MERRILL LYNCH PREFERRED FUNDING V LP - FORM 10-K - EX-99.2 - EXHIBIT 99.2

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EX-12 - EXHIBIT 12 - MERRILL LYNCH PREFERRED FUNDING V LP	ml-12312011xtoprsvxex12.htm
EX-23.1 - EXHIBIT 23.1 - MERRILL LYNCH PREFERRED FUNDING V LP	ml-12312011xtoprsvxex231.htm
EX-31.1 - EXHIBIT 31.1 - MERRILL LYNCH PREFERRED FUNDING V LP	ml-12312011xtoprsvxex311.htm
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EX-32.1 - EXHIBIT 32.1 - MERRILL LYNCH PREFERRED FUNDING V LP	ml-12312011xtoprsvxex321.htm
EX-99.1 - EXHIBIT 99.1 - MERRILL LYNCH PREFERRED FUNDING V LP	ml-12312011xtoprsvxex991.htm
EX-32.2 - EXHIBIT 32.2 - MERRILL LYNCH PREFERRED FUNDING V LP	ml-12312011xtoprsvxex322.htm
10-K - FORM 10-K - MERRILL LYNCH PREFERRED FUNDING V LP	ml-12312011xtoprsvx10k.htm

Exhibit 99.2

The following information is set forth under “Item 1A. Risk Factors” of the Merrill Lynch & Co., Inc. Annual Report on Form 10-K for the year ended December 31, 2011. When used below, “ML & Co.” refers to Merrill Lynch & Co., Inc. and “Merrill Lynch” refers to ML & Co. together with its subsidiaries, “Bank of America” refers to Bank of America Corporation, the “SEC” refers to the Securities and Exchange Commission, the “Financial Reform Act” refers to the Dodd-Frank Wall Street Reform and Consumer Protection Act, the “U.K.” refers to the United Kingdom and the “FSA” refers to the Financial Services Authority. Also, when used below, “we,” “us” and “our” may refer to ML & Co. individually, ML & Co. and its subsidiaries, or certain of ML & Co.'s subsidiaries or affiliates.

Item 1A. Risk Factors

In the course of conducting our business operations, we are exposed to a variety of risks, some of which are

inherent in the financial services industry and others of which are more specific to our own businesses. The

following discussion addresses the most significant factors that could affect our businesses, operations, and

financial condition. Additional factors that could affect our financial condition and operations are discussed in

“Management’s Discussion and Analysis of Financial Condition and Results of Operations — Forward-Looking

Statements.” However, other factors could also adversely affect our businesses, operations, and financial condition.

Therefore, the risk factors below should not be considered a complete list of potential risks that we may face.

General Economic and Market Conditions Risk

Our businesses and results of operations have been, and may continue to be, materially and adversely affected by

the U.S. and international financial markets and economic conditions generally. Our businesses and results of

operations are materially affected by the financial markets and general economic conditions in the U.S. and abroad,

including factors such as the level and volatility of short-term and long-term interest rates, inflation, home prices,

unemployment and under-employment levels, bankruptcies, household income, consumer spending, fluctuations in

both debt and equity capital markets, liquidity of the global financial markets, the availability and cost of capital

and credit, investor sentiment and confidence in the financial markets, European sovereign debt risks and the

strength of the U.S. economy and the non-U.S. economies in which we operate. The deterioration of any of these

conditions can adversely affect our business and securities portfolios, our level of charge-offs and provision for

credit losses, the carrying value of our deferred tax assets, our capital levels and liquidity and our results of

operations.

Although the U.S. economy continued its modest recovery in 2011, elevated unemployment, under-employment

and household debt, along with continued stress in the consumer real estate market and certain commercial real

estate markets, pose challenges for domestic economic performance and the financial services industry. The

sustained high unemployment rate and the lengthy duration of unemployment have directly impaired consumer

finances and pose risks to the financial services industry. The U.S. housing market remains weak and elevated

levels of distressed and delinquent mortgages pose further risks to the housing market. In addition, the public

perception of certain financial services firms and practices appeared to decline during 2011. The current

environment of heightened scrutiny of financial institutions has resulted in increased public awareness of and

sensitivity to financial services industry fees and practices. Each of these factors may adversely affect our fees and

costs.

Liquidity Risk

Liquidity risk is the potential inability to meet our contractual and contingent financial obligations, on- or off-balance sheet, as they become due.

Adverse changes to Bank of America’s or our credit ratings from the major credit rating agencies could have a

material adverse effect on our liquidity, cash flows, competitive position, financial condition and results of

operations by significantly limiting our access to funding or the capital markets, increasing our borrowing costs, or

triggering additional collateral or funding requirements. Our borrowing costs and ability to raise funds are directly

impacted by our credit ratings. In addition, credit ratings may be important to customers or counterparties when we

compete in certain markets and when we seek to engage in certain transactions, including over-the-counter (“OTC”)

derivatives.

Credit ratings and outlooks are opinions on our creditworthiness and that of our obligations or securities, including

long-term debt, short-term borrowings and other securities, including asset securitizations. Following the

acquisition of Merrill Lynch by Bank of America, the major credit rating agencies have indicated that the primary

drivers of Merrill Lynch's credit ratings are Bank of America's credit ratings. Bank of America's credit ratings are

subject to ongoing review by the rating agencies, which consider a number of factors, including Bank of America's

financial strength, performance, prospects and operations as well as factors not under Bank of America's control.

On December 15, 2011, Fitch Ratings ("Fitch") downgraded Bank of America's and ML & Co.'s long-term and

short-term debt ratings as a result of Fitch's decision to lower its “support floor” for systemically important U.S.

financial institutions. On November 29, 2011, Standard & Poor's Ratings Services ("S&P") downgraded Bank of

America's and ML & Co.'s long-term and short-term debt ratings as a result of S&P's implementation of revised

methodologies for determining Banking Industry Country Risk Assessments and bank ratings. On September 21,

2011, Moody's Investors Service, Inc. ("Moody's") downgraded Bank of America's and ML & Co.'s long-term and

short-term debt ratings as a result of Moody's lowering the amount of uplift for potential U.S. government support it

incorporates into ratings. On February 15, 2012, Moody's placed Bank of America's long-term debt ratings on

review for possible downgrade as part of their review of financial institutions with global capital markets

operations. Any adjustment to Bank of America's (and consequently, our) ratings will be determined based on

Moody's review; however, the agency offered guidance that downgrades to Bank of America's ratings, if any, would

likely be limited to one notch.

Currently, Bank of America's and ML & Co.'s long-term/short-term senior debt ratings and outlooks expressed by

the rating agencies are as follows: Baa1/P-2 (negative) by Moody's; A-/A-2 (negative) by S&P; and A/F1 (stable)

by Fitch. The rating agencies could make further adjustments to Bank of America's (and consequently, our) credit

ratings at any time. There can be no assurance that additional downgrades will not occur.

A further reduction in certain of our credit ratings may have a material adverse effect on our liquidity, access to

credit markets, the related cost of funds, our businesses and on certain trading revenues, particularly in those

businesses where counterparty creditworthiness is critical. If Bank of America’s or Merrill Lynch’s (including our

bank's or broker dealer subsidiaries') short-term credit ratings were downgraded by one or more levels, the potential

loss of access to short-term funding sources such as repurchase agreement financing and the effect on our

incremental cost of funds and earnings could be material.

In addition, under the terms of certain OTC derivative contracts and other trading agreements, in the event of a

further downgrade of the credit ratings of ML & Co. or certain subsidiaries, counterparties to those agreements may

require ML & Co. or certain subsidiaries to provide additional collateral, terminate these contracts or agreements, or

provide other remedies. At December 31, 2011, if the rating agencies had downgraded their long-term senior debt

ratings for ML & Co. or certain subsidiaries by one incremental notch, the amount of additional collateral

contractually required by derivative contracts and other trading agreements would have been approximately $0.4

billion. If the rating agencies had downgraded their long-term senior debt ratings for ML & Co. or certain

subsidiaries by a second incremental notch, approximately $0.3 billion in additional collateral would have been

required.

