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 June 30, 2015 and December 31, 2014, we had recorded approximately $1.52 billion and $1.79 billion, respectively, of cash collateral received from counterparties and approximately $2.71 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 June 30, 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 June 30, 2015 totaled approximately $1.09 billion, against which we had $19 million 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 June 30, 2015 was approximately $1.07 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 and foreign currency 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. We use forward and swap foreign exchange contracts to hedge foreign exchange exposure to various foreign currencies with respect to certain assets and liabilities. 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 5.5 years as of June 30, 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 five senior notes and two subordinated notes from fixed rates to floating rates. The senior notes mature in 2017, 2018, 2021, 2023 and 2024 and pay fixed interest at annual rates of 5.38%, 1.35%, 4.38%, 3.70% and 3.30%, respectively. The subordinated notes matures in 2018, and 2023 and pays fixed interest at annual rates of 4.96% and 3.10%, respectively. 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)	June 30, 2015		December 31, 2014
Derivatives not designated as hedging instruments:
Interest-rate contracts:
Swap agreements and forwards	$	266	$	645
Options and caps purchased	2		7
Options and caps written	2		7
Futures	12,225		3,939
Foreign exchange contracts:
Forward, swap and spot	1,331,780		1,231,344
Options purchased	2,433		2,767
Options written	2,309		2,404
Credit derivative contracts:
Credit swap agreements	229		191
Commodity and equity contracts:
Commodity⁽¹⁾	77		26
Equity⁽¹⁾	52		2
Other:
Stable value contracts	23,280		23,409
Deferred value awards⁽²⁾	386		210
Derivatives designated as hedging instruments:
Interest-rate contracts:
Swap agreements	6,961		6,077
Foreign exchange contracts:
Forward and swap	9,570		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:



	June 30, 2015⁽¹⁾
(In millions)	Fair Value Hedges
Investment securities available for sale	$	1,761
Long-term debt⁽²⁾	5,200
Total	$	6,961



	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 June 30, 2015 there were no interest-rate contracts designated as cash flow hedges.

⁽²⁾As of June 30, 2015, these fair value hedges increased the carrying value of long-term debt presented in our consolidated statement of condition by $47 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 June 30,
	2015				2014
	Contractual Rates		Rate Including Impact of Hedges		Contractual Rates		Rate Including Impact of Hedges
Long-term debt	3.70	%	2.67	%	3.53	%	2.73	%



	Six Months Ended June 30,
	2015				2014
	Contractual Rates		Rate Including Impact of Hedges		Contractual Rates		Rate Including Impact of Hedges
Long-term debt	3.61	%	2.60	%	3.46	%	2.66	%

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)	June 30, 2015		December 31, 2014
Derivatives not designated as hedging instruments:
Foreign exchange contracts	$	10,030	$	14,626
Interest-rate contracts	4		15
Other derivative contracts	4		2
Total	$	10,038	$	14,643
Derivatives designated as hedging instruments:
Foreign exchange contracts	$	509	$	509
Interest-rate contracts	45		62
Total	$	554	$	571

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



Derivative Liabilities⁽¹⁾
	Fair Value
(In millions)	June 30, 2015		December 31, 2014
Derivatives not designated as hedging instruments:
Foreign exchange contracts	$	9,976	$	14,922
Other derivative contracts	107		70
Interest-rate contracts	4		16
Total	$	10,087	$	15,008
Derivatives designated as hedging instruments:
Interest-rate contracts	$	215	$	223
Foreign exchange contracts	27		3
Total	$	242	$	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 June 30,						Six Months Ended June 30,
(In millions)		2015			2014			2015			2014
Derivatives not designated as hedging instruments:
Foreign exchange contracts	Trading services revenue	$	165		$	144		$	369		$	278
Interest-rate contracts	Trading services revenue	(1		)	(1		)	(1		)	(1		)
Other derivative contracts	Trading services revenue	1			—			3			—
Other derivative contracts	Processing fees and other revenue	—			—			—			(1		)
Total		$	165		$	143		$	371		$	276



	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 June 30,					Six Months Ended June 30,
(In millions)		2015		2014			2015		2014
Derivatives not designated as hedging instruments:
Other derivative contracts	Compensation and employee benefits	$	33	$	(22	)	$	92	$	(70	)
Total		$	33	$	(22	)	$	92	$	(70	)



	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
(In millions)		Three Months Ended June 30, 2015			Six Months Ended June 30, 2015					Three Months Ended June 30, 2015			Six Months Ended June 30, 2015
Derivatives designated as fair value hedges:
Foreign exchange contracts	Processing fees and other revenue	$	12		$	(52	)	Investment securities	Processing fees and other revenue	$	(12	)	$	52
Foreign exchange contracts	Processing fees and other revenue	(13		)	(13		)	FX deposit	Processing fees and other revenue	13			13
Interest-rate contracts	Processing fees and other revenue	37			12			Available-for-sale securities	Processing fees and other revenue⁽¹⁾	(38		)	(12		)
Interest-rate contracts	Processing fees and other revenue	(85		)	(17		)	Long-term debt	Processing fees and other revenue	82			17
Total		$	(49	)	$	(70	)			$	45		$	70



	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
(In millions)		Three Months Ended June 30, 2014			Six Months Ended June 30, 2014					Three Months Ended June 30, 2014			Six Months Ended June 30, 2014
Derivatives designated as fair value hedges:
Foreign exchange contracts	Processing fees and other revenue	$	47		96			Investment securities	Processing fees and other revenue	$	(44	)	$	(89	)
Interest-rate contracts	Processing fees and other revenue	(24		)	(41		)	Available-for-sale securities	Processing fees and other revenue⁽¹⁾	22			38
Interest-rate contracts	Processing fees and other revenue	18			60			Long-term debt	Processing fees and other revenue	(18		)	(60		)
Total		$	41		$	115				$	(40	)	$	(111	)

⁽¹⁾Represents amounts reclassified out of or into other comprehensive income, or OCI. For the three and six months ended June 30, 2015, $22 million and $7 million, respectively, of unrealized gains on available-for-sale securities designated in fair value hedges were recognized in OCI. For the three and six months ended June 30, 2014, $13 million and $23 million, respectively, of unrealized losses 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
(In millions)	Three Months Ended June 30, 2015		Six Months Ended June 30, 2015			Three Months Ended June 30, 2015			Six Months Ended June 30, 2015				Three Months Ended June 30, 2015		Six Months Ended June 30, 2015
Derivatives designated as cash flow hedges:
Interest-rate contracts	$	—	$	—	Net interest revenue	$	(1	)	$	(2	)	Net interest revenue	$	—	$	—
Foreign exchange contracts	21		41		Net interest revenue	—			—			Net interest revenue	2		4
Total	$	21	$	41		$	(1	)	$	(2	)		$	2	$	4



	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
(In millions)	Three Months Ended June 30, 2014			Six Months Ended June 30, 2014				Three Months Ended June 30, 2014			Six Months Ended June 30, 2014				Three Months Ended June 30, 2014		Six Months Ended June 30, 2014
Derivatives designated as cash flow hedges:
Interest-rate contracts	$	(1	)	$	(2	)	Net interest revenue	$	(1	)	$	(2	)	Net interest revenue	$	1	$	2
Foreign exchange contracts	(52		)	(64		)	Net interest revenue	—			—			Net interest revenue	1		2
Total	$	(53	)	$	(66	)		$	(1	)	$	(2	)		$	2	$	4