Derivative Instruments and Other Financial Instruments Used For Hedging

12 Months Ended

Dec. 31, 2011

Derivative Instruments and Other Financial Instruments Used For Hedging [Abstract]

Derivative Instruments and Other Financial Instruments Used For Hedging

Note 16—Derivative Instruments and Other Financial Instruments Used For Hedging

The Company is a party to certain derivative and other financial instruments that are entered into for the purpose of trading, meeting the needs of customers, and changing the impact on the Company’s operating results due to market fluctuations in currency rates, interest rates, or commodity prices.

Credit and market risks are inherent in derivative instruments. Credit risk is defined as the possibility that a loss may occur from the failure of another party to perform in accordance with the terms of the contract, which exceeds the value of the existing collateral, if any. The Company utilizes master netting and collateral support annex (CSA) agreements in order to reduce its exposure to credit risk. Additionally, the Company considers the potential loss in the event of counterparty default in estimating the fair value amount of the derivative instrument. Market risk is defined as the risk of loss arising from an adverse change in the market value of financial instruments caused by fluctuations in market prices or rates.

Derivatives are primarily used to manage exposure to interest rate, commodity and foreign currency risk, and to assist customers with their risk management objectives. The Company designates derivative instruments as those used for hedge accounting purposes, and those for trading or economic hedge purposes. All derivative instruments are recognized as assets or liabilities on the consolidated balance sheet at fair value.

The tables below present the notional amounts, and the location and fair value amounts of the Company’s derivative instruments reported on the consolidated balance sheet, segregated between derivative instruments designated and qualifying as hedging instruments and all other derivative instruments as of December 31, 2011 and December 31, 2010. Asset and liability values are presented gross, excluding the impact of legally enforceable master netting and CSA agreements.

	December 31, 2011
			Asset Derivatives			Liability Derivatives
(Dollars in millions)	Notional Amount		Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Total derivatives designated as hedging instruments:
Interest rate contracts	$	7,400	Other assets	$	3	Other liabilities	$	10
Derivatives not designated as hedging instruments:
Interest rate contracts	$	33,903	Trading account assets	$	922	Trading account liabilities	$	869
Commodity contracts		5,136	Trading account assets		250	Trading account liabilities		247
Foreign exchange contracts		4,152	Trading account assets		88	Trading account liabilities		95
Equity contracts		3,037	Trading account assets		87	Trading account liabilities		87
Other contracts		—	Trading account assets		—	Trading account liabilities		—
Total derivatives not designated as hedging instruments	$	46,228		$	1,347		$	1,298
Total derivative instruments	$	53,628		$	1,350		$	1,308
	December 31, 2010
			Asset Derivatives			Liability Derivatives
(Dollars in millions)	Notional Amount		Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Total derivatives designated as hedging instruments:
Interest rate contracts	$	5,500	Other assets	$	21	Other liabilities	$	—
Derivatives not designated as hedging instruments:
Interest rate contracts	$	28,820	Trading account assets	$	596	Trading account liabilities	$	551
Commodity contracts		4,679	Trading account assets		234	Trading account liabilities		233
Foreign exchange contracts		3,011	Trading account assets		43	Trading account liabilities		49
Equity contracts		1,313	Trading account assets		50	Trading account liabilities		50
Other contracts		60	Trading account assets		—	Trading account liabilities		14
Total derivatives not designated as hedging instruments	$	37,883		$	923		$	897
Total derivative instruments	$	43,383		$	944		$	897

Certain of the Company’s derivative instruments contain provisions that require the Company to maintain a specified credit rating. If the Company’s credit rating was to fall below the specified rating, the counterparties to these derivative instruments could terminate the contract and demand immediate payment or demand immediate and ongoing full overnight collateralization for those derivative instruments in net liability positions. At December 31, 2011, the aggregate fair value (including net interest payable/receivable) of all derivative instruments with credit-risk mitigated contingent features that are in a liability position was $8 million. At December 31, 2011, the Company had not pledged any collateral to secure these obligations. If all of the credit-risk-related contingent features underlying these agreements had been triggered on December 31, 2011, the Company would have been required to provide collateral of $8 million to settle these contracts.

Derivatives Used in Asset and Liability Management

The Company uses interest rate derivatives to manage the financial impact on the Company from changes in market interest rates. These instruments are used to manage interest rate risk relating to specified groups of assets and liabilities, primarily LIBOR-based commercial loans, certificates of deposit, borrowings, and future debt issuances. Derivatives are typically designated as fair value or cash flow hedges or economic hedge derivatives for those that do not qualify for hedge accounting. As of and for the year ended December 31, 2011 the Company did not have fair value hedges. For the years ended December 31, 2010 and 2009, the net gains and losses for fair value hedges were de minimis. The following describes the significant hedging strategies of the Company.

Cash Flow Hedges

Hedging Strategies for Variable Rate Loans, Borrowings and Certificates of Deposit and Other Time Deposits

The Company engages in several types of cash flow hedging strategies related to forecasted future interest payments, with the hedged risk being the changes in cash flows attributable to changes in the designated benchmark rate (i.e., U.S. dollar LIBOR). In these strategies, the hedging instruments are matched with groups of similar variable rate instruments such that the reset tenor of the variable rate instruments and that of the hedging instrument are identical at inception. Cash flow hedging instruments currently being utilized include purchased caps and interest rate swaps. At December 31, 2011, the weighted average remaining life of the currently active cash flow hedges was approximately 2.0 years.

