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Accounting for Derivative Instruments and Hedging Activities
 12 Months Ended
Dec. 31, 2015
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company enters into derivative transactions primarily to protect against interest rate risk on the value of certain assets, liabilities and future cash flows. Each derivative instrument is recorded on the consolidated balance sheet at fair value as a freestanding asset or liability. The following table summarizes the fair value amounts of derivatives designated as hedging instruments reported in the consolidated balance sheet at December 31, 2015 and 2014 (dollars in millions): 
 
 
 
Fair Value
 
Notional
 
Asset(1)
 
Liability(2)
 
Net(3)
December 31, 2015
 
 
 
 
 
 
 
Interest rate contracts:
 
 
 
 
 
 
 
Cash flow hedges
$
—

 
$
—

 
$
—

 
$
—

Fair value hedges
2,204

 
10

 
(55
)
 
(45
)
Total derivatives designated as hedging instruments(4)
$
2,204

 
$
10

 
$
(55
)
 
$
(45
)
December 31, 2014
 
 
 
 
 
 
 
Interest rate contracts:
 
 
 
 
 
 
 
Cash flow hedges
$
2,000

 
$
23

 
$
(24
)
 
$
(1
)
Fair value hedges
1,069

 
1

 
(42
)
 
(41
)
Total derivatives designated as hedging instruments(4)
$
3,069

 
$
24

 
$
(66
)
 
$
(42
)
 
(1)
Reflected in the other assets line item on the consolidated balance sheet.
(2)
Reflected in the other liabilities line item on the consolidated balance sheet.
(3)
Represents derivative assets net of derivative liabilities for disclosure purposes only.
(4)
All derivatives were designated as hedging instruments at December 31, 2015 and 2014.
Cash Flow Hedges
Cash flow hedges, which include a combination of interest rate swaps and purchased options, including caps, are used primarily to reduce the variability of future cash flows associated with existing variable-rate assets and liabilities and forecasted issuances of liabilities. The effective portion of the changes in fair value of the derivative instruments in a cash flow hedge is reported as a component of accumulated other comprehensive loss, net of tax in the consolidated balance sheet, for both active and discontinued hedges. Amounts are reclassified from accumulated other comprehensive loss into net operating interest income as a yield adjustment in the same period the hedged forecasted transaction affects earnings. If it becomes probable that a hedged forecasted transaction will not occur, amounts included in accumulated other comprehensive loss related to the specific hedging instruments would be immediately reclassified into the gains (losses) on securities and other line item in the consolidated statement of income.
At December 31, 2014, accumulated other comprehensive loss attributable to cash flow hedges, pre-tax, was $422 million. These cash flow hedges were used to hedge the forecasted transactions related to repurchase agreements and FHLB advances. Following E*TRADE Clearing's move out from under E*TRADE Bank on July 1, 2015, the Company evaluated the sufficiency of the capital and liquidity position and, in early September, management and the Board concluded that E*TRADE Bank would deploy excess capital to terminate the $4.4 billion of legacy wholesale funding obligations. As the Company's intent changed and the hedged forecasted transactions became probable of not occurring, the Company reclassified $370 million of pre-tax losses on cash flow hedges from accumulated other comprehensive loss into earnings during the during 2015.
The following table summarizes the effect of interest rate contracts designated and qualifying as hedging instruments in cash flow hedges on accumulated other comprehensive loss and on the consolidated statement of income for the years ended December 31, 2015, 2014 and 2013 (dollars in millions): 
 
 
For the Year Ended December 31,
 
 
2015
 
2014
 
2013
Gains (losses) on derivatives recognized in OCI (effective portion), net of tax
 
$
(10
)
 
$
(39
)
 
$
67

Losses reclassified from AOCI into earnings (effective portion), net of tax(1)
 
$
(271
)
 
$
(76
)
 
$
(87
)
Cash flow hedge ineffectiveness gains(2)
 
