, which can include foreign currency deposits, securities purchased under agreements to resell, and government debt instruments, are revalued daily at current foreign currency market exchange rates in order to report these assets in U.S. dollars. Foreign currency translation gains and losses that result from the daily revaluation of foreign currency denominated investments are reported as "Non-interest income (loss): System Open Market Account: Foreign currency translation losses, net" in the Combined Statements of Income and Comprehensive Income.

Because the FRBNY enters into commitments to buy Treasury securities, federal agency and GSE MBS, and foreign government debt instruments and records the related securities on a settlement-date basis in accordance with the FAM, the related outstanding commitments are not reflected in the Combined Statements of Condition.

Activity related to Treasury securities, GSE debt securities, and federal agency and GSE MBS, including the premiums, discounts, and realized gains and losses, is allocated to each Reserve Bank on a percentage basis derived from an annual settlement of the interdistrict settlement account that occurs in the second quarter of each year. Activity related to foreign currency denominated investments, including the premiums, discounts, and realized and unrealized gains and losses, is allocated in the first quarter of each year to each Reserve Bank based on the ratio of each Reserve Bank's capital and surplus to the Reserve Banks' aggregate capital and surplus at the preceding December 31.

The FRBNY is authorized to hold foreign currency working balances and execute foreign exchange contracts to facilitate international payments and currency transactions it makes on behalf of foreign central bank and U.S. official institution customers. These foreign currency working balances and contracts are not related to FRBNY's monetary policy operations. Foreign currency working balances are reported as a component of "Other assets" in the Combined Statements of Condition and the related foreign currency translation gains and losses that result from the daily revaluation of the foreign currency working balances and contracts are reported as a component of "Non-interest income (loss): Other" in the Combined Statements of Income and Comprehensive Income.

g. Central Bank Liquidity Swaps

Central bank liquidity swaps, which are transacted between the FRBNY and a foreign central bank, can be structured as either U.S. dollar or foreign currency liquidity swap arrangements.

Central bank liquidity swaps activity, including the related income and expense, is allocated in the first quarter of each year to each Reserve Bank based on the ratio of each Reserve Bank's capital and surplus to aggregate capital and surplus at the preceding December 31. The foreign currency amounts associated with these central bank liquidity swap arrangements are revalued daily at current foreign currency market exchange rates.

U.S. dollar liquidity swaps

At the initiation of each U.S. dollar liquidity swap transaction, the foreign central bank transfers a specified amount of its currency to a restricted account for the FRBNY in exchange for U.S. dollars at the prevailing market exchange rate. Concurrent with this transaction, the FRBNY and the foreign central bank agree to a second transaction that obligates the foreign central bank to return the U.S. dollars and the FRBNY to return the foreign currency on a specified future date at the same exchange rate as the initial transaction. The foreign currency amounts that the FRBNY acquires are reported as "System Open Market Account: Central bank liquidity swaps" in the Combined Statements of Condition. Because the swap transaction will be unwound at the same U.S. dollar amount and exchange rate that were used in the initial transaction, the recorded value of the foreign currency amounts is not affected by changes in the market exchange rate.

The foreign central bank compensates the FRBNY based on the amount outstanding and the rate under the swap agreement. The FRBNY recognizes compensation during the term of the swap transaction, which is reported as "Interest income: System Open Market Account: Central bank liquidity swaps" in the Combined Statements of Income and Comprehensive Income.

Foreign currency liquidity swaps

Foreign currency liquidity swap transactions involve the transfer by the FRBNY, at the prevailing market exchange rate, of a specified amount of U.S. dollars to an account for the foreign central bank in exchange for its currency. The foreign currency amounts that the FRBNY receives are recorded as a liability.

h. Consolidated VIEs - Investments and Liabilities

The investments held by consolidated VIEs consist primarily of short-term investments with maturities of greater than three months and less than one year, cash and cash equivalents, and swap contracts. Swap contracts consist of credit default swaps (CDS). Investments are reported as "Investments held by consolidated variable interest entities" in the Combined Statements of Condition. Changes in fair value of the investments are recorded in "Non-interest income (loss): Investments held by consolidated variable interest entities gains, net" in the Combined Statements of Income and Comprehensive Income.

Investments in debt securities are accounted for in accordance with FASB ASC Topic 320, Investments - Debt and Equity Securities, and the VIEs elected the fair value option for all eligible assets and liabilities in accordance with FASB ASC Topic 825 (ASC 825), Financial Instruments. Other financial instruments, including swap contracts, are recorded at fair value in accordance with FASB ASC Topic 815 (ASC 815), Derivatives and Hedging.

The liabilities of consolidated VIEs consist primarily of swap contracts, cash collateral on swap contracts, and accruals for operating expenses. Swap contracts are recorded at fair value in accordance with ASC 815. Liabilities are reported as "Liabilities of consolidated variable interest entities" in the Combined Statements of Condition. Changes in fair value of the liabilities are recorded in "Non-interest income (loss): Investments held by consolidated variable interest entities gains, net" in the Combined Statements of Income and Comprehensive Income.

i. Bank Premises, Equipment, and Software

Reserve Bank premises and equipment are stated at cost less accumulated depreciation. Depreciation is calculated on a straight-line basis over the estimated useful lives of the assets, which range from 2 to 50 years. Major alterations, renovations, and improvements are capitalized at cost as additions to the asset accounts and are depreciated over the remaining useful life of the asset or, if appropriate, over the unique useful life of the alteration, renovation, or improvement. Maintenance, repairs, and minor replacements are charged to operating expense in the year incurred. Reserve Banks may transfer assets to other Reserve Banks or may lease property of other Reserve Banks.

Costs incurred to acquire software are capitalized based on the purchase price. Costs incurred during the application development stage to develop internal-use software are capitalized based on the cost of direct services and materials associated with designing, coding, installing, and testing the software. Capitalized software costs are amortized on a straight-line basis over the estimated useful lives of the software applications, which generally range from two to five years. Maintenance costs and minor replacements related to software are charged to operating expense in the year incurred. Leased assets that meet the criteria of ASC 840, Leases are capitalized and amortized over the shorter of the useful life of the asset or the term of the lease.

Capitalized assets, including software, buildings, leasehold improvements, furniture, and equipment, are impaired and an adjustment is recorded when events or changes in circumstances indicate that the carrying amount of assets or asset groups is not recoverable and significantly exceeds the assets' fair value.

j. Federal Reserve Notes

Federal Reserve notes are the circulating currency of the United States. These notes, which are identified as issued to a specific Reserve Bank, must be fully collateralized. All of the Reserve Banks' assets are eligible to be pledged as collateral. The collateral value is equal to the book value of the collateral tendered with the exception of securities, for which the collateral value is equal to the par value of the securities tendered. The par value of securities sold under agreements to repurchase is deducted from the eligible collateral value.

The Board of Governors may, at any time, call upon a Reserve Bank for additional security to adequately collateralize outstanding Federal Reserve notes. To satisfy the obligation to provide sufficient collateral for outstanding Federal Reserve notes, the Reserve Banks have entered into an agreement that provides for certain assets of the Reserve Banks to be jointly pledged as collateral for the Federal Reserve notes issued to all Reserve Banks. In the event that this collateral is insufficient, the Federal Reserve Act provides that Federal Reserve notes become a first and paramount lien on all the assets of the Reserve Banks. Finally, Federal Reserve notes are obligations of the United States government.

"Federal Reserve notes outstanding, net" in the Combined Statements of Condition represents the Reserve Banks' Federal Reserve notes outstanding, reduced by the Reserve Banks' currency holdings of $170 billion and $171 billion at December 31, 2015 and 2014, respectively.

At December 31, 2015 and 2014, all Federal Reserve notes outstanding, reduced by the Reserve Bank's currency holdings, were fully collateralized. At December 31, 2015, all gold certificates, all special drawing rights certificates, and $1,363 billion of domestic securities held in the SOMA were pledged as collateral. At December 31, 2015, no investments denominated in foreign currencies were pledged as collateral.

k. Deposits

Depository Institutions

Depository institutions' deposits represent the reserve and service-related balances in the accounts that depository institutions hold at the Reserve Banks. Required reserve balances are those that a depository institution must hold to satisfy its reserve requirement. Reserve requirements are the amount of funds that a depository institution must hold in reserve against specified deposit liabilities. Excess reserves are those held by the depository institutions in excess of their required reserve balances. The interest rates paid on required reserve balances and excess balances are determined by the Board of Governors, based on an FOMC-established target range for the federal funds rate. Interest expense on depository institutions' deposits is accrued daily at the appropriate rate. Interest payable is reported as a component of "Interest payable to depository institutions" in the Combined Statements of Condition.

The Term Deposit Facility (TDF) consists of deposits with specific maturities held by eligible institutions at the Reserve Banks. The Reserve Banks pay interest on these deposits at interest rates determined by auction. Interest expense on depository institutions' deposits is accrued daily at the appropriate rate. Interest payable is reported as a component of "Interest payable to depository institutions" in the Combined Statements of Condition. There were no deposits held by the Reserve Bank under the TDF at December 31, 2015 and 2014.

Treasury

The Treasury general account is the primary operational account of the Treasury and is held at the FRBNY.

Other

Other deposits include foreign central bank and foreign government deposits held at the FRBNY. Other deposits also include cash collateral, deposits of designated financial market utilities, and GSE deposits held by the Reserve Banks.

l. Items in Process of Collection and Deferred Credit Items

Items in process of collection primarily represents amounts attributable to checks that have been deposited for collection and that, as of the balance sheet date, have not yet been presented to the paying bank. Deferred credit items represents the counterpart liability to items in process of collection. The amounts in this account arise from deferring credit for deposited items until the amounts are collected.

m. Capital Paid-in

The Federal Reserve Act requires that each member bank subscribe to the capital stock of the Reserve Bank in an amount equal to 6 percent of the capital and surplus of the member bank. These shares are nonvoting, with a par value of $100, and may not be transferred or hypothecated. As a member bank's capital and surplus changes, its holdings of Reserve Bank stock must be adjusted. Currently, only one-half of the subscription is paid in, and the remainder is subject to call. A member bank is liable for Reserve Bank liabilities up to twice the par value of stock subscribed by it.

By law, each Reserve Bank is required to pay each member bank an annual dividend of 6 percent on the paid-in capital stock. This cumulative dividend is paid semiannually.

The Fixing America's Surface Transportation Act (FAST Act), which was enacted on December 4, 2015, amended section 7 of the Federal Reserve Act related to Reserve Bank surplus and the payment of dividends to member banks. The FAST Act changed the dividend rate for member banks with more than $10 billion of consolidated assets, effective January 1, 2016, to the smaller of 6 percent or the rate equal to the high yield of the 10-year Treasury note auctioned at the last auction held prior to the payment of the dividend. The FAST Act did not change the 6 percent dividend rate for member banks with $10 billion or less of total consolidated assets. The provisions of the FAST Act related to dividend payments did not affect the amounts reported by the Bank for the year ended December 31, 2015, but are expected to reduce the amount of dividend payments made to member banks in future years.

n. Surplus

Before the enactment of the FAST Act, the Board of Governors required the Reserve Banks to maintain a surplus equal to the amount of capital paid-in. On a daily basis, surplus was adjusted to equate the balance to capital paid-in. Effective December 4, 2015, the FAST Act limits aggregate Reserve Bank surplus to $10 billion. Reserve Bank surplus is allocated among Reserve Banks based on the ratio of each Bank's capital paid-in to total Reserve Bank capital paid-in as of December 31 of each year.

Accumulated other comprehensive income is reported as a component of "Surplus" in the Combined Statements of Condition and the Combined Statements of Changes in Capital. Additional information regarding the classifications of accumulated other comprehensive income is provided in Notes 9, 10, and 11.

o. Earnings Remittances to the Treasury

Before the enactment of the FAST Act, the Board of Governors required the Reserve Banks to transfer excess earnings to the Treasury as interest on Federal Reserve notes after providing for the costs of operations, payment of dividends, and reservation of an amount necessary to equate surplus with capital paid-in. The Federal Reserve Act, as amended by the FAST Act effective December 4, 2015, now requires that any amounts of the surplus funds of the Reserve Banks that exceed, or would exceed, the aggregate limitation of $10 billion shall be transferred to the Board of Governors for transfer to the Treasury. The Reserve Banks remit excess earnings to the Treasury after providing for the cost of operations, payment of dividends, and reservation of an amount necessary to maintain surplus at the Bank's allocated portion of the $10 billion aggregate surplus limitation. Remittances to the Treasury are made on a weekly basis. The amount of the remittances to the Treasury that were required under the Board of Governor's policy is reported as "Earnings remittances to the Treasury: Interest on Federal Reserve notes" in the Combined Statements of Income and Comprehensive Income. The amount of remittances to the Treasury that are required by the FAST Act is reported as "Earnings remittances to the Treasury: Required by the Federal Reserve Act, as amended by the FAST Act" in the Combined Statements of Income and Comprehensive Income. See Note 13 for additional information on earnings remittances to the Treasury.

