DERIVATIVE FINANCIAL INSTRUMENTS

As part of managing exposure to interest rate and foreign currency risk, the Company enters into derivative transactions with other financial institutions. The Company also enters into derivative contracts with customers as part of its Commercial Banking business. The Company does not enter into derivative financial instruments for proprietary trading or speculative purposes.

See Note 1 — Business and Summary of Significant Accounting Policies for further description of the Company's derivative transaction policies.

The following table presents fair values and notional values of derivative financial instruments:

Fair and Notional Values of Derivative Financial Instruments⁽¹⁾ (dollars in millions)



	December 31, 2017							December 31, 2016
	Notional Amount		Asset Fair Value		Liability Fair Value			Notional Amount		Asset Fair Value		Liability Fair Value
Qualifying Hedges
Foreign currency forward contracts — net investment hedges	$	977.3	$	0.2	$	(18.7	)	$	817.9	$	16.9	$	—
Total Qualifying Hedges	977.3		0.2		(18.7		)	817.9		16.9		—
Non-Qualifying Hedges
Interest rate swaps⁽²⁾	7,112.0		60.8		(38.6		)	5,309.2		63.0		(50.1		)
Written options	2,744.3		—		(0.7		)	2,626.5		0.1		(1.0		)
Purchased options	2,571.5		0.7		—			2,129.6		1.0		(0.1		)
Foreign currency forward contracts	1,375.5		6.9		(14.9		)	1,329.8		30.2		(6.0		)
Total Return Swap (TRS)	182.4		—		(14.1		)	587.5		—		(11.3		)
Equity Warrants	0.8		—		—			1.0		0.2		—
Interest Rate Lock Commitments	7.7		0.1		—			20.7		0.1		(0.1		)
Forward sale commitments on agency MBS	8.0		—		—			39.0		0.1		—
Credit derivatives	285.1		—		—			267.6		—		(0.2		)
Total Non-qualifying Hedges	14,287.3		68.5		(68.3		)	12,310.9		94.7		(68.8		)
Total Hedges	$	15,264.6	$	68.7	$	(87.0	)	$	13,128.8	$	111.6	$	(68.8	)


⁽¹⁾	Presented on a gross basis.


⁽²⁾	Fair value balances include accrued interest.

TRS Transactions

As of December 31, 2017, CIT was party to a financing facility between a Dutch wholly-owned subsidiary of CIT and Goldman Sachs International ("GSI"), which was structured as a total return swap ("TRS"). Amounts available for advances (otherwise known as the unused portion) were accounted for as derivatives and recorded at the estimated fair value. The total facility capacity available under the Dutch TRS was $625 million at December 31, 2017 and 2016. The utilized portion reflects the borrowing.

The aggregate "notional amounts" of the Dutch TRS of $182.4 million at December 31, 2017, and the Dutch TRS and Canadian TRS of $587.5 million at December 31, 2016, represent the aggregate unused portions and constitute derivative financial instruments. These notional amounts were calculated as the maximum facility commitment amount, $625 million, under the Dutch TRS less the actual adjusted qualifying borrowing outstanding of $442.6 million under the facility at December 31, 2017, and the maximum aggregate facility commitment amount, $1,062.3 million at December 31, 2016, under the Dutch TRS and Canadian TRS less the aggregate actual adjusted qualifying borrowing base outstanding of $474.8 million at December 31, 2016. The notional amounts of the derivatives will increase as the adjusted qualifying borrowing base decreases due to repayment of the underlying asset-backed securities ("ABS") to investors. If CIT funds additional ABS under the Dutch TRS, the aggregate adjusted qualifying borrowing base of the total return swap will increase and the notional amount of the derivative will decrease accordingly.

Valuation of the derivatives related to the TRS Transactions is based on several factors using a discounted cash flow (“DCF”) methodology, including:


•	Funding costs for similar financings based on current market conditions;


•	Forecasted amortization, due to principal payments on the underlying ABS, which impacts the amount of the unutilized portion; and


•	Specific to the Dutch TRS, forecasted usage of the long-dated facilities through the final maturity date in 2028.

Based on the Company's valuation, a liability of $14.1 million and $11.3 million was recorded at December 31, 2017, and 2016, respectively. The increase in liability of $2.8 million and the decrease in liability of $43.6 million for the years ended December 31, 2017, and 2016, respectively, were recognized in Other Non-Interest Income.

As of December 31, 2016 CIT was also party to a TRS with its wholly owned Canadian subsidiary ("CFL"). In order to prepare for the previously announced sale of the Company's commercial aircraft leasing business to Avolon Holdings Limited, CIT redeemed in December 2016 the commercial aircraft securitization transaction utilized as a reference obligation in the Canadian TRS, causing the Canadian TRS to become fully unutilized. As a result, the Company and its Board of Directors decided to terminate the Canadian TRS in order to further simplify the Company's business model and reduce earnings volatility resulting from the mark-to-market of the Canadian TRS derivative. On December 7, 2016, CFL entered into a Fourth Amendment and Restated Confirmation (the "Termination Agreement") with GSI to terminate the Canadian TRS and the facility was terminated on January 17, 2017. The Termination agreement required payment by CFL to GSI on December 7, 2016, of the present value of the remaining facility fee in an amount equal to approximately $280 million. The reduction of liability associated with the TRS Transaction of approximately $37 million resulted in a net pretax charge for the Company of approximately $245 million in the fourth quarter of 2016. As a result of the Termination agreement, the unsecured counterparty receivable held by GSI under the Canadian TRS was also released.

