Financial Derivatives

12 Months Ended

Dec. 31, 2018

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Financial Derivatives

FINANCIAL DERIVATIVES

We use a variety of financial derivatives as part of our overall asset and liability risk management process to help manage exposure to market (primarily interest rate) and credit risk inherent in our business activities.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.

Derivative transactions are often measured in terms of notional amount, but this amount is generally not exchanged and it is not recorded on the balance sheet. The notional amount is the basis to which the underlying is applied to determine required payments under the derivative contract. The underlying is a referenced interest rate (commonly LIBOR), security price, credit spread or other index. Residential and commercial real estate loan commitments associated with loans to be sold also qualify as derivative instruments.

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

Table 76: Total Gross Derivatives

	December 31, 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	$	30,919	$	7			$	34,059	$	114	$	94
Cash flow hedges	17,337		1				23,875		60		6
Foreign exchange contracts:
Net investment hedges	1,012				$	10	1,060				11
Total derivatives designated for hedging	$	49,268	$	8	$	10	$	58,994	$	174	$	111
Derivatives not used for hedging under GAAP
Derivatives used for mortgage banking activities (d):
Interest rate contracts:
Swaps	$	43,084			$	3	$	48,335	$	162	$	42
Futures (e) (f)	10,658						47,494
Mortgage-backed commitments	5,771		$	47	39		8,999		19		9
Other	6,509		10		3		2,530		11		2
Subtotal	66,022		57		45		107,358		192		53
Derivatives used for customer-related activities:
Interest rate contracts:
Swaps	218,496		1,352		1,432		194,042		2,079		1,772
Futures (e) (f)	914						3,453
Mortgage-backed commitments	2,246		7		10		2,228		2		2
Other	20,109		77		33		17,775		75		36
Subtotal	241,765		1,436		1,475		217,498		2,156		1,810
Commodity contracts:
Swaps	4,813		244		238		3,339		108		104
Other	1,418		67		67		868		22		22
Subtotal	6,231		311		305		4,207		130		126
Foreign exchange contracts and other	23,253		194		192		23,123		219		206
Subtotal	271,249		1,941		1,972		244,828		2,505		2,142
Derivatives used for other risk management activities:
Foreign exchange contracts and other (g)	7,908		75		263		7,445		3		550
Total derivatives not designated for hedging	$	345,179	$	2,073	$	2,280	$	359,631	$	2,700	$	2,745
Total gross derivatives	$	394,447	$	2,081	$	2,290	$	418,625	$	2,874	$	2,856
Less: Impact of legally enforceable master netting agreements			688		688				1,054		1,054
Less: Cash collateral received/paid			341		539				636		763
Total derivatives			$	1,052	$	1,063			$	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) As a result of administrative changes made by a certain clearing house to its rules governing futures contracts, effective for the fourth quarter of 2018, the unit of measure for calculating notional values decreased. The changes had no impact on the valuation of the contracts.

(g) 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 below. 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 December 31, 2018 was a reduction of gross derivative assets and gross derivative liabilities of $1.5 billion and $.7 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 80 for more information.

Further discussion on how derivatives are accounted for is included in Note 1 Accounting Policies.

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 December 31, 2018, we expect to reclassify net derivative losses of $35 million pretax, or $27 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 December 31, 2018. As of December 31, 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 and 2016 periods presented.

Further detail regarding gains (losses) on fair value hedge derivatives and related hedged items is presented in the following table:

Table 77: 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
Year ended December 31, 2018
Total amounts on the Consolidated Income Statement	$	9,580	$	2,261		$	1,632		$	1,205
Gains (losses) on fair value hedges recognized on:
Hedged items (c)			$	(53	)	$	151
Derivatives			$	60		$	(262	)
Amounts related to interest settlements on derivatives			$	3		$	80
Gains (losses) on cash flow hedges (d):
Amount of derivative gains (losses) reclassified from AOCI	$	41	$	11					$	8
Year ended December 31, 2017
Total amounts on the Consolidated Income Statement	$	8,238	$	1,998		$	1,083		$	1,077
Gains (losses) on fair value hedges recognized on (e):
Hedged items			$	(50	)	$	268
Derivatives			$	48		$	(284	)
Amounts related to interest settlements on derivatives			$	(41	)	$	234
Gains (losses) on cash flow hedges (d):
Amount of derivative gains (losses) reclassified from AOCI	$	159	$	21					$	17
Year ended December 31, 2016
Total amounts on the Consolidated Income Statement	$	7,414	$	1,826		$	831		$	1,039
Gains (losses) on fair value hedges recognized on (e):
Hedged items			$	(141	)	$	299
Derivatives			$	142		$	(332	)
Amounts related to interest settlements on derivatives			$	(84	)	$	401
Gains (losses) on cash flow hedges (d):
Amount of derivative gains (losses) reclassified from AOCI	$	219	$	34

(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.

(e) The difference between the gains (losses) recognized in income on derivatives and their related hedged items represents the ineffective portion of the change in value of our fair value hedged derivatives.

Further detail regarding gains (losses) on derivatives and related cash flows is presented in the following table:

Table 78: Hedged Items - Fair Value Hedges

	December 31, 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)	$	6,216	$	(103	)
Borrowed funds	$	27,121	$	(260	)

(a) Includes $(.5) 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. For 2017 and 2016, there was no net investment hedge ineffectiveness. Net gains (losses) on net investment hedge derivatives recognized in OCI were $76 million in 2018, $(81) million in 2017 and $186 million in 2016.

Derivatives Not Designated As Hedging Instruments under GAAP

Residential mortgage loans that will be sold in the secondary market, and the related loan commitments, which are considered derivatives, are accounted for at fair value. Changes in the fair value of the loans and commitments due to interest rate risk are hedged with forward contracts to sell mortgage-backed securities, as well as U.S. Treasury and Eurodollar futures and options. Gains and losses on the loans and commitments held for sale and the derivatives used to economically hedge them are included in Residential mortgage noninterest income on the Consolidated Income Statement.

Residential mortgage servicing rights are accounted for at fair value with changes in fair value influenced primarily by changes in interest rates. Derivatives used to hedge the fair value of residential mortgage servicing rights include interest rate futures, swaps, options, and forward contracts to purchase mortgage-backed securities. Gains and losses on residential mortgage servicing rights and the related derivatives used for hedging are included in Residential mortgage noninterest income.

Commercial mortgage loans held for sale and the related loan commitments, which are considered derivatives, are accounted for at fair value. Derivatives used to economically hedge these loans and commitments from changes in fair value due to interest rate risk and credit risk include forward loan sale contracts, interest rate swaps, and credit default swaps. Gains and losses on the commitments, loans and derivatives are included in Other noninterest income. Derivatives used to economically hedge the change in value of commercial mortgage servicing rights include interest rate futures, swaps and options. Gains or losses on these derivatives are included in Corporate services noninterest income.

The residential and commercial mortgage loan commitments associated with loans to be sold which are accounted for as derivatives are valued based on the estimated fair value of the underlying loan and the probability that the loan will fund within the terms of the commitment. The fair value also takes into account the fair value of the embedded servicing right.

We offer derivatives to our customers in connection with their risk management needs. These derivatives primarily consist of interest rate and commodity swaps, interest rate and commodity caps and floors, swaptions and foreign exchange contracts. We primarily manage our market risk exposure from customer transactions by entering into a variety of hedging transactions with third-party dealers. Gains and losses on customer-related derivatives are included in Other noninterest income.

Included in the customer, mortgage banking risk management, and other risk management portfolios are written interest-rate caps and floors entered into with customers and for risk management purposes. We receive an upfront premium from the counterparty and are obligated to make payments to the counterparty if the underlying market interest rate rises above or falls below a certain level designated in the contract. Our ultimate obligation under written options is based on future market conditions.

We have entered into risk participation agreements to share some of the credit exposure with other counterparties related to interest rate derivative contracts or to take on credit exposure to generate revenue. The notional amount of risk participation agreements sold was $6.0 billion at December 31, 2018 and $3.6 billion at December 31, 2017. Assuming all underlying third party customers referenced in the swap contracts defaulted, the exposure from these agreements would be $.2 billion at December 31, 2018 and $.1 billion at December 31, 2017 based on the fair value of the underlying swaps.