Also, if the rating agencies had downgraded their long-term senior debt ratings for ML & Co. or certain subsidiaries

by one incremental notch, the derivative liability that would be subject to unilateral termination by counterparties as

of December 31, 2011 was $0.5 billion, against which $0.3 billion of collateral had been posted. If the rating

agencies had downgraded their long-term debt ratings for ML & Co. or certain subsidiaries by a second incremental

notch, the derivative liability that would be subject to unilateral termination by the counterparties as of December

31, 2011 was an incremental $3.5 billion, against which $3.4 billion of collateral had been posted.

While certain potential impacts are contractual and quantifiable, the full consequences of a credit ratings downgrade

to a financial institution are inherently uncertain, as they depend upon numerous dynamic, complex and interrelated

factors and assumptions, including whether any downgrade of a firm's long-term credit ratings precipitates

downgrades to its short-term credit ratings, and assumptions about the potential behaviors of various customers,

investors and counterparties.

For a further discussion of our liquidity matters, see “Management’s Discussion and Analysis of Financial

Condition and Results of Operations — Funding and Liquidity.”

Our liquidity, cash flows, financial condition and results of operations, and competitive position may be

significantly adversely affected by the inability of us or Bank of America to access the capital markets or if there is

an increase in our borrowing costs. Liquidity is essential to our business. We fund our assets primarily with a mix

of secured and unsecured liabilities through a globally coordinated funding strategy with Bank of America. We have

established intercompany lending and borrowing arrangements to facilitate centralized liquidity management. As a

result, our liquidity risk is derived in large part from Bank of America’s liquidity risk. Bank of America’s and our

liquidity could be significantly adversely affected by an inability to access the capital markets; illiquidity or

volatility in the capital markets; unforeseen outflows of cash, including customer deposits, funding for

commitments and contingencies; the ability to sell assets on favorable terms; increased liquidity requirements on

our banking or nonbanking subsidiaries imposed by their home countries; or negative perceptions about Bank of

America’s and our short- or long-term business prospects, including downgrades of credit ratings. Several of these

factors may arise due to circumstances that neither we nor Bank of America may be able to control, such as a

general market disruption, negative views about the financial services industry generally, changes in the regulatory

environment, actions by credit rating agencies or an operational problem that affects third parties, us or Bank of

America.

Our and Bank of America’s cost of obtaining funding is directly related to prevailing market interest rates and to

credit spreads. Credit spreads are the amount in excess of the interest rate of U.S. Treasury securities, or other

benchmark securities, of the same maturity that we or Bank of America need to pay to funding providers. Increases

in interest rates and such credit spreads can significantly increase the cost of funding for us and Bank of America.

Changes in credit spreads are market-driven and may be influenced by market perceptions of the creditworthiness

of us and Bank of America. Changes to interest rates and credit spreads occur continuously and may be

unpredictable and highly volatile.

For additional information about our liquidity, including credit ratings and outlooks, see “Management’s Discussion

and Analysis of Financial Condition and Results of Operations — Funding and Liquidity.”

Our dependence upon funds from our subsidiaries and our parent could adversely impact our liquidity. ML & Co.

is a holding company that is a separate and distinct legal entity from its parent, Bank of America, and our broker-dealers and other subsidiaries. We evaluate and manage liquidity on a legal entity basis. Legal entity liquidity is an

important consideration as there are legal and other limitations on our ability to utilize liquidity from one legal

entity to satisfy the liquidity requirements of another, including ML & Co. For instance, ML & Co. depends on

dividends, distributions and borrowings or other payments from its subsidiaries and may depend in large part on

financing from Bank of America to fund payments on our obligations, including debt obligations. Bank of America

may, in some instances, be unable to provide us with the funding we need to fund payments on our obligations.

Many of our subsidiaries, including our broker-dealer subsidiaries, are subject to laws that restrict dividend

payments to ML & Co. In addition, our broker-dealer subsidiaries are subject to restrictions on their ability to lend

or transact with affiliates and to minimum regulatory capital and liquidity requirements, as well as restrictions on

their ability to use funds deposited with them in brokerage accounts to fund their businesses. Additional restrictions

on related party transactions, increased capital and liquidity requirements and additional limitations on the use of

funds on deposit in brokerage accounts, as well as lower earnings, can reduce the amount of funds available to meet

the obligations of ML & Co. and even require ML & Co. to provide additional funding to such subsidiaries.

Regulatory action of that kind could impede access to funds we need to make payments on our obligations. In

addition, our right to participate in a distribution of assets upon a subsidiary’s liquidation or reorganization is

subject to the prior claims of the subsidiary’s creditors. For additional information about regulatory capital

requirements and limitations on our subsidiaries' ability to pay dividends, see Note 18 to the Consolidated Financial

Statements in Part II, Item 8 of this Form 10-K.

Mortgage and Housing Market-Related Risk

We have been, and expect to continue to be, required to repurchase mortgage loans and/or reimburse whole loan

buyers, Fannie Mae ("FNMA") and Freddie Mac (collectively, the "GSEs") and monolines for losses due to claims

related to representations and warranties made in connection with sales of residential mortgage-backed securities

and other loans, and have received similar claims, and may receive additional claims, from private-label

securitization investors and private-label securitization trustees, monolines and others. We have recorded

provisions for certain of these exposures. However, the ultimate resolution of these exposures could have a material

adverse effect on our cash flows, financial condition and results of operations. In connection with residential loans

sold to investors other than the GSEs as well as to the GSEs, Merrill Lynch and certain of its subsidiaries made

various representations and warranties. Breaches of these representations and warranties may result in a

requirement that we repurchase mortgage loans, or indemnify or provide other remedies to counterparties

(collectively, "repurchases"). Merrill Lynch, including First Franklin Financial Corporation ("First Franklin"), sold

loans originated from 2004 to 2008 (primarily subprime and alt-A) with an original principal balance of $132

billion through private-label securitizations or whole loan sales that were subject to representations and warranties

liabilities. Most of the loans sold in the form of whole loans were subsequently pooled into private-label

securitizations sponsored by the third-party buyer of the whole loans. For the outstanding balance of these loans as

of December 31, 2011 and December 31, 2010, see Management's Discussion and Analysis of Financial Condition

and Results of Operations - Off-Balance Sheet Exposures - Representations and Warranties - Experience with Non-

GSE Investors” in Part II, Item 7 of this Form 10-K. In addition, Merrill Lynch and First Franklin securitized first-lien residential mortgage loans, generally in the form of mortgage-backed securities ("MBS") guaranteed by the

GSEs.

The amount of our total outstanding repurchase claims from all sources totaled approximately $1.3 billion at

December 31, 2011. The total amount of our recorded liability related to representations and warranties repurchase

exposure was $2.8 billion at December 31, 2011. For information concerning the provisions recorded in 2011 and

2010 for our repurchase exposure on private-label securitizations, see Note 14 to the Consolidated Financial

Statements in Part II, Item 8 of this Form 10-K.

Our estimated liability and range of possible loss with respect to non-GSE exposures is necessarily dependent on,

and limited by, our historical claims and settlement experience and the experience of our affiliates with non-GSE

counterparties and may materially change in the future based on factors beyond our control. Future provisions and/

or estimated ranges of possible loss for non-GSE representations and warranties may be significantly impacted if

actual experiences are different from our assumptions in our predictive models, including, without limitation, those

regarding the ultimate resolution of the Bank of New York Mellon settlement, estimated repurchase rates, economic

conditions, home prices, consumer and counterparty behavior, and a variety of judgmental factors. In addition, we

have not recorded any representations and warranties liability for certain potential monoline exposures and certain

potential whole loan exposures. We currently estimate that the range of possible loss related to non-GSE

representations and warranties exposure as of December 31, 2011 could be up to $0.5 billion over existing accruals.

This estimated range of possible loss for non-GSE representations and warranties does not represent a probable

loss, and is based on currently available information, significant judgment, and a number of assumptions that are

subject to change, including the assumption that the conditions of the BNY Mellon Settlement are satisfied.

Adverse developments with respect to one or more of the assumptions underlying the liability for non-GSE

representations and warranties and the corresponding estimated range of possible loss could result in significant

increases to future provisions and our estimated range of possible loss. If future representations and warranties

losses occur in excess of our recorded liability and estimated range of possible loss for non-GSE exposures and in

excess of our recorded liability for GSE exposures, including as a result of the factors set forth below, such losses

could have a material adverse effect on our cash flows, financial condition and results of operations.

