Derivative instruments

9 Months Ended

Sep. 30, 2020

Derivative Instruments and Hedging Activities Disclosure [Abstract]

We use derivatives to manage exposure to market risk, including interest rate risk, equity price risk and foreign currency risk, as well as credit risk. Our trading activities are focused on acting as a market-maker for our customers and facilitating customer trades in compliance with the Volcker Rule.

The notional amounts for derivative financial instruments express the dollar volume of the transactions; however, credit risk is much smaller. We perform credit reviews and enter into netting agreements and collateral arrangements to minimize the credit risk of derivative financial instruments. We enter into offsetting positions to reduce exposure to foreign currency, interest rate and equity price risk.

Use of derivative financial instruments involves reliance on counterparties. Failure of a counterparty to honor its obligation under a derivative contract is a risk we assume whenever we engage in a derivative contract. There were no counterparty default losses recorded in the third quarter of 2020.

Hedging derivatives

We utilize interest rate swap agreements to manage our exposure to interest rate fluctuations. We enter into fair value hedges as an interest rate risk management strategy to reduce fair value variability by converting certain fixed rate interest payments associated with available-for-sale securities and long-term debt to floating interest rates. We also utilize interest rate swaps and forward exchange contracts as cash flow hedges to manage our exposure to interest rate and foreign exchange rate changes.

The available-for-sale securities hedged consist of U.S. Treasury, agency and non-agency commercial MBS, sovereign debt/sovereign guaranteed, corporate bonds and foreign covered bonds. At Sept. 30, 2020, $14.5 billion par value of available-for-sale securities were hedged with interest rate swaps designated as fair value hedges that had notional values of $14.5 billion.

The fixed rate long-term debt instruments hedged generally have original maturities of five to 30 years. In fair value hedging relationships, debt is hedged with “receive fixed rate, pay variable rate” swaps. At Sept. 30, 2020, $13.9 billion par value of debt was hedged with interest rate swaps designated as fair value hedges that had notional values of $13.9 billion.

In addition, we utilize forward foreign exchange contracts as hedges to mitigate foreign exchange exposures. We use forward foreign exchange contracts as cash flow hedges to convert certain forecasted non-U.S. dollar revenue and expenses into U.S. dollars. We use forward foreign exchange contracts with maturities of 15 months or less as cash flow hedges to hedge our foreign exchange exposure to currencies such as Indian rupee, British pound, Euro, Hong Kong dollar, Singapore dollar and Polish zloty used in revenue and expense transactions for entities that have the U.S. dollar as their functional currency. As of Sept. 30, 2020, the hedged forecasted foreign currency transactions and designated forward foreign exchange contract hedges were $319 million (notional), with a pre-tax gain of $5 million recorded in accumulated OCI. This gain will be reclassified to earnings over the next 12 months.

We also utilize forward foreign exchange contracts as fair value hedges of the foreign exchange risk associated with available-for-sale securities. Forward points are designated as an excluded component and amortized into earnings over the hedge period. The unamortized derivative value associated with the excluded component is recognized in accumulated OCI. At Sept. 30, 2020, $140 million par value of available-for-sale securities was hedged with foreign currency forward contracts that had a notional value of $140 million.

Forward foreign exchange contracts are also used to hedge the value of our net investments in foreign subsidiaries. These forward foreign exchange contracts have maturities of less than one year. The derivatives employed are designated as hedges of changes in value of our foreign investments due to exchange rates. The change in fair market value of these forward foreign exchange contracts is reported within foreign currency translation adjustments in shareholders’ equity, net of tax. At Sept. 30, 2020, forward foreign exchange contracts with notional amounts totaling $7.9 billion were designated as net investment hedges.

In addition to forward foreign exchange contracts, we also designate non-derivative financial instruments as hedges of our net investments in foreign subsidiaries. Those non-derivative financial instruments designated as hedges of our net investments in foreign subsidiaries were all long-term liabilities of BNY Mellon and, at Sept. 30, 2020, had a combined U.S. dollar equivalent carrying value of $179 million.

The following table presents the pre-tax gains (losses) related to our fair value and cash flow hedging activities recognized in the consolidated income statement.


