Derivative Instruments and Other Financial Instruments Used For Hedging

The Company enters into certain derivative and other financial instruments primarily to assist customers with their risk management objectives and to manage the Company’s exposure to interest rate risk. When entering into derivatives on behalf of customers, the Company generally acts as a financial intermediary by offsetting a significant portion of the market risk for these derivatives with third parties. The Company may also enter into derivatives for other risk management purposes. All derivative instruments are recognized as assets or liabilities on the consolidated balance sheets at fair value.

Counterparty credit risk is inherent in derivative instruments. In order to reduce its exposure to counterparty credit risk, the Company utilizes credit approvals, limits, monitoring procedures and master netting and credit support annex agreements. Additionally, the Company considers counterparty credit quality and the creditworthiness of the Company in estimating the fair value of derivative instruments.

The table below presents the notional amounts and fair value amounts of the Company's derivative instruments reported on the consolidated balance sheets, segregated between derivative instruments designated and qualifying as hedging instruments and derivative instruments not designated as hedging instruments at December 31, 2019 and December 31, 2018. Asset and liability values are presented gross, excluding the impact of legally enforceable master netting and credit support annex agreements. The fair value of asset and liability derivatives designated and qualifying as hedging instruments and derivatives designated as other risk management are included in other assets and other liabilities, respectively. The fair value of asset and liability trading derivatives are included in trading account assets and trading account liabilities, respectively.



	December 31, 2019						December 31, 2018
			Fair Value						Fair Value
(Dollars in millions)	Notional Amount		Asset Derivatives		Liability Derivatives		Notional Amount		Asset Derivatives		Liability Derivatives
Derivative instruments
Cash flow hedges:
Interest rate contracts	$	13,319	$	—	$	—	$	674	$	6	$	—
Not designated as hedging instruments:
Trading:
Interest rate contracts	214,805		981		446		189,478		531		600
Commodity contracts	9		—		—		336		25		18
Foreign exchange contracts	11,219		230		64		8,475		260		168
Equity contracts	72		8		8		300		22		13
Other contracts	72		—		—		127		—		—
Total Trading	226,177		1,219		518		198,716		838		799
Other risk management	1,948		14		5		1,704		27		5
Total derivative instruments	$	241,444	$	1,233	$	523	$	201,094	$	871	$	804

We recognized net gains of $2 million and net losses of $4 million and $17 million on other risk management derivatives for the years ended December 31, 2019, 2018 and 2017, respectively, which are included in other noninterest income.

Derivatives Designated and Qualifying as Hedging Instruments

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 and debt issuances. Derivatives that qualify for hedge accounting are designated as either fair value or cash flow hedges.

Cash Flow Hedges

From time to time, the Company uses interest rate derivatives to hedge the risk of changes in cash flows attributable to changes in the designated interest rate on LIBOR indexed loans, and to a lesser extent, to hedge interest rate risk on rollover debt.

The Company used interest rate derivatives with an aggregate notional amount of $13.3 billion at December 31, 2019 to hedge the risk of changes in cash flows attributable to changes in the designated interest rates from variable rate loans. The Company used interest rate derivatives with an aggregate notional amount of $69 million at December 31, 2019 to hedge the risk of changes in cash flows attributable to changes in the designated interest rate on LIBOR indexed short-term borrowings. At December 31, 2019, the weighted average remaining life of the active cash flow hedges was 3.1 years.

For cash flow hedges, changes in the fair value of 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. At December 31, 2019, the Company expects to reclassify approximately $67 million of losses from AOCI as a reduction to net interest income during the twelve months ending December 31, 2020. This amount could differ from amounts actually realized due to changes in interest rates, hedge terminations and the addition of other hedges subsequent to December 31, 2019.

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 stockholders' equity for derivative instruments designated as cash flow hedges for the years ended December 31, 2019, 2018 and 2017:



	Gains (Losses) Recognized in OCI									Gains (Losses) Reclassified from AOCI into Income									Gains (Losses) Recognized in Income (Ineffective Portion)
	For the Year Ended December 31,									For the Year Ended December 31,									For the Year Ended December 31,
(Dollars in millions)	2019		2018			2017			Location	2019			2018			2017		Location	2018			2017
Derivatives in cash flow hedging relationships
									Interest income	$	(91	)	$	(34	)	$	69
Interest rate contracts	$	51	$	(96	)	$	(35	)	Interest expense	—			—			—		Noninterest expense	$	(1	)	$	3
Total	$	51	$	(96	)	$	(35	)		$	(91	)	$	(34	)	$	69		$	(1	)	$	3

Fair Value Hedges

The Company engaged in an interest rate hedging strategy in which one or more interest rate derivatives were associated with a specified interest bearing liability, in order to convert the liability from a fixed rate to a floating rate instrument. This strategy mitigated the changes in fair value of the hedged liability caused by changes in the designated interest rate, LIBOR.

Prior to 2019, for fair value hedges, any ineffectiveness was recognized in noninterest expense in the period in which it arose. The change in the fair value of the hedged item and the hedging instrument, to the extent completely effective, offset with no impact on earnings.

The following tables present gains (losses) on the Company's fair value hedges and hedged item for the years ended December 31, 2018 and 2017. The Company did not have any fair value hedges during 2019.



		For the Year Ended December 31, 2018
(Dollars in millions)		Derivative Instrument			Hedged Item		Hedge Ineffectiveness
(Dollars in millions)		Derivative Instrument			Hedged Item		Hedge Ineffectiveness
Interest rate risk on long-term debt		$	(2	)	$	2	$	—
	Total	$	(2	)	$	2	$	—



		For the Year Ended December 31, 2017
(Dollars in millions)		Derivative Instrument			Hedged Item		Hedge Ineffectiveness
(Dollars in millions)		Derivative Instrument			Hedged Item		Hedge Ineffectiveness
Interest rate risk on long-term debt		$	(4	)	$	3	$	(1	)
	Total	$	(4	)	$	3	$	(1	)

Derivatives Not Designated as Hedging Instruments

Trading Derivatives

Derivative instruments classified as trading include derivatives entered into at MUAH's broker-dealer subsidiary, MUSA, and derivatives entered into as an accommodation for customers and for certain economic hedging activities at MUB. Trading derivatives are included in trading assets or trading liabilities with changes in fair value reflected in income from trading account activities.

The following table presents the amount of the net gains and losses for derivative instruments classified as trading reported in the consolidated statements of income under the heading trading account activities for the years ended December 31, 2019, 2018 and 2017:



	Gains (Losses) Recognized in Income on Trading Derivatives
	For the Years Ended
(Dollars in millions)	December 31, 2019			December 31, 2018		December 31, 2017
Trading derivatives
Interest rate contracts	$	(93	)	$	95	$	(49	)
Equity contracts	6			36		12
Foreign exchange contracts	51			44		43
Commodity contracts	—			—		1
Total	$	(36	)	$	175	$	7

Offsetting Financial Assets and Liabilities

The Company primarily enters into derivative contracts with counterparties utilizing standard International Swaps and Derivatives Association Master Agreements and Credit Support Annex Agreements. These agreements generally establish the terms and conditions of the transactions, including a legal right to set-off amounts payable and receivable between the Company and a counterparty, regardless of whether or not such amounts have matured or have contingency features. For additional information related to offsetting of financial assets and liabilities, refer to Note 8 "Securities Financing Arrangements" to these Consolidated Financial Statements.