The liability for obligations under representations and warranties with respect to GSE and non-GSE exposures and

the corresponding estimate of the range of possible loss for non-GSE representations and warranties exposures do

not include any losses related to litigation matters disclosed in Note 14 to the Consolidated Financial Statements,

nor do they include any potential securities law or fraud claims or potential indemnity or other claims against us.

Merrill Lynch is not able to reasonably estimate the amount of any possible loss with respect to any such securities

law (except to the extent reflected in the aggregate range of possible loss for litigation and regulatory matters

disclosed in Note 14 to the Consolidated Financial Statements), fraud or other claims against us; however, such loss

could have a material adverse effect on our cash flows, financial condition and results of operations.

For additional information about our representations and warranties exposure, see “Management’s Discussion and

Analysis of Financial Condition and Results of Operations — Off-Balance Sheet Exposures — Representations and

Warranties” and Note 14 to the Consolidated Financial Statements.

If final court approval is not obtained with respect to the BNY Mellon Settlement or if Bank of America and certain

of its non-Merrill Lynch subsidiaries determine to withdraw from the settlement, Merrill Lynch's future

representations and warranties losses could substantially exceed our existing accruals and the estimated range of

possible loss over existing accruals, and consequently could have a material adverse effect on Merrill Lynch's cash

flows, financial condition and results of operations. On June 28, 2011, Bank of America and certain of its non-

Merrill Lynch subsidiaries entered into a settlement agreement with The Bank of New York Mellon (“BNY

Mellon”), as trustee, to resolve, among other claims, all outstanding and potential claims related to alleged

representations and warranties breaches (including repurchase claims) with respect to the 525 legacy first-lien and

five second-lien non-GSE residential mortgage-backed securitization trusts containing loans principally originated

between 2004 and 2008 and for which BNY Mellon acts as trustee or indenture trustee (the “BNY Mellon

Settlement”). The BNY Mellon Settlement is subject to final court approval and certain other conditions. It is not

currently possible to predict the timing or ultimate outcome of the court approval process, which can include

appeals and could take a substantial period of time. There can be no assurance that final court approval of the

settlement will be obtained, that all conditions will be satisfied (including the receipt of private letter rulings from

the Internal Revenue Service (the “IRS”) and other tax rulings and opinions) or that, if certain conditions to the

BNY Mellon Settlement permitting withdrawal are met, Bank of America and certain of its non-Merrill Lynch

subsidiaries will not determine to withdraw from the BNY Mellon Settlement agreement.

If final court approval is not obtained with respect to the BNY Mellon Settlement or if Bank of America and certain

of its non-Merrill Lynch subsidiaries determine to withdraw from the BNY Mellon Settlement agreement in

accordance with its terms, Merrill Lynch's future representations and warranties losses with respect to non-GSEs

could substantially exceed our non-GSE reserve, together with our estimated range of possible loss related to non-

GSE representations and warranties exposure of up to $0.5 billion over existing accruals at December 31, 2011.

Developments with respect to one or more of the assumptions underlying the estimated range of possible loss for

non-GSE representations and warranties (including the timing and ultimate outcome of the court approval process

relating to the BNY Mellon Settlement) could result in significant increases in our non-GSE reserve and/or to this

estimated range of possible loss, and such increases could have a material adverse effect on our cash flows,

financial condition and results of operations. For additional information regarding the BNY Mellon Settlement, see

“Management's Discussion and Analysis of Financial Condition and Results of Operations - Off-Balance Sheet

Exposures - Representations and Warranties”.

Further weakness in the U.S. housing market, including home prices, may adversely affect our asset classes and

have a significant adverse effect on our financial condition and results of operations. Economic weakness in 2011

was accompanied by continued stress in the U.S. housing market, including declines in home prices. These declines

in the housing market, with falling home prices and elevated foreclosures, have negatively impacted the credit

performance of certain of our portfolios. Continued high unemployment rates in the U.S. have challenged

U.S. consumers and further compounded these stresses in the U.S. housing market as employment conditions may

be compelling some consumers to delay new home purchases or miss payments on existing mortgages.

Conditions in the U.S. housing market have also resulted in significant write-downs of asset values in several asset

classes, notably mortgage-backed securities and exposure to monolines. These conditions may negatively affect the

value of real estate, which could negatively affect our exposure to representations and warranties. While there were

continued indications throughout the past year that the U.S. economy is stabilizing, the performance of our overall

portfolios may not significantly improve in the near future. A protracted continuation or worsening of these difficult

U.S. housing market conditions may exacerbate the adverse effects outlined above and have a significant adverse

effect on our financial condition and results of operations.

Credit Risk

Credit risk is the risk of loss arising from a borrower, obligor or counterparty default when a borrower, obligor or

counterparty does not meet its obligations.

Increased credit risk, due to economic or market disruptions, insufficient credit loss reserves or concentration of

credit risk, may necessitate increased provisions for credit losses and could have an adverse effect on our financial

condition and results of operations. When we buy debt securities, loan money, commit to loan money or enter into

a letter of credit or other contract with a counterparty, we incur credit risk, or the risk of losses if our borrowers do

not repay their loans or our counterparties fail to perform according to the terms of their agreements. A number of

our products expose us to credit risk, including loans, lending commitments, derivatives, trading account assets and

assets held-for-sale. The credit quality of our portfolios has a significant impact on our earnings.

Global and U.S. economic conditions continue to weigh on our credit portfolios. Economic or market disruptions are likely to increase our credit exposure to customers, obligors or other counterparties due to the increased risk that

they may default on their obligations to us.

We estimate and establish an allowance for credit losses for losses inherent in our lending activities (including

unfunded lending commitments), excluding those measured at fair value, through a charge to earnings. The amount

of allowance is determined based on our evaluation of the potential credit losses included within our loan portfolio.

The process for determining the amount of the allowance requires difficult, subjective and complex judgments. Our

ability to assess future economic conditions or the creditworthiness of our customers, obligors or other

counterparties is imperfect. We may suffer unexpected losses if the models and assumptions we use to establish

reserves and make judgments in extending credit to our borrowers and other counterparties become less predictive

of future events. In such an event, we might need to increase the size of our allowance, which could adversely

affect our financial condition and results of operations.

In the ordinary course of our business, we also may be subject to a concentration of credit risk in a particular

industry, country, counterparty, borrower or issuer. A deterioration in the financial condition or prospects of a

particular industry or a failure or downgrade of, or default by, any particular entity or group of entities could have a

material adverse effect on our businesses, and the processes by which we set limits and monitor the level of our

credit exposure to individual entities, industries and countries may not function as we have anticipated. While our

activities expose us to many different industries and counterparties, we routinely execute a high volume of

transactions with counterparties in the financial services industry, including broker-dealers, commercial banks,

investment funds and insurers. This has resulted in significant credit concentration with respect to this industry.

In the ordinary course of business, we also enter into transactions with sovereign nations, U.S. states and

U.S. municipalities. Unfavorable economic or political conditions, disruptions to capital markets, currency

fluctuations, social instability and changes in government policies could impact the operating budgets or credit

ratings of sovereign nations, U.S. states and U.S. municipalities and expose us to credit risk.

For additional information about our credit risk and credit risk management policies and procedures, see

“Quantitative and Qualitative Disclosures about Market Risk — Credit Risk Management.”

We could suffer losses as a result of the actions of, or deterioration in, the commercial soundness of our

counterparties and other financial services institutions. We could suffer losses and our ability to engage in routine

trading and funding transactions could be adversely affected by the actions and commercial soundness of other

market participants. We have exposure to many different industries and counterparties, and we routinely execute

transactions with counterparties in the financial services industry, including broker-dealers, commercial banks,

investment banks, mutual and hedge funds and other institutional clients. Financial services institutions and other

counterparties are inter-related because of trading, funding, clearing or other relationships. As a result, defaults by,

or even rumors or questions about, one or more financial services institutions, or the financial services industry

generally, have led to market-wide liquidity problems and could lead to significant future liquidity problems,

including losses or defaults by us or by other institutions. Many of these transactions expose us to credit risk in the

event of default of a counterparty or client. In addition, our credit risk may be impacted when the collateral held by

us cannot be realized or is liquidated at prices not sufficient to recover the full amount of the loan or derivatives

exposure due us. Any such losses could materially adversely affect our financial condition and results of operations.

