Derivative Financial Instruments

We use derivative financial instruments to support our clients' needs and to manage our interest-rate and currency risk. In undertaking these activities, we assume positions in both the foreign exchange and interest-rate markets by buying and selling cash instruments and using derivative financial instruments, including foreign exchange forward contracts, foreign exchange and interest-rate options and interest-rate swaps, interest-rate forward contracts and interest-rate futures. For information on our derivative instruments, including the related accounting policies, refer to note 16 on pages 173 to 179 in the 2014 10-K.

Derivative financial instruments are also subject to credit and counterparty risk, which we manage by performing credit reviews, maintaining individual counterparty limits, entering into netting arrangements and requiring the receipt of collateral. Cash collateral received from and provided to counterparties in connection with derivative financial instruments is recorded in accrued expenses and other liabilities and other assets, respectively, in our consolidated statement of condition. As of March 31, 2015 and December 31, 2014, we had recorded approximately $1.49 billion and $1.79 billion, respectively, of cash collateral received from counterparties and approximately $4.87 billion and $4.79 billion, respectively, of cash collateral provided to counterparties in connection with derivative financial instruments in our consolidated statement of condition.

Certain of our derivative assets and liabilities as of March 31, 2015 and December 31, 2014 are subject to master netting agreements with our derivative counterparties. Certain of these agreements contain credit risk-related contingent features in which the counterparty has the right to declare us in default and accelerate cash settlement of our net derivative liabilities with the counterparty in the event that our credit rating falls below specified levels. The aggregate fair value of all derivative instruments with credit risk-related contingent features that were in a net liability position as of March 31, 2015 totaled approximately $2.16 billion, against which we had no underlying collateral, due to timing differences with respect to the market-to market valuation of the collateral. If our credit rating were downgraded below levels specified in the agreements, the maximum additional amount of payments related to termination events that could have been required pursuant to these contingent features as of March 31, 2015 was approximately $2.16 billion. Such accelerated settlement would not affect our consolidated results of operations.

Derivatives Not Designated as Hedging Instruments:

In connection with our trading activities, we use derivative financial instruments in our role as a financial intermediary and as both a manager and servicer of financial assets, in order to accommodate our clients' investment and risk management needs. In addition, we use derivative financial instruments for risk management purposes as economic hedges, which are not formally designated as accounting hedges, in order to contribute to our overall corporate earnings and liquidity. These activities are designed to generate trading services revenue and to manage volatility in our net interest revenue. The level of market risk that we assume is a function of our overall objectives and liquidity needs, our clients' requirements and market volatility. Refer to pages 174 to 175 within note 16 in the 2014 Form 10-K for information on derivatives not designated as hedging instruments.

Derivatives Designated as Hedging Instruments:

In connection with our asset-and-liability management activities, we use derivative financial instruments to manage our interest-rate risk. Interest-rate risk, defined as the sensitivity of income or financial condition to variations in interest rates, is a significant non-trading market risk to which our assets and liabilities are exposed. We manage our interest-rate risk by identifying, quantifying and hedging our exposures, using fixed-rate portfolio securities and a variety of derivative financial instruments, most frequently interest-rate swaps and options (for example, interest-rate caps and floors). Interest-rate swap agreements alter the interest-rate characteristics of specific balance sheet assets or liabilities. When appropriate, forward-rate agreements, options on swaps, and exchange-traded futures and options are also used. Our hedging relationships are formally designated, and qualify for hedge accounting, as fair value or cash flow hedges. Refer to pages 175 to 179 within note 16 in the 2014 Form 10-K for information on derivatives designated as hedging instruments.

Fair value hedges

We have entered into interest-rate swap agreements to modify our interest revenue from certain available-for-sale investment securities from a fixed rate to a floating rate. The hedged trusts had a weighted-average life of approximately 5.7 years as of March 31, 2015, compared to 5.9 years as of December 31, 2014.

We have entered into interest-rate swap agreements to modify our interest expense on three senior notes and one subordinated note from fixed rates to floating rates. The senior notes mature in 2018, 2023 and 2024 and pay fixed interest at annual rates of 1.35%, 3.70% and 3.30%, respectively. The subordinated note matures in 2023 and pays fixed interest at a 3.10% annual rate. The senior and subordinated notes are hedged with interest-rate swap contracts with notional amounts, maturities and fixed-rate coupon terms that align with the hedged notes.