Under the previous Board of Governor's policy, if earnings during the year were not sufficient to provide for the costs of operations, payment of dividends, and equating surplus and capital paid-in, remittances to the Treasury were suspended, and under the FAST Act, if earnings during the year are not sufficient to provide for the costs of operations, payment of dividends, and maintaining surplus at an amount equal to the Bank's allocated portion of the $10 billion aggregate surplus limitation, remittances to the Treasury are suspended. A deferred asset is recorded that represents the amount of net earnings a Reserve Bank will need to realize before remittances to the Treasury resume. As of December 31, 2014, such adjustments resulted in recording a deferred asset in the amount of $667 million, which is reported as "Deferred asset - remittances to the Treasury" in the Combined Statements of Condition. This deferred asset is periodically reviewed for impairment, and as of December 31, 2014, no impairment existed.

p. Income and Costs Related to Treasury Services

When directed by the Secretary of the Treasury, the Reserve Banks are required by the Federal Reserve Act to serve as fiscal agent and depositary of the United States Government. By statute, the Treasury has appropriations to pay for these services. During the years ended December 31, 2015 and 2014, the Reserve Banks were reimbursed for all services provided to the Treasury as its fiscal agent.

q. Assessments

The Board of Governors assesses the Reserve Banks to fund its operations and the operations of the Bureau. These assessments are allocated to each Reserve Bank based on each Reserve Bank's capital and surplus balances. The Board of Governors also assesses each Reserve Bank for expenses related to producing, issuing, and retiring Federal Reserve notes based on each Reserve Bank's share of the number of notes comprising the System's net liability for Federal Reserve notes on December 31 of the prior year.

The Dodd-Frank Act requires that, after the transfer of its responsibilities to the Bureau on July 21, 2011, the Board of Governors fund the Bureau in an amount not to exceed a fixed percentage of the total operating expenses of the System as reported in the Board of Governors' 2009 annual report, which totaled $4.98 billion. After 2013, the amount will be adjusted annually in accordance with the provisions of the Dodd-Frank Act. The percentage of total operating expenses of the System for the years ended December 31, 2015 and 2014 was 12.42 percent ($618.7 million) and 12.22 percent ($608.4 million), respectively. The Reserve Banks' assessment for Bureau funding is reported as "Assessments: Bureau of Consumer Financial Protection" in the Combined Statements of Income and Comprehensive Income.

r. Fair Value

Investments and liabilities of the one remaining consolidated VIE and assets of the Retirement Plan for Employees of the System are measured at fair value in accordance with FASB ASC Topic 820 (ASC 820), Fair Value Measurement. ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 establishes a three-level fair value hierarchy that distinguishes between assumptions developed using market data obtained from independent sources (observable inputs) and the Reserve Banks' assumptions developed using the best information available in the circumstances (unobservable inputs). The three levels established by ASC 820 are described as follows:

• Level 1 - Valuation is based on quoted prices for identical instruments traded in active markets.
• Level 2 - Valuation is based on quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.
• Level 3 - Valuation is based on model-based techniques that use significant inputs and assumptions not observable in the market. These unobservable inputs and assumptions reflect the Reserve Banks' estimates of inputs and assumptions that market participants would use in pricing the assets and liabilities. Valuation techniques include the use of option pricing models, discounted cash flow models, and similar techniques.

The inputs or methodology used for valuing assets and liabilities are not necessarily an indication of the risk associated with those assets and liabilities.

s. Taxes

The Reserve Banks are exempt from federal, state, and local taxes, except for taxes on real property. The Reserve Banks' real property taxes were $51 million and $48 million for the years ended December 31, 2015 and 2014, respectively, and are reported as a component of "Operating expenses: Occupancy" in the Combined Statements of Income and Comprehensive Income.

t. Restructuring Charges

The Reserve Banks recognize restructuring charges for exit or disposal costs incurred as part of the closure of business activities in a particular location, the relocation of business activities from one location to another, or a fundamental reorganization that affects the nature of operations. Restructuring charges may include costs associated with employee separations, contract terminations, and asset impairments. Expenses are recognized in the period in which the Reserve Banks commit to a formalized restructuring plan or executes the specific actions contemplated in the plan and all criteria for financial statement recognition have been met.

In 2014, the Treasury announced plans to consolidate the provision of substantially all fiscal agent services for the U.S. Treasury at the Federal Reserve Bank of Cleveland (FRBC), the Federal Reserve Bank of Kansas City (FRBKC), the FRBNY, and the Federal Reserve Bank of St. Louis (FRBSL). The implementation plan associated with this consolidation is expected to be completed in 2018.

Note 12 describes the Reserve Banks' restructuring initiatives and provides information about the costs and liabilities associated with employee separations and contract terminations. The costs associated with the impairment of certain Reserve Bank assets are discussed in Note 7. Costs and liabilities associated with enhanced pension benefits in connection with the restructuring activities for all of the Reserve Banks are recorded on the books of the FRBNY and discussed in Note 9. Costs and liabilities associated with enhanced postretirement benefits are discussed in Note 10.

u. Recently Issued Accounting Standards

In April 2014, the FASB issued Accounting Standards Update (ASU) 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. This update changes the requirements for reporting discontinued operations, which may include a component of an entity or a group of components of an entity, or a business or nonprofit activity. This update is effective for the Reserve Banks for the year ended December 31, 2015, and did not have a material effect on the Reserve Banks' combined financial statements.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). This update was issued to create common revenue recognition guidance for U.S. GAAP and International Financial Reporting Standards. The guidance is applicable to all contracts for the transfer of goods or services regardless of industry or type of transaction. This update requires recognition of revenue in a manner that reflects the consideration that the entity expects to receive in return for the transfer of goods or services to customers. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date that delayed the required effective date of this accounting by one year. This revenue recognition accounting guidance is effective for the Reserve Banks for the year ending December 31, 2019, although the Reserve Banks may elect to adopt guidance earlier. The Reserve Banks are continuing to evaluate the effect of this new guidance on the combined financial statements.

In June 2014, the FASB issued ASU 2014-11, Transfer and Servicing (Topic 860): Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures. This update requires certain changes in the accounting for repurchase-to-maturity transactions and repurchase financing transactions. Additionally, this update provides guidance for the disclosures for certain transfers of financial assets accounted for as sales, where the transferor retains substantially all of the exposure to economic return on the transferred financial asset; and repurchase agreements, securities lending transactions, and repurchase-to-maturity transactions that are accounted for as secured borrowings. This update is effective for the Reserve Banks for the year ended December 31, 2015. The update did not have any effect on the Reserve Banks' accounting for these transactions. The relevant required disclosures have been included in the Note 3e and Note 5 to the Reserve Banks' combined financial statements.

In August 2014, the FASB issued ASU 2014-13, Consolidation (Topic 810): Measuring the Financial Assets and the Financial Liabilities of a Consolidated Collateralized Financing Entity. This update provides guidance for the measurement of the financial assets and financial liabilities of a collateralized financing entity (CFE). A reporting entity that consolidates a CFE may elect to measure the financial assets and financial liabilities of that CFE using either the fair value or a measurement alternative as prescribed in the accounting pronouncement. This update is effective for the Reserve Banks for the year ending December 31, 2016, and is not expected to have a material effect on the Reserve Banks' combined financial statements.

In February 2015, the FASB issued ASU 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis. This update revised the consolidation model for reporting entities that are required to evaluate whether they should consolidate certain legal entities. More specifically, the update modified the evaluation of whether limited liability companies are VIEs or voting interest entities, and revised the consolidation analysis of reporting entities involved with VIEs, particularly those with fee arrangements and related party relationships. This update is effective for the Reserve Banks for the year ending December 31, 2016, and is not expected to have a material effect on the Reserve Banks' combined financial statements.

In April 2015, the FASB issued ASU 2015-05, Intangibles - Goodwill and Other - Internal Use Software (Subtopic 350-40). The amendments in this update provide guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. Consequently, all software licenses within the scope of subtopic 350-40 will be accounted for consistent with other licenses of intangible assets. This update is effective for the Reserve Banks for the year ending December 31, 2016, and is not expected to have a material effect on the Reserve Banks' combined financial statements.

In May 2015, the FASB issued ASU 2015-07, Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent). This update removes the requirement to categorize investments that are measured using net asset value within the fair value hierarchy. The update also changes disclosure requirements for investments measured using net asset value. Some of the investments held in the defined benefit retirement plans (Note 9) are currently measured using net asset value. This update is effective for the Reserve Banks for the year ending December 31, 2017, although early adoption is permitted. The Reserve Banks are continuing to evaluate the effect of this new guidance on the combined financial statements.

In July 2015, the FASB issued ASU 2015-12, Plan Accounting: Defined Benefit Pension Plans (Topic 960), Defined Contribution Pension Plans (Topic 962), Health and Welfare Benefit Plans (Topic 965): (Part I) Fully Benefit-Responsive Investment Contracts, (Part II) Plan Investment Disclosures, (Part III) Measurement Date Practical Expedient (consensuses of the FASB Emerging Issues Task Force). Previously, plans were required to disclose (1) individual investments representing 5 percent or more of net assets available for benefits and (2) net appreciation or depreciation for investments by general type. The amendments in Part II of this update (1) eliminate the required disclosure related to individual investments and (2) removes the requirement to disaggregate net appreciation or depreciation for investments by general type. This update is effective for the Reserve Banks for the year ending December 31, 2016, and is not expected to have a material effect on the Reserve Banks' combined financial statements.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments--Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The amendments in this update eliminate the requirement to disclose methods and significant assumptions used to estimate the fair value for financial instruments measured at amortized cost on the balance sheet. This update is effective for the Reserve Banks for the year ending December 31, 2019. The Reserve Banks are continuing to evaluate the effect of this new guidance on the combined financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). This update revises the model to assess how a lease should be classified and provides guidance for lessees, requiring lessees to present right-of-use assets and lease liabilities on the balance sheet. The update is effective for the Reserve Banks for the year ended December 31, 2020, although earlier adoption is permitted. The Reserve Banks are continuing to evaluate the effect of this new guidance on their combined financial statements.

(4) Loans

Loans to Depository Institutions

The Reserve Banks offer primary, secondary, and seasonal loans to eligible borrowers (depository institutions that maintain reservable transaction accounts or nonpersonal time deposits and have established discount window borrowing privileges). Each program has its own interest rate and interest is accrued using the applicable interest rate established at least every 14 days by the Reserve Banks' board of directors, subject to review and determination by the Board of Governors. Primary and secondary loans are extended on a short-term basis, typically overnight, whereas seasonal loans may be extended for a period of up to nine months.

Primary, secondary, and seasonal loans are collateralized to the satisfaction of each Reserve Bank to reduce credit risk. Assets eligible to collateralize these loans include consumer, business, and real estate loans; Treasury securities; GSE debt securities; foreign sovereign debt; municipal, corporate, and state and local government obligations; asset-backed securities (ABS); corporate bonds; commercial paper; and bank-issued assets, such as certificates of deposit, bank notes, and deposit notes. Collateral is assigned a lending value that is deemed appropriate by the Reserve Bank, which is typically fair value reduced by a margin. Loans to depository institutions are monitored daily to ensure that borrowers continue to meet eligibility requirements for these programs. If a borrower no longer qualifies for these programs, the Reserve Bank will generally request full repayment of the outstanding loan or, for primary or seasonal loans, may convert the loan to a secondary credit loan. Collateral levels are reviewed daily against outstanding obligations, and borrowers that no longer have sufficient collateral to support outstanding loans are required to provide additional collateral or to make partial or full repayment.

