Financial Derivatives

9 Months Ended

Sep. 30, 2018

Derivative Instruments and Hedging Activities Disclosure [Abstract]

NOTE 9 FINANCIAL DERIVATIVES

We use derivative financial instruments primarily to help manage exposure to interest rate, market and credit risk and reduce the effects that changes in interest rates may have on net income, the fair value of assets and liabilities and cash flows. We also enter into derivatives with customers to facilitate their risk management activities. Derivatives represent contracts between parties that usually require little or no initial net investment and result in one party delivering cash or another type of asset to the other party based on a notional amount and an underlying as specified in the contract.

For more information regarding derivatives see Note 1 Accounting Policies and Note 13 Financial Derivatives in our 2017 Form 10-K.

The following table presents the notional amounts and gross fair values of all derivative assets and liabilities held by us.

Table 63: Total Gross Derivatives



	September 30, 2018						December 31, 2017
In millions	Notional / Contract Amount		Asset Fair Value (a)		Liability Fair Value (b)		Notional / Contract Amount		Asset Fair Value (a)		Liability Fair Value (b)
Derivatives used for hedging under GAAP
Interest rate contracts (c):
Fair value hedges	$	33,232	$	14			$	34,059	$	114	$	94
Cash flow hedges	17,394						23,875		60		6
Foreign exchange contracts:
Net investment hedges	1,042		36				1,060				11
Total derivatives designated for hedging under GAAP	$	51,668	$	50			$	58,994	$	174	$	111
Derivatives not used for hedging under GAAP
Derivatives used for mortgage banking activities (d):
Interest rate contracts:
Swaps	$	71,254			$	3	$	48,335	$	162	$	42
Futures (e)	44,063						47,494
Mortgage-backed commitments	6,595		$	21	16		8,999		19		9
Other	4,610		5		2		2,530		11		2
Subtotal	126,522		26		21		107,358		192		53
Derivatives used for customer-related activities:
Interest rate contracts:
Swaps	216,998		1,039		1,946		194,042		2,079		1,772
Futures (e)	3,550						3,453
Mortgage-backed commitments	3,280		9		2		2,228		2		2
Other	21,581		66		71		17,775		75		36
Subtotal	245,409		1,114		2,019		217,498		2,156		1,810
Foreign exchange contracts and other	28,494		581		552		27,330		349		332
Subtotal	273,903		1,695		2,571		244,828		2,505		2,142
Derivatives used for other risk management activities:
Foreign exchange contracts and other (f)	8,780		18		350		7,445		3		550
Total derivatives not designated for hedging under GAAP	$	409,205	$	1,739	$	2,942	$	359,631	$	2,700	$	2,745
Total gross derivatives	$	460,873	$	1,789	$	2,942	$	418,625	$	2,874	$	2,856
Less: Impact of legally enforceable master netting agreements			710		710				1,054		1,054
Less: Cash collateral received/paid			80		728				636		763
Total derivatives			$	999	$	1,504			$	1,184	$	1,039


(a)	Included in Other assets on our Consolidated Balance Sheet.


(b)	Included in Other liabilities on our Consolidated Balance Sheet.


(c)	Represents primarily swaps.


(d)	Includes both residential and commercial mortgage banking activities.


(e)	Futures contracts settle in cash daily and, therefore, no derivative asset or derivative liability is recognized on our Consolidated Balance Sheet.


(f)	Includes our obligation to fund a portion of certain BlackRock LTIP programs and the swaps entered into in connection with sales of a portion of Visa Class B common shares.

All derivatives are carried on our Consolidated Balance Sheet at fair value. Derivative balances are presented on the Consolidated Balance Sheet on a net basis taking into consideration the effects of legally enforceable master netting agreements and, when appropriate, any related cash collateral exchanged with counterparties. Further discussion regarding the offsetting rights associated with these legally enforceable master netting agreements is included in the Offsetting, Counterparty Credit Risk and Contingent Features section of this Note 9. Any nonperformance risk, including credit risk, is included in the determination of the estimated net fair value of the derivatives. Exchange-traded and over-the-counter cleared derivative instruments are typically settled in cash each day based on the prior day value. In the first quarter of 2018, we changed our presentation for variation margin related to derivative instruments cleared through a central clearinghouse as a result of changes made by that clearinghouse to its rules governing such instruments with its counterparties. This variation margin is now recorded as a settlement payment instead of collateral. The impact at September 30, 2018 was a reduction of gross derivative assets and gross derivative liabilities of $1.8 billion and $.6 billion, respectively. The accounting change had no impact on the net fair value of the derivative assets and liabilities that otherwise would have been reported on our Consolidated Balance Sheet. See Table 67 for more information.

