Our primary objective for using derivatives is to manage risks, primarily interest rate risk. We use derivatives to manage volatility in interest income, interest expense, earnings, and capital by adjusting our interest rate sensitivity to minimize the impact of fluctuations in interest rates. Derivatives are used to stabilize forecasted interest income from variable-rate assets and to modify the coupon or the duration of fixed-rate financial assets or liabilities as we consider advisable. We also assist customers with their risk management needs through the use of derivatives.

Derivatives Related to Interest Rate Risk Management — When we use derivatives as hedges, either for economic or accounting purposes, it is done only to manage identified risks. We apply hedge accounting to certain derivatives executed for risk management purposes. However, we do not apply hedge accounting to all the derivatives involved in our risk management activities. Derivatives not designated as accounting hedges are not speculative and are used to economically manage our exposure to interest rate movements, including offsetting customer-facing derivatives. These derivatives either do not require the use of hedge accounting for their economic impact to be appropriately reflected in our financial statements or they do not meet the strict hedge accounting requirements.

Derivatives Related to Customers — We provide certain borrowers access to over-the-counter interest rate derivatives, which we generally offset with interest rate derivatives executed with dealers or central clearing houses. Other interest rate derivatives that we provide to customers, or use for our own purposes, include mortgage rate locks and forward sale loan commitments. We also provide commercial customers with short-term foreign currency spot trades or forward contracts with maturities that are typically 90 days or less. These trades are also largely offset by foreign currency trades with closely matching terms executed with other dealer counterparties or central clearing houses.

We record all derivatives at fair value, and they are presented on the consolidated balance sheet in “Other assets” or “Other liabilities,” regardless of the accounting designation of each derivative. We enter into International Swaps and Derivatives Association, Inc. (“ISDA”) master netting agreements, or similar agreements, with substantially all derivative counterparties. Where legally enforceable, these master netting agreements give us, in the event of default or the triggering of other specified contingent events by the counterparty, the right to use cash or liquidate securities held as collateral and to offset receivables and payables with the same counterparty. For purposes of the Consolidated Balance Sheet, we report all derivatives on a gross fair value basis (i.e., we do not offset derivative assets and liabilities and cash collateral held with the same counterparty where we have a legally enforceable master netting agreement). Note 3 discusses the process to estimate fair value for derivatives. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative and the resulting accounting designation. Derivatives used to hedge the exposure to changes in the fair value of assets, liabilities, or firm commitments attributable to interest rates or other eligible risks, are considered fair value hedges. Derivatives used to hedge the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Changes in the fair value of derivatives that are not part of designated fair value or cash flow hedging relationships are recorded in current period earnings.

Fair Value Hedges — We generally use interest rate swaps designated as fair value hedges to hedge changes in the fair value of fixed-rate assets and liabilities for specific risks (e.g., interest rate risk resulting from changes in a benchmark interest rate). We use both pay-fixed, receive-floating and received-fixed, pay-floating interest rate swaps to effectively convert the fixed-rate assets and liabilities to floating rates. In qualifying fair value hedges, changes in value of the derivative hedging instrument are recognized in current period earnings in the same line item affected by the hedged item. Similarly, the periodic changes in value of the hedged item, for the risk being hedged, are recognized in current period earnings, thereby offsetting all, or a significant majority, of the change in the value of the derivative hedging instrument. Interest accruals on both the derivative hedging instrument and the hedged item are recorded in the same line item, effectively converting the designated fixed-rate assets or liabilities to a floating rate. Generally, the designated risk being hedged in all of our fair value hedges is the change in fair value of the LIBOR (or alternative rate) benchmark swap rate component of the contractual coupon cash flows of the fixed-rate assets or liabilities. The swaps are structured to match the critical terms of the hedged items, maximizing the economic (and accounting) effectiveness of the hedging relationships and resulting in the expectation that the swaps will be highly effective as a hedging instrument. All interest rate swaps designated as fair value hedges were highly effective and met all other requirements to remain designated and part of qualifying hedge accounting relationships as of the balance sheet date.

Fair Value Hedges of Assets — We hedge certain newly acquired fixed-rate AFS securities using pay-fixed, receive-floating interest rate swaps, effectively converting the fixed coupon to a floating-rate on the hedged portion of the securities. We have $10 million of cumulative unamortized basis adjustments from previous fair value hedging relationships, which will continue to be amortized as an adjustment to interest income through the end of 2050, thereby increasing the effective interest rate recognized on these securities. At December 31, 2022, we had qualifying fair value hedging relationships of fixed-rate AFS securities being hedged by pay-fixed, receive-floating interest rate swaps with an aggregate notional amount of $1.2 billion (inclusive of forward starting swaps).