The remaining maturity distribution of loans to depository institutions outstanding as of December 31, 2015 and 2014, was as follows (in millions):

	Within 15 days	16 days to 90 days	Total
December 31, 2015	$ 104	$ 11	$ 115
December 31, 2014	$ 140	$ 5	$ 145

At December 31, 2015 and 2014, the Reserve Banks did not have any loans that were impaired, restructured, past due, or on non-accrual status, and no allowance for loan losses was required. There were no impaired loans during the years ended December 31, 2015 and 2014. Interest income attributable to loans to depository institutions was immaterial during the years ended December 31, 2015 and 2014.

TALF

The TALF assisted financial markets in accommodating the credit needs of consumers and businesses of all sizes by facilitating the issuance of ABS collateralized by a variety of consumer and business loans. Each TALF loan had an original maturity of three years, except loans secured by Small Business Administration (SBA) Pool Certificates, loans secured by SBA Development Company Participation Certificates, or ABS backed by student loans or commercial mortgage loans, which had an original maturity of five years if the borrower so elected. The loans were secured by eligible collateral, with the FRBNY having lent an amount equal to the value of the collateral, as determined by the FRBNY, less a margin.

The TALF loans were extended on a nonrecourse basis. If the borrower did not repay the loan, the FRBNY would have enforced its rights in the collateral and might have sold the collateral to TALF LLC, a Delaware LLC, established for the purpose of purchasing such assets. Pursuant to a put agreement with the FRBNY, TALF LLC had committed to purchase assets that secure a TALF loan at a price equal to the principal amount outstanding plus accrued but unpaid interest, regardless of the fair value of the collateral.

On October 29, 2014, the final outstanding TALF loan was repaid in full. Over the life of the program, all TALF loans were repaid in full at or before their respective maturity dates, and as such, the FRBNY did not incur a loss on any TALF loan. Subsequent to the repayment of the final outstanding TALF loan, the FRBNY terminated the put agreement with TALF LLC. Refer to Note 6 for additional information related to TALF LLC.

TALF had no loans outstanding as of December 31, 2015 and 2014. Interest income attributable to TALF loans was $2 million during the year ended December 31, 2014.

(5) System Open Market Account

a. Domestic Securities Holdings

The FRBNY conducts domestic open market operations and, on behalf of the Reserve Banks, holds the resulting securities in the SOMA.

During the year ended December 31, 2014, the FRBNY continued the purchase of Treasury securities and federal agency and GSE MBS under the large-scale asset purchase programs as directed by the FOMC, although at a reduced pace than in previous years. In October 2014, the FOMC concluded its asset purchase program while maintaining its existing policy of reinvesting principal payments from its holdings of GSE debt securities and federal agency and GSE MBS and of rolling over maturing Treasury securities at auction. During the year ended December 31, 2015, the FRBNY continued the reinvestments.

The total of Treasury securities, GSE debt securities, and federal agency and GSE MBS, net, excluding accrued interest, held in the SOMA at December 31 was as follows (in millions):

	2015
	Par	Unamortized premiums	Unaccreted discounts	Total amortized cost
Treasury securities
Notes	$ 1,634,772	$ 20,937	$ (6,481)	$ 1,649,228
Bonds	826,780	114,015	(9,347)	931,448
Total Treasury securities	$ 2,461,552	$ 134,952	$ (15,828)	$ 2,580,676
GSE debt securities	$ 32,944	$ 804	$ -	$ 33,748
Federal agency and GSE MBS	$ 1,747,461	$ 53,730	$ (742)	$ 1,800,449

	2014
	Par	Unamortized premiums	Unaccreted discounts	Total amortized cost
Treasury securities
Notes	$ 1,634,949	$ 27,670	$ (7,718)	$ 1,654,901
Bonds	826,414	124,621	(9,695)	941,340
Total Treasury securities	$ 2,461,363	$ 152,291	$ (17,413)	$ 2,596,241
GSE debt securities	$ 38,677	$ 1,313	$ -	$ 39,990
Federal agency and GSE MBS	$ 1,736,833	$ 53,231	$ (981)	$ 1,789,083

The FRBNY enters into transactions for the purchase of securities under agreements to resell and transactions to sell securities under agreements to repurchase as part of its monetary policy activities. Prior to December 17, 2015, these operations were for the purpose of further assessing the appropriate structure of such operations in supporting the implementation of monetary policy during normalization. From December 17, 2015, these operations have been undertaken as necessary to maintain the federal funds rate in a target range. In addition, transactions to sell securities under agreements to repurchase are entered into as part of a service offering to foreign official and international account holders.

There were no material transactions related to securities purchased under agreements to resell during the years ended December 31, 2015 and 2014. Financial information related to securities sold under agreements to repurchase for the years ended December 31 was as follows (in millions):

	2015	2014
Primary dealers and expanded counterparties:
Contract amount outstanding, end of year	$ 474,592	$ 396,705
Average daily amount outstanding, during the year	125,656	130,281
Maximum balance outstanding, during the year	474,592	396,705
Securities pledged (par value), end of year	437,961	365,235
Securities pledged (market value), end of year	475,422	398,540
Foreign official and international accounts:
Contract amount outstanding, end of year	$ 237,809	$ 113,132
Average daily amount outstanding, during the year	157,929	102,968
Maximum balance outstanding, during the year	237,809	122,232
Securities pledged (par value), end of year	230,333	108,355
Securities pledged (market value), end of year	237,825	113,132
Total contract amount outstanding, end of year	$ 712,401	$ 509,837
Supplemental information - interest expense:
Primary dealers and expanded counterparties	$ 84	$ 68
Foreign official and international accounts	164	44
Total interest expense - securities sold under agreements to repurchase	$ 248	$ 112

Securities pledged as collateral, at December 31, 2015 and 2014, consisted solely of Treasury securities. The contract amount outstanding as of December 31, 2015 of securities sold under agreements to repurchase that were transacted with primary dealers and expanded counterparties had a term of one business day and matured on January 4, 2016. The contract amount outstanding as of December 31, 2015 of securities sold under agreements to repurchase that were transacted with foreign official and international accounts had a term of one business day and matured on January 4, 2016.

The remaining maturity distribution of Treasury securities, GSE debt securities, federal agency and GSE MBS bought outright, and securities sold under agreements to repurchase at December 31, 2015 and 2014 was as follows (in millions):

	Within 15 days	16 days to 90 days	91 days to 1 year	Over 1 year to 5 years	Over 5 years to 10 years	Over 10 years	Total
December 31, 2015:
Treasury securities (par value)	$ -	$ 38,619	$ 177,496	$ 1,118,349	$ 489,226	$ 637,862	$ 2,461,552
GSE debt securities (par value)	-	3,687	13,077	13,833	-	2,347	32,944
Federal agency and GSE MBS (par value) 1	-	-	-	467	9,014	1,737,980	1,747,461
Securities sold under agreements to repurchase (contract amount)	712,401	-	-	-	-	-	712,401
December 31, 2014:
Treasury securities (par value)	$ -	$ 4	$ 3,516	$ 1,112,927	$ 686,627	$ 658,289	$ 2,461,363
GSE debt securities (par value)	1,089	711	3,933	30,597	-	2,347	38,677
Federal agency and GSE MBS (par value)1	-	-	-	13	6,453	1,730,367	1,736,833
Securities sold under agreements to repurchase (contract amount)	509,837	-	-	-	-	-	509,837

1. The part amount shown for federal agency and GSE MBS is the remaining principal balance of the securities. Return to table

Federal agency and GSE MBS are reported at stated maturity in the table above. The estimated weighted average life of these securities, which differs from the stated maturity primarily because it factors in scheduled payments and prepayment assumptions, was approximately 6.5 and 5.7 years as of December 31, 2015 and 2014, respectively.

The amortized cost and par value of Treasury securities and GSE debt securities that were loaned from the SOMA under securities lending agreements, at December 31 were as follows (in millions):

	2015	2014
Treasury securities (amortized costs)	$ 18,960	$ 11,144
Treasury securities (par value)	18,055	10,105
GSE debt securities (amortized cost)	146	633
GSE debt securities (par value)	137	616

Securities pledged as collateral by the counterparties in the securities lending arrangements at December 31, 2015 and 2014, consisted solely of Treasury securities. The securities lending agreements outstanding as of December 31, 2015 had a term of one business day and matured on January 4, 2016.

The FRBNY enters into commitments to buy and sell Treasury securities and records the related securities on a settlement-date basis. As of December 31, 2015, there were no outstanding commitments.

The FRBNY enters into commitments to buy and sell federal agency and GSE MBS and records the related securities on a settlement-date basis. As of December 31, 2015, the total purchase price of the federal agency and GSE MBS under outstanding purchase commitments was $22,187 million, none of which was related to dollar rolls. MBS commitments, which had contractual settlement dates extending through January 2016, are principally for the purchase of TBA MBS for which the number and identity of the pools that will be delivered to fulfill the commitment are unknown at the time of the trade. As of December 31, 2015, there were no outstanding sales commitments for federal agency and GSE MBS. These commitments are subject to varying degrees of off-balance-sheet market risk and counterparty credit risk that result from their future settlement. The FRBNY requires the posting of cash collateral for MBS commitments as part of its risk management practices used to mitigate the counterparty credit risk.

Other assets consists primarily of cash and short-term investments related to the federal agency and GSE MBS portfolio. Other liabilities, which are primarily related to federal agency and GSE MBS purchases and sales, includes the FRBNY's obligation to return cash margin posted by counterparties as collateral under commitments to purchase and sell federal agency and GSE MBS. In addition, other liabilities includes obligations that arise from the failure of a seller to deliver MBS to the FRBNY on the settlement date. Although the FRBNY has ownership of and records its investments in the MBS as of the contractual settlement date, it is not obligated to make payment until the securities are delivered, and the amount included in other liabilities represents FRBNY's obligation to pay for the securities when delivered. The amount of other assets and other liabilities held in the SOMA at December 31 was as follows (in millions):

	2015	2014
Other assets:
MBS portfolio related cash and short term investments	$ 13	$ 28
Other	1	1
Total other assets	$ 14	$29
Other liabilities:
Cash margin	$ 486	$ 793
Obligations from MBS transaction fails	16	30
Other	6	7
Total other liabilities	$ 508	$ 830

Accrued interest receivable on domestic securities holdings was $25,354 million and $25,561 million as of December 31, 2015 and 2014, respectively. These amounts are reported as a component of "System Open Market Account: Accrued interest receivable" in the Combined Statements of Condition.

Information about transactions related to Treasury securities, GSE debt securities, and federal agency and GSE MBS during the years ended December 31, 2015 and 2014, is summarized as follows (in millions):

	Notes	Bonds	Total Treasury securities	GSE debt securities	Federal agency and GSE MBS
Balance December 31, 2013	$ 1,495,115	$ 864,319	$ 2,359,434	$ 59,122	$ 1,533,860
Purchases 1	165,306	85,826	251,132	-	466,384
Sales1	-	-	-	-	(29)
Realized gains, net 2	-	-	-	-	-
Principal payments and maturities	(475)	-	(475)	(18,544)	(203,933)
Amortization of premiums and accretion of discounts, net	(5,545)	(10,132)	(15,677)	(588)	(7,199)
Inflation adjustment on inflation-indexed securities	500	1,327	1,827	-	-
Balance at December 31, 2014	$ 1,654,901	$ 941,340	$ 2,596,241	$ 39,990	$ 1,789,083
Purchases1	2,736	761	3,497	-	356,976
Sales1	-	-	-	-	(464)
Realized gains, net2	-	-	-	-	16
Principal payments and maturities	(2,977)	(543)	(3,520)	(5,733)	(333,441)
Amortization of premiums and accretion of discounts, net	(5,485)	(10,253)	(15,738)	(509)	(11,721)
Inflation adjustment on inflation-indexed securities	53	143	196	-	-
Balance at December 31, 2015	$ 1,649,228	$ 931,448	$ 2,580,676	$ 33,748	$ 1,800,449
Year-ended December 31, 2014
Supplemental information--par value of transactions:
Purchases 3	$ 167,497	$ 83,739	$ 251,236	$ -	$ 450,633
Sales	-	-	-	-	(29)
Year-ended December 31, 2015
Supplemental information--par value of transactions:
Purchases3	$ 2,747	$ 766	$ 3,513	$ -	$ 344,505
Sales	-	-	-	-	(435)

1.Purchases and sales may include payments and receipts related to principal, premiums, discounts, and inflation compensation adjustments to the basis of inflation-indexed securities. The amount reported as sales includes the realized gains and losses on such transactions. Purchases and sales exclude MBS TBA transactions that are settled on a net basis. Return to table

2.Realized gains, net offset the amount of realized gains and losses included in the reported sales amount. Return to table

3.Includes inflation compensation. Return to table

b. Foreign Currency Denominated Investments

The FRBNY conducts foreign currency operations and, on behalf of the Reserve Banks, holds the resulting foreign currency denominated investments in the SOMA.

