The Bancorp maintains an overall risk management strategy that incorporates the use of derivative instruments to reduce certain risks related to interest rate, prepayment and foreign currency volatility. Additionally, the Bancorp holds derivative instruments for the benefit of its commercial customers and for other business purposes. The Bancorp does not enter into unhedged speculative derivative positions.

The Bancorp's interest rate risk management strategy involves modifying the repricing characteristics of certain financial instruments so that changes in interest rates do not adversely affect the Bancorp's net interest margin and cash flows. Derivative instruments that the Bancorp may use as part of its interest rate risk management strategy include interest rate swaps, interest rate floors, interest rate caps, forward contracts, options and swaptions. Interest rate swap contracts are exchanges of interest payments, such as fixed-rate payments for floating-rate payments, based on a stated notional amount and maturity date. Interest rate floors protect against declining rates, while interest rate caps protect against rising interest rates. Forward contracts are contracts in which the buyer agrees to purchase, and the seller agrees to make delivery of, a specific financial instrument at a predetermined price or yield. Options provide the purchaser with the right, but not the obligation, to purchase or sell a contracted item during a specified period at an agreed upon price. Swaptions are financial instruments granting the owner the right, but not the obligation, to enter into or cancel a swap.

Prepayment volatility arises mostly from changes in fair value of the largely fixed-rate MSR portfolio, mortgage loans and mortgage-backed securities. The Bancorp may enter into various free-standing derivatives (principal-only swaps, interest rate swaptions, interest rate floors, mortgage options, TBAs and interest rate swaps) to economically hedge prepayment volatility. Principal-only swaps are total return swaps based on changes in the value of the underlying mortgage principal-only trust. TBAs are a forward purchase agreement for a mortgage-backed securities trade whereby the terms of the security are undefined at the time the trade is made.

Foreign currency volatility occurs as the Bancorp enters into certain loans denominated in foreign currencies. Derivative instruments that the Bancorp may use to economically hedge these foreign denominated loans include foreign exchange swaps and forward contracts.

The Bancorp also enters into derivative contracts (including foreign exchange contracts, commodity contracts and interest rate contracts) for the benefit of commercial customers and other business purposes. The Bancorp may economically hedge significant exposures related to these free-standing derivatives by entering into offsetting third-party contracts with approved, reputable counterparties with substantially matching terms and currencies. Credit risk arises from the possible inability of counterparties to meet the terms of their contracts. The Bancorp's exposure is limited to the replacement value of the contracts rather than the notional, principal or contract amounts. Credit risk is minimized through credit approvals, limits, counterparty collateral and monitoring procedures.

The Bancorp's derivative assets contain certain contracts in which the Bancorp requires the counterparties to provide collateral in the form of cash and securities to offset changes in the fair value of the derivatives, including changes in the fair value due to credit risk of the counterparty. As of September 30, 2012, the balance of collateral held by the Bancorp for derivative assets was $1.0 billion and was $1.2 billion at both December 31, 2011 and September 30, 2011. The credit component negatively impacting the fair value of derivative assets associated with customer accommodation contracts as of September 30, 2012, December 31, 2011 and September 30, 2011 was $20 million, $28 million and $33 million, respectively.

In measuring the fair value of derivative liabilities, the Bancorp considers its own credit risk, taking into consideration collateral maintenance requirements of certain derivative counterparties and the duration of instruments with counterparties that do not require collateral maintenance. When necessary, the Bancorp primarily posts collateral in the form of cash and securities to offset changes in fair value of the derivatives, including changes in fair value due to the Bancorp's credit risk. As of September 30, 2012, December 31, 2011 and September 30, 2011, the balance of collateral posted by the Bancorp for derivative liabilities was $885 million, $788 million and $758 million, respectively. Certain of the Bancorp's derivative liabilities contain credit-risk related contingent features that could result in the requirement to post additional collateral upon the occurrence of specified events. As of September 30, 2012, the fair value of the additional collateral that could be required to be posted as a result of the credit-risk related contingent features being triggered was not material to the Bancorp's Condensed Consolidated Financial Statements. The posting of collateral has been determined to remove the need for consideration of credit risk. As a result, the Bancorp determined that the impact of the Bancorp's credit risk to the valuation of its derivative liabilities was immaterial to the Bancorp's Condensed Consolidated Financial Statements.

