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Derivative Financial Instruments
 3 Months Ended
Mar. 31, 2017
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivative Financial Instruments
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 options and interest-rate contracts. For information on our derivative instruments, including the related accounting policies, refer to pages 160 to 166 in Note 10 to the consolidated financial statements included under Item 8, Financial Statements and Supplementary Data, in our 2016 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, 2017 and December 31, 2016, we had recorded approximately $1.70 billion and $1.99 billion, respectively, of cash collateral received from counterparties and approximately $742 million and $4.39 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, 2017 and December 31, 2016 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, 2017 totaled approximately $1.14 billion, against which we provided $25 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, 2017 was approximately $1.11 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 income. 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 derivative not designated as hedging instruments, refer to pages 161 to 162 in Note 10 to the consolidated financial statements included under Item 8, Financial Statements and Supplementary Data, in our 2016 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. Interest rate swap agreements alter the interest-rate characteristics of specific balance sheet assets or liabilities. 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, cash flow or net investment hedges. For additional information on derivative designated as hedging instruments, refer to pages 162 to 166 in Note 10 to the consolidated financial statements included under Item 8, Financial Statements and Supplementary Data, in our 2016 Form 10-K.
 Fair Value Hedges
We have entered into interest rate swap agreements to modify our interest income from certain AFS 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 4.4 years as of March 31, 2017, compared to 4.5 years as of December 31, 2016.
We have entered into interest rate swap agreements to modify our interest expense on eight senior notes and one subordinated note 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 effectively hedge the fixed-rate notes. The table below summarizes the maturities and the paid fixed interest rates for the hedged senior and subordinated notes:
March 31, 2017
 
Maturity
 
Paid Fixed Interest Rate
Senior Notes
 
 
 
 
 
 
2018
 
1.35%
 
 
2020
 
2.55
 
 
2021
 
1.95
 
 
2021
 
4.38
 
 
2023
 
3.70
 
 
2024
 
3.30
 
 
2025
 
3.55
 
 
2026
 
2.65
 
 
 
 
 
Subordinated Notes
 
 
 
 
 
 
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.
Net Investment Hedges
We have entered into foreign exchange contracts to protect the net investment in our foreign operations against adverse changes in exchange rates. These forward contracts convert the foreign currency risk to U.S. dollars, thereby mitigating our exposure to fluctuations in the fair value of our net investments in our foreign operations attributable to changes in foreign exchange rates. The changes in fair value of the foreign exchange forward contracts are recorded, net of taxes, in the foreign currency translation component of other comprehensive income.  Effectiveness of net investment hedges is based on the overall changes in the fair value of the forward contracts.
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,
2017
 
December 31,
2016
Derivatives not designated as hedging instruments:
 
 
Interest-rate contracts:
 
 
 
Futures
$
16,893

 
$
13,455

Foreign exchange contracts:
 
 
 
Forward, swap and spot
1,588,100

 
1,414,765

Options purchased
666

 
337

Options written
353

 
202

Futures
3

 
—

Other:
 
 
 
Stable value contracts
26,020

 
27,182

Deferred value awards(1)(2)
652

 
409

Derivatives designated as hedging instruments:
 
 
Interest-rate contracts:
 
 
 
Swap agreements
10,131

 
10,169

Foreign exchange contracts:
 
 
 
Forward and swap
12,735

 
8,564

 
 
(1) Represents grants of deferred value awards to employees; refer to discussion in this note under "Derivatives Not Designated as Hedging Instruments."
(2) Amount as of December 31, 2016 reflects $249 million related to the acceleration of expense associated with certain cash settled deferred incentive compensation awards.
In connection with our asset-and-liability management activities, we have entered into interest-rate contracts designated as fair value 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, 2017(1)
(In millions)
Fair Value Hedges
Investment securities available-for-sale
$
1,406

Long-term debt(2)
8,725

Total
$
10,131

 
December 31, 2016(1)
(In millions)
Fair Value Hedges
Investment securities available-for-sale
$
1,444

Long-term debt(2)
8,725

Total
$
10,169

 
 
