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Derivative Financial Instruments
 9 Months Ended
Sep. 30, 2019
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 risks. These financial instruments consist of FX contracts such as forwards, futures and options contracts; interest rate contracts such as interest rate swaps (cross currency and single currency) and futures; and other derivative contracts. Derivative instruments used for risk management purposes that are highly effective in offsetting the risk being hedged are generally designated as hedging instruments in hedge accounting relationships, while others are economic hedges and not designated in hedge accounting relationships. For additional information on our derivative financial instruments, including derivatives not designated as hedging instruments, refer to page 55 in Note 10 to the consolidated financial statements included under Item 8, Financial Statements and Supplementary Data, in the 2018 Annual Financial Statements.
Derivatives Designated as Hedging Instruments
For additional information on our derivatives designated as hedging instruments, including our risk management objectives and hedging documentation methodologies, refer to pages 55 to 58 in Note 10 to the consolidated financial statements included under
Item 8, Financial Statements and Supplementary Data, in the 2018 Annual Financial Statements.
Fair Value Hedges
Derivatives designated as fair value hedges are utilized to mitigate the risk of changes in the fair values of recognized assets and liabilities, including long-term debt, AFS securities, and foreign currency investment securities. We use interest rate or FX contracts in this manner to manage our exposure to changes in the fair value of hedged items caused by changes in interest rates or FX rates.
Changes in the fair value of the derivative and changes in fair value of the hedged item due to changes in the hedged risk are recognized in earnings in the same line item. If a hedge is terminated, but the hedged item was not derecognized, all remaining adjustments to the carrying amount of the hedged item shall be amortized over a period that is consistent with the amortization of other discounts or premiums associated with the hedged item.
Cash Flow Hedges
Derivatives designated as cash flow hedges are utilized to offset the variability of cash flows of recognized assets or liabilities or forecasted transactions. We have entered into FX contracts to hedge the change in cash flows attributable to FX movements in foreign currency denominated investment securities. Additionally, 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.
Changes in fair value of the derivatives designated as cash flow hedges are initially recorded in AOCI and then reclassified into earnings in the same period or periods during which the hedged forecasted transaction affects earnings and are presented in the same income statement line item as the earnings effect of the hedged item. If the hedge relationship is terminated, the change in fair value on the derivative recorded in AOCI is reclassified into earnings consistent with the timing of the hedged item. For hedge relationships that are discontinued because a forecasted transaction is not expected to occur according to the original hedge terms, any related derivative values recorded in AOCI are immediately recognized in earnings. As of September 30, 2019, the maximum maturity date of the underlying loans is approximately 3 years.
Net Investment Hedges
Derivatives categorized as net investment hedges are entered into to protect the net investment in our foreign operations against adverse changes in exchange rates. We use FX forward contracts to convert the foreign currency risk to U.S. dollars to mitigate our exposure to fluctuations in FX rates. The changes in fair value of the FX forward contracts are recorded, net of taxes, in the foreign currency translation component of OCI.
The following table presents the aggregate contractual, or notional, amounts of derivative financial instruments including those entered into for trading and asset-and-liability management activities as of the dates indicated:
(In millions)
September 30, 2019
 
December 31, 2018
Derivatives not designated as hedging instruments:
 
 
 
Interest rate contracts:
 
 
 
Futures
$
6,539

 
$
2,348

Foreign exchange contracts:
 
 
 
Forward, swap and spot
2,480,037

 
2,238,819

Options purchased
1,219

 
578

Options written
618

 
576

Futures
1,546

 
49

Other:
 
 
 
Stable value contracts(1)
27,023

 
26,634

Deferred value awards(2)
450

 
434

Derivatives designated as hedging instruments:
 
 
 
Interest rate contracts:
 
 
 
Swap agreements
12,758

 
10,596

Foreign exchange contracts:
 
 
 
Forward and swap
3,285

 
3,412

 
 
 
(1) The notional value of the stable value contracts represents our maximum exposure. However, exposure to various stable value contracts is generally contractually limited to substantially lower amounts than the notional values.
(2) For additional information on our derivatives not designated as hedging instruments, including deferred value awards, refer to page 55 in Note 10 to the consolidated financial statements under Item 8, Financial Statements and Supplementary Data, in the 2018 Annual Financial Statements.
Notional amounts are provided here as an indication of the volume of our derivative activity and serve as a reference to calculate the fair values of the derivative.
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.
 