The Bancorp holds certain derivative instruments that qualify for hedge accounting treatment and are designated as either fair value hedges or cash flow hedges. Derivative instruments that do not qualify for hedge accounting treatment, or for which hedge accounting is not established, are held as free-standing derivatives. All customer accommodation derivatives are held as free-standing derivatives.

The fair value of derivative instruments is presented on a gross basis, even when the derivative instruments are subject to master netting arrangements. Derivative instruments with a positive fair value are reported in other assets in the Condensed Consolidated Balance Sheets while derivative instruments with a negative fair value are reported in other liabilities in the Condensed Consolidated Balance Sheets. Cash collateral payables and receivables associated with the derivative instruments are not added to or netted against the fair value amounts.

The following tables reflect the notional amounts and fair values for all derivative instruments included in the Condensed Consolidated Balance Sheets as of:

				Fair Value
		Notional		Derivative	Derivative
September 30, 2012 ($ in millions)		Amount		Assets	Liabilities
Qualifying hedging instruments
Fair value hedges:
Interest rate swaps related to long-term debt	$	2,880		606	-
Total fair value hedges				606	-
Cash flow hedges:
Interest rate floors related to C&I loans		1,500		42	-
Interest rate swaps related to C&I loans		1,000		65	-
Interest rate caps related to long-term debt		500		-	-
Interest rate swaps related to long-term debt		250		-	2
Total cash flow hedges				107	2
Total derivatives designated as qualifying hedging instruments				713	2
Derivatives not designated as qualifying hedging instruments
Free-standing derivatives - risk management and other business purposes
Interest rate contracts related to MSRs		9,327		258	5
Forward contracts related to held for sale mortgage loans		8,749		10	92
Stock warrants associated with sale of the processing business		439		197	-
Swap associated with the sale of Visa, Inc. Class B shares		571		-	21
Total free-standing derivatives - risk management and other business purposes				465	118
Free-standing derivatives - customer accommodation:
Interest rate contracts for customers		27,112		640	658
Interest rate lock commitments		5,154		102	-
Commodity contracts		2,860		99	95
Foreign exchange contracts		18,809		216	198
Derivative instruments related to equity linked CDs		13		1	1
Total free-standing derivatives - customer accommodation				1,058	952
Total derivatives not designated as qualifying hedging instruments				1,523	1,070
Total			$	2,236	1,072


				Fair Value
		Notional		Derivative	Derivative
December 31, 2011 ($ in millions)		Amount		Assets	Liabilities
Qualifying hedging instruments
Fair value hedges:
Interest rate swaps related to long-term debt	$	4,080		662	-
Total fair value hedges				662	-
Cash flow hedges:
Interest rate floors related to C&I loans		1,500		91	-
Interest rate swaps related to C&I loans		1,500		59	-
Interest rate caps related to long-term debt		500		-	-
Interest rate swaps related to long-term debt		250		-	5
Total cash flow hedges				150	5
Total derivatives designated as qualifying hedging instruments				812	5
Derivatives not designated as qualifying hedging instruments
Free-standing derivatives - risk management and other business purposes
Interest rate contracts related to MSRs		3,077		187	-
Forward contracts related to held for sale mortgage loans		5,705		8	54
Interest rate swaps related to long-term debt		311		1	3
Put options associated with sale of the processing business		978		-	1
Stock warrants associated with sale of the processing business		223		111	-
Swap associated with the sale of Visa, Inc. Class B shares		436		-	78
Total free-standing derivatives - risk management and other business purposes				307	136
Free-standing derivatives - customer accommodation:
Interest rate contracts for customers		30,000		774	795
Interest rate lock commitments		3,835		33	1
Commodity contracts		2,074		134	130
Foreign exchange contracts		17,909		294	275
Derivative instruments related to equity linked CDs		34		2	2
Total free-standing derivatives - customer accommodation				1,237	1,203
Total derivatives not designated as qualifying hedging instruments				1,544	1,339
Total			$	2,356	1,344

