Financial Derivatives

9 Months Ended

Sep. 30, 2021

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Financial Derivatives

FINANCIAL DERIVATIVES

We use a variety of financial derivatives to both mitigate exposure to market (primarily interest rate) and credit risks inherent in our business activities, as well as to facilitate customer risk management activities. We manage these risks as part of our overall asset and liability management process and through our credit policies and procedures. 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, 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.

For more information regarding derivatives see Note 1 Accounting Policies and Note 16 Financial Derivatives in the Notes to Consolidated Financial Statements included in Item 8 of our 2020 Form 10-K.

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

Table 77: Total Gross Derivatives (a)

	September 30, 2021						December 31, 2020
In millions	Notional / Contract Amount		Asset Fair Value (b)		Liability Fair Value (c)		Notional / Contract Amount		Asset Fair Value (b)		Liability Fair Value (c)
Derivatives used for hedging
Interest rate contracts (d):
Fair value hedges	$	24,837					$	24,153
Cash flow hedges	42,018		$	12	$	38	22,875		$	14
Foreign exchange contracts:
Net investment hedges	1,148		1		3		1,075				$	22
Total derivatives designated for hedging	$	68,003	$	13	$	41	$	48,103	$	14	$	22
Derivatives not used for hedging
Derivatives used for mortgage banking activities (e):
Interest rate contracts:
Swaps	$	33,994					$	50,511
Futures (f)	3,666						2,841
Mortgage-backed commitments	13,702		$	98	$	54	11,288		$	147	$	77
Other	13,732		38		11		1,831		11		2
Total interest rate contracts	65,094		136		65		66,471		158		79
Derivatives used for customer-related activities:
Interest rate contracts:
Swaps	304,724		3,961		1,508		280,125		5,475		1,601
Futures (f)	1,006						1,235
Mortgage-backed commitments	4,692		18		16		4,178		11		14
Other	25,333		143		88		20,125		193		88
Total interest rate contracts	335,755		4,122		1,612		305,663		5,679		1,703
Commodity contracts:
Swaps	9,249		2,099		2,114		6,149		350		323
Other	3,236		422		422		2,770		61		61
Total commodity contracts	12,485		2,521		2,536		8,919		411		384
Foreign exchange contracts and other	27,995		192		182		26,620		267		243
Total derivatives for customer-related activities	376,235		6,835		4,330		341,202		6,357		2,330
Derivatives used for other risk management activities:
Foreign exchange contracts and other	12,782		51		345		10,931		4		325
Total derivatives not designated for hedging	$	454,111	$	7,022	$	4,740	$	418,604	$	6,519	$	2,734
Total gross derivatives	$	522,114	$	7,035	$	4,781	$	466,707	$	6,533	$	2,756
Less: Impact of legally enforceable master netting agreements			1,027		1,027				720		720
Less: Cash collateral received/paid			757		2,403				1,434		1,452
Total derivatives			$	5,251	$	1,351			$	4,379	$	584

(a)Centrally cleared derivatives are settled in cash daily and result in no derivative asset or derivative liability being recognized on our Consolidated Balance Sheet.

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

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

(d)Represents primarily swaps.

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

(f)Futures contracts are settled in cash daily and result in no derivative asset or derivative liability being recognized on our Consolidated Balance Sheet.

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 12. Any nonperformance risk, including credit risk, is included in the determination of the estimated net fair value of the derivatives.

Derivatives Designated As Hedging Instruments

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. 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 and interest rate caps and floors 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 hedging instruments 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, 2021, we expect to reclassify net derivative gains of $312 million pretax, or $240 million after-tax, from AOCI to interest income for these 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, 2021. As of September 30, 2021, the maximum length of time over which forecasted transactions are hedged is ten years.

Further detail regarding gains (losses) related to our fair value and cash flow hedge derivatives is presented in the following table:

Table 78: 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, 2021
Total amounts on the Consolidated Income Statement	$	2,437	$	460	$	90	$	449
Gains (losses) on fair value hedges recognized on:
Hedged items (c)			$	2	$	155
Derivatives					$	(169)
Amounts related to interest settlements on derivatives			$	(1)	$	129
Gains (losses) on cash flow hedges (d):
Amount of derivative gains (losses) reclassified from AOCI	$	91	$	11			$	13
For the three months ended September 30, 2020
Total amounts on the Consolidated Income Statement	$	2,116	$	490	$	118	$	457
Gains (losses) on fair value hedges recognized on:
Hedged items (c)			$	(13)	$	141
Derivatives			$	14	$	(166)
Amounts related to interest settlements on derivatives			$	(3)	$	149
Gains (losses) on cash flow hedges (d):
Amount of derivative gains (losses) reclassified from AOCI	$	118	$	16
For the nine months ended September 30, 2021
Total amounts on the Consolidated Income Statement	$	6,593	$	1,350	$	275	$	1,400
Gains (losses) on fair value hedges recognized on:
Hedged items (c)			$	(3)	$	695
Derivatives			$	7	$	(740)
Amounts related to interest settlements on derivatives			$	(3)	$	394
Gains (losses) on cash flow hedges (d):
Amount of derivative gains (losses) reclassified from AOCI	$	282	$	49			$	27
For the nine months ended September 30, 2020
Total amounts on the Consolidated Income Statement	$	6,853	$	1,599	$	619	$	1,071
Gains (losses) on fair value hedges recognized on:
Hedged items (c)			$	224	$	(1,300)
Derivatives			$	(219)	$	1,220
Amounts related to interest settlements on derivatives			$	(7)	$	341
Gains (losses) on cash flow hedges (d):
Amount of derivative gains (losses) reclassified from AOCI	$	262	$	19			$	1