September 30, 2019
 
December 31, 2018
 
September 30, 2019
 
December 31, 2018
(In millions)
Derivative Assets(1)
 
Derivative Liabilities(2)
Derivatives not designated as hedging instruments:
 
 
 
 
Foreign exchange contracts
$
13,883

 
$
16,369

 
$
14,111

 
$
16,434

Other derivative contracts
—

 
—

 
207

 
214

Total
$
13,883

 
$
16,369

 
$
14,318

 
$
16,648

 
 
 
 
 
 
 
 
Derivatives designated as hedging instruments:
 
 
 
 
Foreign exchange contracts
$
29

 
$
17

 
$
78

 
$
88

Interest rate contracts
22

 
13

 
51

 
71

Total
$
51

 
$
30

 
$
129

 
$
159

 
 
 
(1) Derivative assets are included within other assets in our consolidated statement of condition.
(2) 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:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2019

2018
 
2019
 
2018
(In millions)
Location of Gain (Loss) on
Derivative in Consolidated
Statement of Income
Amount of Gain (Loss) on Derivative Recognized in Consolidated Statement of Income
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
Foreign exchange contracts
Foreign exchange trading services revenue
$
160

 
$
170

 
$
476

 
$
549

Foreign exchange contracts
Interest Expense
(37
)
 
(3
)
 
(135
)
 
(18
)
Interest rate contracts
Foreign exchange trading services revenue
(1
)
 
(2
)
 
(2
)
 
(6
)
Interest rate contracts
Processing fees and other revenue
—

 
(1
)
 
—

 
(1
)
Other derivative contracts
Foreign exchange trading services revenue
—

 
3

 
—

 
3

Other derivative contracts
Compensation and employee benefits
(46
)
 
(34
)
 
(166
)
 
(140
)
Total
 
$
76

 
$
133

 
$
173

 
$
387


The following table shows the carrying amount and associated cumulative basis adjustments related to the application of hedge accounting that is included in the carrying amount of hedged assets and liabilities in fair value hedging relationships:
 
September 30, 2019
 
Hedged Items Currently Designated
 
Hedged Items No Longer Designated(1)
(In millions)
Carrying Amount of Assets and Liabilities(2)
 
Cumulative Hedge Accounting Basis Adjustments
 
Carrying Amount of Assets and Liabilities
 
Cumulative Hedge Accounting Basis Adjustments
Long-term debt
$
8,274

 
$
254

 
$
1,199

 
$
(11
)
Available-for-sale securities
985

 
56

 
—

 
—

Total
$
9,259

 
$
310

 
$
1,199

 
$
(11
)
 
 
 
 
 
 
 
 
 
December 31, 2018
 
Hedged Items Currently Designated
 
Hedged Items No Longer Designated(1)
(In millions)
Carrying Amount of Assets and Liabilities(2)
 
Cumulative Hedge Accounting Basis Adjustments
 
Carrying Amount of Assets and Liabilities
 
Cumulative Hedge Accounting Basis Adjustments
Long-term debt
$
8,270

 
$
(137
)
 
$
1,197

 
$
(20
)
Available-for-sale securities
1,496

 
72

 
50

 
1

Total
$
9,766

 
$
(65
)
 
$
1,247

 
$
(19
)
 
 
 
 
 
(1) Represents hedged items no longer designated in qualifying fair value hedging relationships for which an associated basis adjustment exists at the balance sheet date.
(2) Does not include the carrying amount of hedged items when only foreign currency risk is the designated hedged risk. The carrying amount excluded for investment securities was zero and $458 million for September 30, 2019 and December 31, 2018, respectively.

As of September 30, 2019 and December 31, 2018, the total notional amount of the interest rate swaps of fair value hedges was $8.76 billion and $9.30 billion, respectively.
The following tables present the impact of our use of derivative financial instruments on our consolidated statement of income for the periods indicated:
 
 
 
Three Months Ended September 30,
 
 
 
 
 
Three Months Ended September 30,
 
 
 
2019
 
2018
 
 
 
 
 
2019
 
2018
(In millions)
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
Derivatives designated as fair value hedges:
Foreign exchange contracts
Processing fees and other revenue
 
$
—

 
$
(14
)
 
Investment securities
 
Processing fees and other revenue

 
$
—

 
$
14

Foreign exchange contracts
Processing fees and other revenue
 
—

 
33

 
Foreign exchange deposit
 
Processing fees and other revenue

 
—

 
(33
)
Interest rate contracts
Net interest income
 
1

 
9

 
Available-for-sale securities(1)
 
Net interest income
 
(2
)
 
(8
)
Interest rate contracts
Net interest income
 
75

 
(40
)
 
Long-term debt
 
Net interest income
 
(72
)
 
39

Total

 
$
76


$
(12
)
 
 
 
 
 
$
(74
)

$
12

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30,
 
 
 
 
 
Nine Months Ended September 30,
 
 
 
2019
 
2018
 
 
 
 
 