Interest expense related to the TRS Transactions is affected by the following:

* A fixed facility fee of 2.85% per annum times the maximum facility commitment amount,

* A variable amount based on one-month or three-month USD LIBOR time the "utilized amount" (effectively the "adjusted qualifying borrowing base") of the total return swap, and

* A reduction in interest expense due to the recognition of the payment of any original issue discount from GSI on the various ABS.

Impact of Collateral and Netting Arrangements on the Total Derivative Portfolio

The following tables present a summary of our derivative portfolio, which includes the gross amounts of recognized financial assets and liabilities; the amounts offset in the consolidated balance sheet; the net amounts presented in the consolidated balance sheet; the amounts subject to an enforceable master netting arrangement or similar agreement that were not included in the offset amount above, and the amount of cash collateral received or pledged. Derivative transactions are documented under an International Swaps and Derivatives Association ("ISDA") agreement.

Offsetting of Derivative Assets and Liabilities (dollars in millions)⁽¹⁾



									Gross Amounts not offset in the Consolidated Balance Sheet
	Gross Amount of Recognized Assets (Liabilities)			Gross Amount Offset in the Consolidated Balance Sheet		Net Amount Presented in the Consolidated Balance Sheet			Derivative Financial Instruments⁽²⁾			Cash Collateral Pledged / (Received)⁽²⁾⁽³⁾			Net Amount
December 31, 2017
Derivative assets	$	68.7		$	—	$	68.7		$	(18.7	)	$	(8.4	)	$	41.6
Derivative liabilities	(87.0		)	—		(87.0		)	18.7			23.0			(45.3		)
December 31, 2016
Derivative assets	$	111.6		$	—	$	111.6		$	(30.9	)	$	(48.7	)	$	32.0
Derivative liabilities	(68.8		)	—		(68.8		)	30.9			5.0			(32.9		)

⁽¹⁾

Due to a change in clearinghouse rules, the Company accounts for swap contracts cleared by the Chicago Mercantile Exchange (“CME”) as “settled-to-market” effective January 2017. As a result, variation margin payments are characterized as settlement of the derivative exposure and variation margin balances are netted against the corresponding derivative mark-to-market balances. The Company’s swap contracts cleared by LCH Clearnet (“LCH”) continue to be accounted for as “collateralized-to-market” and variation margin balances are characterized as collateral against derivative exposures. At December 31, 2017, gross amount of recognized assets and liabilities were lower by $5.4 million and 10.4 million, respectively.

⁽²⁾

The Company's derivative transactions are governed by ISDA agreements that allow for net settlements of certain payments as well as offsetting of all contracts ("Derivative Financial Instruments") with a given counterparty in the event of bankruptcy or default of one of the two parties to the transaction. We believe our ISDA agreements meet the definition of a master netting arrangement or similar agreement for purposes of the above disclosure. In conjunction with the ISDA agreements, the Company has entered into collateral arrangements with its counterparties which provide for the exchange of cash depending on change in the market valuation of the derivative contracts outstanding. Such collateral is available to be applied in settlement of the net balances upon an event of default of one of the counterparties.


⁽³⁾	Collateral pledged or received is included in Other assets or Other liabilities, respectively.

The following table presents the impact of derivatives on the statements of income.

Derivative Instrument Gains and Losses (dollars in millions)



		Years Ended December 31,
Derivative Instruments	Gain / (Loss) Recognized	2017			2016			2015
Non Qualifying Hedges
Interest rate swaps	Other non-interest income	$	8.5		$	7.9		$	4.6
Interest rate options	Other non-interest income	0.4			0.6			1.6
Foreign currency forward contracts	Other non-interest income	(34.2		)	26.2			116.5
Equity warrants	Other non-interest income	(0.2		)	(0.2		)	0.2
Total Return Swaps (TRS)	Other non-interest income	(2.8		)	43.6			(30.4		)
Interest Rate Lock Commitments	Other non-interest income	0.1			(0.2		)	—
Forward sale commitments on agency MBS	Other non-interest income	(0.4		)	1.1			—
Risk Participation Agreements	Other non-interest income	(0.1		)	1.8			—
Total Non-qualifying Hedges		(28.7		)	80.8			92.5
Total derivatives-income statement impact		$	(28.7	)	$	80.8		$	92.5

The following table presents the changes in AOCI relating to derivatives:

Changes in AOCI Relating to Derivatives (dollars in millions)



Contract Type	Derivatives — effective portion reclassified from AOCI to income		Total income statement impact		Derivatives — effective portion recorded in OCI			Total change in OCI for period
Year Ended December 31, 2017
Foreign currency forward contracts — net investment hedges	$	13.4	$	13.4	$	(74.7	)	$	(88.1	)
Total	$	13.4	$	13.4	$	(74.7	)	$	(88.1	)
Year Ended December 31, 2016
Foreign currency forward contracts — net investment hedges	$	1.8	$	1.8	$	2.7		$	0.9
Total	$	1.8	$	1.8	$	2.7		$	0.9
Year Ended December 31, 2015
Foreign currency forward contracts — net investment hedges	$	33.8	$	33.8	$	128.4		$	94.6
Total	$	33.8	$	33.8	$	128.4		$	94.6