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

Table 79: Gains (Losses) on Derivatives Not Designated for Hedging under GAAP

	Year ended December 31
In millions	2018			2017			2016
Derivatives used for mortgage banking activities:
Interest rate contracts (a)	$	(56	)	$	75		$	152
Derivatives used for customer-related activities:
Interest rate contracts	99			95			78
Foreign exchange contracts and other (b)	104			146			84
Gains (losses) from customer-related activities (c)	203			241			162
Derivatives used for other risk management activities:
Foreign exchange contracts and other (c) (d)	268			(525		)	(7		)
Total gains (losses) from derivatives not designated as hedging instruments	$	415		$	(209	)	$	307

(a) Included in Residential mortgage, Corporate services and Other noninterest income.

(b) Includes an insignificant amount of gains (losses) on commodity contracts for all periods presented.

(c) Included in Other noninterest income.

(d) 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. In certain cases, minimum thresholds must be exceeded before any collateral is exchanged. Collateral is typically exchanged daily on unsettled positions based on the net fair value of the positions with the counterparty as of the preceding day. Collateral representing initial margin, which is based on potential future exposure, is also required to be pledged by us in relation to derivative instruments with central clearing house counterparties. Any cash collateral exchanged with counterparties under these master netting agreements is also netted, when appropriate, against the applicable derivative fair values on the Consolidated Balance Sheet. However, the fair value of any securities held or pledged is not included in the net presentation on the balance sheet. In order for derivative instruments under a master netting agreement to be eligible for closeout netting under GAAP, we must conduct sufficient legal review to conclude with a well-founded basis that the offsetting rights included in the master netting agreement would be legally enforceable upon an event of default, including upon an event of bankruptcy, insolvency, or a similar proceeding of the counterparty. Enforceability is evidenced by a legal opinion that supports, with sufficient confidence, the enforceability of the master netting agreement in such circumstances.

Table 80 shows the impact legally enforceable master netting agreements had on our derivative assets and derivative liabilities as of December 31, 2018 and 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 80: Derivative Assets and Liabilities Offsetting

In millions	Gross Fair Value		Amounts Offset on the Consolidated Balance Sheet				Net Fair Value			Securities Collateral Held /Pledged Under Master Netting Agreements		Net Amounts
			Fair Value Offset Amount		Cash Collateral
December 31, 2018
Derivative assets
Interest rate contracts:
Over-the-counter cleared (a)	$	29					$	29				$	29
Over-the-counter	1,472		$	450	$	117	905			$	25	880
Commodity contracts	311		76		210		25					25
Foreign exchange and other contracts	269		162		14		93					93
Total derivative assets	$	2,081	$	688	$	341	$	1,052	(b)	$	25	$	1,027
Derivative liabilities
Interest rate contracts:
Over-the-counter cleared (a)	$	24					$	24				$	24
Over-the-counter	1,496		$	557	$	489	450			$	11	439
Commodity contracts	305		56		17		232					232
Foreign exchange and other contracts	465		75		33		357					357
Total derivative liabilities	$	2,290	$	688	$	539	$	1,063	(c)	$	11	$	1,052
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
Commodity contracts	130		38				92					92
Foreign exchange and other contracts	222		97		2		123					123
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
Commodity contracts	126		38				88					88
Foreign exchange and other contracts	767		103		94		570					570
Total derivative liabilities	$	2,856	$	1,054	$	763	$	1,039	(c)			$	1,039

(a) Reflects our first quarter 2018 change in accounting treatment 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 80 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 industry standard 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 December 31, 2018, we held cash, U.S. government securities and mortgage-backed securities totaling $.4 billion under master netting agreements and other collateral agreements to collateralize net derivative assets due from counterparties, and we pledged cash totaling $1.2 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 December 31, 2018 was $1.5 billion for which we had posted collateral of $1.0 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 December 31, 2018 would be $.5 billion.