(1) As of March 31, 2017 and December 31, 2016 , there were no interest-rate contracts designated as cash flow hedges.
(2) As of March 31, 2017, these fair value hedges decreased the carrying value of long-term debt presented in our consolidated statement of condition by $43 million. As of December 31, 2016, these fair value hedges decreased the carrying value of long-term debt presented in our consolidated statement of condition by $15 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,
 
2017
 
2016
 
Contractual
Rates
 
Rate 
Including
Impact of Hedges
 
Contractual
Rates
 
Rate 
Including
Impact of Hedges
Long-term debt
3.40
%
 
2.56
%
 
3.44
%
 
2.20
%

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 provided in Note 8 to the consolidated financial statements in this Form 10-Q.
 
Derivative Assets(1)
 
Fair Value
(In millions)
March 31, 2017
 
December 31, 2016
Derivatives not designated as hedging instruments:
Foreign exchange contracts
$
8,783

 
$
15,982

Total
$
8,783

 
$
15,982

 
 
 
 
Derivatives designated as hedging instruments:
Foreign exchange contracts
$
378

 
$
502

Interest-rate contracts
9

 
68

Total
$
387

 
$
570

 
 
(1) Derivative assets are included within other assets in our consolidated statement of condition.
 
Derivative Liabilities(1)
 
Fair Value
(In millions)
March 31, 2017
 
December 31, 2016
Derivatives not designated as hedging instruments:
Foreign exchange contracts
$
8,780

 
$
15,881

Other derivative contracts
389

 
380

Total
$
9,169

 
$
16,261

 
 
 
 
Derivatives designated as hedging instruments:
Foreign exchange contracts
$
112

 
$
75

Interest-rate contracts
113

 
348

Total
$
225

 
$
423


 
 
(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)
 
 
2017
 
2016
Derivatives not designated as hedging instruments:
 
 
 
 
Foreign exchange contracts
Trading services revenue
 
$
163

 
$
154

Interest-rate contracts
Processing fees and other revenue
 
—

 
2

Interest-rate contracts
Trading services revenue
 
1

 
(2
)
Credit derivative contracts
Trading services revenue
 
—

 
(1
)
Other derivative contracts
Trading services revenue
 
—

 
1

Other derivative contracts
Compensation and employee benefits
 
(66
)
 
71

Total
 
 
$
98

 
$
225


 
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)
 
 
2017
 
2016
 
 
 
 
 
2017
 
2016
Derivatives designated as fair value hedges:
 
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
Processing fees and
other revenue
 
$
(2
)
 
$
44

 
Investment securities
 
Processing fees and
other revenue
 
$
2

 
$
(44
)
Foreign exchange contracts
Processing fees and other revenue
 
979

 
248

 
FX deposit
 
Processing fees and other revenue
 
(980
)
 
(248
)
Interest-rate contracts
Processing fees and
other revenue
 
12

 
(30
)
 
Available-for-sale securities
 
Processing fees and
other revenue(1)
 
(11
)
 
31

Interest-rate contracts
Processing fees and
other revenue
 
(20
)
 
248

 
Long-term debt
 
Processing fees and
other revenue
 
19

 
(240
)
Total
 
 
$
969

 
$
510

 
 
 
 
 
$
(970
)
 
$
(501
)

 
 
 
 
 
(1) In the three months ended March 31, 2017 and 2016, $6 million and $19 million, respectively, of net unrealized (losses) gains on AFS investment 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 income, 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)
2017
 
2016
 
 
 
2017
 
2016
 
 
 
2017
 
2016
Derivatives designated as cash flow hedges:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
$
(106
)
 
$
(113
)
 
Net interest income
 
$
—

 
$
—

 
Net interest income
 
$
6

 
$
5

Total
$
(106
)
 
$
(113
)
 
 
 
$
—

 
$
—

 
 
 
$
6

 
$
5

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives designated as net investment hedges:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
$
(14
)
 
$
—

 
Gains (Losses) related to investment securities, net
 
$
—

 
$
—

 
Gains (Losses) related to investment securities, net
 
$
—

 
$
—

Total
$
(14
)
 
$
—

 
 
 
$
—

 
$
—

 
 
 
$
—

 
$
—