Income statement impact of fair value and cash flow hedges
(in millions)	Location of gains (losses)	3Q20		2Q20		3Q19		YTD20		YTD19
Interest rate fair value hedges of available-for-sale securities
Derivative	Interest revenue	$	150	$	19	$	(250)	$	(864)	$	(1,119)
Hedged item	Interest revenue	(140)		(15)		243		856		1,099
Interest rate fair value hedges of long-term debt
Derivative	Interest expense	(68)		47		146		693		631
Hedged item	Interest expense	66		(49)		(145)		(691)		(627)
Foreign exchange fair value hedges of available-for-sale securities
Derivative (a)	Other revenue	1		(5)		2		(11)		3
Hedged item	Other revenue	1		5		(2)		13		(2)
Cash flow hedge of interest rate risk
(Loss) reclassified from OCI into income	Interest expense	—		—		(1)		—		(1)
Cash flow hedges of forecasted FX exposures



(Loss) gain reclassified from OCI into income	Staff expense	—		(3)		2		(2)		1
Gain (loss) recognized in the consolidated income statement due to fair value and cash flow hedging relationships		$	10	$	(1)	$	(5)	$	(6)	$	(15)

(a) Includes gains of less than $1 million in the third quarter of 2020, second quarter of 2020 and third quarter of 2019 and gains of $1 million in the first nine months of 2020 and first nine months of 2019 associated with the amortization of the excluded component. At Sept. 30, 2020 and Dec. 31, 2019, the remaining accumulated OCI balance associated with the excluded component was de minimis.

The following table presents the impact of hedging derivatives used in net investment hedging relationships.


Impact of derivative instruments used in net investment hedging relationships
(in millions)
Derivatives in net investment hedging relationships	Gain or (loss) recognized in accumulated OCI on derivatives										Location of gain or (loss) reclassified from accumulated OCI into income	Gain or (loss) reclassified from accumulated OCI into income
	3Q20		2Q20		3Q19		YTD20		YTD19			3Q20		2Q20		3Q19		YTD20		YTD19
FX contracts	$	(289)	$	(45)	$	252	$	103	$	322	Net interest revenue	$	—	$	—	$	—	$	—	$	—

The following table presents information on the hedged items in fair value hedging relationships.


Hedged items in fair value hedging relationships	Carrying amount of hedged asset or liability				Hedge accounting basis adjustment increase (decrease) (a)


(in millions)	Sept. 30, 2020		Dec. 31, 2019		Sept. 30, 2020		Dec. 31, 2019
Available-for-sale securities (b)(c)	$	14,629	$	13,792	$	1,650	$	687
Long-term debt	$	14,889	$	13,945	$	870	$	116

(a) Includes $187 million and $53 million of basis adjustment increases on discontinued hedges associated with available-for-sale securities at Sept. 30, 2020 and Dec. 31, 2019, respectively, and $136 million and $200 million of basis adjustment decreases on discontinued hedges associated with long-term debt at Sept. 30, 2020 and Dec. 31, 2019, respectively.

(b) Excludes hedged items where only foreign currency risk is the designated hedged risk, as the basis adjustments related to foreign currency hedges will not reverse through the consolidated income statement in future periods. The carrying amount excluded for available-for-sale securities was $140 million at Sept. 30, 2020 and $142 million at Dec. 31, 2019.

The following table summarizes the notional amount and carrying values of our total derivative portfolio at Sept. 30, 2020 and Dec. 31, 2019.


Impact of derivative instruments on the balance sheet	Notional value				Asset derivatives fair value				Liability derivatives fair value
	Sept. 30, 2020		Dec. 31, 2019		Sept. 30, 2020		Dec. 31, 2019		Sept. 30, 2020		Dec. 31, 2019
(in millions)
Derivatives designated as hedging instruments: (a)(b)
Interest rate contracts	$	28,441	$	28,365	$	—	$	—	$	803	$	350
Foreign exchange contracts	8,369		8,390		56		21		194		257
Total derivatives designated as hedging instruments					$	56	$	21	$	997	$	607
Derivatives not designated as hedging instruments: (b)(c)
Interest rate contracts	$	206,771	$	306,790	$	4,962	$	3,690	$	4,246	$	3,250
Foreign exchange contracts	753,812		848,961		4,410		5,331		4,522		5,340
Equity contracts	2,241		3,189		15		19		8		5
Credit contracts	165		165		—		—		3		4
Total derivatives not designated as hedging instruments					$	9,387	$	9,040	$	8,779	$	8,599
Total derivatives fair value (d)					$	9,443	$	9,061	$	9,776	$	9,206
Effect of master netting agreements (e)					(5,238)		(5,819)		(6,183)		(5,415)
Fair value after effect of master netting agreements					$	4,205	$	3,242	$	3,593	$	3,791

(a) The fair value of asset derivatives and liability derivatives designated as hedging instruments is recorded as other assets and other liabilities, respectively, on the consolidated balance sheet.

