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 153 to 159 in Note 10 to the consolidated financial statements included under Item 8, Financial Statements and Supplementary Data, in our 2017 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 September 30, 2018 and December 31, 2017, we had recorded approximately $2.14 billion and $2.55 billion, respectively, of cash collateral received from counterparties and approximately $2.33 billion and $869 million, 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 September 30, 2018 and December 31, 2017 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 September 30, 2018 totaled approximately $2.98 billion, against which we provided $1.04 billion in 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 September 30, 2018 was approximately $1.94 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 NII. 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 pages 154 to 155 in Note 10 to the consolidated financial statements included under Item 8, Financial Statements and Supplementary Data, in our 2017 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 derivatives designated as hedging instruments, refer to pages 155 to 159 in Note 10 to the consolidated financial statements included under Item 8, Financial Statements and Supplementary Data, in our 2017 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 3.6 years as of September 30, 2018, compared to 4.6 years as of December 31, 2017.

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 fixed interest rates paid for the hedged senior and subordinated notes:



September 30, 2018
Maturity		Fixed Interest Rate Paid
Senior Notes
2020		2.55%
2021		4.38
2021		1.95
2022		2.65
2023		3.70
2024		3.30
2025		3.55
2026		2.65
Subordinated Notes
2023		3.10

As of January 1, 2018, we prospectively changed the presentation of gains (losses) on hedging instruments and hedge items designated as fair value hedges of interest rate risk, and any resulting hedge ineffectiveness, from processing fees and other revenue to NII. The change was made prospectively and prior periods have not been adjusted.

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.

We have entered into interest rate swap agreements to hedge the forecasted cash flows associated with LIBOR-indexed floating-rate loans. The interest rate swaps synthetically convert the loan interest receipts from a variable-rate to a fixed-rate, thereby mitigating the risk attributable to changes in the LIBOR benchmark rate. As of September 30, 2018, the maximum maturity date of the underlying loans is approximately 4 years.

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)	September 30, 2018		December 31, 2017
Derivatives not designated as hedging instruments:
Interest-rate contracts:
Futures	$	14,656	$	2,392
Swap agreements	300		—
Foreign exchange contracts:
Forward, swap and spot	2,389,839		1,679,976
Options purchased	452		350
Options written	267		302
Futures	—		50
Commodity and equity contracts:
Commodity⁽¹⁾	73		16
Equity⁽¹⁾	365		50
Other:
Stable value contracts	26,313		26,653
Deferred value awards⁽²⁾	497		473

Derivatives designated as hedging instruments:
Interest-rate contracts:
Swap agreements	10,994		11,047
Foreign exchange contracts:
Forward and swap	3,884		28,913

⁽¹⁾Primarily composed of positions held by a consolidated sponsored investments fund

⁽²⁾Represents grants of deferred value awards to employees; refer to pages 154 to 155 in Note 10 to the consolidated financial statements included under Item 8, Financial Statements and Supplementary Data, in our 2017 Form 10-K

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:



	September 30, 2018
(In millions)	Fair Value Hedges		Cash Flow Hedges		Total
Investment securities available-for-sale	$	1,201	$	—	$	1,201
Long-term debt⁽¹⁾	8,493		—		8,493
Floating-rate loans	—		1,300		1,300
Total	$	9,694	$	1,300	$	10,994



	December 31, 2017
(In millions)	Fair Value Hedges		Cash Flow Hedges		Total
Investment securities available-for-sale	$	1,254	$	—	$	1,254
Long-term debt⁽¹⁾	8,493		—		8,493
Floating rate loans	—		1,300		1,300
Total	$	9,747	$	1,300	$	11,047

⁽¹⁾ As of September 30, 2018, these fair value hedges decreased the carrying value of LTD presented in our consolidated statement of condition by $347 million. As of December 31, 2017, these fair value hedges decreased the carrying value of long-term debt presented in our consolidated statement of condition by $87 million.

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)	September 30, 2018		December 31, 2017
Derivatives not designated as hedging instruments:
Foreign exchange contracts	$	15,032	$	11,477
Interest-rate contracts	1		—
Other derivative contracts	13		1
Total	$	15,046	$	11,478

Derivatives designated as hedging instruments:
Foreign exchange contracts	$	29	$	120
Interest-rate contracts	3		8
Total	$	32	$	128

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



	Derivative Liabilities⁽¹⁾
	Fair Value
(In millions)	September 30, 2018		December 31, 2017
Derivatives not designated as hedging instruments:
Foreign exchange contracts	$	14,878	$	11,361
Interest-rate contracts	1		—
Other derivative contracts	252		284
Total	$	15,131	$	11,645

Derivatives designated as hedging instruments:
Foreign exchange contracts	$	57	$	107
Interest-rate contracts	91		100
Total	$	148	$	207

⁽¹⁾ Derivative liabilities are included within accrued expenses and 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 September 30,						Nine Months Ended September 30,
(In millions)		2018			2017			2018			2017
Derivatives not designated as hedging instruments:
Foreign exchange contracts	Trading services revenue	$	170		$	152		$	549		$	485
Foreign exchange contracts	Processing fees and other revenue⁽¹⁾	—			(9		)	—			(11		)
Foreign exchange contracts	Interest expense⁽¹⁾	(3		)	—			(18		)	—
Interest-rate contracts	Trading services revenue	(2		)	(2		)	(6		)	7
Interest-rate contracts	Processing fees and other revenue	(1		)	—			(1		)	—
Other derivative contracts	Trading services revenue	3			—			3			—
Other derivative contracts	Compensation and employee benefits	(34		)	(25		)	(140		)	(120		)
Total		$	133		$	116		$	387		$	361

⁽¹⁾ The first nine months of 2018 includes approximately $15 million of swap costs related to the first quarter of 2018 that were reclassified from Processing fees and other revenues to NII.