The FRBNY holds foreign currency deposits with foreign central banks and the Bank for International Settlements and invests in foreign government debt instruments of Germany, France, and Japan. These foreign government debt instruments are backed by the full faith and credit of the issuing foreign governments. In addition, the FRBNY may enter into transactions to purchase Euro-denominated government debt securities under agreements to resell for which the accepted collateral is the debt instruments issued by the governments of Belgium, France, Germany, Italy, the Netherlands, and Spain, which are backed by the full faith and credit of those issuing governments.

At December 31, 2015 and 2014, there were no securities purchased under agreements to resell outstanding and, consequently, no related foreign securities held as collateral.

Information about foreign currency denominated investments valued at amortized cost and at foreign currency market exchange rates at December 31 was as follows (in millions):

	2015	2014
Euro:
Foreign currency deposits	$ 6,218	$ 6,936
German government debt instruments	2,261	2,494
French government debt instruments	3,325	3,687
Japanese yen:
Foreign currency deposits	2,568	2,576
Japanese government debt instruments	5,195	5,207
Total	$ 19,567	$ 20,900

Accrued interest receivable on foreign currency denominated investments was $64 million and $83 million as of December 31, 2015 and 2014, respectively. These amounts are reported as a component of "System Open Market Account: Accrued interest receivable" in the Combined Statements of Condition.

The remaining maturity distribution of foreign currency denominated investments at December 31, 2015 and 2014, was as follows (in millions):

	Within 15 days	16 days to 90 days	91 days to 1 year	Over 1 year to 5 years	Over 5 years to 10 years	Total
December 31, 2015:
Euro	$ 2,136	$ 4,440	$ 1,051	$ 3,824	$ 353	$ 11,804
Japanese yen	2,734	350	1,604	3,075	-	7,763
Total	$ 4,870	$ 4,790	$ 2,655	$ 6,899	$ 353	$ 19,567
December 31, 2014:
Euro	$ 3,635	$ 2,809	$ 1,644	$ 5,029	$ -	$ 13,117
Japanese yen	2,755	392	1,540	3,096	-	7,783
Total	$ 6,390	$ 3,201	$ 3,184	$ 8,125	$ -	$ 20,900

There were no foreign exchange contracts related to foreign currency operations outstanding as of December 31, 2015.

The FRBNY enters into commitments to buy foreign government debt instruments and records the related securities on a settlement-date basis. As of December 31, 2015, there were no outstanding commitments to purchase foreign government debt instruments. During 2015, there were purchases and maturities of foreign government debt instruments of $3,288 million and $3,155 million, respectively. There were no sales of foreign government debt instruments in 2015.

In connection with its foreign currency activities, the FRBNY may enter into transactions that are subject to varying degrees of off-balance-sheet market risk and counterparty credit risk that result from their future settlement. The FRBNY controls these risks by obtaining credit approvals, establishing transaction limits, receiving collateral in some cases, and performing monitoring procedures.

Foreign currency working balances held and foreign exchange contracts executed by the Bank to facilitate international payments and currency transactions made on behalf of foreign central banks and U.S. official institution customers were not material as of December 31, 2015 and 2014.

c. Central Bank Liquidity Swaps

U.S. Dollar Liquidity Swaps

The total foreign currency held under U.S. dollar liquidity swaps in the SOMA at December 31, 2015 and 2014, was $997 million and $1,528 million, respectively.

The remaining maturity distribution of U.S. dollar liquidity swaps that were allocated to the Reserve Banks at December 31 was as follows (in millions):

	2015	2014
	Within 15 days	Within 15 days
Euro	$ 925	$ -
Japanese yen	72	1,528
Total	$ 997	$ 1,528

Foreign Currency Liquidity Swaps

At December 31, 2015 and 2014, there was no balance outstanding related to foreign currency liquidity swaps.

d. Fair Value of SOMA Assets and Liabilities

The fair value amounts below are presented solely for informational purposes and are not intended to comply with the fair value disclosures required by ASC 820. Although the fair value of SOMA security holdings can be substantially greater than or less than the recorded value at any point in time, these unrealized gains or losses have no effect on the ability of the Reserve Banks, as the central bank, to meet their financial obligations and responsibilities. Because SOMA securities are recorded at amortized cost, cumulative unrealized gains (losses) are not recognized in the Combined Statements of Condition and the changes in cumulative unrealized gains (losses) are not recognized in the Combined Statements of Income and Comprehensive Income.

The fair value of the Treasury securities, GSE debt securities, federal agency and GSE MBS, and foreign government debt instruments held in the SOMA is subject to market risk, arising from movements in market variables such as interest rates and credit risk. The fair value of federal agency and GSE MBS is also affected by the expected rate of prepayments of mortgage loans underlying the securities. The fair value of foreign government debt instruments is also affected by currency risk. Based on evaluations performed as of December 31, 2015 and 2014, there are no credit impairments of SOMA securities holdings.

The following table presents the amortized cost, fair value, and cumulative unrealized gains (losses) on the Treasury securities, GSE debt securities, and federal agency and GSE MBS held in the SOMA at December 31 (in millions):

	2015			2014
	Amortized cost	Fair value	Cumulative unrealized gains (losses)	Amortized cost	Fair value	Cumulative unrealized gains
Treasury securities:
Notes	$ 1,649,228	$ 1,669,395	$ 20,167	$ 1,654,901	$ 1,683,377	$ 28,476
Bonds	931,448	1,006,514	75,066	941,340	1,052,916	111,576
Total Treasury securities	$ 2,580,676	$ 2,675,909	$ 95,233	$ 2,596,241	$ 2,736,293	$ 140,052
GSE debt securities	33,748	35,165	1,417	39,990	42,499	2,509
Federal agency and GSE MBS	1,800,449	1,810,256	9,807	1,789,083	1,820,544	31,461
Total domestic SOMA portfolio securities holdings	$ 4,414,873	$ 4,521,330	$ 106,457	$ 4,425,314	$ 4,599,336	$ 174,022
Memorandum-Commitments for:
Purchases of Treasury securities	$ -	$ -	$ -	$ -	$ -	$ -
Purchases of federal agency and GSE MBS	22,187	22,170	(17)	28,692	28,803	111
Sales of federal agency and GSE MBS	-	-	-	-	-	-

The fair value of Treasury securities and GSE debt securities was determined using pricing services that provide market consensus prices based on indicative quotes from various market participants. The fair value of federal agency and GSE MBS was determined using a pricing service that utilizes a model-based approach that considers observable inputs for similar securities.

The cost bases of securities purchased under agreements to resell, securities sold under agreements to repurchase, central bank liquidity swaps and other investments held in the SOMA domestic portfolio approximate fair value. Due to the short-term nature of these agreements and the defined amount that will be received upon settlement, the cost basis is estimated to approximate fair value.

At December 31, 2015 and 2014, the fair value of foreign currency denominated investments was $19,630 million and $20,996 million, respectively. The fair value of foreign government debt instruments was determined using pricing services that provide market consensus prices based on indicative quotes from various market participants. The fair value of foreign currency deposits and securities purchased under agreements to resell was determined by reference to market interest rates.

The following table provides additional information on the amortized cost and fair values of the federal agency and GSE MBS portfolio at December 31 (in millions):

Distribution of MBS holdings by coupon rate	2015		2014
	Amortized cost	Fair value	Amortized cost	Fair value
Total SOMA:
2.0%	$ 11,198	$ 10,993	$ 12,788	$ 12,618
2.5%	116,527	115,018	114,609	113,468
3.0%	554,430	543,270	513,289	506,280
3.5%	579,403	581,940	481,305	489,390
4.0%	361,149	368,576	428,047	441,204
4.5%	115,914	124,043	155,867	167,844
5.0%	48,931	52,523	65,544	70,719
5.5%	11,138	11,989	15,232	16,414
6.0%	1,542	1,666	2,110	2,287
6.5%	217	238	292	320
Total	$ 1,800,449	$ 1,810,256	$ 1,789,083	$ 1,820,544

The following table presents the realized gains and the change in the cumulative unrealized gains (losses) related to SOMA domestic securities holdings during the years ended December 31, 2015 and 2014 (in millions):

	2015		2014
	Realized gains 1	Change in cumulative unrealized gains (losses) 2	Realized gains1	Change in cumulative unrealized gains2
Treasury securities	$ -	$ (44,819)	$ -	$ 158,150
GSE debt securities	-	(1,092)	-	(605)
Federal agency and GSE MBS	43	(21,654)	81	69,749
Total	$ 43	$ (67,565)	$ 81	$ 227,294

1.Realized gains are reported in "Non-interest income: System Open Market Account: Federal agency and government-sponsored enterprise mortgage-backed securities gains, net" in the Combined Statements of Income and Comprehensive Income. Return to table

2. Because SOMA securities are recorded at amortized cost, the change in the cumulative unrealized gains (losses) is not reported in the Combined Statements of Income and Comprehensive Income. Return to table

The amount of change in cumulative unrealized gains (losses) position, net, related to foreign currency denominated investments was a loss of $33 million and a gain of $18 million for the years ended December 31, 2015 and 2014, respectively.

Treasury securities, GSE debt securities, federal agency and GSE MBS, and foreign government debt instruments are classified as Level 2 within the ASC 820 hierarchy because the fair values are based on indicative quotes and other observable inputs obtained from independent pricing services. The fair value hierarchy level of SOMA financial assets is not necessarily an indication of the risk associated with those assets.

(6) Consolidated Variable Interest Entities

a. Description of Consolidated VIEs

i. Maiden Lane LLC

To facilitate the merger of The Bear Stearns Companies, Inc. (Bear Stearns) and JPMorgan Chase & Co. (JPMC), the FRBNY extended credit to ML in June 2008. ML is a Delaware LLC formed by the FRBNY to acquire certain assets of Bear Stearns and to manage those assets. The assets acquired by ML were valued at $29.9 billion as of March 14, 2008, the date that the FRBNY committed to the transaction, and largely consisted of federal agency and GSE MBS, non-agency residential mortgage-back securities (RMBS), commercial and residential mortgage loans, and derivatives and associated hedges.

The FRBNY extended a senior loan of approximately $28.8 billion and JPMC extended a subordinated loan of $1.15 billion to finance the acquisition of the assets, both of which were repaid in full plus interest in 2012. The FRBNY has continued and will continue to sell the remaining assets from the ML portfolio as market conditions warrant and if the sales represent good value for the public. In accordance with the ML agreements, proceeds from future asset sales will be distributed to the FRBNY as contingent interest after all derivative instruments in ML have been terminated and paid or sold from the portfolio.

ii. Maiden Lane II LLC

The FRBNY extended credit to ML II, a Delaware LLC formed to purchase non-agency RMBS from the reinvestment pool of the securities lending portfolios of several regulated U.S. insurance subsidiaries of American International Group, Inc. (AIG). ML II purchased from the AIG subsidiaries non-agency RMBS with an approximate fair value of $20.8 billion as of October 31, 2008. ML II financed this purchase by borrowing $19.5 billion from the FRBNY and through the deferral of $1.0 billion of the purchase price payable to the AIG subsidiaries. Both the loan and the fixed deferred purchase price were paid in full plus interest in 2012.