				Fair Value
		Notional		Derivative	Derivative
September 30, 2011 ($ in millions)		Amount		Assets	Liabilities
Qualifying hedging instruments
Fair value hedges:
Interest rate swaps related to long-term debt	$	4,080		679	-
Total fair value hedges				679	-
Cash flow hedges:
Interest rate floors related to C&I loans		1,500		112	-
Interest rate swaps related to C&I loans		1,500		60	-
Interest rate caps related to long-term debt		500		-	-
Interest rate swaps related to long-term debt		250		-	7
Total cash flow hedges				172	7
Total derivatives designated as qualifying hedging instruments				851	7
Derivatives not designated as qualifying hedging instruments
Free-standing derivatives - risk management and other business purposes
Interest rate contracts related to MSRs		3,577		193	2
Forward contracts and options related to held for sale mortgage loans		5,062		4	59
Interest rate swaps related to long-term debt		360		1	3
Foreign exchange contracts for trading purposes		1,696		12	12
Put options associated with sale of the processing business		901		-	1
Stock warrants associated with sale of the processing business		205		101	-
Swap associated with the sale of Visa, Inc. Class B shares		423		-	27
Total free-standing derivatives - risk management and other business purposes				311	104
Free-standing derivatives - customer accommodation:
Interest rate contracts for customers		29,433		827	851
Interest rate lock commitments		4,772		38	1
Commodity contracts		2,102		112	105
Foreign exchange contracts		19,243		459	435
Derivative instruments related to equity linked CDs		34		2	2
Total free-standing derivatives - customer accommodation				1,438	1,394
Total derivatives not designated as qualifying hedging instruments				1,749	1,498
Total			$	2,600	1,505

The Bancorp may enter into interest rate swaps to convert its fixed-rate funding to floating-rate. Decisions to convert fixed-rate funding to floating are made primarily through consideration of the asset/liability mix of the Bancorp, the desired asset/liability sensitivity and interest rate levels. As of September 30, 2012, December 31, 2011 and September 30, 2011, certain interest rate swaps met the criteria required to qualify for the “shortcut” method of accounting. Based on this shortcut method of accounting treatment, no ineffectiveness is assumed. For interest rate swaps that do not meet the shortcut requirements, an assessment of hedge effectiveness using regression analysis was performed and such swaps were accounted for using the “long-haul” method. The long-haul method requires a quarterly assessment of hedge effectiveness and measurement of ineffectiveness. For interest rate swaps accounted for as a fair value hedge using the long-haul method, ineffectiveness is the difference between the changes in the fair value of the interest rate swap and changes in fair value of the related hedged item attributable to the risk being hedged. The ineffectiveness on interest rate swaps hedging fixed-rate funding is reported within interest expense in the Condensed Consolidated Statements of Income.

The following table reflects the change in fair value of interest rate contracts, designated as fair value hedges, as well as the change in fair value of the related hedged items attributable to the risk being hedged, included in the Condensed Consolidated Statements of Income:

	Condensed Consolidated		For the three months		For the nine months
	Statements of		ended September 30,		ended September 30,
($ in millions)	Income Caption		2012	2011	2012	2011
Interest rate contracts:
Change in fair value of interest rate swaps hedging long-term debt	Interest on long-term debt	$	(35)	258	(56)	238
Change in fair value of hedged long-term debt attributable to the risk being hedged	Interest on long-term debt		44	(255)	59	(242)