Derivatives Designated As Hedging Instruments under GAAP

Certain derivatives used to manage interest rate and foreign exchange risk as part of our asset and liability risk management activities are designated as accounting hedges under GAAP. Derivatives hedging the risks associated with changes in the fair value of assets or liabilities are considered fair value hedges, derivatives hedging the variability of expected future cash flows are considered cash flow hedges, and derivatives hedging a net investment in a foreign subsidiary are considered net investment hedges. Designating derivatives as accounting hedges allows for gains and losses on those derivatives to be recognized in the same period and in the same income statement line item as the earnings impact of the hedged items.

Fair Value Hedges

We enter into receive-fixed, pay-variable interest rate swaps to hedge changes in the fair value of outstanding fixed-rate debt caused by fluctuations in market interest rates. We also enter into pay-fixed, receive-variable interest rate swaps and zero-coupon swaps to hedge changes in the fair value of fixed rate and zero-coupon investment securities caused by fluctuations in market interest rates. Gains and losses on the interest rate swaps designated in these hedge relationships, along with the offsetting gains and losses on the hedged items attributable to the hedged risk, are recognized in current earnings within the same income statement line item.

Cash Flow Hedges

We enter into receive-fixed, pay-variable interest rate swaps to modify the interest rate characteristics of designated commercial loans from variable to fixed in order to reduce the impact of changes in future cash flows due to market interest rate changes. We also periodically enter into forward purchase and sale contracts to hedge the variability of the consideration that will be paid or received related to the purchase or sale of investment securities. The forecasted purchase or sale is consummated upon gross settlement of the forward contract itself. For these cash flow hedges, gains and losses on the interest rate swaps and forward contracts are recorded in AOCI and are then reclassified into earnings in the same period the hedged cash flows affect earnings and within the same income statement line as the hedged cash flows.

In the 12 months that follow September 30, 2018, we expect to reclassify net derivative losses of $39 million pretax, or $31 million after-tax, from AOCI to interest income for both cash flow hedge strategies. This reclassified amount could differ from amounts actually recognized due to changes in interest rates, hedge de-designations and the addition of other hedges subsequent to September 30, 2018. As of September 30, 2018, the maximum length of time over which forecasted transactions are hedged is ten years.

The amount of cash flow hedge ineffectiveness recognized in income was not significant for the 2017 period presented.

Detail regarding the net gains (losses) related to our fair value and cash flow hedge derivatives is presented in the following table.

Table 64: Gains (Losses) Recognized on Fair Value and Cash Flow Hedges in the Consolidated Income Statement (a) (b)



	Location and Amount of Gains (Losses) Recognized in Income
	Interest Income					Interest Expense			Noninterest Income
In millions	Loans		Investment Securities			Borrowed Funds			Other
For the three months ended September 30, 2018
Total amounts on the Consolidated Income Statement	$	2,452	$	584		$	421		$	301
Gains (losses) on fair value hedges recognized on:
Hedged items (c)			$	(31	)	$	107
Derivatives			$	30		$	(137	)
Amounts related to interest settlements on derivatives			$	2		$	24
Gains (losses) on cash flow hedges (d):
Amount of derivative gains (losses) reclassified from accumulated OCI	$	6	$	2					$	1
For the three months ended September 30, 2017
Total amounts on the Consolidated Income Statement	$	2,140	$	501		$	280		$	313
Gains (losses) on fair value hedges recognized on:
Hedged items			$	(8	)	$	50
Derivatives			$	9		$	(56	)
Amounts related to interest settlements on derivatives			$	(9	)	$	53
Gains (losses) on cash flow hedges - interest rate contracts (d):
Amount of derivative gains (losses) reclassified from accumulated OCI	$	38	$	5					$	2
For the nine months ended September 30, 2018
Total amounts on the Consolidated Income Statement	$	7,025	$	1,653		$	1,173		$	880
Gains (losses) on fair value hedges recognized on:
Hedged items (c)			$	(145	)	$	577
Derivatives			$	149		$	(632	)
Amounts related to interest settlements on derivatives						$	57
Gains (losses) on cash flow hedges (d):
Amount of derivative gains (losses) reclassified from accumulated OCI	$	43	$	9					$	8
For the nine months ended September 30, 2017
Total amounts on the Consolidated Income Statement	$	6,084	$	1,489		$	793		$	918
Gains (losses) on fair value hedges recognized on:
Hedged items			$	4		$	61
Derivatives			$	(3	)	$	(84	)
Amounts related to interest settlements on derivatives			$	(34	)	$	190
Gains (losses) on cash flow hedges - interest rate contracts (d):
Amount of derivative gains (losses) reclassified from accumulated OCI	$	128	$	16					$	5


(a)	For all periods presented, there were no components of derivative gains or losses excluded from the assessment of hedge effectiveness for any of the fair value or cash flow hedge strategies.