Cash Flow Hedges — For derivatives designated and qualifying as cash flow hedges, as long as the hedging relationship continues to qualify for hedge accounting, the entire change in the fair value of the hedging instrument is recorded in OCI and recognized in earnings as the hedged transaction affects earnings. Ineffectiveness is not measured or separately disclosed. Derivative amounts affecting earnings are recognized in the same line item as the hedged transactions. We may use interest rate swaps, options, or a combination of options in our cash flow hedging strategy to eliminate or reduce the variability of interest receipts on floating-rate commercial loans due to changes in any separately identifiable and reliably measurable contractual interest rate index.

At December 31, 2022, we had receive-fixed interest rate swaps with an aggregate notional amount of $7.6 billion designated as cash flow hedges of the variability of interest receipts on floating-rate commercial loans due to changes in the LIBOR swap rate. At December 31, 2022, we have $410 million of net deferred losses in AOCI from active cash flow hedges. There were no amounts deferred in AOCI for terminated cash flow hedges as of December 31, 2022. Amounts deferred in AOCI from cash flow hedges are expected to be fully reclassified to interest income by the third quarter of 2027.

Hedge Effectiveness — We assess the effectiveness of each hedging relationship by comparing the changes in fair value or cash flows on the derivative hedging instrument with the changes in fair value or cash flows on the designated hedged item or transactions for the risk being hedged. If a hedging relationship ceases to qualify for hedge accounting, the relationship is discontinued and future changes in the fair value of the derivative instrument are recognized in current period earnings. For a discontinued or terminated fair value hedging relationship, all remaining basis adjustments to the carrying amount of the hedged item are amortized to interest income or expense over the remaining life of the hedged item consistent with the amortization of other discounts or premiums. Previous balances deferred in AOCI from discontinued or terminated cash flow hedges are reclassified to interest income or expense as the hedged transactions affect earnings or over the originally specified term of the hedging relationship.

Credit risk arises from the possibility of nonperformance by counterparties. No significant losses on derivative instruments have occurred during 2022 as a result of counterparty nonperformance. We reduce our counterparty exposure for derivative contracts by centrally clearing all eligible derivatives and by executing dealer-facing derivative transactions with well-capitalized financial institutions.

For those derivatives that are not centrally cleared, the counterparties are typically financial institutions or our customers. For those that are financial institutions, as noted above, we manage our credit exposure through the use of a Credit Support Annex (“CSA”) to an ISDA master agreement with each counterparty. Eligible collateral types are documented by the CSA and controlled under our general credit policies. Collateral balances are typically monitored on a daily basis. A valuation haircut policy reflects the fact that collateral may fall in value between the date the collateral is called and the date of liquidation or enforcement. At December 31, 2022, all of our collateral held as credit risk mitigation under a CSA was cash.

We manage the credit risk associated with customer nonperformance through additional underwriting that includes modeling the credit risk exposure for the swap, shared collateral and guarantee protection applicable to the loan and credit approvals, limits, and monitoring procedures. We measure counterparty credit risk through the calculation of a CVA that captures the value of both the nonperformance risk that we have to our customers and that they have to us. Periodic changes in the net CVA are recorded in current period earnings in “Fair value and nonhedge derivative income or loss” on the consolidated statement of income.

Our derivative contracts require us to pledge collateral for derivatives that are in a net liability position. Certain derivative contracts contain credit-risk-related contingent features that include the requirement to maintain a minimum debt credit rating. We may be required to pledge additional collateral if a credit-risk-related feature were triggered, such as a downgrade of our credit rating. However, in past situations, not all counterparties have demanded that additional collateral be pledged when provided for by the contractual terms. At December 31, 2022, the fair value of our derivative liabilities was $451 million, for which we were required to pledge cash collateral of approximately $152 million in the normal course of business. If our credit rating were downgraded one notch by either Standard and Poor’s (“S&P”) or Moody’s at December 31, 2022, there would likely be no additional collateral required to be pledged. Derivatives that are centrally cleared do not have credit-risk-related features that require additional collateral if our credit rating were downgraded.

The following schedule presents derivative notional amounts and recorded gross fair values at December 31, 2022 and 2021.