On March 19, 2012, ML II was dissolved and the FRBNY began the process of winding up in accordance with and as required by Delaware law and the agreements governing ML II. As part of that process, during the year ended December 31, 2014, after paying expenses, ML II distributed its remaining assets to the FRBNY and to AIG and its subsidiaries in accordance with the agreement. Distributions were made to the FRBNY in the form of contingent interest totaling $53 million and to AIG and its subsidiaries in the form of variable deferred purchase price totaling $11 million during the year ended December 31, 2014. On November 12, 2014, a certificate of cancellation was filed in the office of the Delaware Secretary of State, thereby terminating the legal existence of ML II.

iii. Maiden Lane III LLC

The FRBNY extended credit to ML III, a Delaware LLC formed to purchase ABS collateralized debt obligations (CDOs) from certain third-party counterparties of AIG Financial Products Corp (AIGFP). ML III borrowed approximately $24.3 billion from the FRBNY, and AIG provided an equity contribution of $5.0 billion to ML III. The proceeds were used to purchase ABS CDOs with a fair value of $29.6 billion as of October 31, 2008. The counterparties received $26.8 billion net of principal and interest received and finance charges paid on the ABS CDOs. The LLC also made a payment to AIGFP of $2.5 billion representing the over collateralization previously posted by AIGFP and retained by counterparties in respect of terminated CDS as compared to the LLC's fair value acquisition prices calculated as of October 31, 2008. The aggregate amount of principal and interest proceeds from CDOs received after the announcement date, but prior to the settlement dates, net of financing costs, amounted to approximately $0.3 billion and therefore reduced the amount of funding required at settlement by $0.3 billion, from $29.6 billion to $29.3 billion. Both the loan and the equity contribution were repaid in full plus interest in 2012.

On September 10, 2012, ML III was dissolved, and the FRBNY began the process of winding up in accordance with and as required by Delaware law and the agreements governing ML III. As part of that process, during the year ended December 31, 2014, after paying expenses, ML III distributed its remaining assets to the FRBNY and to AIG in accordance with the agreement. Distributions were made to the FRBNY in the form of contingent interest totaling $14 million and to AIG in the form of excess amounts totaling $7 million during the year ended December 31, 2014. On November 12, 2014, a certificate of cancellation was filed in the office of the Delaware Secretary of State, thereby terminating the legal existence of ML III.

iv. TALF LLC

As discussed in Note 4, TALF LLC was formed in connection with the implementation of the TALF. TALF LLC was established for the limited purpose of purchasing any ABS that might be surrendered to the FRBNY by borrowers under the TALF or, in certain limited circumstances, TALF loans. Funding for TALF LLC's purchases of these securities was derived first through the fees received by TALF LLC from the FRBNY for this commitment and any interest earned on its investments. If that funding had proved insufficient for the purchases TALF LLC had committed to make under the put agreement, the Treasury and the FRBNY had committed to lend to TALF LLC. On March 25, 2009, the Treasury provided initial funding to TALF LLC of $100 million. On January 15, 2013, the Treasury and the FRBNY agreed to eliminate their funding commitments to TALF LLC. Pursuant to this agreement on February 6, 2013, TALF LLC repaid in full the outstanding principal and accrued interest on the Treasury loan.

On October 31, 2014, TALF LLC was dissolved and the FRBNY began the process of winding up in accordance with and as required by Delaware law and the agreements governing TALF LLC. As part of that process, during the year ended December 31, 2014, after paying expenses, TALF LLC distributed its remaining assets to the Treasury and to the FRBNY in accordance with the agreement. Distributions were made in the form of contingent interest to the Treasury totaling $98 million and to the FRBNY totaling $11 million during the year ended December 31, 2014. On November 26, 2014, a certificate of cancellation was filed in the office of the Delaware Secretary of State, thereby terminating the legal existence of TALF LLC.

b. Summary Information for Consolidated VIEs

The classification of significant assets and liabilities of ML at December 31, 2015 and 2014 is summarized in the following table (in millions):

	ML
	2015	2014
Assets:
Short-term investments	$ 1,496	$ 1,399
Swap contracts	56	124
Other investments	13	11
Subtotal	1,565	1,534
Cash, cash equivalents, accrued interest receivable, and other receivables	213	277
Total investments held by consolidated VIEs	$ 1,778	$ 1,811
Liabilities:
Swap contracts	$ 21	$ 41
Cash collateral on swap contracts	36	85
Other liabilities	-	1
Total liabilities of consolidated VIEs	$ 57	$ 127

There were no assets and liabilities remaining in the ML II, ML III, and TALF LLC at December 31, 2015 and 2014.

The FRBNY's approximate maximum exposure to loss at December 31, 2015 and 2014, was $1,565 million and $1,534 million, respectively. These estimates incorporate potential losses associated with the investments recorded on the Bank's balance sheet. Additionally, information concerning the notional exposure on swap contracts is contained in the derivatives credit risk section of this Note.

The net income attributable to ML for the year ended December 31, 2015 and 2014, was as follows (in millions):

	ML
	2015	2014
Interest income: Investments held by consolidated VIEs	$ 4	$ 77
Non-interest income:
Realized portfolio holdings gains, net	32	1
Unrealized portfolio holdings gains, net	3	36
Non-interest income: Consolidated VIEs gains, net	35	37
Total net interest income and non-interest income	39	114
Less: Professional fees	3	4
Net income attributable to consolidated VIEs	$ 36	$ 110

i. Debt Securities

ML has investments in short-term instruments with maturities of greater than three months and less than one year when acquired. As of December 31, 2015 and 2014, ML's short-term instruments consisted of U.S. Treasury bills.

Other investments primarily consist of non-agency RMBS and commercial mortgage-backed securities (CMBS).

ii. Derivative Instruments

Derivative contracts are instruments, such as swap contracts, that derive their value from underlying assets, indexes, reference rates, or a combination of these factors. The ML portfolio is composed of derivative financial instruments included in a total return swap (TRS) agreement with JPMC. ML and JPMC entered into the TRS with reference obligations representing CDS primarily on CMBS and RMBS, with various market participants, including JPMC.

On an ongoing basis, ML pledges collateral for credit or liquidity related shortfalls. Separately, ML and JPMC engage in bilateral posting of collateral to cover the net mark-to-market (MTM) variations in the swap portfolio. ML only nets the collateral received from JPMC from the bilateral MTM posting for the reference obligations for which JPMC is the counterparty.

The values of ML's cash and cash equivalents include cash collateral associated with the TRS of $72 million and $128 million as of December 31, 2015 and 2014, respectively. In addition, ML has pledged $52 million and $87 million of U.S. Treasury bills to JPMC as of December 31, 2015 and 2014, respectively.

ML has entered into an International Swaps and Derivatives Association, Inc. master netting agreement with JPMC in connection with the TRS. This agreement provides ML with the right to liquidate securities held as collateral and to offset receivables and payables with JPMC in the event of default. This agreement also establishes the method for determining the net amount of receivables and payables that ML is entitled to receive from or owes to each counterparty to the swaps that underlie the TRS based upon the fair value of the relevant CDS.

For the derivative balances reported in the Combined Statements of Condition, ML offsets its asset and liability positions held with the same counterparty. In addition, ML offsets the cash collateral held with JPMC against any net liabilities of JPMC with ML under the TRS. As of December 31, 2015 and 2014, there were no amounts subject to an enforceable master netting agreement that were not offset in the Combined Statements of Condition.

The maximum potential amount of future payments the seller of credit protection could be required to make to the buyer of credit protection under a CDS is equal to the notional amount of the contract. For ML, the maximum potential payout (notional) associated with credit protection sold was $162 million and $219 million as of December 31, 2015 and 2014, respectively, and the maximum potential recovery (notional) associated with credit protection bought was $195 million and $413 million as of December 31, 2015 and 2014, respectively. The change in notional amounts is representative of the volume of activity for the year ended December 31, 2015.

There were 128 and 210 CDS contracts outstanding in the ML portfolio as of December 31, 2015 and 2014, respectively. The majority of the CDS held by ML had remaining maturities of greater than five years and reference obligations with non-investment grade (BB+ or lower) credit ratings as of December 31, 2015 and 2014.

c. Fair Value Measurement

ML has adopted ASC 820 and ASC 825 and has elected the fair value option for all holdings. The accounting and classification of these investments appropriately reflect the ML's and the FRBNY's intent with respect to the purpose of the investments and most closely reflect the amount of the assets available to liquidate the entity's obligations.

Determination of Fair Value

ML values its investments and cash equivalents on the basis of last available bid prices or current market quotations provided by dealers or pricing services selected under the supervision of the FRBNY's designated investment manager. To determine the value of a particular investment, pricing services may use certain information with respect to market transactions in such investments or comparable investments, various relationships observed in the market between investments, quotations from dealers, and pricing metrics and calculated yield measures based on valuation methodologies commonly employed in the market for such investments. The fair value of swap contracts is provided by JPMC as calculation agent and is reviewed by the investment manager.

Market quotations may not represent fair value in certain instances in which the investment manager and the VIEs believe that facts and circumstances applicable to an issuer, a seller, a purchaser, or the market for a particular investment cause such market quotations to not reflect the fair value of an investment. In such cases or when market quotations are unavailable, the investment manager applies proprietary valuation models that use collateral performance scenarios and pricing metrics derived from the reported performance of investments with similar characteristics as well as available market data to determine fair value.

Due to the uncertainty inherent in determining the fair value of investments that do not have a readily available fair value, the fair value of these investments may differ from the values that may ultimately be realized and paid.

The following tables present the financial instruments recorded in VIEs at fair value as of December 31, 2015 by ASC 820 hierarchy (in millions):

	Level 1 1	Level 21	Level 3	Netting 2	Total fair value
Assets:
Short-term investments	$ 1,496	$ -	$ -	$ -	$ 1,496
Cash equivalents 3	213	-	-	-	213
Swap contracts	-	-	130	(74)	56
Other investments	-	12	1	-	13
Total assets	$ 1,709	$ 12	$ 131	$ (74)	$ 1,778
Liabilities:
Swap contracts	$ -	$ -	$ 59	$ (38)	$ 21

1.There were no transfers between Level 1 and Level 2 and no material transfers between Levels 2 and 3 during the year ended December 31, 2015. Return to table

2.Derivative receivables and payables and the related cash collateral received and paid are shown net when a master netting agreement exists. Return to table

3.Cash equivalents consist primarily of money market funds. Return to table

The following tables present the financial instruments recorded in VIEs at fair value as of December 31, 2014 by ASC 820 hierarchy (in millions):

	Level 1 1	Level 21	Level 3	Netting 2	Total fair value
Assets:
Short-term investments	$ 1,399	$ -	$ -	$ -	$ 1,399
Cash equivalents 3	274	-	-	-	274
Swap contracts	-	-	240	(116)	124
Other investments	-	6	5	-	11
Total assets	$ 1,673	$ 6	$ 245	$ (116)	$ 1,808
Liabilities:
Swap contracts	$ -	$ -	$ 115	$ (74)	$ 41

1.There were no transfers between Level 1 and Level 2 during the year ended December 31, 2014. Return to table

2.Derivative receivables and payables and the related cash collateral received and paid are shown net when a master netting agreement exists. Return to table

3.Cash equivalents consist primarily of money market funds. Return to table

As of December 31, 2015, both the Level 3 assets and liabilities held in the Combined Statements of Condition as "Investments held by consolidated variable interest entities" and "Liabilities of consolidated variable interest entities," respectively, and the associated unrealized gains and losses related to those assets and liabilities are immaterial.

The table below presents a reconciliation of all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) as of December 31, 2014 (in millions). Unrealized gains and losses related to those assets and liabilities still held at December 31, 2014 are reported as a component of "Investments held by consolidated variable interest entities" and "Liabilities of consolidated variable interest entities," respectively, in the Combined Statements of Condition.