(b)	All cash flow and fair value hedge derivatives were interest rate contracts for the periods presented.


(c)	Includes an insignificant amount of fair value hedge adjustments related to discontinued hedge relationships.


(d)	For all periods presented, there were no gains or losses from cash flow hedge derivatives reclassified to income because it became probable that the original forecasted transaction would not occur.

Detail regarding the impact of fair value hedge accounting on the carrying value of the hedged items is presented in the following table.

Table 65: Hedged Items - Fair Value Hedges



	September 30, 2018
In millions	Carrying Value of the Hedged Items		Cumulative Fair Value Hedge Adjustment included in the Carrying Value of Hedged Items (a)
Investment securities - Available for Sale (b)	$	7,056	$	(230	)
Borrowed funds	$	28,284	$	(686	)


(a)	Includes $.6 billion of fair value hedge adjustments primarily related to discontinued borrowed funds hedge relationships.


(b)	Carrying value shown represents amortized cost.

Net Investment Hedges

We enter into foreign currency forward contracts to hedge non-U.S. dollar net investments in foreign subsidiaries against adverse changes in foreign exchange rates. We assess whether the hedging relationship is highly effective in achieving offsetting changes in the value of the hedge and hedged item by qualitatively verifying that the critical terms of the hedge and hedged item match at the inception of the hedging relationship and on an ongoing basis. Net investment hedge derivatives are classified as foreign exchange contracts. There were no components of derivative gains or losses excluded from the assessment of the hedge effectiveness for all periods presented. During the first three and nine months of 2017 there was no net investment hedge ineffectiveness. Gains (losses) on net investment hedge derivatives recognized in OCI were net gains of $17 million and $47 million for the three and nine months ended September 30, 2018, respectively, compared with net losses of $26 million and $76 million for the three and nine months ended September 30, 2017, respectively.

Derivatives Not Designated As Hedging Instruments under GAAP

We also enter into derivatives that are not designated as accounting hedges under GAAP. For additional information on derivatives not designated as hedging instruments under GAAP, see Note 13 Financial Derivatives in our 2017 Form 10-K.

Further detail regarding the gains (losses) on derivatives not designated in hedging relationships is presented in the following table.

Table 66: Gains (Losses) on Derivatives Not Designated for Hedging under GAAP



	Three months ended September 30						Nine months ended September 30
In millions	2018			2017			2018			2017
Derivatives used for mortgage banking activities:
Interest rate contracts (a)	$	(34	)	$	19		$	(166	)	$	92
Derivatives used for customer-related activities:
Interest rate contracts	15			10			96			63
Foreign exchange contracts and other	22			38			79			110
Gains (losses) from customer-related activities (b)	37			48			175			173
Derivatives used for other risk management activities:
Foreign exchange contracts and other (b) (c)	(19		)	(101		)	111			(257		)
Total gains (losses) from derivatives not designated as hedging instruments	$	(16	)	$	(34	)	$	120		$	8


(a)	Included in Residential mortgage, Corporate services and Other noninterest income on our Consolidated Income Statement.


(b)	Included in Other noninterest income on our Consolidated Income Statement.


(c)	Includes BlackRock LTIP funding obligation and the swaps entered into in connection with sales of a portion of Visa Class B common shares.

Offsetting, Counterparty Credit Risk and Contingent Features

We generally utilize a net presentation on the Consolidated Balance Sheet for those derivative financial instruments entered into with counterparties under legally enforceable master netting agreements. The master netting agreements reduce credit risk by permitting the closeout netting of all outstanding derivative instruments under the master netting agreement with the same counterparty upon the occurrence of an event of default. The master netting agreement also may require the exchange of cash or marketable securities to collateralize either party’s net position. For additional information on derivative offsetting, counterparty credit risk and contingent features, see Note 13 Financial Derivatives in our 2017 Form 10-K.

Table 67 shows the impact legally enforceable master netting agreements had on our derivative assets and derivative liabilities as of September 30, 2018 and December 31, 2017. The table includes cash collateral held or pledged under legally enforceable master netting agreements. The table also includes the fair value of any securities collateral held or pledged under legally enforceable master netting agreements. Cash and securities collateral amounts are included in the table only to the extent of the related net derivative fair values.

