Note 13

Derivative Instruments

In the ordinary course of business, the Company enters into derivative transactions to manage various risks and to accommodate the business requirements of its customers. The Company recognizes all derivatives on the Consolidated Balance Sheet at fair value in other assets or in other liabilities. On the date the Company enters into a derivative contract, the derivative is designated as either a hedge of the fair value of a recognized asset or liability (“fair value hedge”); a hedge of a forecasted transaction or the variability of cash flows to be received or paid related to a recognized asset or liability (“cash flow hedge”); a hedge of the volatility of an investment in foreign operations driven by changes in foreign currency exchange rates (“net investment hedge”); or a designation is not made as it is a customer-related transaction, an economic hedge for asset/liability risk management purposes or another stand-alone derivative created through the Company’s operations (“free-standing derivative”). When a derivative is designated as a fair value, cash flow or net investment hedge, the Company performs an assessment, at inception and, at a minimum, quarterly thereafter, to determine the effectiveness of the derivative in offsetting changes in the value or cash flows of the hedged item(s).

Fair Value Hedges These derivatives are interest rate swaps the Company uses to hedge the change in fair value related to interest rate changes of its underlying fixed-rate debt. Changes in the fair value of derivatives designated as fair value hedges, and changes in the fair value of the hedged items, are recorded in earnings. All fair value hedges were highly effective for the nine months ended September 30, 2014, and the change in fair value attributed to hedge ineffectiveness was not material.

Cash Flow Hedges These derivatives are interest rate swaps the Company uses to hedge the forecasted cash flows from its underlying variable-rate loans and debt. Changes in the fair value of derivatives designated as cash flow hedges are recorded in other comprehensive income (loss) until the cash flows of the hedged items are realized. If a derivative designated as a cash flow hedge is terminated or ceases to be highly effective, the gain or loss in other comprehensive income (loss) is amortized to earnings over the period the forecasted hedged transactions impact earnings. If a hedged forecasted transaction is no longer probable, hedge accounting is ceased and any gain or loss included in other comprehensive income (loss) is reported in earnings immediately, unless the forecasted transaction is at least reasonably possible of occurring, whereby the amounts remain within other comprehensive income (loss). At September 30, 2014, the Company had $187 million (net-of-tax) of realized and unrealized losses on derivatives classified as cash flow hedges recorded in other comprehensive income (loss), compared with $261 million (net-of-tax) at December 31, 2013. The estimated amount to be reclassified from other comprehensive income (loss) into earnings during the remainder of 2014 and the next 12 months are losses of $31 million (net-of-tax) and $121 million (net-of-tax), respectively. These amounts include gains and losses related to hedges that were terminated early for which the forecasted transactions are still probable. All cash flow hedges were highly effective for the nine months ended September 30, 2014, and the change in fair value attributed to hedge ineffectiveness was not material.

Net Investment Hedges The Company uses forward commitments to sell specified amounts of certain foreign currencies, and occasionally non-derivative debt instruments, to hedge the volatility of its investment in foreign operations driven by fluctuations in foreign currency exchange rates. The ineffectiveness on all net investment hedges was not material for the nine months ended September 30, 2014. There were no non-derivative debt instruments designated as net investment hedges at September 30, 2014 or December 31, 2013.

Other Derivative Positions The Company enters into free-standing derivatives to mitigate interest rate risk and for other risk management purposes. These derivatives include forward commitments to sell to-be-announced securities (“TBAs”) and other commitments to sell residential mortgage loans, which are used to economically hedge the interest rate risk related to residential mortgage loans held for sale (“MLHFS”) and unfunded mortgage loan commitments. The Company also enters into interest rate swaps, forward commitments to buy TBAs, U.S. Treasury futures and options on U.S. Treasury futures to economically hedge the change in the fair value of the Company’s MSRs. The Company also enters into foreign currency forwards to economically hedge remeasurement gains and losses the Company recognizes on foreign currency denominated assets and liabilities. In addition, the Company acts as a seller and buyer of interest rate derivatives and foreign exchange contracts for its customers. To mitigate the market and liquidity risk associated with these customer derivatives, the Company historically has entered into similar offsetting positions with broker-dealers. In 2014, the Company began to actively manage the risks from its exposure to customer-related interest rate positions on a portfolio basis by entering into other derivative or non-derivative financial instruments that partially or fully offset the exposure from these customer-related positions. The Company’s customer derivatives and related hedges are monitored and reviewed by the Company’s Market Risk Committee, which establishes policies for market risk management, including exposure limits for each portfolio. The Company also has derivative contracts that are created through its operations, including commitments to originate MLHFS and swap agreements related to the sale of a portion of its Class B common shares of Visa Inc. Refer to Note 16 for further information on the Visa restructuring and related card association litigation.