	Fair value December 31, 2013	Purchases, sales, issuances, and settlements, net	Net realized/ unrealized gains (losses)	Gross transfers in 1, 2	Gross transfers out1,2	Fair value December 31, 2014	Change in unrealized gains (losses) related to financial instruments held at December 31, 2014
Assets:
Commercial mortgage loans	$ 507	$(523)	$ 16	$ -	$ -	$ -	$ -
Other investments	8	4	(4)	-	(3)	5	(4)
Total assets	$ 515	$ (519)	$ 12	$ -	$ (3)	$ 5	$ (4)
Swap contracts, net	$ 152	$ (48)	$ 21	$ -	$ -	$ 125	$ 13

1.The amount of transfers is based on the fair values of the transferred assets at the beginning of the reporting period. Return to table

2.Other investments, with a December 31, 2013 fair value of $3 million, were transferred from Level 2 to Level 3 because they are valued at December 31, 2014 based on non-observable inputs (Level 3). These investments were valued in the prior year based on quoted prices for identical or similar assets in non-active markets or model-based techniques for which all significant inputs are observable (Level 2). Return to table

The following table presents the gross components of purchases, sales, issuances, and settlements, net, shown for the year ended December 31, 2014 (in millions):

	Purchases	Sales	Issuances	Settlements 1	Purchases, sales, issuances, and settlements, net
Assets:
Commercial mortgage loans	$ -	$ -	$ -	$ (523)	$ (523)
Other investments	1	-	-	3	4
Total assets	$ 1	$ -	$ -	$ (520)	$ (519)
Swap contracts, net	$ -	$ (24)	$ -	$ (24)	$ (48)

1.Includes paydowns. Return to table

As of December 31, 2014, the only material Level 3 assets or liabilities for the VIEs were the swap contracts held by ML. For the swap contracts, there are various valuation methodologies, but in each case, the fair value of the instrument underlying the swap is a significant input used to derive the fair value of the swap. The key unobservable inputs used to value those underlying instruments are credit spreads when the underlying instrument is a market index or performance data (i.e. discount rates, prepayment rates, default rates, and loss severity) when the underlying instrument is a debt security.

(7) Bank Premises, Equipment, and Software

Bank premises and equipment at December 31 were as follows (in millions):

	2015	2014
Bank premises and equipment:
Land and land improvements	$ 404	$ 397
Buildings	2,811	2,748
Building machinery and equipment	578	564
Construction in progress	39	33
Furniture and equipment	1,048	1,032
Subtotal	4,880	4,774
Accumulated depreciation	(2,277)	(2,144)
Bank premises and equipment, net	2,603	2,630
Depreciation expense, for the years ended December 31	$ 217	$ 206

Bank premises and equipment at December 31 included the following amounts for capitalized leases (in millions):

	2015	2014
Leased premises and equipment under capital leases	$ 25	$ 26
Accumulated depreciation	(21)	(20)
Leased premises and equipment under capital leases, net	$ 4	$ 6
Depreciation expense related to leased premises and equipment under capital leases, for the years ended December 31	$ 4	$ 6

The Reserve Banks lease space to outside tenants with remaining lease terms ranging from 1 to 12 years. Rental income from such leases was $39 million and $37 million for the years ended December 31, 2015 and 2014, respectively, and is reported as a component of "Non-interest income: Other" in the Combined Statements of Income and Comprehensive Income. Future minimum lease payments that the Reserve Banks will receive under non-cancelable lease agreements in existence at December 31, 2015, are as follows (in millions):

2016	$ 34
2017	30
2018	27
2019	25
2020	21
Thereafter	63
Total	$ 200

The Reserve Banks had capitalized software assets, net of amortization, of $416 million and $376 million at December 31, 2015 and 2014, respectively. Amortization expense was $95 million and $117 million for the years ended December 31, 2015 and 2014, respectively. Capitalized software assets are reported as a component of "Other assets" in the Combined Statements of Condition and the related amortization is reported as a component of "Operating expenses: Other" in the Combined Statements of Income and Comprehensive Income.

The Reserve Banks had no material impairment losses in 2015. In 2014, software assets related to a multiyear ACH technology initiative were impaired and written off due to the suspension of development efforts. The resulting asset impairment loss of $23 million for the year ended December 31, 2014 is reported as a component of "Operating expenses: Other" in the Combined Statement of Income and Comprehensive Income.

(8) Commitments and Contingencies

In conducting its operations, the Reserve Banks enter into contractual commitments, normally with fixed expiration dates or termination provisions, at specific rates and for specific purposes.

At December 31, 2015, the Reserve Banks were obligated under non-cancelable leases for premises and equipment with remaining terms ranging from 1 to approximately 14 years. These leases provide for increased lease payments based upon increases in real estate taxes, operating costs, or selected price indexes.

Rental expense under operating leases for certain operating facilities, warehouses, and data processing and office equipment (including taxes, insurance, and maintenance when included in rent), net of sublease rentals, was $15 million and $13 million for the years ended December 31, 2015 and 2014, respectively.

Future minimum lease payments under non-cancelable operating leases, net of sublease rentals, with remaining terms of one year or more, at December 31, 2015, are as follows (in millions):

	Operating Leases
2016	$ 5
2017	5
2018	5
2019	4
2020	2
Thereafter	11
Future minimum lease payments	$ 32

At December 31, 2015, the Reserve Banks had unrecorded unconditional purchase commitments and long-term obligations extending through the year 2022 with a remaining fixed commitment of $150 million. Purchases of $31 million and $44 million were made against these commitments during 2015 and 2014, respectively. These commitments are for maintenance of currency processing machines and have variable and/or fixed components. The variable portion of the commitments is for additional services above the fixed contractual service limits. The fixed payments for the next five years under these commitments are as follows (in millions):

2016	$ -
2017	24
2018	24
2019	25
2020	25

The Reserve Banks are involved in certain legal actions and claims arising in the ordinary course of business. Although it is difficult to predict the ultimate outcome of these actions, in management's opinion, based on discussions with counsel, the legal actions and claims will be resolved without material adverse effect on the financial position or results of operations of the Reserve Banks.

(9) Retirement and Thrift Plans

Retirement Plans

The Reserve Banks currently offer three defined benefit retirement plans to its employees, based on length of service and level of compensation. Substantially all of the employees of the Reserve Banks, Board of Governors, and Office of Employee Benefits of the Federal Reserve System (OEB) participate in the Retirement Plan for Employees of the Federal Reserve System (System Plan). ¹ Under the Dodd-Frank Act, newly hired Bureau employees are eligible to participate in the System Plan and, during the years ended December 31, 2015 and 2014, certain costs associated with the System Plan were reimbursed by the Bureau. In addition, employees at certain compensation levels participate in the Benefit Equalization Retirement Plan (BEP) and certain Reserve Bank officers participate in the Supplemental Retirement Plan for Select Officers of the Federal Reserve Banks (SERP).

The FRBNY, on behalf of the System, recognizes the net asset or net liability and costs associated with the System Plan in its consolidated financial statements. The net costs related to the System Plan, as well as the costs related to the BEP and SERP, are reported as a component of "Operating Expenses: Net periodic pension expense" in the Combined Statements of Income and Comprehensive Income. Accrued pension benefit costs are reported as a component of "Prepaid pension benefit costs" if the funded status is a net asset or "Accrued benefit costs" if the funded status is a net liability in the Combined Statements of Condition.

Following is a reconciliation of the beginning and ending balances of the System Plan benefit obligation (in millions):

	2015	2014
Estimated actuarial present value of projected benefit obligation at January 1	$ 13,641	$ 10,476
Service cost-benefits earned during the period	487	355
Interest cost on projected benefit obligation	571	530
Actuarial loss (gain)	(1,044)	2,630
Contributions by plan participants	5	5
Special termination benefits	6	15
Benefits paid	(396)	(370)
Estimated actuarial present value of projected benefit obligation at December 31	$ 13,270	$ 13,641

In October 2014, the Society of Actuaries released new mortality tables (RP-2014) and in October 2015 and 2014 new mortality projection scales (MP-2015 and MP 2014, respectively) for use in the valuation of benefits liabilities. The adoption of these new mortality tables and new mortality projection scales, adjusted for the System's recent mortality experience and the retirement rates of System retirees, resulted in an estimated net decrease of the System Plan projected benefit obligation of approximately $471 million and an increase of $935 million in 2015 and 2014, respectively.

Following is a reconciliation showing the beginning and ending balance of the System Plan assets, the funded status, and the accrued pension benefit costs (in millions):

	2015	2014
Estimated plan assets at January 1 (of which $12,608 and $10,687 is measured at fair value as of January 1, 2015 and 2014, respectively)	$ 12,669	$ 10,808
Actual return on plan assets	(258)	1,734
Contributions by the employer	480	492
Contributions by plan participants	5	5
Benefits paid	(396)	(370)
Estimated plan assets at December 31 (of which $12,477 and $12,608 is measured at fair value as of December 31, 2015 and 2014, respectively)	$ 12,500	$ 12,669
Funded status and accrued pension benefit costs	$ (770)	$ (972)
Amounts included in accumulated other comprehensive loss are shown below:
Prior service cost	$ (263)	$ (356)
Net actuarial loss	(3,333)	(3,484)
Total accumulated other comprehensive loss	$ (3,596)	$ (3,840)

The FRBNY, on behalf of the System, funded $480 million for each of the years ended December 31, 2015 and 2014. The Bureau is required by the Dodd-Frank Act to fund the System plan for each Bureau employee based on an established formula. During the year ended December 31, 2015, the FRBNY provided for contributions from the Bureau of $26 million, which was received by FRBNY in February 2016. During the year ended December 31, 2014, the Bank provided for and received contributions of $12 million.

The accumulated benefit obligation for the System Plan, which differs from the estimated actuarial present value of projected benefit obligation because it is based on current rather than future compensation levels, was $11,727 million and $11,985 million at December 31, 2015 and 2014, respectively.

The weighted-average assumptions used in developing the accumulated pension benefit obligation for the System Plan as of December 31 were as follows:

	2015	2014
Discount rate	4.42%	4.05%
Rate of compensation increase	4.00%	4.00%

Net periodic benefit expenses for the years ended December 31, 2015 and 2014, were actuarially determined using a January 1 measurement date. The weighted-average assumptions used in developing net periodic benefit expenses for the System Plan for the years were as follows:

	2015	2014
Discount rate	4.05%	4.92%
Expected asset return	6.75%	7.00%
Rate of compensation increase	4.00%	4.50%

Discount rates reflect yields available on high-quality corporate bonds that would generate the cash flows necessary to pay the System Plan's benefits when due. The expected long-term rate of return on assets is an estimate that is based on a combination of factors, including the System Plan's asset allocation strategy and historical returns; surveys of expected rates of return for other entities' plans and for various asset classes; a projected return for equities and fixed income investments based on real interest rates, inflation expectations, and equity risk premiums; and surveys of expected returns in equity and fixed income markets.

The components of net periodic pension benefit expense (credit) for the System Plan for the years ended December 31 are shown below (in millions):

	2015	2014
Service cost-benefits earned during the period	$ 487	$ 355
Interest cost on projected benefit obligation	571	530
Amortization of prior service cost	93	100
Amortization of net loss	223	101
Expected return on plan assets	(857)	(759)
Net periodic pension benefit expense	517	327
Special termination benefits	6	15
Bureau of Consumer Financial Protection contributions	-	(12)
Total periodic pension benefit expense	$ 523	$ 330

Estimated amounts that will be amortized from accumulated other comprehensive loss into net periodic pension benefit expense in 2016 are shown below (in millions):

Prior service cost	$ 93
Net actuarial loss	200
Total	$ 293

The recognition of special termination losses is primarily the result of enhanced retirement benefits provided to employees during the restructuring described in Note 12. Following is a summary of expected benefit payments, excluding enhanced retirement benefits (in millions):

2016	$ 444
2017	475
2018	508
2019	540
2020	574
2021-2025	3,395
Total	$ 5,936

The System's Committee on Plan Administration is responsible for oversight of the operations of the Retirement Plan, which includes the Retirement Plan trust and for determining the amounts necessary to maintain the Retirement Plan on an actuarially sound basis and the amounts that employers must contribute to pay the expenses of OEB and the Retirement Plan.

The System's Committee on Investment Performance (CIP) is responsible for establishing investment policies, selecting investment managers, and monitoring the investment managers' compliance with its policies. At December 31, 2015, the System Plan's assets were held in 14 investment vehicles: 3 actively-managed long-duration fixed income portfolios, a passively-managed long-duration fixed income portfolio, an indexed U.S. equity fund, an indexed non-U.S. developed-markets equity fund, an indexed emerging-markets equity fund, 2 private equity limited partnerships, a private equity separate account, 2 core real estate funds, a real estate limited partnership, and a money market fund.