(b) For derivative transactions settled at clearing organizations, cash collateral exchanged is deemed a settlement of the derivative each day. The settlement reduces the gross fair value of derivative assets and liabilities and results in a corresponding decrease in the effect of master netting agreements, with no impact to the consolidated balance sheet.

(c) The fair value of asset derivatives and liability derivatives not designated as hedging instruments is recorded as trading assets and trading liabilities, respectively, on the consolidated balance sheet.

(d) Fair values are on a gross basis, before consideration of master netting agreements, as required by ASC 815, Derivatives and Hedging.

(e) Effect of master netting agreements includes cash collateral received and paid of $675 million and $1,620 million, respectively, at Sept. 30, 2020, and $1,022 million and $618 million, respectively, at Dec. 31, 2019.

Trading activities (including trading derivatives)

Our trading activities are focused on acting as a market-maker for our customers, facilitating customer trades and risk mitigating economic hedging in compliance with the Volcker Rule. The change in the fair value of the derivatives utilized in our trading activities is recorded in foreign exchange and other trading revenue on the consolidated income statement.

The following table presents our foreign exchange and other trading revenue.


Foreign exchange and other trading revenue
(in millions)	3Q20		2Q20		3Q19		YTD20		YTD19
Foreign exchange	$	151	$	174	$	129	$	578	$	439
Other trading (loss) revenue	(14)		(8)		21		44		47
Total foreign exchange and other trading revenue	$	137	$	166	$	150	$	622	$	486

Foreign exchange revenue includes income from purchasing and selling foreign currencies and

currency forwards, futures and options. Other trading revenue reflects results from trading in cash instruments, including fixed income and equity securities and non-foreign exchange derivatives.

We also use derivative financial instruments as risk mitigating economic hedges, which are not formally designated as accounting hedges. This includes hedging the foreign currency, interest rate or market risks inherent in some of our balance sheet exposures, such as seed capital investments and deposits, as well as certain investment management fee revenue streams. We also use total return swaps to economically hedge obligations arising from the Company’s deferred compensation plan whereby the participants defer compensation and earn a return linked to the performance of investments they select. The gains or losses on these total return swaps are recorded in staff expense on the consolidated income statement and were a gain of $12 million in the third quarter of 2020, a de minimis loss in the third quarter of 2019, a gain of $28 million in the second quarter of 2020, a loss of $1 million in the first nine months of 2020 and a gain of $23 million in the first nine months of 2019.

We manage trading risk through a system of position limits, a value-at-risk (“VaR”) methodology based on historical simulation and other market sensitivity measures. Risk is monitored and reported to senior management by a separate unit, independent from trading, on a daily basis. Based on certain assumptions, the VaR methodology is designed to capture the potential overnight pre-tax dollar loss from adverse changes in fair values of all trading positions. The calculation assumes a one-day holding period, utilizes a 99% confidence level and incorporates non-linear product characteristics. The VaR model is one of several statistical models used to develop economic capital results, which are allocated to lines of business for computing risk-adjusted performance.

VaR methodology does not evaluate risk attributable to extraordinary financial, economic or other occurrences. As a result, the risk assessment process includes a number of stress scenarios based upon the risk factors in the portfolio and management’s assessment of market conditions. Additional stress scenarios based upon historical market events are also performed. Stress tests may incorporate the impact of reduced market liquidity and the breakdown of historically observed correlations and extreme scenarios. VaR and other statistical measures, stress testing and sensitivity analysis are incorporated into other risk management materials.

Counterparty credit risk and collateral

We assess the credit risk of our counterparties through regular examination of their financial statements, confidential communication with the management of those counterparties and regular monitoring of publicly available credit rating information. This and other information is used to develop proprietary credit rating metrics used to assess credit quality.

Collateral requirements are determined after a comprehensive review of the credit quality of each counterparty. Collateral is generally held or pledged in the form of cash and/or highly liquid government securities. Collateral requirements are monitored and adjusted daily.

Additional disclosures concerning derivative financial instruments are provided in Note 15.

Disclosure of contingent features in over-the-counter (“OTC”) derivative instruments

Certain OTC derivative contracts and/or collateral agreements contain credit-risk contingent features triggered upon a rating downgrade in which the counterparty has the right to request additional collateral or the right to terminate the contracts in a net liability position.

The following table shows the aggregate fair value of OTC derivative contracts in net liability positions that contained credit-risk contingent features and the value of collateral that has been posted.


	Sept. 30, 2020		Dec. 31, 2019
(in millions)	Sept. 30, 2020		Dec. 31, 2019
Aggregate fair value of OTC derivatives in net liability positions (a)	$	5,958	$	3,442
Collateral posted	$	6,384	$	3,671

(a) Before consideration of cash collateral.