$
—

 
$
—

 
$
1


(1)
Includes the reclassification of losses deferred in accumulated other comprehensive loss into earnings related to cash flow hedges as a result of the termination of repurchase agreements and FHLB advances during the year ended December 31, 2015.
(2)
The ineffective portion of the change in fair value of the derivative instrument in a cash flow hedge, which is equal to the excess of the cumulative change in the fair value of the actual derivative over the cumulative change in the fair value of a hypothetical derivative which is created to match the exact terms of the underlying instruments being hedged, is reported in the gains (losses) on securities and other line item in the consolidated statement of income.
Fair Value Hedges
Fair value hedges are used to offset exposure to changes in value of certain fixed-rate assets and liabilities. Fair value hedges are accounted for by recording the fair value of the derivative instrument and the fair value of the asset or liability being hedged on the consolidated balance sheet. Changes in the fair value of both the derivative instruments and the underlying assets or liabilities are recognized in the gains (losses) on securities and other line item in the consolidated statement of income. To the extent that the hedge is ineffective, the changes in the fair values will not offset and the difference, or hedge ineffectiveness, is reflected in the gains (losses) on securities and other line item in the consolidated statement of income.
Hedge accounting is discontinued for fair value hedges if a derivative instrument is sold, terminated or otherwise de-designated. If fair value hedge accounting is discontinued, the previously hedged item is no longer adjusted for changes in fair value through the consolidated statement of income and the cumulative net gain or loss on the hedged asset or liability at the time of de-designation is amortized to interest income or interest expense using the effective interest method over the expected remaining life of the hedged item. Changes in the fair value of the derivative instruments after de-designation of fair value hedge accounting are recorded in the gains (losses) on securities and other line item in the consolidated statement of income.
The following table summarizes the effect of interest rate contracts designated and qualifying as hedging instruments in fair value hedges and related hedged items on the consolidated statement of income for the years ended December 31, 2015, 2014 and 2013 (dollars in millions): 
 
Year Ended December 31,
 
2015
 
2014
 
Hedging
Instrument
 
Hedged
Item
 
Hedge
Ineffectiveness(1)
 
Hedging
Instrument
 
Hedged
Item
 
Hedge
Ineffectiveness(1)
Agency debentures
$
(3
)
 
$
3

 
$
—

 
$
(100
)
 
$
91

 
$
(9
)
Agency mortgage-backed securities
(4
)
 
3

 
(1
)
 
(33
)
 
32

 
(1
)
Total gains (losses) included in earnings
$
(7
)
 
$
6

 
$
(1
)
 
$
(133
)
 
$
123

 
$
(10
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Year Ended December 31,
 
 
 
 
 
 
 
2013
 
 
 
 
 
 
 
Hedging
Instrument
 
Hedged
Item
 
Hedge
Ineffectiveness(1)
 
 
 
 
 
 
Agency debentures
$
73

 
$
(72
)
 
$
1

 
 
 
 
 
 
Agency mortgage-backed securities
34

 
(35
)
 
(1
)
 
 
 
 
 
 
Total gains (losses) included in earnings
$
107

 
$
(107
)
 
$
—

 
 
 
 
 
 
(1)
Reflected in the gains (losses) on securities and other line item on the consolidated statement of income.

Credit Risk
Impact on Fair Value Measurements
Credit risk is an element of the recurring fair value measurements for certain assets and liabilities, including derivative instruments. Credit risk is managed by limiting activity to approved counterparties and setting aggregate exposure limits for each approved counterparty. The Company also monitors collateral requirements on derivative instruments through credit support agreements, which reduce risk by permitting the netting of transactions with the same counterparty upon occurrence of certain events.
The Company considered the impact of credit risk on the fair value measurement for derivative instruments, particularly those in net liability positions to counterparties, to be mitigated by the enforcement of credit support agreements, and the collateral requirements therein. The Company pledged approximately $130 million of its cash and mortgage-backed securities as collateral related to its derivative contracts in net liability positions to counterparties at December 31, 2015.
The Company’s credit risk analysis for derivative instruments also considered the credit loss exposure on derivative instruments in net asset positions. During the year ended December 31, 2015, the consideration of counterparty credit risk did not result in an adjustment to the valuation of the Company’s derivative instruments.
Impact on Liquidity
In the normal course of business, collateral requirements contained in the Company’s derivative instruments are enforced by the Company and its counterparties. Upon enforcement of the collateral requirements, the amount of collateral requested is typically based on the net fair value of all derivative instruments with the counterparty; that is derivative assets net of derivative liabilities at the counterparty level. If the Company were to be in violation of certain provisions of the derivative instruments, the counterparties to the derivative instruments could request payment or collateralization on derivative instruments. The Company expects such requests would be based on the fair value of derivative assets net of derivative liabilities at the counterparty level. The fair value of derivative instruments in net liability positions at the counterparty level was $45 million at December 31, 2015. The fair value of the Company’s cash and mortgage-backed securities pledged as collateral related to derivative contracts in net liability positions to counterparties, was $130 million at December 31, 2015, which exceeded derivative instruments in net liability positions at the counterparty level by $85 million.