Our derivatives businesses may expose us to unexpected risks and potential losses. We are party to a large number

of derivatives transactions, including credit derivatives. Our derivatives businesses may expose us to unexpected

market, credit and operational risks that could cause us to suffer unexpected losses and have an adverse effect on

our financial condition and results of operations. Severe declines in asset values, unanticipated credit events or

unforeseen circumstances that may cause previously uncorrelated factors to become correlated (and vice versa) may

create losses resulting from risks not appropriately taken into account in the development, structuring or pricing of a

derivative instrument. The terms of certain of our OTC derivative contracts and other trading agreements provide

that upon the occurrence of certain specified events, such as a change in our credit ratings, we may be required to

provide additional collateral or to provide other remedies, or our counterparties may have the right to terminate or

otherwise diminish our rights under these contracts or agreements.

Many derivative instruments are individually negotiated and non-standardized, which can make exiting, transferring

or settling some positions difficult. Many derivatives require that we deliver to the counterparty the underlying

security, loan or other obligation in order to receive payment. In a number of cases, we do not hold, and may not be

able to obtain, the underlying security, loan or other obligation.

Following the downgrade of the credit ratings of ML & Co. and certain subsidiaries, we have engaged in

discussions with certain derivative and other counterparties regarding their rights under these agreements. In

response to counterparties' inquiries and requests, we have discussed and in some cases substituted derivative

contracts and other trading agreements, including naming our affiliate, Bank of America, N.A. ("BANA") as the

new counterparty. Our ability to substitute or make changes to these agreements to meet counterparties' requests

may be subject to certain limitations, including counterparty willingness, regulatory limitations on naming BANA

as the new counterparty, and the type or amount of collateral required. It is possible that such limitations on our

ability to substitute or make changes to these agreements, including naming BANA as the new counterparty, could

adversely affect our results of operations.

Derivatives contracts and other transactions entered into with third parties are not always confirmed by the

counterparties or settled on a timely basis. While a transaction remains unconfirmed or during any delay in

settlement, we are subject to heightened credit and operational risk and in the event of default may find it more

difficult to enforce the contract. In addition, as new and more complex derivatives products have been created,

covering a wider array of underlying credit and other instruments, disputes about the terms of the underlying

contracts may arise, which could impair our ability to effectively manage our risk exposures from these products

and subject us to increased costs.

For additional information on our derivatives exposure, see Note 6 to the Consolidated Financial Statements.

Market Risk

Market risk is the risk that values of assets and liabilities or revenues will be adversely affected by changes in

market conditions such as market volatility. Market risk is inherent in the financial instruments associated with our

operations and activities, including loans, deposits, securities, short-term borrowings, long-term debt, trading

account assets and liabilities, and derivatives.

Our businesses and results of operations have been, and may continue to be, significantly adversely affected by

changes in the levels of market volatility and by other financial or capital market conditions. Our businesses and

results of operations may be adversely affected by market risk factors such as changes in interest and currency

exchange rates, equity and futures prices, the implied volatility of interest rates, credit spreads and other economic

and business factors. These market risks may adversely affect, among other things, (i) the value of our on- and off-balance sheet securities, trading assets, and other financial instruments, (ii) the cost of debt capital and our access to

credit markets, (iii) the value of assets under management, which could reduce our fee income relating to those

assets, (iv) customer allocation of capital among investment alternatives, (v) the volume of client activity in our

trading operations, (vi) investment banking fees, and (vii) the general profitability and risk level of the transactions

in which we engage. Any of these developments could have a significant adverse impact on our financial condition

and results of operations.

We use various models and strategies to assess and control our market risk exposures but those are subject to

inherent limitations. Our models, which rely on historical trends and assumptions, may not be sufficiently predictive

of future results due to limited historical patterns, extreme or unanticipated market movements and illiquidity,

especially during severe market downturns or stress events. The models that we use to assess and control our

market risk exposures also reflect assumptions about the degree of correlation or lack thereof among prices of

various asset classes or other market indicators.

In times of market stress or other unforeseen circumstances, such as the market conditions experienced in 2008 and

2009, previously uncorrelated indicators may become correlated, or previously correlated indicators may move in

different directions. These types of market movements have at times limited the effectiveness of our hedging

strategies and have caused us to incur significant losses, and they may do so in the future. These changes in

correlation can be exacerbated where other market participants are using risk or trading models with assumptions or

algorithms that are similar to ours. In these and other cases, it may be difficult to reduce our risk positions due to the

activity of other market participants or widespread market dislocations, including circumstances where asset values

are declining significantly or no market exists for certain assets. To the extent that we own securities that do not

have an established liquid trading market or are otherwise subject to restrictions on sale or hedging, we may not be

able to reduce our positions and therefore reduce our risk associated with such positions. In addition, challenging

market conditions may also adversely affect our investment banking fees.

For additional information about market risk and our market risk management policies and procedures, see

“Quantitative and Qualitative Disclosures about Market Risk” in Part II, Item 7A of this Form 10-K.

Further downgrades in the U.S. government's sovereign credit rating, or in the credit ratings of instruments issued,

insured or guaranteed by related institutions, agencies or instrumentalities, could result in risks to Merrill Lynch

and its credit ratings and general economic conditions that we are not able to predict.

On August 2, 2011, Moody's affirmed the U.S. government's existing sovereign rating, but revised the rating

outlook to negative. On August 5, 2011, S&P downgraded the U.S. government's long-term sovereign credit rating

to AA+ from AAA and stated that the outlook on the long-term rating is negative. On the same day, S&P affirmed

its A-1+ short-term rating on the U.S. and removed it from CreditWatch negative. On November 28, 2011, Fitch

affirmed its AAA long-term rating on the U.S., but changed the outlook from stable to negative. On the same day,

Fitch affirmed its F1+ short-term rating on the U.S. All three rating agencies have indicated that they will continue

to assess fiscal projections and consolidation measures, as well as the medium-term economic outlook for the U.S.

There continues to be the perceived risk of a sovereign credit ratings downgrade of the U.S. government, including

the ratings of U.S. Treasury securities. It is foreseeable that the ratings and perceived creditworthiness of

instruments issued, insured or guaranteed by institutions, agencies or instrumentalities directly linked to the U.S.

government could also be correspondingly affected by any such downgrade. Instruments of this nature are key

assets on the balance sheets of financial institutions, including Merrill Lynch, and are widely used as collateral by

financial institutions to meet their day-to-day cash flows in the short-term debt market. A downgrade of the

sovereign credit ratings of the U.S. government and perceived creditworthiness of U.S. government-related

obligations could impact our ability to obtain funding that is collateralized by affected instruments, as well as

affecting the pricing of that funding when it is available. A downgrade may also adversely affect the market value of

such instruments.

We cannot predict if, when or how any changes to the credit ratings or perceived creditworthiness of these

organizations will affect economic conditions. Such ratings actions could result in a significant adverse impact to

us. The credit rating agencies’ ratings for Bank of America (and consequently, Merrill Lynch) could be directly or

indirectly impacted by a downgrade of the U.S. government’s sovereign rating because the credit ratings of large

systemically important financial institutions currently incorporate a degree of uplift due to assumptions concerning

government support.

A downgrade of the sovereign credit ratings of the U.S. government or the credit ratings of related institutions,

agencies or instrumentalities would significantly exacerbate the other risks to which Merrill Lynch is subject and

any related adverse effects on our business, financial condition and results of operations, including those described

under "Risk Factors - Credit Risk - We could suffer losses as a result of the actions of or deterioration in the

commercial soundness of our counterparties and other financial services institutions," "Risk Factors - Market Risk -

Our business and results of operations have been, and may continue to be, significantly adversely affected by

changes in the levels of market volatility and by other financial or capital market conditions" and "Risk Factors -

Liquidity Risk - Our liquidity, cash flows, financial condition and results of operations, and competitive position

may be significantly adversely affected by the inability of us or Bank of America to access capital markets, or if

there is an increase in our borrowing costs."

