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 10 to the consolidated financial statements on pages 162 to 168 in our 2015 Form 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, 2016 and December 31, 2015, we had recorded approximately $3.89 billion and $1.40 billion, respectively, of cash collateral received from counterparties and approximately $1.11 billion and $1.65 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, 2016 and December 31, 2015 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, 2016 totaled approximately $1.49 billion, against which we provided $267 million of underlying 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, assuming no change in fair value, as of March 31, 2016 was approximately $1.22 billion. Such accelerated settlement would be at fair value and therefore 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. For additional information on derivatives not designated as hedging instruments, refer to Note 10 to the consolidated financial statements on pages 163 to 164 in our 2015 Form 10-K.

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 foreign exchange forward and swap 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. For additional information on derivatives designated as hedging instruments, refer to Note 10 to the consolidated financial statements on pages 164 to 168 in our 2015 Form 10-K.

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 AFS investment securities included hedged trusts that had a weighted-average life of approximately 5.3 years as of March 31, 2016, compared to 5.4 years as of December 31, 2015.

We have entered into interest-rate swap agreements to modify our interest expense on six senior notes and two subordinated notes from fixed rates to floating rates. 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. The table below summarizes the maturities and the paid fixed interest rates for the hedged senior and subordinated notes:



March 31, 2016	Maturity	Paid Fixed Interest Rate
Senior Notes
	2018	1.35%
	2020	2.55%
	2021	4.38%
	2023	3.70%
	2024	3.30%
	2025	3.55%
Subordinated Notes
	2018	4.96%
	2023	3.10%

We have entered into foreign exchange swap contracts to hedge the change in fair value attributable to foreign exchange movements in our foreign currency denominated investment securities and deposits. 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 and deposits 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 foreign 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, 2016		December 31, 2015
Derivatives not designated as hedging instruments:
Interest-rate contracts:
Swap agreements and forwards	$	197	$	336
Futures	13,198		2,621
Foreign exchange contracts:
Forward, swap and spot	1,354,032		1,274,277
Options purchased	1		403
Options written	—		404
Futures	3		—
Credit derivative contracts:
Credit swap agreements	37		141
Commodity and equity contracts:
Commodity⁽¹⁾	97		113
Equity⁽¹⁾	25		87
Other:
Stable value contracts	24,771		24,583
Deferred value awards⁽²⁾	550		320
Derivatives designated as hedging instruments:
Interest-rate contracts:
Swap agreements	8,916		9,398
Foreign exchange contracts:
Forward and swap	5,789		4,515

⁽¹⁾Primarily composed of positions held by a consolidated sponsored investment fund, more fully described in Note 11.

⁽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 tables present the aggregate notional amounts of these interest-rate contracts and the related assets or liabilities being hedged as of the dates indicated:



	March 31, 2016⁽¹⁾
(In millions)	Fair Value Hedges
Investment securities available for sale	$	1,666
Long-term debt⁽²⁾	7,250
Total	$	8,916



	December 31, 2015⁽¹⁾
(In millions)	Fair Value Hedges
Investment securities available for sale	$	1,698
Long-term debt⁽²⁾	7,700
Total	$	9,398

⁽¹⁾ As of March 31, 2016 and December 31, 2015, there were no interest-rate contracts designated as cash flow hedges.

⁽²⁾As of March 31, 2016, these fair value hedges increased the carrying value of long-term debt presented in our consolidated statement of condition by $340 million. As of December 31, 2015, these fair value hedges decreased the carrying value of long-term debt presented in our consolidated statement of condition by $105 million.

The following table presents 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,
	2016				2015
	Contractual Rates		Rate Including Impact of Hedges		Contractual Rates		Rate Including Impact of Hedges
Long-term debt	3.44	%	2.20	%	3.53	%	2.54	%

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 8.



Derivative Assets⁽¹⁾
	Fair Value
(In millions)	March 31, 2016		December 31, 2015
Derivatives not designated as hedging instruments:
Foreign exchange contracts	$	15,799	$	10,799
Interest-rate contracts	1		2
Other derivative contracts	3		5
Total	$	15,803	$	10,806
Derivatives designated as hedging instruments:
Foreign exchange contracts	$	501	$	517
Interest-rate contracts	370		133
Total	$	871	$	650

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



Derivative Liabilities⁽¹⁾
	Fair Value
(In millions)	March 31, 2016		December 31, 2015
Derivatives not designated as hedging instruments:
Foreign exchange contracts	$	15,705	$	10,795
Other derivative contracts	144		103
Interest-rate contracts	1		2
Total	$	15,850	$	10,900
Derivatives designated as hedging instruments:
Interest-rate contracts	$	205	$	180
Foreign exchange contracts	81		73
Total	$	286	$	253

⁽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)			2016			2015
Derivatives not designated as hedging instruments:
Foreign exchange contracts	Trading services revenue		$	154		$	204
Interest-rate contracts	Processing fees and other revenue		2			1
Interest-rate contracts	Trading services revenue		(2		)	—
Credit derivative contracts	Trading services revenue		(1		)	—
Other derivative contracts	Trading services revenue		1			2
Total			$	154		$	207



	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)		2016		2015
Derivatives not designated as hedging instruments:
Other derivative contracts	Compensation and employee benefits	$	71	$	59
Total		$	71	$	59



	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)		2016			2015					2016			2015
Derivatives designated as fair value hedges:
Foreign exchange contracts	Processing fees and other revenue	$	44		$	(67	)	Investment securities	Processing fees and other revenue	$	(44	)	$	67
Foreign exchange contracts	Processing fees and other revenue	248			—			FX deposit	Processing fees and other revenue	(248		)	—
Interest-rate contracts	Processing fees and other revenue	(30		)	(25		)	Available-for-sale securities	Processing fees and other revenue⁽¹⁾	31			25
Interest-rate contracts	Processing fees and other revenue	248			68			Long-term debt	Processing fees and other revenue	(240		)	(65		)
Total		$	510		$	(24	)			$	(501	)	$	27

⁽¹⁾For the three months ended March 31, 2016 and 2015, $19 million and $15 million, respectively, of unrealized losses on AFS investment securities designated in fair value hedges was 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,
(In millions)	2016			2015			2016		2015				2016		2015
Derivatives designated as cash flow hedges:
Interest-rate contracts	$	—		$	—	Net interest revenue	$	—	$	(1	)	Net interest revenue	$	—	$	—
Foreign exchange contracts	(113		)	20		Net interest revenue			—			Net interest revenue	5		2
Total	$	(113	)	$	20		$	—	$	(1	)		$	5	$	2