The aggregate fair value of OTC derivative contracts containing credit-risk contingent features can fluctuate from quarter to quarter due to changes in market conditions, composition of counterparty trades, new business or changes to the contingent features.

The Bank of New York Mellon, our largest banking subsidiary, enters into the substantial majority of our OTC derivative contracts and/or collateral agreements. As such, the contingent features may be triggered if The Bank of New York Mellon’s long-term issuer rating was downgraded.

The following table shows the fair value of contracts falling under early termination provisions that were in net liability positions for three key ratings triggers.


Potential close-out exposures (fair value) (a)
	Sept. 30, 2020		Dec. 31, 2019
(in millions)
If The Bank of New York Mellon’s rating changed to: (b)
A3/A-	$	10	$	56
Baa2/BBB	$	565	$	608
Ba1/BB+	$	3,113	$	2,084

(a) The amounts represent potential total close-out values if The Bank of New York Mellon’s long-term issuer rating were to immediately drop to the indicated levels, and do not reflect collateral posted.

(b) Represents ratings by Moody’s/S&P.

If The Bank of New York Mellon’s debt rating had fallen below investment grade on Sept. 30, 2020 and Dec. 31, 2019, existing collateral arrangements would have required us to post additional collateral of $31 million and $63 million, respectively.

Offsetting assets and liabilities

The following tables present derivative and financial instruments and their related offsets. There were no derivative instruments or financial instruments subject to a legally enforceable netting agreement for which we are not currently netting.


Offsetting of derivative assets and financial assets at Sept. 30, 2020
	Gross assets recognized		Gross amounts offset in the balance sheet			Net assets recognized in the balance sheet		Gross amounts not offset in the balance sheet
(in millions)					(a)			Financial instruments		Cash collateral received		Net amount
Derivatives subject to netting arrangements:
Interest rate contracts	$	3,183	$	2,133		$	1,050	$	350	$	—	$	700
Foreign exchange contracts	4,043		3,102			941		33		—		908
Equity and other contracts	8		3			5		—		—		5
Total derivatives subject to netting arrangements	7,234		5,238			1,996		383		—		1,613
Total derivatives not subject to netting arrangements	2,209		—			2,209		—		—		2,209
Total derivatives	9,443		5,238			4,205		383		—		3,822
Reverse repurchase agreements	72,507		54,629		(b)	17,878		17,852		—		26
Securities borrowing	11,769		—			11,769		11,216		—		553
Total	$	93,719	$	59,867		$	33,852	$	29,451	$	—	$	4,401

(a) Includes the effect of netting agreements and net cash collateral received. The offset related to the OTC derivatives was allocated to the various types of derivatives based on the net positions.

(b) Offsetting of reverse repurchase agreements relates to our involvement in the Fixed Income Clearing Corporation (“FICC”), where we settle government securities transactions on a net basis for payment and delivery through the Fedwire system.


Offsetting of derivative assets and financial assets at Dec. 31, 2019
	Gross assets recognized		Gross amounts offset in the balance sheet			Net assets recognized in the balance sheet		Gross amounts not offset in the balance sheet
(in millions)					(a)			Financial instruments		Cash collateral received		Net amount
Derivatives subject to netting arrangements:
Interest rate contracts	$	2,394	$	1,792		$	602	$	207	$	—	$	395
Foreign exchange contracts	4,861		4,021			840		44		—		796
Equity and other contracts	9		6			3		—		—		3
Total derivatives subject to netting arrangements	7,264		5,819			1,445		251		—		1,194
Total derivatives not subject to netting arrangements	1,797		—			1,797		—		—		1,797
Total derivatives	9,061		5,819			3,242		251		—		2,991
Reverse repurchase agreements	112,355		93,794		(b)	18,561		18,554		—		7
Securities borrowing	11,621		—			11,621		11,278		—		343
Total	$	133,037	$	99,613		$	33,424	$	30,083	$	—	$	3,341

(a) Includes the effect of netting agreements and net cash collateral received. The offset related to the OTC derivatives was allocated to the various types of derivatives based on the net positions.

(b) Offsetting of reverse repurchase agreements relates to our involvement in the FICC, where we settle government securities transactions on a net basis for payment and delivery through the Fedwire system.