Uncertainty about the financial stability of several countries in the European Union ("EU"), the increasing risk that

those countries may default on their sovereign debt and related stresses on financial markets, the Euro and the EU

could have a significant adverse effect on our business, financial condition and results of operations. In 2011, the

financial crisis in Europe continued, triggered by high sovereign budget deficits and rising direct and contingent

sovereign debt in Greece, Ireland, Italy, Portugal and Spain, which created concerns about the ability of these EU

countries to continue to service their sovereign debt obligations. These conditions impacted financial markets and

resulted in credit ratings downgrades for, and high and volatile bond yields on, the sovereign debt of many EU

countries. Certain European countries continue to experience varying degrees of financial stress, and yields on

government-issued bonds in Greece, Ireland, Italy, Portugal and Spain have risen and remain volatile. Despite

assistance packages to certain of these countries, the creation of a joint EU-IMF European Financial Stability

Facility and additional expanded financial assistance to Greece, uncertainty over the outcome of the EU

governments' financial support programs and worries about sovereign finances and the stability of the Euro and the

EU persist. Market concerns over the direct and indirect exposure of certain European banks and insurers to these

EU countries resulted in a widening of credit spreads and increased costs of funding for these financial institutions.

While we have reduced our exposure to European financial institutions, the insolvency of one or more major

European financial institutions could adversely impact financial markets and, consequently, our results of

operations.

Risks and ongoing concerns about the debt crisis in Europe could have a detrimental impact on the global economic

recovery, sovereign and non-sovereign debt in these countries and the financial condition of European financial

institutions, and international financial institutions with exposure to the region, including us. Market and economic

disruptions have affected, and may continue to affect, consumer confidence levels and spending, personal

bankruptcy rates, levels of incurrence and default on consumer debt and residential mortgages, and housing prices,

among other factors. There can be no assurance that the market disruptions in Europe, including the increased cost

of funding for certain governments and financial institutions, will not spread, nor can there be any assurance that

future assistance packages will be available or, even if provided, will be sufficient to stabilize the affected countries

and markets in Europe or elsewhere. To the extent uncertainty regarding the European economic recovery

continues to negatively impact consumer confidence and consumer credit factors, or should the EU enter a deep

recession, both the U.S. economy and our business and results of operations could be significantly and adversely

affected. Global economic uncertainty, regulatory initiatives and reform have impacted, and will likely continue to

impact, non-U.S. credit and trading portfolios. We are seeking to address this risk but there can be no assurance our

efforts in this respect will be sufficient or successful. Our total sovereign and non-sovereign exposure to Greece,

Italy, Ireland, Portugal, and Spain was $2.7 billion at December 31, 2011. Our total net sovereign and non-sovereign

exposure to these countries was $1.1 billion at December 31, 2011, after taking into account net credit

default protection. At December 31, 2011, the fair value of net credit default protection purchased was $1.6 billion.

Losses could still result because our credit protection contracts pay out only under certain scenarios.

For additional information regarding our direct sovereign and non-sovereign exposures in Europe, see

“Management's Discussion and Analysis of Financial Condition and Results of Operations - Executive Overview -

Other Events - European Union Sovereign Credit Risks" and “Quantitative and Qualitative Disclosures about

Market Risk-Credit Risk Management” in Part II, Item 7A of this Form 10-K.

Declines in the value of certain of our assets could have an adverse effect on our results of operations. We have a

large portfolio of financial instruments, including, among others, certain corporate loans and loan commitments,

loans held-for-sale, repurchase agreements, long-term deposits, trading assets and liabilities, derivatives assets and

liabilities, available-for-sale securities and certain other assets and liabilities that we measure at fair value. We

determine the fair values of these instruments based on the fair value hierarchy under applicable accounting

guidance. The fair values of these financial instruments include adjustments for market liquidity, credit quality and

other transaction-specific factors, where appropriate.

Gains or losses on these instruments can have a direct and significant impact on our results of operations, unless we

have effectively hedged our exposures. Fair values may be impacted by declining values of the underlying assets or

the prices at which observable market transactions occur and the continued availability of these transactions. The

financial strength of counterparties, such as monolines, with whom we have economically hedged some of our

exposure to these assets, also will affect the fair value of these assets. Sudden declines and significant volatility in

the prices of assets may substantially curtail or eliminate the trading activity for these assets, which may make it

very difficult to sell, hedge or value such assets. The inability to sell or effectively hedge assets reduces our ability

to limit losses in such positions and the difficulty in valuing assets may increase our risk-weighted assets, which

requires us to maintain additional capital and increases our funding costs.

Asset values also directly impact revenues in our asset management businesses. We receive asset-based

management fees based on the value of our clients’ portfolios or investments in funds managed by us and, in some

cases, we also receive incentive fees based on increases in the value of such investments. Declines in asset values

can reduce the value of our clients’ portfolios or fund assets, which in turn can result in lower fees earned for

managing such assets.

For additional information about fair value measurements, see Note 4 and Note 5 to the Consolidated Financial

Statements.

Regulatory and Legal Risk

Government measures to regulate the financial services industry, including the Financial Reform Act, either

individually, in combination or in the aggregate, have increased and will continue to increase our compliance costs

and could require us to change certain of our business practices, impose significant additional costs on us, limit the

products that we offer, limit our ability to pursue business opportunities in an efficient manner, require us to

increase our capital, impact the value of assets that we hold, significantly reduce our revenues or otherwise

materially and adversely affect our businesses, financial condition and results of operations. As a financial

institution, we are heavily regulated at the state, federal and international levels. As a result of the 2008-2009

financial crisis and related global economic downturn, we have faced and expect to continue to face increased

public and legislative scrutiny as well as stricter and more comprehensive regulation of our businesses. These

regulatory and legislative measures, either individually, in combination or in the aggregate, could require us to

further change certain of our business practices, impose significant additional costs on us, limit the products that we

offer, limit our ability to pursue business opportunities in an efficient manner, require us to increase our capital,

impact the value of assets that we hold, significantly reduce our revenues or otherwise materially and adversely

affect our businesses, financial condition and results of operations.

On October 11, 2011, the Federal Reserve, the Office of the Comptroller of the Currency (the “OCC”), the Federal

Deposit Insurance Corporation (the “FDIC”) and the SEC, four of the five regulatory agencies charged with

promulgating regulations implementing limitations on proprietary trading as well as the sponsorship of or

investment in hedge funds and private equity funds (the “Volcker Rule”) established by the Financial Reform Act,

released for comment proposed implementing regulations. On January 11, 2012, the Commodities Futures Trading

Commission (the “CFTC”), the fifth agency, released for comment its proposed regulations under the Volcker Rule.

The proposed regulations include clarifications to the definition of proprietary trading and distinctions between

permitted and prohibited activities. The comment period for the first regulations proposed ended on February 13,

2012 and the comment period for the CFTC regulations will end in March 2012.

The statutory provisions of the Volcker Rule will become effective on July 21, 2012, whether or not the final

regulations are adopted, and it gives certain financial institutions two years from the effective date, with

opportunities for additional extensions, to bring activities and investments into compliance. Although Merrill Lynch

exited its stand-alone proprietary trading business as of June 30, 2011 in anticipation of the Volcker Rule and to

further our initiative to optimize our balance sheet, the ultimate impact of the Volcker Rule on us remains uncertain.

However, based on the content of the proposed regulations, it is possible that the implementation of the Volcker

Rule could limit or restrict our remaining trading activities. Implementation of the Volcker Rule could also limit or

restrict our ability to sponsor and hold ownership interests in hedge funds, private equity funds and other subsidiary

operations. Additionally, implementation of the Volcker Rule could increase our operational and compliance costs,

reduce our trading revenues and adversely affect our results of operations. The date by which final regulations will

be issued is uncertain.

Additionally, the Financial Reform Act includes measures to broaden the scope of derivative instruments subject to

regulation by requiring clearing and exchange trading of certain derivatives; imposing new capital, margin,

reporting, registration and business conduct requirements for certain market participants; and imposing position

limits on certain OTC derivatives. The Financial Reform Act grants the CFTC and the SEC substantial new

authority and requires numerous rulemakings by these agencies. The Financial Reform Act required regulators to

promulgate the rulemakings necessary to implement these regulations by July 16, 2011. However, the rulemaking

process was not completed as of that date, and is not expected to conclude until well into 2012. Further, the

regulators granted temporary relief from certain requirements that would have taken effect on July 16, 2011 absent

any rulemaking. The SEC temporary relief is effective until final rules relevant to each requirement become

effective. The CFTC temporary relief is effective until the earlier of July 16, 2012 or the date on which final rules

relevant to each requirement become effective. The ultimate impact of these derivatives regulations, and the time it

will take to comply, continue to remain uncertain. The final regulations will impose additional operational and

compliance costs on us and may require us to restructure certain businesses, thereby negatively impacting our

revenues and results of operations.