	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 in Consolidated Statement of Income	Amount of Gain (Loss) on Derivatives Recognized in Consolidated Statement of Income
	Three Months Ended September 30,							Three Months Ended September 30,					Three Months Ended September 30,
(In millions)	2018			2017				2018		2017			2018			2017
Derivatives designated as cash flow hedges:
Interest-rate contracts	$	(6	)	$	(1	)	Net interest income	$	—	$	—	Net interest income	$	(1	)	$	—
Foreign exchange contracts	32			(1		)	Net interest income	—		—		Net interest income	6			5
	$	26		$	(2	)		$	—	$	—		$	5		$	5
Derivatives designated as net investment hedges:
Foreign exchange contracts	$	19		$	(47	)	Gains (Losses) related to investment securities, net	$	—	$	—	Gains (Losses) related to investment securities, net	$	—		$	—
Total	$	19		$	(47	)	Total	$	—	$	—	Total	$	—		$	—



	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 in Consolidated Statement of Income	Amount of Gain (Loss) on Derivatives Recognized in Consolidated Statement of Income
	Nine Months Ended September 30,							Nine Months Ended September 30,					Nine Months Ended September 30,
(In millions)	2018			2017				2018		2017			2018		2017
Derivatives designated as cash flow hedges:
Interest-rate contracts	$	(35	)	$	(2	)	Net interest income	$	—	$	—	Net interest income	$	—	$	—
Foreign exchange contracts	(6		)	(93		)	Net interest income	—		—		Net interest income	20		18
	$	(41	)	$	(95	)		$	—	$	—		$	20	$	18
Derivatives designated as net investment hedges:
Foreign exchange contracts	$	54		$	(148	)	Gains (Losses) related to investment securities, net	$	—	$	—	Gains (Losses) related to investment securities, net	$	—	$	—
Total	$	54		$	(148	)	Total	$	—	$	—	Total	$	—	$	—



	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 September 30,								Three Months Ended September 30,
(In millions)		2018			2017					2018			2017
Derivatives designated as fair value hedges:
Foreign exchange contracts	Processing fees and other revenue	$	(14	)	$	19		Investment securities	Processing fees and other revenue	$	14		$	(19	)
Foreign exchange contracts	Processing fees and other revenue	33			200			FX deposit	Processing fees and other revenue	(33		)	(200		)
Interest-rate contracts⁽¹⁾	Net interest income⁽²⁾	9			—			Available-for-sale securities	Net interest income⁽²⁾	(8		)	—
Interest-rate contracts⁽¹⁾	Net interest income	(40		)	—			Long-term debt	Net interest income	39			—
Interest-rate contracts⁽¹⁾	Processing fees and other revenue	—			9			Available-for-sale securities	Processing fees and other revenue⁽²⁾	—			(9		)
Interest-rate contracts⁽¹⁾	Processing fees and other revenue	—			(8		)	Long-term debt	Processing fees and other revenue	—			5
Total		$	(12	)	$	220				$	12		$	(223	)


	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
		Nine Months Ended September 30,								Nine Months Ended September 30,
(In millions)		2018			2017					2018			2017
Derivatives designated as fair value hedges:
Foreign exchange contracts	Processing fees and other revenue	$	(57	)	$	21		Investment securities	Processing fees and other revenue	$	57		$	(21	)
Foreign exchange contracts	Processing fees and other revenue	(320		)	1,282			FX deposit	Processing fees and other revenue	320			(1,282		)
Interest-rate contracts⁽¹⁾	Net interest income	(254		)	—			Long-term debt	Net interest income	239			—
Interest-rate contracts⁽¹⁾	Net interest income⁽³⁾	40			—			Available-for-sale securities	Net interest income⁽³⁾	(38		)	—
Interest-rate contracts⁽¹⁾	Processing fees and other revenue	—			23			Available-for-sale securities	Processing fees and other revenue⁽³⁾	—			(21		)
Interest-rate contracts⁽¹⁾	Processing fees and other revenue	—			37			Long-term debt	Processing fees and other revenue	—			(39		)
Total		$	(591	)	$	1,363				$	578		$	(1,363	)

⁽¹⁾ As of January 1, 2018, we prospectively changed the presentation of gains (losses) on hedging instruments and hedge items designated as fair value hedges of interest rate risk, and any resulting hedge ineffectiveness, from processing fees and other revenue to NII.

⁽²⁾ In the three months ended September 30, 2018 and 2017, $20 million and $4 million, respectively, of net unrealized (losses) gains on AFS investment securities designated in fair value hedges were recognized in OCI.

⁽³⁾ In the nine months ended September 30, 2018 and 2017, $29 million and $13 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 foreign exchange contracts and the gains (losses) on the hedged item, excluding any accrued interest, represent hedge ineffectiveness. Similarly, differences between the gains (losses) on interest rate contracts and the gains (losses) on the hedged item represent hedge ineffectiveness.