For additional information on the Company’s purpose for entering into derivative transactions and its overall risk management strategies, refer to “Management Discussion and Analysis — Use of Derivatives to Manage Interest Rate and Other Risks” which is incorporated by reference into these Notes to Consolidated Financial Statements.

The following table summarizes the asset and liability management derivative positions of the Company:


	Asset Derivatives						Liability Derivatives
(Dollars in Millions)	Notional Value		Fair Value		Weighted- Average Remaining Maturity In Years		Notional Value		Fair Value		Weighted- Average Remaining Maturity In Years
September 30, 2014
Fair value hedges
Interest rate contracts
Receive fixed/pay floating swaps	$	1,750	$	21		3.65	$	1,000	$	4		9.96
Cash flow hedges
Interest rate contracts
Pay fixed/receive floating swaps		1,972		15		3.73		4,084		351		1.81
Receive fixed/pay floating swaps		5,500		6		.15		–		–		–
Net investment hedges
Foreign exchange forward contracts		1,043		29		.05		–		–		–
Other economic hedges
Interest rate contracts
Futures and forwards
Buy		2,981		20		.09		1,422		4		.05
Sell		2,691		10		.10		4,077		22		.11
Options
Purchased		2,100		–		.07		–		–		–
Written		2,349		32		.08		8		1		.08
Receive fixed/pay floating swaps		3,375		6		10.22		232		3		10.22
Pay fixed/receive floating swaps		–		–		–		55		–		10.22
Foreign exchange forward contracts		1,049		11		.02		3,576		38		.01
Equity contracts		27		–		1.13		57		1		.72
Credit contracts		1,263		3		3.40		2,288		5		3.04
Other (a)		722		15		.01		1,017		51		1.17
Total	$	26,822	$	168			$	17,816	$	480
December 31, 2013
Fair value hedges
Interest rate contracts
Receive fixed/pay floating swaps	$	500	$	22		2.09	$	–	$	–		–
Cash flow hedges
Interest rate contracts
Pay fixed/receive floating swaps		772		26		6.25		4,288		498		2.46
Receive fixed/pay floating swaps		7,000		26		.84		–		–		–
Net investment hedges
Foreign exchange forward contracts		–		–		–		1,056		4		.04
Other economic hedges
Interest rate contracts
Futures and forwards
Buy		2,310		9		.07		1,025		7		.06
Sell		5,234		58		.08		346		4		.17
Options
Purchased		2,300		–		.07		–		–		–
Written		1,902		17		.07		2		–		.08
Receive fixed/pay floating swaps		–		–		–		3,540		56		10.22
Foreign exchange forward contracts		6,813		24		.02		2,121		4		.02
Equity contracts		79		3		1.62		–		–		–
Credit contracts		1,209		4		4.04		2,352		7		3.08
Total	$	28,119	$	189			$	14,730	$	580

(a)

Includes short-term underwriting purchase and sale commitments with total asset and liability notional values of $722 million at September 30, 2014, and derivative liability swap agreements related to the sale of a portion of the Company’s Class B common shares of Visa Inc. These swap agreements had a total notional value, fair value and weighted average remaining maturity of $295 million, $42 million and 4.01 years at September 30, 2014, respectively.

The following table summarizes the customer-related derivative positions of the Company:


	Asset Derivatives						Liability Derivatives
(Dollars in Millions)	Notional Value		Fair Value		Weighted- Average Remaining Maturity In Years		Notional Value		Fair Value		Weighted- Average Remaining Maturity In Years
September 30, 2014
Interest rate contracts
Receive fixed/pay floating swaps	$	16,055	$	645		5.94	$	8,509	$	47		4.33
Pay fixed/receive floating swaps		7,215		54		3.98		16,384		638		5.86
Options
Purchased		4,110		10		3.84		24		–		2.67
Written		24		–		2.67		4,096		10		3.85
Futures
Buy		2,439		–		.25		–		–		–
Sell		334		–		1.28		131		–		.96
Foreign exchange rate contracts
Forwards, spots and swaps		13,349		595		.55		13,212		575		.55
Options
Purchased		751		22		.57		–		–		–
Written		–		–		–		751		22		.57
Total	$	44,277	$	1,326			$	43,107	$	1,292
December 31, 2013
Interest rate contracts
Receive fixed/pay floating swaps	$	11,717	$	600		5.11	$	7,291	$	106		5.57
Pay fixed/receive floating swaps		6,746		114		6.03		12,361		560		4.90
Options
Purchased		3,489		33		4.53		–		–		–
Written		–		–		–		3,489		33		4.53
Foreign exchange rate contracts
Forwards, spots and swaps		10,970		457		.59		9,975		427		.62
Options
Purchased		364		11		.53		–		–		–
Written		–		–		–		364		11		.53
Total	$	33,286	$	1,215			$	33,480	$	1,137

