Derivative Instruments and Hedging Activities

6 Months Ended

Jun. 30, 2020

Derivative Instruments and Hedging Activities Disclosure [Abstract]

DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES


NOTE 8—DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

Presentation on the Consolidated Balance Sheets

Hedging Instruments

The Company utilizes fair value hedges to offset exposure to changes in value of certain fixed-rate assets. All derivative contracts were designated as hedging instruments at June 30, 2020 and December 31, 2019, and the notional amount associated with these fair value hedge contracts was $10.5 billion and $10.1 billion, respectively, for the same periods. The consolidated balance sheets exclude derivative assets of $1 million and $52 million at June 30, 2020 and December 31, 2019, respectively, and derivative liabilities of $994 million and $457 million for the same periods. These contracts were executed through central clearing organizations and were settled by variation margin payments.

Credit Risk

As all of the derivatives that the Company utilizes in its hedging activities at June 30, 2020 are subject to derivatives clearing agreements (cleared derivatives contracts), the credit risk associated with these cleared derivatives contracts is largely mitigated by the daily variation margin exchanged with counterparties.

Hedged Assets

The following table presents the cumulative basis adjustments related to the amortized cost basis or carrying amount of hedged assets in fair value hedging relationships (dollars in millions):


			Cumulative Amount of Fair Value Hedging Basis Adjustment of Hedged Assets⁽²⁾
	Amortized Cost of Hedged Assets⁽¹⁾		Total		Active		Discontinued
June 30, 2020:
Available-for-sale securities⁽³⁾	$	13,589	$	1,540	$	1,301	$	239







			Cumulative Amount of Fair Value Hedging Basis Adjustment Included in Carrying Amount of Hedged Assets⁽²⁾
	Carrying Amount of Hedged Assets⁽⁴⁾		Total		Active		Discontinued
December 31, 2019:
Available-for-sale securities⁽³⁾	$	12,480	$	583	$	810	$	(227)

(1)The Company adopted amended accounting guidance related to derivatives and hedging on a prospective basis on January 1, 2020. Prior year amounts were not restated. Refer to Note 1—Organization, Basis of Presentation and Summary of Significant Accounting Policies for further details. Amortized cost includes the initial acquisition price and the cost basis adjustments relating to discontinued fair value hedges, net of accumulated amortization or accretion.

(2)Represents the increase (decrease) to the amortized cost or carrying amount of hedged assets. If fair value hedge accounting is discontinued, the previously hedged item is no longer adjusted for changes in fair value through the consolidated statements of income and the cumulative net gain or loss on the hedged item is amortized to net interest income using the effective interest method over the contractual life of the hedged item adjusted to reflect actual prepayments.

(3)Includes the amortized cost basis and carrying value of closed portfolios of prepayable securities designated in hedging relationships in which the hedged item is the last layer of principal expected to be remaining throughout the hedge term as of June 30, 2020 and December 31, 2019. As of June 30, 2020 and December 31, 2019, respectively, the amortized cost basis of this portfolio was $383 million and $162 million, the amount of the designated hedged items was $290 million and $148 million and the cumulative amount of fair value hedging basis adjustments associated with these hedges was a loss of $19 million and a gain of $1 million.

(4)The carrying amount includes the amortized cost and the impact of basis adjustments on active fair value hedges.

Presentation on the Consolidated Statements of Income

The following table presents the effects of fair value hedge accounting on the consolidated statements of income (dollars in millions):


	Interest Income
	Three Months Ended June 30,						Six Months Ended June 30,
	2020		2019		2020		2019

Total interest income	$	409	$	560	$	852	$	1,115

Effects of fair value hedging on total interest income⁽¹⁾⁽²⁾
Agency debentures:
Amounts recognized as interest accruals on derivatives	(2)		—		(2)		—

Changes in fair value of hedged items	10		24		225		31
Changes in fair value of derivatives	(9)		(25)		(224)		(32)
Net loss on fair value hedging relationships - agency debentures	(1)		(1)		(1)		(1)

Agency mortgage-backed securities:
Amounts recognized as interest accruals on derivatives	(25)		1		(37)		4
Amortization of basis adjustments from discontinued hedges	2		9		10		19
Changes in fair value of hedged items	75		414		930		688
Changes in fair value of derivatives	(73)		(413)		(939)		(686)
Net (loss) gain on fair value hedging relationships - agency mortgage-backed securities	(21)		11		(36)		25






Total net (loss) gain on fair value hedging relationships	$	(22)	$	10	$	(37)	$	24

(1)Excludes interest income accruals on hedged items and amounts recognized upon the sale of securities attributable to fair value hedge accounting.

(2)Excludes interest on variation margin related to centrally cleared derivative contracts.