In the first quarter of 2011, the Company terminated $1.0 billion notional amount of interest rate swaps concurrent with the issuance of $1.0 billion of fixed rate debt. The swaps were accounted for as a cash flow hedge and were used to mitigate the changes in cash flows on the forecasted fixed rate debt. At termination, the Company had a related unrealized gain of $14 million, which is being amortized into interest expense over the life of the debt. The hedge ineffectiveness that was recognized in earnings upon the termination of the interest rate swap was not significant.

The Company used purchased interest rate caps with a notional amount of $1.0 billion to hedge the risk of changes in cash flows attributable to changes in the designated benchmark interest rate on LIBOR indexed borrowings. Payments received under the cap contract offset the increase in borrowing interest expense if the relevant LIBOR index rises above the cap’s strike rate.

The Company used interest rate swaps with a notional amount of $1.1 billion to hedge the risk of changes in cash flows attributable to changes in the designated benchmark interest rate on LIBOR indexed other borrowings and long-term debt. Payments received (or paid) under the swap contract offset fluctuations in other borrowings and long-term debt interest expense caused by changes in the relevant LIBOR index.

The Company used purchased interest rate caps with a notional amount of $3.0 billion to hedge the risk of changes in cash flows attributable to changes in the designated benchmark interest rate component of forecasted issuances of short-term, fixed rate certificates of deposit (CDs). Net payments to be received under the cap contract offset increases in interest expense if the relevant LIBOR index rises above the cap’s strike rate.

The Company used interest rate swaps with a notional amount of $2.3 billion to hedge the risk of changes in cash flows attributable to changes in the designated benchmark interest rate on LIBOR indexed loans. Payments received (or paid) under the swap contract offset fluctuations in interest income on loans caused by changes in the relevant LIBOR index.

Hedging transactions are structured at inception so that the notional amounts of the hedging instruments are matched to an equal principal amount of loans, CDs, or borrowings, the index and repricing frequencies of the hedging instruments match those of the loans, CDs, or borrowings and the period in which the designated hedged cash flows occurs is equal to the term of the hedge instruments. As such, most of the ineffectiveness in the hedging relationship results from the mismatch between the timing of reset dates on the hedging instruments versus those of the loans, CDs or borrowings.

For cash flow hedges, the effective portion of the gain or loss on the hedging instruments is reported as a component of other comprehensive income and reclassified into earnings in the same period or periods during which the hedged cash flows are recognized in net interest income. Gains and losses representing hedge ineffectiveness and any non qualifying hedge components are recognized in noninterest expense in the period in which they arise. At December 31, 2011, the Company expects to reclassify approximately $10 million of income from accumulated other comprehensive income to net interest income during the twelve months ending December 31, 2012. This amount could differ from amounts actually realized due to changes in interest rates and the addition of other hedges subsequent to December 31, 2011.

The following table presents the amount and location of the net gains and losses recorded in the Company’s consolidated statements of income and changes in stockholder’s equity for derivatives designated as cash flow hedges for the years ended December 31, 2011 and 2010.

	Amount of Gain or (Loss) Recognized in OCI on Derivative Instruments (Effective Portion)						Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)						Gain or (Loss) Recognized in Income on Derivative Instruments (Ineffective Portion and Amount Excluded from Effectiveness Testing)
	For the Year Ended December 31,							For the Year Ended December 31,						For the Year Ended December 31,
(Dollars in millions)	2011			2010			Location	2011			2010		Location	2011		2010
Derivatives in cash flow hedging relationships
							Interest income	$	(7	)	$	62
Interest rate contracts	$	(5	)	$	(3	)	Interest expense(1)		(4	)		—	Noninterest expense(1)	$	1	$	—
Total	$	(5	)	$	(3	)		$	(11	)	$	62		$	1	$	—

⁽¹⁾  Amount recognized was less than $1 million.

Trading Derivatives

Derivative instruments classified as trading include both derivatives entered into for the Company’s own account and as an accommodation for customers. Trading derivatives are included in trading assets or trading liabilities with changes in fair value reflected in income from trading account activities. The majority of the Company’s derivative transactions for customers were essentially offset by contracts with third parties that reduce or eliminate market risk exposures.

The Company offers market-linked certificates of deposit, which allow the client to earn the higher of either a minimum fixed rate of interest or a return tied to either equity, commodity or currency indices. The Company hedges its exposure to the embedded derivative contained in market-linked CDs with a perfectly matched over-the-counter option. Both the embedded derivative and hedge options are recorded at fair value with the realized and unrealized changes in fair value recorded in noninterest income within trading account activities.

The following table presents the amount and location of the net gains and losses reported in the consolidated statement of income for derivative instruments classified as trading for the years ended December 31, 2011 and 2010.

	Gain or (Loss) Recognized in Income on Derivative Instruments
		For the Year Ended
(Dollars in millions)	Location	December 31, 2011		December 31, 2010
Trading Derivatives:
Interest rate contracts	Trading account activities	$	40	$	40
Equity contracts	Trading account activities		28		15
Foreign exchange contracts	Trading account activities		26		30
Commodity contracts	Trading account activities		4		7
Other contracts	Trading account activities		14		—
Total		$	112	$	92