We have entered into forward foreign exchange contracts to hedge the change in fair value attributable to foreign exchange movements in the funding of non-functional currency-denominated investment securities. These forward contracts convert the foreign currency risk to U.S. dollars, thereby mitigating our exposure to fluctuations in the fair value of the securities attributable to changes in foreign exchange rates.

Cash flow hedges

We have entered into foreign exchange contracts to hedge the change in cash flows attributable to foreign exchange movements in the funding of non-functional currency-denominated investment securities. These foreign exchange contracts convert the foreign currency risk to U.S. dollars, thereby mitigating our exposure to fluctuations in the cash flows of the securities attributable to changes in foreign exchange rates.

The following table presents the aggregate contractual, or notional, amounts of derivative financial instruments entered into in connection with our trading and asset-and-liability management activities as of the dates indicated:



(In millions)	March 31, 2015		December 31, 2014
Derivatives not designated as hedging instruments:
Interest-rate contracts:
Swap agreements and forwards	$	474	$	645
Options and caps purchased	4		7
Options and caps written	4		7
Futures	2,969		3,939
Foreign exchange contracts:
Forward, swap and spot	1,414,506		1,231,344
Options purchased	3,008		2,767
Options written	2,905		2,404
Futures	21		—
Credit derivative contracts:
Credit swap agreements	226		191
Commodity and equity contracts:
Commodity⁽¹⁾	61		26
Equity⁽¹⁾	92		2
Other:
Stable value contracts	23,425		23,409
Deferred value awards⁽²⁾	417		210
Derivatives designated as hedging instruments:
Interest-rate contracts:
Swap agreements	6,065		6,077
Foreign exchange contracts:
Forward and swap	2,605		2,705

⁽¹⁾Primarily composed of positions held by a consolidated sponsored investment fund, more fully described in note 9.

⁽²⁾Represents grants of deferred value awards to employees; refer to discussion in this note under "Derivatives Not Designated as Hedging Instruments."

In connection with our asset-and-liability management activities, we have entered into interest-rate contracts designated as fair value and cash flow hedges to manage our interest-rate risk. The following table presents the aggregate notional amounts of these interest-rate contracts and the related assets or liabilities being hedged as of the dates indicated:



	March 31, 2015⁽¹⁾
(In millions)	Fair Value Hedges
Investment securities available for sale	$	2,565
Long-term debt⁽²⁾	3,500
Total	$	6,065



	December 31, 2014
(In millions)	Fair Value Hedges
Investment securities available for sale	$	2,577
Long-term debt⁽²⁾	3,500
Total	$	6,077

⁽¹⁾ As of March 31, 2015 there were no interest-rate contracts designated as cash flow hedges.

⁽²⁾As of March 31, 2015, these fair value hedges increased the carrying value of long-term debt presented in our consolidated statement of condition by $135 million. As of December 31, 2014, these fair value hedges decreased the carrying value of long-term debt presented in our consolidated statement of condition by $76 million.

The following tables present the contractual and weighted-average interest rates for long-term debt, which include the effects of the fair value hedges presented in the table above, for the periods indicated:



	Three Months Ended March 31,
	2015				2014
	Contractual Rates		Rate Including Impact of Hedges		Contractual Rates		Rate Including Impact of Hedges
Long-term debt	3.53	%	2.54	%	3.39	%	2.60	%

The following tables present the fair value of derivative financial instruments, excluding the impact of master netting agreements, recorded in our consolidated statement of condition as of the dates indicated. The impact of master netting agreements is disclosed in note 2.



Derivative Assets⁽¹⁾
	Fair Value
(In millions)	March 31, 2015		December 31, 2014
Derivatives not designated as hedging instruments:
Foreign exchange contracts	$	15,610	$	14,626
Interest-rate contracts	12		15
Other derivative contracts	3		2
Total	$	15,625	$	14,643
Derivatives designated as hedging instruments:
Foreign exchange contracts	$	506	$	509
Interest-rate contracts	129		62
Total	$	635	$	571

⁽¹⁾ Derivative assets are included within other assets in our consolidated statement of condition.