Similarly, in the U.K., the FSA has issued proposed rules requiring the submission of significant information about

certain U.K. incorporated subsidiaries (including information on intra-group dependencies and legal entity separation) to allow the FSA to develop resolution plans. As a result of the FSA review, we could be required to take certain actions over the next several years, which could impose operational costs and potentially could result in the restructuring of certain businesses and subsidiaries.

Many of the provisions under the Financial Reform Act have begun to be phased in or will be phased in over the

next several months or years and will be subject both to further rulemaking and the discretion of applicable

regulatory bodies. The Financial Reform Act will continue to have a significant and negative impact on our earnings

through revenue reductions, higher costs and new restrictions. The ultimate impact of the Financial Reform Act on

our businesses and results of operations will depend on regulatory interpretation and rulemaking, as well as the

success of any of our actions to mitigate the negative earnings impact of certain provisions.

Changes in the structure of the GSEs and the relationship among the GSEs, the government and the private

markets, or the conversion of the current conservatorship of the GSEs into receivership, could adversely impact

certain of our operations. Each GSE is currently in a conservatorship, with its primary regulator, the Federal

Housing Finance Agency (the "FHFA"), acting as conservator. During these conservatorships the FHFA may

increasingly converge certain risk management and other standards and practices of each enterprise, which could

result in a more uniform market for delivering agency conforming mortgage loans. We cannot predict if, when or

how the conservatorships will end, or any associated changes to the GSEs' business structure that could result. We

also cannot predict whether the conservatorships will end in receivership. There are several proposed approaches to

reform the GSEs which, if enacted, could change the structure of the GSEs and the relationship among the GSEs,

the government and the private markets, including the trading markets for agency conforming mortgage loans and

markets for mortgage-related securities in which we participate. We cannot predict the prospects for the enactment,

timing or content of legislative or rulemaking proposals regarding the future status of the GSEs. Accordingly, there

continues to be uncertainty regarding the future of the GSEs, including whether they will continue to exist in their

current form. GSE reform, if enacted, could adversely impact certain of our operations.

We face substantial potential legal liability and significant regulatory action, which could have material adverse

effects on our cash flows, financial condition and results of operations or cause significant reputational harm to

us. We face significant legal risks in our businesses, and the volume of claims and amount of damages and

penalties claimed in litigation and regulatory proceedings against us and other financial institutions remain high and

are increasing. Increased litigation costs, substantial legal liability or significant regulatory action against us could

have material adverse effects on our financial condition and results of operations or cause significant reputational

harm to us, which in turn could adversely impact our business prospects. In addition, we continue to face increased

litigation risk and regulatory scrutiny. We have continued to experience increased litigation and other disputes with

counterparties regarding relative rights and responsibilities. Consumers, clients and other counterparties have grown

more litigious. Our experience with certain regulatory authorities suggests a migration towards an increasing

supervisory focus on enforcement, including in connection with alleged violations of law and customer harm. The

current environment of additional regulation, increased regulatory compliance burdens, and enhanced regulatory

enforcement, combined with ongoing uncertainty related to the continuing evolution of the regulatory environment,

has resulted in significant operational and compliance costs and may limit our ability to continue providing certain

products and services.

These litigation and regulatory matters and any related settlements could have a material adverse effect on our cash

flows, financial condition and results of operations. They could also negatively impact our reputation. For

information concerning certain litigation-related expenses recognized for 2011 and 2010, the estimated aggregate

range of possible losses in excess of the accrued liability (if any) related to litigation matters (where an estimate is

possible) at December 31, 2011, as well as a further discussion of litigation risks, see Note 14 to the Consolidated

Financial Statements in Part II, Item 8 of this Form 10-K.

Changes in governmental fiscal and monetary policy could adversely affect our financial condition and results of

operations. Our businesses and earnings are affected by domestic and international fiscal and monetary policy. The

Federal Reserve regulates the supply of money and credit in the U.S. and its policies determine in large part our cost

of funds for lending, investing and capital raising activities and the return we earn on those loans and investments,

both of which affect our net interest revenue. The actions of the Federal Reserve also can materially affect the value

of financial instruments and other assets, such as debt securities, and its policies also can affect our borrowers,

potentially increasing the risk that they may fail to repay their loans. Our businesses and earnings are also affected

by the fiscal or other policies that are adopted by the U.S. government, various U.S. regulatory authorities and non-

U.S. governments and regulatory authorities. Changes in domestic and international fiscal and monetary policies

are beyond our control and difficult to predict, but could have an adverse impact on our capital requirements and the

costs of running our businesses, in turn adversely impacting our financial condition and results of operations.

Changes in U.S. and non-U.S. tax and other laws and regulations could adversely affect our financial condition and

results of operations. The U.S. Congress and the Administration have signaled growing interest in reforming the

U.S. corporate income tax. While the timing of such reform is unclear, possible approaches include lowering the

35% corporate tax rate, modifying the taxation of income earned outside of the U.S. and limiting or eliminating

various other deductions, tax credits and/or other tax preferences. It is not possible at this time to quantify either the

one-time impact from remeasuring deferred tax assets and liabilities that might result upon enactment of tax reform

or the ongoing impact reform might have on income tax expense, but either of these impacts could adversely affect

our financial condition and results of operations.

In addition, the income from certain non-U.S. subsidiaries has not been subject to U.S. income tax as a result of

long-standing deferral provisions applicable to income that is derived in the active conduct of a banking and

financing business (active finance income). The U.S. Congress has extended the application of these deferral

provisions several times, most recently in 2010. These provisions now are set to expire for taxable years beginning

on or after January 1, 2012. Absent an extension of these provisions, active financing income earned by certain non-

U.S. subsidiaries will generally be subject to a tax provision that considers incremental U.S. income tax. The impact

of the expiration of these provisions would depend upon the amount, composition and geographic mix of our future

earnings.

Other countries have also proposed and, in some cases, adopted certain regulatory changes targeted at financial

institutions or that otherwise affect us. The EU has adopted increased capital requirements and the U.K. has (i)

increased liquidity requirements for local financial institutions, including regulated U.K. subsidiaries of non-U.K.

bank holding companies and other financial institutions as well as branches of non-U.K. banks located in the U.K;

(ii) adopted a Bank Tax Levy which will apply to the aggregate balance sheet of branches and subsidiaries of non-

U.K. banks and banking groups operating in the U.K.; and (iii) proposed the creation and production of recovery

and resolution plans by U.K.-regulated entities.

On July 19, 2011, the U.K. 2011 Finance Bill was enacted, which reduced the corporate income tax rate by one

percent to 26% beginning on April 1, 2011, and then to 25% effective April 1, 2012. These rate reductions will

favorably affect income tax expense on future U.K. earnings but also required us to remeasure our U.K. net deferred

tax assets using the lower tax rates. The income tax benefit for the year ended December 31, 2011 included a $774

million charge for the remeasurement. If U.K. corporate income tax rates were to be reduced to 23% by 2014, as

suggested in U.K. Treasury announcements and assuming no change in the deferred tax asset balance, a charge to

income tax expense of approximately $400 million for each one percent reduction in the rate would result in each

period of enactment (for a total of approximately $800 million). We are also monitoring other international

legislative proposals that could materially impact us, such as changes to corporate income tax laws. Currently, in the

U.K., net operating loss carryforwards (“NOLs”) have an indefinite life. Were the U.K. taxing authorities to

introduce limitations on the future utilization of NOLs and we were unable to document our continued ability to

fully utilize our NOLs, we would be required to establish a valuation allowance by a charge to income tax expense.

Depending upon the nature of the limitations, such a charge could be material to our results of operations in the

period of enactment.

Risk of the Competitive Environment in Which We Operate

We face significant and increasing competition in the financial services industry. We operate in a highly

competitive environment. Over time, there has been substantial consolidation among companies in the financial

services industry, and this trend accelerated in recent years. This trend has also hastened the globalization of the

securities and financial services markets. We will continue to experience intensified competition as consolidation

and globalization of the financial services industry may produce larger, better-capitalized and more geographically

diverse companies that are capable of offering a wider array of financial products and services at more competitive

prices. To the extent we expand into new business areas and new geographic regions, we may face competitors with

more experience and more established relationships with clients, regulators and industry participants in the relevant

market, which could adversely affect our ability to compete. In addition, technological advances and the growth of

e-commerce have made it possible for non-depository institutions to offer products and services that traditionally

were banking products, and for financial institutions to compete with technology companies in providing electronic

and internet-based financial solutions. Increased competition may negatively affect our results of operations by

creating pressure to lower prices on our products and services and reducing market share.