Offsetting of derivative liabilities and financial liabilities at Sept. 30, 2020						Net liabilities recognized in the balance sheet
	Gross liabilities recognized		Gross amounts offset in the balance sheet					Gross amounts not offset in the balance sheet
(in millions)					(a)			Financial instruments		Cash collateral pledged		Net amount
Derivatives subject to netting arrangements:
Interest rate contracts	$	5,035	$	2,551		$	2,484	$	2,477	$	—	$	7
Foreign exchange contracts	4,294		3,631			663		224		—		439
Equity and other contracts	8		1			7		—		—		7
Total derivatives subject to netting arrangements	9,337		6,183			3,154		2,701		—		453
Total derivatives not subject to netting arrangements	439		—			439		—		—		439
Total derivatives	9,776		6,183			3,593		2,701		—		892
Repurchase agreements	69,494		54,629		(b)	14,865		14,863		1		1
Securities lending	1,002		—			1,002		961		—		41
Total	$	80,272	$	60,812		$	19,460	$	18,525	$	1	$	934

(a) Includes the effect of netting agreements and net cash collateral paid. The offset related to the OTC derivatives was allocated to the various types of derivatives based on the net positions.

(b) Offsetting of repurchase agreements relates to our involvement in the FICC, where we settle government securities transactions on a net basis for payment and delivery through the Fedwire system.


Offsetting of derivative liabilities and financial liabilities at Dec. 31, 2019						Net liabilities recognized in the balance sheet
	Gross liabilities recognized		Gross amounts offset in the balance sheet					Gross amounts not offset in the balance sheet
(in millions)					(a)			Financial instruments		Cash collateral pledged		Net amount
Derivatives subject to netting arrangements:
Interest rate contracts	$	3,550	$	1,986		$	1,564	$	1,539	$	—	$	25
Foreign exchange contracts	4,873		3,428			1,445		74		—		1,371
Equity and other contracts	5		1			4		2		—		2
Total derivatives subject to netting arrangements	8,428		5,415			3,013		1,615		—		1,398
Total derivatives not subject to netting arrangements	778		—			778		—		—		778
Total derivatives	9,206		5,415			3,791		1,615		—		2,176
Repurchase agreements	104,451		93,794		(b)	10,657		10,657		—		—
Securities lending	718		—			718		694		—		24
Total	$	114,375	$	99,209		$	15,166	$	12,966	$	—	$	2,200

(a) Includes the effect of netting agreements and net cash collateral paid. The offset related to the OTC derivatives was allocated to the various types of derivatives based on the net positions.

(b) Offsetting of repurchase agreements relates to our involvement in the FICC, where we settle government securities transactions on a net basis for payment and delivery through the Fedwire system.

Secured borrowings

The following table presents the contract value of repurchase agreements and securities lending transactions accounted for as secured borrowings by the type of collateral provided to counterparties.


Repurchase agreements and securities lending transactions accounted for as secured borrowings
	Sept. 30, 2020								Dec. 31, 2019
	Remaining contractual maturity						Total		Remaining contractual maturity						Total
(in millions)	Overnight and continuous		Up to 30 days		30 days or more				Overnight and continuous		Up to 30 days		30 days or more
Repurchase agreements:
U.S. Treasury	$	60,350	$	—	$	—	$	60,350	$	94,788	$	10	$	—	$	94,798
Agency RMBS	2,913		675		2		3,590		4,234		774		—		5,008
Corporate bonds	232		64		1,432		1,728		266		236		1,617		2,119
Sovereign debt/ sovereign guaranteed	128		—		1,151		1,279		—		22		—		22
State and political subdivisions	43		39		810		892		38		166		1,077		1,281
U.S. government agencies	610		—		—		610		594		16		—		610
Other debt securities	47		44		186		277		2		—		2		4
Equity securities	—		53		715		768		31		99		479		609
Total	$	64,323	$	875	$	4,296	$	69,494	$	99,953	$	1,323	$	3,175	$	104,451
Securities lending:
Agency RMBS	$	180	$	—	$	—	$	180	$	160	$	—	$	—	$	160
U.S. government agencies	1		—		—		1		19		—		—		19
Other debt securities	49		—		—		49		41		—		—		41
Equity securities	772		—		—		772		498		—		—		498
Total	$	1,002	$	—	$	—	$	1,002	$	718	$	—	$	—	$	718
Total secured borrowings	$	65,325	$	875	$	4,296	$	70,496	$	100,671	$	1,323	$	3,175	$	105,169

BNY Mellon’s repurchase agreements and securities lending transactions primarily encounter risk associated with liquidity. We are required to pledge collateral based on predetermined terms within the agreements. If we were to experience a decline in the fair value of the collateral pledged for these transactions, we could be required to provide additional collateral to the counterparty, therefore decreasing the amount of assets available for other liquidity needs that may arise. BNY Mellon also offers tri-party collateral agency services in the tri-party repo market where we are exposed to credit risk. In order to mitigate this risk, we require dealers to fully secure intraday credit.