	December 31, 2022						December 31, 2021
	Notional amount		Fair value				Notional amount		Fair value
(In millions)			Other assets		Other liabilities				Other assets		Other liabilities
Derivatives designated as hedging instruments:
Cash flow hedges of floating-rate assets:
Purchased interest rate floors	$	—	$	—	$	—	$	—	$	—	$	—
Receive-fixed interest rate swaps	7,633		—		1		6,883		—		—
Fair value hedges:
Debt hedges: Receive-fixed interest rate swaps	500		—		—		500		—		—
Asset hedges: Pay-fixed interest rate swaps 1	1,228		84		—		479		10		—
Total derivatives designated as hedging instruments	9,361		84		1		7,862		10		—
Derivatives not designated as hedging instruments:
Customer interest rate derivatives 2	13,670		296		443		13,174		200		48
Other interest rate derivatives	862		—		—		1,286		6		1
Foreign exchange derivatives	605		6		7		288		3		2
Total derivatives not designated as hedging instruments	15,137		302		450		14,748		209		51
Total derivatives	$	24,498	$	386	$	451	$	22,610	$	219	$	51

2 Customer interest rate derivatives include both customer-facing derivatives and the offsetting, dealer-facing derivatives. Customer interest rate derivatives include a net CVA of $13 million and $3 million, reducing the fair value amount at December 31, 2022, and December 31, 2021, respectively. These adjustments are required to reflect both our nonperformance risk and that of the respective counterparty.

The amount of derivative gains (losses) from cash flow and fair value hedges that was deferred in OCI or recognized in earnings for year ended December 31, 2022 and 2021 is shown in the schedules below.


	Year Ended December 31, 2022
(In millions)	Effective portion of derivative gain/(loss) deferred in AOCI		Excluded components deferred in AOCI (amortization approach)		Amount of gain/(loss) reclassified from AOCI into income		Interest on fair value hedges		Hedge ineffectiveness / AOCI reclass due to missed forecast

Cash flow hedges of floating-rate assets: 1
Purchased interest rate floors	$	—	$	—	$	2	$	—	$	—
Interest rate swaps	(437)		—		(29)		—		—
Fair value hedges of liabilities:
Receive-fixed interest rate swaps	—		—		—		(1)		—
Basis amortization on terminated hedges 2, 3	—		—		—		1		—
Fair value hedges of assets:
Pay-fixed interest rate swaps	—		—		—		4		(1)
Basis amortization on terminated hedges 2, 3	—		—		—		—		—
Total derivatives designated as hedging instruments	$	(437)	$	—	$	(27)	$	4	$	(1)


	Year Ended December 31, 2021
(In millions)	Effective portion of derivative gain/(loss) deferred in AOCI		Excluded components deferred in AOCI (amortization approach)		Amount of gain/(loss) reclassified from AOCI into income		Interest on fair value hedges		Hedge ineffectiveness / AOCI reclass due to missed forecast

Cash flow hedges of floating-rate assets: 1
Purchased interest rate floors	$	—	$	—	$	11	$	—	$	—
Interest rate swaps	(34)		—		51		—		—
Fair value hedges of liabilities:
Receive-fixed interest rate swaps	—		—		—		8		—
Basis amortization on terminated hedges 2, 3	—		—		—		10		—
Fair value hedges of assets:
Pay-fixed interest rate swaps	—		—		—		(3)		—
Basis amortization on terminated hedges 2, 3	—		—		—		—		—
Total derivatives designated as hedging instruments	$	(34)	$	—	$	62	$	15	$	—

3The cumulative unamortized basis adjustment from previously terminated or redesignated fair value hedges at December 31, 2022 was zero and $10 million of terminated fair value debt and asset hedges, respectively, compared with $1 million and $7 million at December 31, 2021. The amortization of the cumulative unamortized basis adjustment from asset hedges is not shown in the schedules because it is not significant.


	Gain/(loss) recorded in income
	Twelve Months Ended December 31, 2022						Twelve Months Ended December 31, 2021
(In millions)	Derivatives 2		Hedged items		Total income statement impact		Derivatives 2		Hedged items		Total income statement impact

Debt: Receive-fixed interest rate swaps 1,2	$	(79)	$	79	$	—	$	(30)	$	30	$	—
Assets: Pay-fixed interest rate swaps 1,2	224		(225)		(1)		23		(23)		—

The following schedule provides information regarding basis adjustments for hedged items.


	Par value of hedged assets/(liabilities)				Carrying amount of the hedged assets/(liabilities)				Cumulative amount of fair value hedging adjustment included in the carrying amount of the hedged assets/(liabilities)
(In millions)	2022		2021		2022		2021		2022		2021

Long-term fixed-rate debt 1,2	$	(500)	$	(500)	$	(435)	$	(507)	$	65	$	(7)
Fixed-rate AFS securities 1,2	1,228		479		962		435		(266)		(44)