Damage to our reputation could significantly harm our businesses, including our competitive position and business

prospects. Our ability to attract and retain customers, clients, investors and employees is impacted by our

reputation. Public perception of us and others in the financial services industry appeared to decline in 2011. We

continue to face increased public and regulatory scrutiny resulting from the financial crisis and economic downturn,

as well as our acquisition by Bank of America and the suitability or reasonableness of recommending particular

trading or investment strategies.

Significant harm to our reputation can also arise from other sources, including indirectly as a result of actions by

Bank of America or damage to its reputation, employee misconduct, litigation or regulatory outcomes, failing to

deliver minimum or required standards of service and quality, compliance failures, unethical behavior, unintended

disclosure of confidential information, and the activities of our clients, customers and counterparties, including

vendors. Actions by the financial services industry generally or by certain members or individuals in the industry

also can significantly adversely affect our reputation.

We are subject to complex and evolving laws and regulations regarding privacy, data protections and other matters.

Principles concerning the appropriate scope of consumer and commercial privacy vary considerably in different

jurisdictions, and regulatory and public expectations regarding the definition and scope of consumer and

commercial privacy may remain fluid into the future. It is possible that these laws may be interpreted and applied

by various jurisdictions in a manner that is inconsistent with our current or future practices, or that is inconsistent

with one another. We face regulatory, reputational and operational risks if personal, confidential or proprietary

information of customers or clients in our possession is mishandled or misused.

We could suffer significant reputational harm if we fail to properly identify and manage potential conflicts of

interest. Management of potential conflicts of interest has become increasingly complex as we expand our business

activities through more numerous transactions, obligations and interests with and among our clients. The failure to

adequately address, or the perceived failure to adequately address, conflicts of interest could affect the willingness

of clients to deal with us, or give rise to litigation or enforcement actions, which could adversely affect our

businesses.

Our actual or perceived failure to address these and other issues gives rise to reputational risk that could cause

significant harm to us and our business prospects, including failure to properly address operational risks. Failure to

appropriately address any of these issues could also give rise to additional regulatory restrictions, legal risks and

reputational harm, which could, among other consequences, increase the size and number of litigation claims and

damages asserted or subject us to enforcement actions, fines and penalties and cause us to incur related costs and

expenses.

Our ability to attract and retain qualified employees is critical to the success of our businesses and failure to do so

could adversely affect our business prospects, including our competitive position and results of operations. Our

performance is heavily dependent on the talents and efforts of highly skilled individuals. Competition for qualified

personnel within the financial services industry and from businesses outside the financial services industry has

been, and is expected to continue to be, intense. Our competitors include non-U.S.-based institutions and

institutions otherwise not subject to compensation and hiring regulations imposed on U.S. institutions and financial

institutions in particular. The difficulty we face in competing for key personnel is exacerbated in emerging markets,

where we are often competing for qualified employees with entities that may have a significantly greater presence

or more extensive experience in the region.

In order to attract and retain qualified personnel, we must provide market-level compensation. As a subsidiary of

Bank of America, we may be subject to limitations on compensation practices (which may or may not affect our

competitors) by regulators in the U.S. or around the world. Any future limitations on executive compensation

imposed by legislation or regulation could adversely affect our ability to attract and maintain qualified employees.

Furthermore, a substantial portion of our annual bonus compensation paid to our senior employees has in recent

years taken the form of long-term equity awards. The value of long-term equity awards to senior employees

generally has been negatively affected by the significant decline in the market price of Bank of America's common

stock. If we are unable to continue to attract and retain qualified individuals, our business prospects, including our

competitive position and results of operations, could be adversely affected.

In addition, if we fail to retain the wealth advisors that we employ in our wealth and investment management

business, particularly those with significant client relationships, such failure could result in a significant loss of

clients or the withdrawal of significant client assets. Any such loss or withdrawal could adversely impact our wealth

and investment management business activities and our financial condition, results of operations and cash flows.

We may not be able to achieve expected cost savings from cost-saving initiatives, including from Project New BAC,

or in accordance with currently anticipated time frames. We are currently engaged in numerous efforts to achieve

certain cost savings, including, among other things, Project New BAC.

Project New BAC is a two-phase, enterprise-wide initiative to simplify and streamline workflows and processes,

align businesses and costs more closely with Bank of America's overall strategic plan and operating principles, and

increase revenues. Phase 1 focused on Bank of America's consumer businesses and related support, technology and

operations functions. Phase 2 focuses on businesses and related support, technology and operations functions not

subject to evaluation in Phase 1. All aspects of Project New BAC are expected to be implemented by the end of

2014.

We may be unable to fully realize the cost savings and other anticipated benefits from our cost saving initiatives, or

in accordance with currently anticipated timeframes.

Our inability to adapt our products and services to evolving industry standards and consumer preferences could

harm our businesses. Our success depends, in part, on our ability to adapt our products and services to evolving

industry standards. There is increasing pressure by competitors to provide products and services at lower prices.

This can reduce our revenues from our fee-based products and services. In addition, the widespread adoption of

new technologies, including internet services, could require us to incur substantial expenditures to modify or adapt

our existing products and services. We might not be successful in developing or introducing new products and

services, responding or adapting to changes in consumer spending and saving habits, achieving market acceptance

of our products and services, or sufficiently developing and maintaining loyal customers.

Risks Related to Risk Management

Our risk management framework may not be effective in mitigating risk and reducing the potential for significant

losses. Our risk management framework is designed to minimize risk and loss to us. We seek to identify, measure,

monitor, report and control our exposure to the types of risk to which we are subject, including strategic, credit,

market, liquidity, compliance, operational and reputational risks, among others. While we employ a broad and

diversified set of risk monitoring and mitigation techniques, those techniques are inherently limited because they

cannot anticipate the existence or future development of currently unanticipated or unknown risks. Recent

economic conditions, heightened legislative and regulatory scrutiny of the financial services industry and increases

in the overall complexity of our operations, among other developments, have resulted in a heightened level of risk

for us. Accordingly, we could suffer losses as a result of our failure to properly anticipate and manage these risks,

including all correlations and downstream secondary or follow-on effects that occur.

A failure in or breach of our operational or security systems or infrastructure, or those of third parties with which

we do business, including as a result of cyber attacks, could disrupt our businesses, result in the disclosure or

misuse of confidential or proprietary information, damage our reputation, increase our costs and cause losses. Any

such failure also could have a material adverse effect on our business, financial condition and results of

operations. Our business is highly dependent on our ability to process, record and monitor, on a continuous basis, a

large number of transactions, many of which are highly complex, across numerous and diverse markets in many

currencies. The potential for operational risk exposure exists throughout our organization, including losses resulting

from unauthorized trades by any employees.

Integral to our performance is the continued efficacy of our internal processes, systems, relationships with third

parties and the vast array of employees and key executives in our day-to-day and ongoing operations. With regard

to the physical infrastructure and systems that support our operations, we have taken measures to implement backup

systems and other safeguards, but our ability to conduct business may be adversely affected by any significant and

widespread disruption to our infrastructure or systems. Our financial, accounting, data processing, backup or other

operating systems and facilities may fail to operate properly or become disabled or damaged as a result of a number

of factors including events that are wholly or partially beyond our control and adversely affect our ability to process

these transactions or provide these services. There could be sudden increases in customer transaction volume;

electrical or telecommunications outages; natural disasters such as earthquakes, tornadoes and hurricanes; disease

pandemics; events arising from local or larger scale political or social matters, including terrorist acts; and cyber

attacks. We continuously update these systems to support our operations and growth. This updating entails

significant costs and creates risks associated with implementing new systems and integrating them with existing

ones.