Table 67: Derivative Assets and Liabilities Offsetting



In millions			Amounts Offset on the Consolidated Balance Sheet							Securities Collateral Held / (Pledged) Under Master Netting Agreements
In millions	Gross Fair Value		Fair Value Offset Amount		Cash Collateral		Net Fair Value					Net Amounts
September 30, 2018
Derivative assets
Interest rate contracts:
Over-the-counter cleared (a)	$	16					$	16				$	16
Over-the-counter	1,138		$	432	$	75	631			$	19	612
Foreign exchange and other contracts	635		278		5		352					352
Total derivative assets	$	1,789	$	710	$	80	$	999	(b)	$	19	$	980
Derivative liabilities
Interest rate contracts:
Over-the-counter cleared (a)	$	11					$	11				$	11
Over-the-counter	2,029		$	563	$	435	1,031					1,031
Foreign exchange and other contracts	902		147		293		462					462
Total derivative liabilities	$	2,942	$	710	$	728	$	1,504	(c)			$	1,504
December 31, 2017
Derivative assets
Interest rate contracts:
Over-the-counter cleared	$	827	$	251	$	567	$	9				$	9
Over-the-counter	1,695		668		67		960			$	32	928
Foreign exchange and other contracts	352		135		2		215					215
Total derivative assets	$	2,874	$	1,054	$	636	$	1,184	(b)	$	32	$	1,152
Derivative liabilities
Interest rate contracts:
Over-the-counter cleared	$	260	$	251			$	9				$	9
Over-the-counter	1,703		662		$	669	372					372
Foreign exchange and other contracts	893		141		94		658					658
Total derivative liabilities	$	2,856	$	1,054	$	763	$	1,039	(c)			$	1,039


(a)	Reflects our first quarter 2018 change in accounting presentation for variation margin for certain derivative instruments cleared through a central clearing house. The accounting change reduced the asset and liability gross fair values with corresponding reductions to the fair value and cash collateral offsets, resulting in no changes to the net fair value amounts.


(b)	Represents the net amount of derivative assets included in Other assets on our Consolidated Balance Sheet.


(c)	Represents the net amount of derivative liabilities included in Other liabilities on our Consolidated Balance Sheet.

Table 67 includes over-the-counter (OTC) derivatives, OTC cleared derivatives and exchange-traded derivatives. OTC derivatives represent contracts executed bilaterally with counterparties that are not settled through an organized exchange or cleared through a central clearing house. The majority of OTC derivatives are governed by the International Swaps and Derivatives Association (ISDA) documentation or other legally enforceable master netting agreements. OTC cleared derivatives represent contracts executed bilaterally with counterparties in the OTC market that are novated to a central clearing house who then becomes our counterparty. Exchange-traded derivatives represent standardized futures and options contracts executed directly on an organized exchange.

In addition to using master netting agreements and other collateral agreements to reduce credit risk associated with derivative instruments, we also seek to manage credit risk by evaluating credit ratings of counterparties and by using internal credit analysis, limits and monitoring procedures.

At September 30, 2018, we held cash, U.S. government securities and mortgage-backed securities totaling $.2 billion under master netting agreements and other collateral agreements to collateralize net derivative assets due from counterparties, and we pledged cash totaling $1.4 billion under these agreements to collateralize net derivative liabilities owed to counterparties and to meet initial margin requirements. These totals may differ from the amounts presented in the preceding offsetting table because these totals may include collateral exchanged under an agreement that does not qualify as a master netting agreement or because the total amount of collateral held or pledged exceeds the net derivative fair values with the counterparty as of the balance sheet date due to timing or other factors, such as initial margin. To the extent not netted against the derivative fair values under a master netting agreement, the receivable for cash pledged is included in Other assets and the obligation for cash held is included in Other liabilities on our Consolidated Balance Sheet. Securities held from counterparties are not recognized on our balance sheet. Likewise securities we have pledged to counterparties remain on our balance sheet.

Certain derivative agreements contain various credit-risk related contingent provisions, such as those that require our debt to maintain a specified credit rating from one or more of the major credit rating agencies. If our debt ratings were to fall below such specified ratings, the counterparties to the derivative instruments could request immediate payment or demand immediate and ongoing full collateralization on derivative instruments in net liability positions. The aggregate fair value of all derivative instruments with credit-risk-related contingent features that were in a net liability position on September 30, 2018 was $2.2 billion for which we had posted collateral of $.8 billion in the normal course of business. The maximum additional amount of collateral we would have been required to post if the credit-risk-related contingent features underlying these agreements had been triggered on September 30, 2018 would be $1.4 billion.