(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 79: Hedged Items - Fair Value Hedges

 

	September 30, 2021				December 31, 2020
In millions	Carrying Value of the Hedged Items		Cumulative Fair Value Hedge Adjustment included in the Carrying Value of Hedged Items (a)		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)	$	2,905	$	25	$	2,785	$	30
Borrowed funds	$	25,924	$	906	$	25,797	$	1,611

(a)Includes $(0.1) billion of fair value hedge adjustments primarily related to discontinued borrowed funds hedge relationships at both September 30, 2021 and December 31, 2020, respectively.

(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. Net gains (losses) on net investment hedge derivatives recognized in OCI were $28 million and $20 million for the three and nine months ended September 30, 2021, compared with $(42) million and $38 million for the same periods in 2020, respectively.

Derivatives Not Designated As Hedging Instruments

For additional information on derivatives not designated as hedging instruments under GAAP, see Note 16 Financial Derivatives in the Notes to Consolidated Financial Statements included in Item 8 of our 2020 Form 10-K.

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

Table 80: Gains (Losses) on Derivatives Not Designated for Hedging

	Three months ended September 30				Nine months ended September 30
In millions	2021		2020		2021		2020
Derivatives used for mortgage banking activities:
Interest rate contracts (a)	$	6	$	20	$	(100)	$	799
Derivatives used for customer-related activities:
Interest rate contracts	(4)		59		93		99
Foreign exchange contracts and other	23		43		88		83
Gains (losses) from customer-related activities (b)	19		102		181		182
Derivatives used for other risk management activities:
Foreign exchange contracts and other (b)	(72)		(106)		(53)		(1)
Total gains (losses) from derivatives not designated as hedging instruments	$	(47)	$	16	$	28	$	980

(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.

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 16 Financial Derivatives in the Notes to Consolidated Financial Statements included in Item 8 of our 2020 Form 10-K.

Table 81 shows the impact legally enforceable master netting agreements had on our derivative assets and derivative liabilities as of September 30, 2021 and December 31, 2020. 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 81 includes OTC derivatives and OTC derivatives cleared through a central clearing house. OTC derivatives represent contracts executed bilaterally with counterparties that are not settled through an organized exchange or directly cleared through a central clearing house. The majority of OTC derivatives are governed by the 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. OTC cleared derivative instruments are typically settled in cash each day based on the prior day value.

Table 81: Derivative Assets and Liabilities Offsetting

In millions			Amounts Offset on the Consolidated Balance Sheet							Securities Collateral Held/Pledged Under Master Netting Agreements
	Gross Fair Value		Fair Value Offset Amount		Cash Collateral		Net Fair Value					Net Amounts
September 30, 2021
Derivative assets
Interest rate contracts:
Over-the-counter cleared	$	51					$	51				$	51
Over-the-counter	4,219		$	556	$	723	2,940			$	287	2,653
Commodity contracts	2,521		343		28		2,150					2,150
Foreign exchange and other contracts	244		128		6		110					110
Total derivative assets	$	7,035	$	1,027	$	757	$	5,251	(a)	$	287	$	4,964
Derivative liabilities
Interest rate contracts:
Over-the-counter cleared	$	68					$	68				$	68
Over-the-counter	1,647		$	613	$	813	221					221
Commodity contracts	2,536		353		1,511		672					672
Foreign exchange and other contracts	530		61		79		390					390
Total derivative liabilities	$	4,781	$	1,027	$	2,403	$	1,351	(b)			$	1,351
December 31, 2020
Derivative assets
Interest rate contracts:
Over-the-counter cleared	$	48					$	48				$	48
Over-the-counter	5,803		$	430	$	1,426	3,947			$	531	3,416
Commodity contracts	411		209		4		198					198
Foreign exchange and other contracts	271		81		4		186			1		185
Total derivative assets	$	6,533	$	720	$	1,434	$	4,379	(a)	$	532	$	3,847
Derivative liabilities
Interest rate contracts:
Over-the-counter cleared	$	42					$	42				$	42
Over-the-counter	1,740		$	462	$	1,179	99					99
Commodity contracts	384		182		103		99					99
Foreign exchange and other contracts	590		76		170		344					344
Total derivative liabilities	$	2,756	$	720	$	1,452	$	584	(b)			$	584

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

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

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, 2021, we held cash and debt securities (primarily agency mortgage-backed securities) totaling $1.6 billion under master netting agreements and other collateral agreements to collateralize net derivative assets due from counterparties, and we pledged cash totaling $3.4 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, 2021 was $3.5 billion for which we had posted collateral of $2.8 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, 2021 would be $0.7 billion.