Derivative Liabilities⁽¹⁾
	Fair Value
(In millions)	March 31, 2015		December 31, 2014
Derivatives not designated as hedging instruments:
Foreign exchange contracts	$	17,053	$	14,922
Other derivative contracts	112		70
Interest-rate contracts	12		16
Total	$	17,177	$	15,008
Derivatives designated as hedging instruments:
Interest-rate contracts	$	220	$	223
Foreign exchange contracts	—		3
Total	$	220	$	226

⁽¹⁾ Derivative liabilities are included within other liabilities in our consolidated statement of condition.

The following tables present the impact of our use of derivative financial instruments on our consolidated statement of income for the periods indicated:



	Location of Gain (Loss) on Derivative in Consolidated Statement of Income	Amount of Gain (Loss) on Derivative Recognized in Consolidated Statement of Income
		Three Months Ended March 31,
(In millions)		2015		2014
Derivatives not designated as hedging instruments:
Foreign exchange contracts	Trading services revenue	$	204	$	134
Interest-rate contracts	Processing fees and other revenue	1		—
Other derivative contracts	Trading services revenue	2		(1		)
Total		$	207	$	133



	Location of (Gain) Loss on Derivative in Consolidated Statement of Income	Amount of (Gain) Loss on Derivative Recognized in Consolidated Statement of Income
		Three Months Ended March 31,
(In millions)		2015		2014
Derivatives not designated as hedging instruments:
Other derivative contracts	Compensation and employee benefits	$	59	$	49
Total		$	59	$	49



	Location of Gain (Loss) on Derivative in Consolidated Statement of Income	Amount of Gain (Loss) on Derivative Recognized in Consolidated Statement of Income						Hedged Item in Fair Value Hedging Relationship	Location of Gain (Loss) on Hedged Item in Consolidated Statement of Income	Amount of Gain (Loss) on Hedged Item Recognized in Consolidated Statement of Income
		Three Months Ended March 31,								Three Months Ended March 31,
(In millions)		2015			2014					2015			2014
Derivatives designated as fair value hedges:
Foreign exchange contracts	Processing fees and other revenue	$	(67	)	42			Investment securities	Processing fees and other revenue	$	67		$	(42	)
Interest-rate contracts	Processing fees and other revenue	(25		)	(12		)	Available-for-sale securities	Processing fees and other revenue⁽¹⁾	25			12
Interest-rate contracts	Processing fees and other revenue	68			49			Long-term debt	Processing fees and other revenue	(65		)	(45		)
Total		$	(24	)	$	79				$	27		$	(75	)

⁽¹⁾Represents amounts reclassified out of or into other comprehensive income, or OCI. For the three months ended March 31, 2015, $15 million of unrealized losses on available-for-sale securities designated in fair value hedges were recognized in OCI. For the three months ended March 31, 2014, $10 million of unrealized gains on available-for-sale securities designated in fair value hedges were recognized in OCI.

Differences between the gains (losses) on the derivative and the gains (losses) on the hedged item, excluding any amounts recorded in net interest revenue, represent hedge ineffectiveness.



	Amount of Gain (Loss) on Derivative Recognized in Other Comprehensive Income					Location of Gain (Loss) Reclassified from OCI to Consolidated Statement of Income	Amount of Gain (Loss) Reclassified from OCI to Consolidated Statement of Income						Location of Gain (Loss) on Derivative Recognized in Consolidated Statement of Income	Amount of Gain (Loss) on Derivative Recognized in Consolidated Statement of Income
	Three Months Ended March 31,						Three Months Ended March 31,							Three Months Ended March 31,
	2015		2014				2015			2014				2015		2014
(In millions)
Derivatives designated as cash flow hedges:
Interest-rate contracts	$	—	$	(1	)	Net interest revenue	$	(1	)	$	(1	)	Net interest revenue	$	—	$	1
Foreign exchange contracts	20		(12		)	Net interest revenue	—			—			Net interest revenue	2		1
Total	$	20	$	(13	)		$	(1	)	$	(1	)		$	2	$	2