The table below shows the effective portion of the gains (losses) recognized in other comprehensive income (loss) and the gains (losses) reclassified from other comprehensive income (loss) into earnings (net-of-tax):


	Three Months Ended September 30,											Nine Months Ended September 30,
	Gains (Losses) Recognized in Other Comprehensive Income (Loss)					Gains (Losses) Reclassified from Other Comprehensive Income (Loss) into Earnings						Gains (Losses) Recognized in Other Comprehensive Income (Loss)						Gains (Losses) Reclassified from Other Comprehensive Income (Loss) into Earnings
(Dollars in Millions)	2014		2013			2014			2013			2014			2013			2014			2013
Asset and Liability Management Positions
Cash flow hedges
Interest rate contracts (a)	$	10	$	(11	)	$	(28	)	$	(30	)	$	(12	)	$	22		$	(86	)	$	(88	)
Net investment hedges
Foreign exchange forward contracts	$	84		(29	)		–			–		$	93			(23	)		–			–

Note: Ineffectiveness on cash flow and net investment hedges was not material for the three and nine months ended September 30, 2014 and 2013.

(a)

Gains (Losses) reclassified from other comprehensive income (loss) into interest income on loans and interest expense on long-term debt.

The table below shows the gains (losses) recognized in earnings for fair value hedges, other economic hedges and the customer-related positions:


	Location of Gains (Losses)	Three Months						Nine Months
	Location of Gains (Losses)	Ended September 30,						Ended September 30,
(Dollars in Millions)	Recognized in Earnings	2014			2013			2014			2013
Asset and Liability Management Positions
Fair value hedges (a)
Interest rate contracts	Other noninterest income	$	(19	)	$	–		$	(13	)	$	(7	)
Other economic hedges
Interest rate contracts
Futures and forwards	Mortgage banking revenue		6			33			(69	)		569
Purchased and written options	Mortgage banking revenue		64			54			210			200
Receive fixed/pay floating swaps	Mortgage banking revenue		17			(5	)		238			(264	)
Foreign exchange forward contracts	Commercial products revenue		(24	)		(16	)		(41	)		18
Equity contracts	Compensation expense		–			–			1			1
Credit contracts	Other noninterest income/expense		–			2			–			1
Other	Other noninterest income/expense		1			–			(42	)		–
Customer-Related Positions
Interest rate contracts
Receive fixed/pay floating swaps	Other noninterest income		(20	)		13			329			(288	)
Pay fixed/receive floating swaps	Other noninterest income		28			(10	)		(307	)		298
Foreign exchange rate contracts
Forwards, spots and swaps	Commercial products revenue		13			15			45			36

(a)

Gains (Losses) on items hedged by interest rate contracts included in noninterest income (expense), were $19 million and zero million for the three months ended September 30, 2014 and 2013, respectively, and $13 million and $7 million for the nine months ended September 30, 2014 and 2013, respectively. The ineffective portion was immaterial for the three and nine months ended September 30, 2014 and 2013.

Derivatives are subject to credit risk associated with counterparties to the derivative contracts. The Company measures that credit risk using a credit valuation adjustment and includes it within the fair value of the derivative. The Company manages counterparty credit risk through diversification of its derivative positions among various counterparties, by entering into master netting arrangements and, where possible, by requiring collateral arrangements. A master netting arrangement allows two counterparties, who have multiple derivative contracts with each other, the ability to net settle amounts under all contracts, including any related collateral, through a single payment and in a single currency. Collateral arrangements require the counterparty to deliver collateral (typically cash or U.S. Treasury and agency securities) equal to the Company’s net derivative receivable, subject to minimum transfer and credit rating requirements.

The Company’s collateral arrangements are predominately bilateral and, therefore, contain provisions that require collateralization of the Company’s net liability derivative positions. Required collateral coverage is based on certain net liability thresholds and contingent upon the Company’s credit rating from two of the nationally recognized statistical rating organizations. If the Company’s credit rating were to fall below credit ratings thresholds established in the collateral arrangements, the counterparties to the derivatives could request immediate additional collateral coverage up to and including full collateral coverage for derivatives in a net liability position. The aggregate fair value of all derivatives under collateral arrangements that were in a net liability position at September 30, 2014, was $868 million. At September 30, 2014, the Company had $697 million of cash posted as collateral against this net liability position.