2019
 
2018
(In millions)
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
Derivatives designated as fair value hedges:
Foreign exchange contracts
Processing fees and other revenue
 
$
—

 
$
(57
)
 
Investment securities
 
Processing fees and other revenue

 
$
—

 
$
57

Foreign exchange contracts
Processing fees and other revenue
 
—

 
(320
)
 
Foreign exchange deposit
 
Processing fees and other revenue

 
—

 
320

Interest rate contracts
Net interest income
 
(10
)
 
40

 
Available-for-sale securities(2)
 
Net interest income
 
9

 
(38
)
Interest rate contracts
Net interest income
 
366

 
(254
)
 
Long-term debt
 
Net interest income
 
(357
)
 
239

Total

 
$
356

 
$
(591
)
 
 
 
 
 
$
(348
)
 
$
578

 
 
 
 
 
(1) In the three months ended September 30, 2019, $10 million of net unrealized gains on AFS investment securities designated in fair value hedges was recognized in OCI compared to $6 million of net unrealized gains in the same period in 2018.
(2) In the nine months ended September 30, 2019, $13 million of net unrealized gains on AFS investment securities designated in fair value hedges was recognized in OCI compared to $29 million of net unrealized gains in the same period in 2018.

 
Three Months Ended September 30,
 
 
 
Three Months Ended September 30,
 
2019
 
2018
 
 
 
2019
 
2018
(In millions)
Amount of Gain or (Loss) Recognized in Other Comprehensive Income on Derivative
 
Location of Gain or (Loss) Reclassified from Accumulated Other Comprehensive Income into Income
 
Amount of Gain or (Loss) Reclassified from Accumulated Other Comprehensive Income into Income
Derivatives designated as cash flow hedges:
 
 
 
 
 
 
 
 
 
Interest rate contracts
$
2

 
$
(7
)
 
Net interest income
 
$
(3
)
 
$
(1
)
Foreign exchange contracts
12

 
38

 
Net interest income
 
7

 
6

Total derivatives designated as cash flow hedges
$
14

 
$
31

 
 
 
$
4

 
$
5

 
 
 
 
 
 
 
 
 
 
Derivatives designated as net investment hedges:
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
$
57

 
$
19

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

 
$
—

Total derivatives designated as net investment hedges
57

 
19

 
 
 
—

 
—

 
 
 
 
 
 
 
 
 
 
Total
$
71

 
$
50

 
 
 
$
4

 
$
5

 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30,
 
 
 
Nine Months Ended September 30,
 
2019
 
2018
 
 
 
2019
 
2018
(In millions)
Amount of Gain or (Loss) Recognized in Other Comprehensive Income on Derivative
 
Location of Gain or (Loss) Reclassified from Accumulated Other Comprehensive Income into Income
 
Amount of Gain or (Loss) Reclassified from Accumulated Other Comprehensive Income into Income
Derivatives designated as cash flow hedges:
 
 
 
 
 
 
 
 
 
Interest rate contracts
$
33

 
$
(35
)
 
Net interest income
 
$
(7
)
 
$
—

Foreign exchange contracts
24

 
14

 
Net interest income
 
21

 
20

Total derivatives designated as cash flow hedges
$
57

 
$
(21
)
 
 
 
$
14

 
$
20

 
 
 
 
 
 
 
 
 
 
Derivatives designated as net investment hedges:
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
$
75

 
$
54

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

 
$
—

Total derivatives designated as net investment hedges
75

 
54

 
 
 
—

 
—

 
 
 
 
 
 
 
 
 
 
Total
$
132

 
$
33

 
 
 
$
14

 
$
20


Derivatives Netting and Credit Contingencies
Netting
Derivatives receivable and payable as well as cash collateral from the same counterparty are netted in the consolidated statement of condition for those counterparties with whom we have legally binding master netting agreements in place. In addition to cash collateral received and transferred presented on a net basis, we also receive and transfer collateral in the form of securities, which mitigate credit risk but are not eligible for netting. Additional information on netting is provided in Note 8.
Credit Contingencies
Certain of our derivatives are subject to master netting agreements with our derivative counterparties containing credit risk-related contingent features, which
requires us to maintain an investment grade credit rating with the various credit rating agencies. If our rating falls below investment grade, we would be in violation of the provisions, and counterparties to the derivatives could request immediate payment or demand full overnight collateralization on derivatives instruments in net liability positions. The aggregate fair value of all derivatives with credit contingent features and in a liability position as of September 30, 2019 totaled approximately $2.53 billion, against which we provided $1.67 billion of collateral in the normal course of business. If our credit related contingent features underlying these agreements were triggered as of September 30, 2019, the maximum additional collateral we would be required to post to our counterparties is approximately $0.86 billion.