The diversification of the System Plan's investments is designed to limit concentration of risk and the risk of loss related to an individual asset class. The three actively-managed long-duration fixed income portfolios are separate accounts benchmarked to a custom benchmark of 55 percent Barclays Long Credit Index and 45 percent Citigroup 15+ years U.S. Treasury STRIPS Index. This custom benchmark was selected as a proxy to match the liabilities of the Plan and the guidelines for these portfolios are designed to limit portfolio deviations from the benchmark. The passively-managed long-duration fixed-income portfolio is invested in 2 commingled funds and is benchmarked to 55 percent Barclays Long Credit Index and 45 percent Barclays 20+ STRIPS Index. The indexed U.S. equity fund is intended to track the overall U.S. equity market across market capitalizations and is benchmarked to the Dow Jones U.S. Total Stock Market Index. The indexed non-U.S. developed-markets equity fund is intended to track the Morgan Stanley Capital International (MSCI) World ex-US Investible Markets Index (IMI), which includes stocks from 23 markets deemed by MSCI to be "developed markets." The indexed emerging-markets equity fund is intended to track the MSCI Emerging Markets IMI Index, which includes stocks from 21 markets deemed by MSCI to be "emerging markets." The 3 indexed equity funds include stocks from across the market capitalization spectrum (i.e., large-, mid- and small-cap stocks). The 2 private equity limited partnership invest globally across various private equity strategies and the private equity separate account invests in various private equity investments globally across various strategies. The private equity separate account invests in various private equity funds and coinvestment opportunities globally in private companies and targets returns in excess of public markets over a complete market cycle. The two U.S. core real estate funds invest in high quality, well leased, low leverage commercial real estate throughout the U.S. The Real estate limited partnership invests in non-core U.S. commercial real estate including development and repositioning of assets. Finally, the money market fund, which invests in short term Treasury and agency debt and repurchase agreements backed by Treasury and agency debt, is the repository for cash balances and adheres to a constant dollar methodology.

Permitted and prohibited investments, including the use of derivatives, are defined in either the trust agreement (for the passively-managed long-duration fixed income portfolio) or the investment guidelines (for the remaining investments). The CIP reviews the trust agreement and approves all investment guidelines as part of the selection of each investment to ensure that they are consistent with the CIP's investment objectives for the System Plan's assets.

The System Plan's policy weight and actual asset allocations at December 31, by asset category, are as follows:

	2015 Policy weight	Actual asset allocations
		2015	2014
Fixed income	50.0%	48.6%	51.2%
U.S. equities	24.7%	25.4%	25.8%
International equities	17.4%	17.8%	17.6%
Emerging markets equities	4.5%	4.5%	4.9%
Private equity	1.7%	1.3%	0.0%
Real estate	1.7%	1.7%	0.0%
Cash	0.0%	0.7%	0.5%
Total	100.0%	100.0%	100.0%

Employer contributions to the System Plan may be determined using different assumptions than those required for financial reporting. The System Plan's anticipated funding level for 2016 is $480 million. In 2016, the Reserve Banks plan to make monthly contributions of $40 million and will reevaluate the monthly contributions upon completion of the 2016 actuarial valuation. The Reserve Banks' projected benefit obligation, funded status, and net pension expenses for the BEP and the SERP at December 31, 2015 and 2014, and for the years then ended, were not material.

Determination of Fair Value

The System Plan's publicly available investments are valued on the basis of the last available bid prices or current market quotations provided by dealers, or pricing services. To determine the value of a particular investment, pricing services may use information on transactions in such investments, quotations from dealers, pricing metrics, market transactions in comparable investments, relationships observed in the market between investments, and calculated yield measures based on valuation methodologies commonly employed in the market for such investments.

Commingled funds are valued using the net asset value as a practical expedient, as determined by the respective issuer of the fund based on the fair value of the underlying investments. Private equity and real estate investments are valued using the net asset value, as a practical expedient, which is based on the fair value of the underlying investments. The net asset value is adjusted for contributions, distributions, and both realized and unrealized gains and losses incurred during the period. The realized and unrealized gains and losses are based on reported valuation changes.

Because of the uncertainty inherent in determining the fair value of investments that do not have a readily available fair value, the fair value of these investments may differ significantly from the values that would have been reported if a readily available fair value had existed for these investments and may differ materially from the values that may ultimately be realized.

The following tables present the financial instruments recorded at fair value as of December 31 by ASC 820 hierarchy (in millions):

Description	2015
	Level 1 1	Level 21	Level 3	Total
Short-term investments 2	$ 34	$ 118	$ -	$ 152
Treasury and federal agency securities	64	2,182	-	2,246
Corporate bonds	-	2,130	-	2,130
Other fixed income securities	-	373	-	373
Commingled funds	-	7,205	-	7,205
Private Equity	-	-	157	157
Real Estate	-	-	214	214
Total	$ 98	$ 12,008	$ 371	$ 12,477

1.There were no transfers between Level 1 and Level 2 during the year. Return to table

2.Short-term investments include cash equivalents of $88 million. Return to table

Description	2014
	Level 1 1	Level 21	Level 3	Total
Short-term investments 2	$ 27	$ 94	$-	$ 121
Treasury and federal agency securities	111	2,179	-	2,290
Corporate bonds	-	2,109	-	2,109
Other fixed income securities	-	443	-	443
Commingled funds	-	7,598	-	7,598
Private Equity	-	-	47	47
Real Estate	-	-	-	-
Total	$ 138	$ 12,423	$ 47	$ 12,608

1.There were no transfers between Level 1 and Level 2 during the year. Return to table

2.Short-term investments include cash equivalents of $63 million. Return to table

The System Plan enters into futures contracts, traded on regulated exchanges, to manage certain risks and to maintain appropriate market exposure in meeting the investment objectives of the System Plan. The System Plan bears the market risk that arises from any unfavorable changes in the value of the securities or indexes underlying these futures contracts. The use of futures contracts involves, to varying degrees, elements of market risk in excess of the amount recorded in the Combined Statements of Condition. The guidelines established by the CIP further reduce risk by limiting the net futures positions, for most fund managers, to 15 percent of the market value of the advisor's portfolio.

At December 31, 2015 and 2014, a portion of short-term investments was available for futures trading. There were $3 million and $1 million of Treasury securities pledged as collateral for the years ended December 31, 2015 and 2014, respectively.

Thrift Plan

Employees of the Reserve Banks participate in the defined contribution Thrift Plan for Employees of the Federal Reserve System (Thrift Plan). The Reserve Banks match 100 percent of the first 6 percent of employee contributions from the date of hire and provide an automatic employer contribution of 1 percent of eligible pay. The Reserve Banks' Thrift Plan contributions totaled $121 million and $113 million for the years ended December 31, 2015 and 2014, respectively, and are reported as a component of "Operating expenses: Salaries and benefits" in the Combined Statements of Income and Comprehensive Income.

(10) Postretirement Benefits Other Than Retirement Plans and Postemployment Benefits

Postretirement Benefits Other Than Retirement Plans

In addition to the Reserve Banks' retirement plans, employees who have met certain age and length-of-service requirements are eligible for both medical and life insurance benefits during retirement.

The Reserve Bank and plan participants fund benefits payable under the medical and life insurance plans as due and the plans have no assets.

Following is a reconciliation of the beginning and ending balances of the benefit obligation (in millions):

	2015	2014
Accumulated postretirement benefit obligation at January 1	$ 1,769	$ 1,538
Service cost-benefits earned during the period	76	63
Interest cost on accumulated benefit obligation	72	75
Net actuarial loss (gain)	(105)	164
Curtailment loss (gain)	-	(2)
Contributions by plan participants	23	25
Benefits paid	(93)	(92)
Medicare Part D subsidies	5	5
Plan amendments	(3)	(7)
Accumulated postretirement benefit obligation at December 31	$ 1,744	$ 1,769

At December 31, 2015 and 2014, the weighted-average discount rate assumptions used in developing the postretirement benefit obligation were 4.31 percent and 3.96 percent, respectively.

Discount rates reflect yields available on high-quality corporate bonds that would generate the cash flows necessary to pay the plan's benefits when due. The System Plan discount rate assumption setting convention uses an unrounded rate.

Following is a reconciliation of the beginning and ending balance of the plan assets, and the unfunded postretirement benefit obligation and accrued postretirement benefit costs (in millions):

	2015	2014
Fair value of plan assets at January 1	$ -	$ -
Contributions by the employer	65	62
Contributions by plan participants	23	25
Benefits paid	(93)	(92)
Medicare Part D subsidies	5	5
Fair value of plan assets at December 31	$ -	$ -
Unfunded obligation and accrued postretirement benefit cost	$ 1,744	$ 1,769
Amounts included in accumulated other comprehensive loss are shown below:
Prior service cost	$ 20	$ 26
Net actuarial loss	(227)	(355)
Deferred curtailment gain	1	1
Total accumulated other comprehensive loss	$ (206)	$ (328)

Accrued postretirement benefit costs are reported as a component of "Accrued benefit costs" in the Combined Statements of Condition.

For measurement purposes, the assumed health-care cost trend rates at December 31 are provided in the table below. The current health-care cost trend rate for next year is expected to decline ratably each year until achieving the ultimate trend rate in 2022:

	2015	2014
Health-care cost trend rate assumed for next year	7.00%	6.60%
Rate to which the cost trend rate is assumed to decline (the ultimate trend rate)	4.75%	4.75%
Year that the rate reaches the ultimate trend rate	2022	2019

Assumed health-care cost trend rates have a significant effect on the amounts reported for health-care plans. A one percentage point change in assumed health-care cost trend rates would have the following effects for the year ended December 31, 2015 (in millions):

	2015	2014
Service cost-benefits earned during the period	$ 76	$ 63
Interest cost on accumulated benefit obligation	72	75
Amortization of prior service cost	(10)	(10)
Amortization of net actuarial loss	24	10
Net periodic postretirement benefit expense	$ 162	$ 138

Estimated amounts that will be amortized from accumulated other comprehensive loss into net periodic postretirement benefit expense in 2016 are shown below:

Prior service cost	$ (9)
Net actuarial loss	8
Total	$ (1)

Net postretirement benefit costs are actuarially determined using a January 1 measurement date. At January 1, 2015 and 2014, the weighted-average discount rate assumptions used to determine net periodic postretirement benefit costs were 3.96 percent and 4.79 percent, respectively.

Net periodic postretirement benefit expense is reported as a component of "Operating expenses: Salaries and benefits" in the Combined Statements of Income and Comprehensive Income.

The Medicare Prescription Drug, Improvement and Modernization Act of 2003 established a prescription drug benefit under Medicare (Medicare Part D) and a federal subsidy to sponsors of retiree health-care benefit plans that provide benefits that are at least actuarially equivalent to Medicare Part D. The benefits provided under the Reserve Banks' plan to certain participants are at least actuarially equivalent to the Medicare Part D prescription drug benefit. The estimated effects of the subsidy are reflected in actuarial (gain)/loss in the accumulated postretirement benefit obligation and net periodic postretirement benefit expense.

Federal Medicare Part D subsidy receipts were $4 million and $5 million in the years ended December 31, 2015 and 2014, respectively. Expected receipts in 2016, related to benefits paid in the years ended December 31, 2015 and 2014, are $3 million.

Following is a summary of expected postretirement benefit payments (in millions):

	Without subsidy	With subsidy
2016	$ 79	$ 74
2017	84	78
2018	89	83
2019	94	87
2020	98	91
2021-2025	574	528
Total	$ 1,018	$ 941

Postemployment Benefits

The Reserve Banks offers benefits to former qualifying or inactive employees. Postemployment benefit costs are actuarially determined using a December 31 measurement date and include the cost of providing disability; medical, dental, and vision insurance; and survivor income benefits. The accrued postemployment benefit costs recognized by the Reserve Banks at December 31, 2015 and 2014, were $148 million and $156 million, respectively. This cost is included as a component of "Accrued benefit costs" in the Combined Statements of Condition. Net periodic postemployment benefit expense (credit) included in 2015 and 2014 operating expenses were $12 million and $29 million, respectively, and are recorded as a component of "Operating expenses: Salaries and benefits" in the Combined Statements of Income and Comprehensive Income.

