Derivative Financial Instruments

6 Months Ended

Jun. 30, 2020

Derivative Instruments and Hedging Activities Disclosure [Abstract]

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 pages 147 to 148 in Note 10 to the consolidated financial statements included under Item 8, Financial Statements and Supplementary Data, in our 2019 Form 10-K.

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 page 148 in Note 10 to the consolidated financial statements included under Item 8, Financial Statements and Supplementary Data, in our 2019 Form 10-K.

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, 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 June 30, 2020, the maximum maturity date of the underlying loans is approximately 4 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 other comprehensive income (OCI).

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, 2020		December 31, 2019
Derivatives not designated as hedging instruments:
Interest-rate contracts:
Futures	$	2,500	$	4,368
Foreign exchange contracts:
Forward, swap and spot	2,614,018		2,378,808
Options purchased	1,165		1,581
Options written	907		1,110
Futures	1,436		1,040
Other:
Stable value contracts⁽¹⁾	29,060		26,895
Deferred value awards⁽²⁾	426		389
Derivatives designated as hedging instruments:
Interest-rate contracts:
Swap agreements	15,929		15,196
Foreign exchange contracts:
Forward and swap	5,516		3,176

⁽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⁾Represents grants of deferred value awards to employees; refer to pages 147 to 148 in Note 10 to the consolidated financial statements included under Item 8, Financial Statements and Supplementary Data, in our 2019 Form 10-K.

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.



	Fair Value
	Derivative Assets⁽¹⁾				Derivative Liabilities⁽²⁾
(In millions)	June 30, 2020		December 31, 2019		June 30, 2020		December 31, 2019
Derivatives not designated as hedging instruments:
Foreign exchange contracts	$	15,974	$	15,140	$	15,547	$	15,054
Other derivative contracts	—		—		185		182
Total	$	15,974	$	15,140	$	15,732	$	15,236

Derivatives designated as hedging instruments:
Foreign exchange contracts	$	16	$	—	$	138	$	96
Interest-rate contracts	51		8		56		49
Total	$	67	$	8	$	194	$	145

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

⁽²⁾ 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 June 30,						Six Months Ended June 30,
(In millions)		2020			2019			2020			2019
Derivatives not designated as hedging instruments:
Foreign exchange contracts	Foreign exchange trading services revenue	$	215		$	156		$	548		$	316
Foreign exchange contracts	Interest expense	17			(59		)	19			(98		)
Interest rate contracts	Foreign exchange trading services revenue	—			—			3			(1		)
Other derivative contracts	Compensation and employee benefits	(45		)	(46		)	(112		)	(120		)
Total		$	187		$	51		$	458		$	97

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:



	June 30, 2020
	Hedged Items Currently Designated				Hedged Items No Longer Designated⁽¹⁾
(In millions)	Carrying Amount of Assets and Liabilities		Cumulative Hedge Accounting Basis Adjustments		Carrying Amount of Assets and Liabilities		Cumulative Hedge Accounting Basis Adjustments
Long-term debt	$	10,515	$	762	$	1,200	$	(2	)
Available-for-sale securities	873		55		—		—
Total	$	11,388	$	817	$	1,200	$	(2	)

	December 31, 2019
	Hedged Items Currently Designated				Hedged Items No Longer Designated⁽¹⁾
(In millions)	Carrying Amount of Assets and Liabilities		Cumulative Hedge Accounting Basis Adjustments		Carrying Amount of Assets and Liabilities		Cumulative Hedge Accounting Basis Adjustments
Long-term debt	$	9,769	$	164	$	1,199	$	(8	)
Available-for-sale securities	940		49		—		—
Total	$	10,709	$	213	$	1,199	$	(8	)

⁽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.

As of June 30, 2020 and December 31, 2019, the total notional amount of the interest rate swaps of fair value hedges was $10.93 billion and $10.20 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 June 30,								Three Months Ended June 30,
		2020			2019					2020			2019
(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:
Interest rate contracts	Net interest income	$	3		$	(8	)	Available-for-sale securities⁽¹⁾	Net interest income	$	(4	)	$	7
Interest rate contracts	Net interest income	36			185			Long-term debt	Net interest income	(39		)	(183		)
Total		$	39		$	177				$	(43	)	$	(176	)

		Six Months Ended June 30,								Six Months Ended June 30,
		2020			2019					2020			2019
(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:
Interest rate contracts	Net interest income	(8		)	(11		)	Available-for-sale securities⁽²⁾	Net interest income	6			11
Interest rate contracts	Net interest income	583			291			Long-term debt	Net interest income	(574		)	(285		)
Total		$	575		$	280				$	(568	)	$	(274	)

⁽¹⁾In the three months ended June 30, 2020, $3 million of net unrealized gains on AFS investment securities designated in fair value hedges was recognized in OCI compared to $5 million of net unrealized gains in the same period in 2019.

⁽²⁾In the six months ended June 30, 2020, $4 million of net unrealized losses on AFS investment securities designated in fair value hedges was recognized in OCI compared to $3 million of net unrealized gains in the same period in 2019.



	Three Months Ended June 30,							Three Months Ended June 30,
	2020			2019				2020		2019
(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	$	21		$	21		Net interest income	$	14	$	(2	)
Foreign exchange contracts	9			(15		)	Net interest income	7		7
Total derivatives designated as cash flow hedges	$	30		$	6			$	21	$	5

Derivatives designated as net investment hedges:
Foreign exchange contracts	$	(86	)	$	(2	)	Gains (Losses) related to investment securities, net	$	—	$	—
Total derivatives designated as net investment hedges	(86		)	(2		)		—		—
Total	$	(56	)	$	4			$	21	$	5

	Six Months Ended June 30,							Six Months Ended June 30,
	2020			2019				2020		2019
(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	$	179		$	31		Net interest income	$	14	$	(4	)
Foreign exchange contracts	19			12			Net interest income	14		14
Total derivatives designated as cash flow hedges	$	198		$	43			$	28	$	10

Derivatives designated as net investment hedges:
Foreign exchange contracts	$	22		$	18		Gains (losses) related to investment securities, net	$	—	$	—
Total derivatives designated as net investment hedges	22			18				—		—
Total	$	220		$	61			$	28	$	10

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 June 30, 2020 totaled approximately $1.77 billion, against which we provided $1.03 billion of collateral in the normal course of business. If our credit related contingent features underlying these agreements were triggered as of June 30, 2020, the maximum additional collateral we would be required to post to our counterparties is approximately $0.74 billion.