Information security risks for large financial institutions such as Bank of America and Merrill Lynch have

significantly increased in recent years in part because of the proliferation of new technologies, the use of the

Internet and telecommunications technologies to conduct financial transactions, and the increased sophistication

and activities of organized crime, hackers, terrorists and other external parties, including foreign state actors. Our

operations rely on the secure processing, transmission and storage of confidential, proprietary and other information

in our computer systems and networks. We rely on our digital technologies, computer and email systems, software,

and networks to conduct our operations. In addition, to access our products and services, our customers may use

personal smartphones, tablet PCs, and other mobile devices that are beyond our control systems. Our technologies,

systems, networks, and our customers' devices have been subject to, and are likely to continue to be the target of,

cyber attacks, computer viruses, malicious code, phishing attacks or information security breaches that could result

in the unauthorized release, gathering, monitoring, misuse, loss or destruction of our or our customers' confidential,

proprietary and other information, or otherwise disrupt our or our customers' or other third parties' business

operations. Because of our prominence, we believe that such attacks may continue.

Although to date we have not experienced any material losses relating to cyber attacks or other information security

breaches, there can be no assurance that we will not suffer such losses in the future. Our risk and exposure to these

matters remains heightened because of, among other things, the evolving nature of these threats, the prominent size

and scale of Bank of America and Merrill Lynch and their roles in the financial services industry, their expanded

geographic footprint and international presence, the outsourcing of some of their business operations, the continued

uncertain global economic environment, and system and customer account conversions. As a result, cybersecurity

and the continued development and enhancement of our controls, processes and practices designed to protect our

systems, computers, software, data and networks from attack, damage or unauthorized access remain a priority for us. As cyber threats continue to evolve, we may be required to expend significant additional resources to continue to

modify or enhance our protective measures or to investigate and remediate any information security vulnerabilities.

In addition, we also face the risk of operational failure, termination or capacity constraints of any of the third parties

with which we do business or that facilitate our business activities, including clearing agents, exchanges, clearing

houses or other financial intermediaries we use to facilitate our securities transactions. In recent years, there has

been significant consolidation among clearing agents, exchanges and clearing houses and increased

interconnectivity of multiple financial institutions with central agents, exchanges and clearing houses. This

consolidation and interconnectivity increases the risk of operational failure, on both individual and industry-wide

bases, as disparate complex systems need to be integrated, often on an accelerated basis. Any such failure,

termination or constraint could adversely affect our ability to effect transactions, service our clients, manage our

exposure to risk or expand our businesses and could have a significant adverse impact on our liquidity, financial

condition and results of operations.

Disruptions or failures in the physical infrastructure or operating systems that support our business and customers,

or cyber attacks or security breaches of the networks, systems or devices that our customers use to access our

products and services could result in the loss of customers and business opportunities, legal liability, regulatory

fines, penalties or intervention, reputational damage, reimbursement or other compensatory costs, and additional

compliance costs, any of which could materially adversely affect our business, financial condition and results of

operations.

Risk of Being an International Business

We are subject to numerous political, economic, market, reputational, operational, legal, regulatory and other risks

in the non-U.S. jurisdictions in which we operate which could adversely impact our businesses, financial condition

and results of operations. We do business throughout the world, including in developing regions of the world

commonly known as emerging markets. Our businesses and revenues derived from non-U.S. jurisdictions are

subject to risk of loss from currency fluctuations, social or judicial instability, changes in governmental policies or

policies of central banks, expropriation, nationalization and/or confiscation of assets, price controls, capital controls,

exchange controls, other restrictive actions, unfavorable political and diplomatic developments and changes in

legislation. These risks are especially acute in emerging markets. Many non-U.S. jurisdictions in which we do

business have been negatively impacted by recessionary conditions. While a number of these jurisdictions are

showing signs of recovery, others continue to experience increasing levels of stress. In addition, the increasing

potential risk of default on sovereign debt in some non-U.S. jurisdictions could expose us to substantial losses.

Risks in one country can affect our operations in another country or countries, including our operations in the U.S.

As a result, any such unfavorable conditions or developments could have an adverse impact on our businesses,

financial condition and results of operations.

Our non-U.S. businesses are also subject to extensive regulation by various non-U.S. regulators, including

governments, securities exchanges, central banks and other regulatory bodies, in the jurisdictions in which those

businesses operate. In many countries, the laws and regulations applicable to the financial services and securities

industries are uncertain and evolving, and it may be difficult for us to determine the exact requirements of local

laws in every market or manage our relationships with multiple regulators in various jurisdictions. Our inability to

remain in compliance with local laws in a particular market and manage our relationships with regulators could

have a significant and adverse effect not only on our businesses in that market but also on our reputation generally.

We also invest or trade in the securities of corporations and governments located in non-U.S. jurisdictions,

including emerging markets. Revenues from the trading of non-U.S. securities may be subject to negative

fluctuations as a result of the above factors. Furthermore, the impact of these fluctuations could be magnified

because non-U.S. trading markets, particularly in emerging market countries, are generally smaller, less liquid and

more volatile than U.S. trading markets.

We are subject to geopolitical risks, including acts or threats of terrorism, and actions taken by the U.S. or other

governments in response thereto and/or military conflicts that could adversely affect business and economic

conditions abroad as well as in the U.S.

Risk from Accounting Changes

Changes in accounting standards or inaccurate estimates or assumptions in the application of accounting policies

could adversely affect our financial condition and results of operations. Our accounting policies and methods are

fundamental to how we record and report our financial condition and results of operations. Some of these policies

require use of estimates and assumptions that may affect the reported value of our assets or liabilities and results of

operations and are critical because they require management to make difficult, subjective and complex judgments

about matters that are inherently uncertain. If those assumptions, estimates or judgments were incorrectly made, we

could be required to correct and restate prior-period financial statements.

Accounting standard-setters and those who interpret the accounting standards (such as the Financial Accounting

Standards Board, the SEC and our independent registered public accounting firm) may also amend or even reverse

their previous interpretations or positions on how various standards should be applied. These changes can be

difficult to predict and can materially impact how we record and report our financial condition and results of

operations. In some cases, we could be required to apply a new or revised standard retroactively, resulting in Merrill

Lynch needing to revise and republish prior-period financial statements. For further information on some of our

critical accounting policies and standards and recent accounting changes, see Note 1 to the Consolidated Financial

Statements.

Risk of Being a Wholly-Owned Subsidiary

We are a direct wholly-owned subsidiary of Bank of America and therefore are subject to strategic decisions of

Bank of America and affected by Bank of America’s performance. We are fundamentally affected by our

relationship with Bank of America. As a direct wholly-owned subsidiary of Bank of America, we are subject to a

wide range of possible strategic decisions that Bank of America may make from time to time. Those strategic

decisions could include the level and types of financing and other support made available to us by Bank of America.

In addition, circumstances and events affecting Bank of America can significantly affect us. For example, the

primary drivers of our credit ratings are Bank of America’s credit ratings, and when rating agencies take actions

regarding Bank of America’s credit ratings and outlooks, they generally take the same actions with respect to our

ratings and outlooks. Also, we have several borrowing arrangements and a globally coordinated funding strategy

with Bank of America. Significant changes in Bank of America’s strategy or its relationship with us could have a

material adverse effect on our business. Material adverse changes in the performance of Bank of America or its

other subsidiaries could have a material adverse effect on our results of operations, financial condition and liquidity.

We are indirectly exposed, therefore, to many of the risks to which Bank of America is directly exposed. Bank of

America has not assumed or guaranteed the long-term debt that was issued or guaranteed by ML & Co. or its

subsidiaries prior to the acquisition of Merrill Lynch by Bank of America.

As a wholly-owned subsidiary of Bank of America, a bank holding company that is also a financial holding

company, we are subject to the oversight of, and inspection by, the Federal Reserve. If Bank of America does not

comply with regulatory requirements applicable to banking institutions with respect to regulatory capital, capital

ratios and liquidity and required increases in the foregoing, our liquidity would be adversely affected. In order to

comply with such requirements, Bank of America may be required to liquidate company assets, among other

actions. Our activities are limited to those that are permissible for Bank of America under applicable laws and

regulations. As a financial holding company, Bank of America (directly or through its subsidiaries) may engage in

activities that are “financial in nature.” Bank of America’s status as a financial holding company requires, among

other conditions, that each of its subsidiary insured depository institutions be well-capitalized and well-managed.

Failure to satisfy these conditions may result in the Federal Reserve limiting the activities of Bank of America,

which thereby could restrict our current business activities, require divestiture of certain of our assets and

operations or limit potential future strategic plans.

Attached files

MERRILL LYNCH PREFERRED FUNDING V LP Reports

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