(11) Accumulated Other Comprehensive Income and Other Comprehensive Income

Following is a reconciliation of beginning and ending balances of accumulated other comprehensive income (loss) as of December 31 (in millions):

	2015			2014
	Amount related to defined benefit retirement plan	Amount related to postretirement benefits other than retirement plans	Total accumulated other comprehensive income (loss)	Amount related to defined benefit retirement plan	Amount related to postretirement benefits other than retirement plans	Total accumulated other comprehensive income (loss)
Balance at January 1	$ (3,840)	$ (328)	$ (4,168)	$ (2,384)	$ (172)	$ (2,556)
Change in funded status of benefit plans:
Prior service costs arising during the year	-	3	3	-	7	7
Amortization of prior service cost	93 1	(10) 2	83	1001	(10) 2	90
Change in prior service costs related to benefit plans	93	(7)	86	100	(3)	97
Net actuarial (loss) gain arising during the year	(72)	105	33	(1,657)	(164)	(1,821)
Deferred curtailment gain	-	-	-	-	1	1
Amortization of net actuarial loss	2231	242	247	1011	102	111
Change in actuarial (losses) gains related to benefit plans	151	129	280	(1,556)	(153)	(1,709)
Change in funded status of benefit plans-- other comprehensive income (loss)	244	122	366	(1,456)	(156)	(1,612)
Balance at December 31	$ (3,596)	$ (206)	$ (3,802)	$ (3,840)	$ (328)	$ (4,168)

1.Reclassification is reported as a component of "Operating Expenses: Net periodic pension expense" in the Combined Statements of Income and Comprehensive Income. Return to table

2.Reclassification is reported as a component of "Operating Expenses: Salaries and benefits" in the Combined Statements of Income and Comprehensive Income. Return to table

Additional detail regarding the classification of accumulated other comprehensive loss is included in Note 9 and 10.

(12) Business Restructuring Charges

In 2014, the Treasury announced a plan to consolidate the number of Reserve Banks providing fiscal agent services to the Treasury from ten to four. The new infrastructure will involve consolidation of substantially all operations to the FRBC, the FRBKC, the FRBNY, and the FRBSL.

Following is a summary of financial information related to the restructuring plans (in millions):

	2015 restructuring plans	2014 restructuring plans	Total
Information related to restructuring plans as of December 31, 2015:
Total expected costs related to restructuring activity	$ 1	$22	$ 23
Estimated future costs related to restructuring activity	-	3	3
Expected completion date	2017	2018
Reconciliation of liability balances:
Balance at December 31, 2013	$ -	$ -	$-
Employee separation costs	-	14	14
Other costs	-	1	1
Adjustments	-	1	1
Payments	-	-	-
Balance at December 31, 2014	$ -	$ 16	$ 16
Employee separation costs	1	3	4
Other costs	-	2	2
Adjustments	-	(3)	(3)
Payments	-	(2)	(2)
Balance at December 31, 2015	$ 1	$ 16	$ 17

Employee separation costs are primarily severance costs for identified staff reductions associated with the announced restructuring plans. Separation costs that are provided under terms of ongoing benefit arrangements are recorded based on the accumulated benefit earned by the employee. Separation costs that are provided under the terms of one-time benefit arrangements are generally measured based on the expected benefit as of the termination date and recorded ratably over the period to termination. Restructuring costs related to employee separations are reported as a component of "Operating expenses: Salaries and benefits" in the Combined Statements of Income and Comprehensive Income.

Other costs include retention pay and are shown as a component of "Operating Expenses: Salaries and benefits" in the Combined Statements of Income and Comprehensive Income.

Adjustments to the accrued liability are primarily due to changes in the estimated restructuring costs and are shown as a component of the appropriate expense category in the Combined Statements of Income and Comprehensive Income.

Restructuring costs associated with the impairment of certain Reserve Bank assets, including software, buildings, leasehold improvements, furniture, and equipment, are discussed in Note 7. Costs associated with enhanced pension benefits for all Reserve Banks are recorded on the books of the FRBNY as discussed in Note 9. Costs associated with enhanced postretirement benefits are disclosed in Note 10.

(13) Distribution of Comprehensive Income

The following table presents the distribution of the Bank's comprehensive income for the years ended December 31 (in millions):

	2015	2014
Dividends on capital stock	$ 1,743	$ 1,686
Transfer to (from) surplus	(18,572)	1,065
Earnings remittances to the Treasury Interest on Federal Reserve notes	91,143	96,902
Required by the Federal Reserve Act, as amended by the FAST Act	25,956	-
Total distribution	$ 100,270	$ 99,653

Before the enactment of the FAST Act, the amount reported as transfer to (from) surplus represented the amount necessary to equate surplus with capital paid-in, in accordance with the Board of Governor's policy. Subsequent to the enactment of the FAST Act, the amount reported as transfer to (from) surplus represents the amount necessary to maintain surplus at an amount equal to the Reserve Banks' allocated portion of the aggregate surplus limitation.

On December 28, 2015, the Reserve Banks reduced the aggregate surplus to the $10 billion limit in the FAST Act by remitting $19.3 billion to the Treasury, which is reported as a component of "Earnings remittances to the Treasury: Required by the Federal Reserve Act, as amended by the FAST Act" in the Reserve Banks' Combined Statements of Income and Comprehensive Income, and in the table above.

(14) Subsequent Events

The FAST Act includes provisions that, effective on January 1, 2016, will change the rate of dividends paid to member banks by the Reserve Banks. See Note 3m for additional information on these FAST Act provisions.

There were no other subsequent events that require adjustments to or disclosures in the combined financial statements as of December 31, 2015. Subsequent events were evaluated through March 8, 2016, which is the date that the combined financial statements were available to be issued.

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Office of Inspector General Activities

The Office of Inspector General (OIG) for the Federal Reserve Board, which is also the OIG for the Consumer Financial Protection Bureau (CFPB), operates in accordance with the Inspector General Act of 1978, as amended. The OIG conducts activities and makes recommendations to promote economy and efficiency; enhance policies and procedures; and prevent and detect waste, fraud, and abuse in Board programs and operations, including functions that the Board has delegated to the Federal Reserve Banks. Accordingly, the OIG plans and conducts audits, inspections, evaluations, investigations, and other reviews relating to Board and Board-delegated programs and operations. It also retains an independent public accounting firm to annually audit the Board's and the Federal Financial Institutions Examination Council's financial statements. In addition, the OIG keeps the Congress and the Board of Governors fully informed about serious abuses and deficiencies.

During 2015, the OIG issued 23 audit, inspection, and evaluation reports (table 1) and conducted a number of follow-up reviews to evaluate action taken on prior recommendations. Due to the sensitive nature of some of the material, certain reports were only issued internally to the Board, as indicated. OIG investigative work resulted in 26 arrests, 30 indictments, and 17 convictions, as well as $1,003,607,154 in criminal fines and restitution. Twenty-seven investigations were opened and 32 investigations were closed during the year. The OIG also issued its listings of major management challenges facing the Board and the CFPB. Further, the OIG issued two Semiannual Reports to Congress and performed approximately 51 reviews of legislation and regulations related to the operations of the Board, the CFPB, or the OIG.

For more information and to view OIG reports, visit the OIG's website at http://oig.federalreserve.gov. Specific details about the OIG's body of work also may be found in the OIG's Work Plan and Semiannual Reports to Congress.

Table 1. OIG audit, inspection, and evaluation reports issued in 2015

Report title	Month issued
Audit of Planned Physical and Environmental Controls for the Board's Data Center Relocation	January
The CFPB Can Enhance Its Diversity and Inclusion Efforts	March
Board of Governors of the Federal Reserve System Financial Statements as of and for the Years Ended December 31, 2014 and 2013, and Independent Auditors' Reports	March
Federal Financial Institutions Examination Council Financial Statements as of and for the Years Ended December 31, 2014 and 2013, and Independent Auditors' Reports	March
Review of the Failure of Waccamaw Bank	March
Security Control Review of the CFPB's Tableau System (internal report)	March
The Board Can Enhance Its Diversity and Inclusion Efforts	March
The CFPB Is in Compliance With IPIA, as Amended	May
Coordination of Responsibilities Among the Consumer Financial Protection Bureau and the Prudential Regulators--Limited Scope Review	June
The CFPB Can Enhance Its Process for Notifying Prudential Regulators of Potential Material Violations	June
Security Control Review of the CFPB's Data Team Complaint Database (internal report)	July
CFPB Headquarters Construction Costs Appear Reasonable and Controls Are Designed Appropriately	July
The CFPB Can Further Enhance Internal Controls for Certain Hiring Processes	August
The CFPB Can Enhance Its Contract Management Processes and Related Controls	September
Security Control Review of the Board's Consolidated Supervision Comparative Analysis, Planning and Execution System (internal report)	September
Opportunities Exist to Enhance Management Controls Over the CFPB's Consumer Complaint Database	September
The Board Continues to Follow a Structured Approach to Planning and Executing the Relocation of the Data Center	September
Congressional Request Related to the In-Scope Borrower Population of the Independent Foreclosure Review and the Subsequent Payment Agreement	September
The Board Identified Areas of Improvement for Its Supervisory Stress Testing Model Validation Activities, and Opportunities Exist for Further Enhancement	October
2015 Audit of the Board's Information Security Program	November
2015 Audit of the CFPB's Information Security Program	November
Fiscal Year 2015 Risk Assessment of the CFPB's Purchase Card Program	December
Security Control Review of the Board's Statistics and Reserves System (internal report)	December

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Government Accountability Office Reviews

The Federal Banking Agency Audit Act (Pub. L. No. 95-320) authorizes the Government Accountability Office (GAO) to audit certain aspects of Federal Reserve System operations. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act) directs the GAO to conduct additional audits with respect to these operations. In 2015, the GAO completed 12 projects that involved the Federal Reserve (table 1). Sixteen projects were ongoing as of December 31, 2015 (table 2).

Table 1. Reports completed during 2015

Report title	Report number	Month issued (2015)
Dodd-Frank Regulations: Impacts on Community Banks, Credit Unions and Systemically Important Institutions	GAO-16-169	December
Financial Audit: Bureau of the Fiscal Service's Fiscal Years 2015 and 2014 Schedules of Federal Debt	GAO-16-160	November
Lender-Placed Insurance: More Robust Data Could Improve Oversight	GAO-15-631	September
International Insurance Capital Standards: Collaboration among U.S. Stakeholders Has Improved but Could Be Enhanced	GAO-15-534	July
Mortgage Reforms: Actions Needed to Help Assess Effects of New Regulations	GAO-15-185	July
Debt Limit: Market Response to Recent Impasses Underscores Need to Consider Alternative Approaches	GAO-15-476	July
Cybersecurity: Bank and Other Depository Regulators Need Better Data Analytics and Depository Institutions Want More Usable Threat Information	GAO-15-509	July
Bank Regulation: Lessons Learned and a Framework for Monitoring Emerging Risks and Regulatory Response	GAO-15-365	June
Community Development Capital Initiative: Status of the Program Investments and Participants	GAO-15-542	May
Securities Regulation: SEC Can Further Enhance Its Oversight Program of FINRA	GAO-15-376	April
Management Report: Areas for Improvement in the Federal Reserve Banks' Information Systems Controls	GAO-15-413R	April
Financial Company Bankruptcies: Information on Legislative Proposals and International Coordination	GAO-15-299	March

Note: In February 2015, the GAO removed the Federal Reserve as an agency participant for an engagement concerning student loan repayment programs.

Table 2. Projects active at year-end 2015

Subject of project	Month initiated	Status
Duplication in the U.S. financial regulatory system	February 2014	Open
Federal Reserve's payments system operations	October 2014	Open
Remittance service providers	October 2014	Closed 2/16/2016
International remittances update	November 2014	Closed 2/16/2016
Resolution plans for large financial institutions	November 2014	Open
Federal Reserve stress tests	December 2014	Open
Office of Financial Research	March 2015	Open
Implementation of Regulation D	April 2015	Open
Mortgage servicing rights	May 2015	Open
Section 302 of the Riegle Community Development and Regulatory Improvement Act of 1994	June 2015	Closed 1/27/2016
National Flood Insurance Program	July 2015	Open
Accounting and disbursement of funds related to payments from financial institutions associated with fines, penalties, and forfeitures for BSA/AML violations, U.S. sanctions programs, and the Foreign Corrupt Practices Act requirements	August 2015	Open
Accounting and disbursement of funds related to payments from financial institutions to the federal government associated with fines, penalties, and forfeitures for various violations	August 2015	Open
Independent leasing authority	September 2015	Open
Community Reinvestment Act	September 2015	Open
Self-directed retirement savings arrangements	November 2015	Open

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References

1. The OEB was established by the System to administer selected System benefit plans. Return to text

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