The Bancorp may enter into interest rate swaps to convert floating-rate assets and liabilities to fixed rates or to hedge certain forecasted transactions. The assets or liabilities may be grouped in circumstances where they share the same risk exposure for which the Bancorp desired to hedge. The Bancorp may also enter into interest rate caps and floors to limit cash flow variability of floating rate assets and liabilities. As of September 30, 2012, all hedges designated as cash flow hedges are assessed for effectiveness using regression analysis. Ineffectiveness is generally measured as the amount by which the cumulative change in the fair value of the hedging instrument exceeds the present value of the cumulative change in the hedged item's expected cash flows attributable to the risk being hedged. Ineffectiveness is reported within other noninterest income in the Condensed Consolidated Statements of Income. The effective portion of the cumulative gains or losses on cash flow hedges are reported within accumulated other comprehensive income and are reclassified from accumulated other comprehensive income to current period earnings when the forecasted transaction affects earnings. As of September 30, 2012, the maximum length of time over which the Bancorp is hedging its exposure to the variability in future cash flows is 41 months.

Reclassified gains and losses on interest rate contracts related to commercial and industrial loans are recorded within interest income while reclassified gains and losses on interest rate contracts related to long-term debt are recorded within interest expense in the Condensed Consolidated Statements of Income. As of September 30, 2012, December 31, 2011 and September 30, 2011, $62 million, $80 million and $92 million, respectively, of deferred gains, net of tax, on cash flow hedges were recorded in accumulated other comprehensive income in the Condensed Consolidated Balance Sheets. As of September 30, 2012, $41 million in net deferred gains, net of tax, recorded in accumulated other comprehensive income are expected to be reclassified into earnings during the next 12 months, primarily due to the benefit of interest rate floors that mature during the second quarter of 2013. During the third quarter of 2011, $11 million of losses were reclassified from accumulated other comprehensive income into noninterest expense as it was determined that the original forecasted transaction was no longer probable of occurring by the end of the originally specified time period or within the additional period of time as defined by U.S. GAAP. During the three and nine months ended September 30, 2012, there were no gains or losses reclassified into earnings associated with the discontinuance of cash flow hedges because it was probable that the original forecasted transaction would not occur.

The following table presents the net gains (losses) recorded in the Condensed Consolidated Statements of Income and accumulated other comprehensive income in the Condensed Consolidated Statements of Comprehensive Income relating to derivative instruments designated as cash flow hedges:

		For the three months		For the nine months
		ended September 30,		ended September 30,
($ in millions)		2012	2011	2012	2011
Amount of net gain recognized in OCI	$	10	27	35	59
Amount of net gain (loss) reclassified from OCI into net income		22	(10)	63	21
Amount of ineffectiveness recognized in other noninterest income		-	-	-	2

Free-Standing Derivative Instruments – Risk Management and Other Business Purposes

As part of its overall risk management strategy relative to its mortgage banking activity, the Bancorp may enter into various free-standing derivatives (principal-only swaps, interest rate swaptions, interest rate floors, mortgage options, TBAs and interest rate swaps) to economically hedge changes in fair value of its largely fixed-rate MSR portfolio. Principal-only swaps hedge the mortgage-LIBOR spread because these swaps appreciate in value as a result of tightening spreads. Principal-only swaps also provide prepayment protection by increasing in value when prepayment speeds increase, as opposed to MSRs that lose value in a faster prepayment environment. Receive fixed/pay floating interest rate swaps and swaptions increase in value when interest rates do not increase as quickly as expected.

The Bancorp enters into forward contracts and mortgage options to economically hedge the change in fair value of certain residential mortgage loans held for sale due to changes in interest rates. Interest rate lock commitments issued on residential mortgage loan commitments that will be held for sale are also considered free-standing derivative instruments and the interest rate exposure on these commitments is economically hedged primarily with forward contracts. Revaluation gains and losses from free-standing derivatives related to mortgage banking activity are recorded as a component of mortgage banking net revenue in the Condensed Consolidated Statements of Income.

Additionally, the Bancorp may enter into free-standing derivative instruments (options, swaptions and interest rate swaps) in order to minimize significant fluctuations in earnings and cash flows caused by interest rate and prepayment volatility. The gains and losses on these derivative contracts are recorded within other noninterest income in the Condensed Consolidated Statements of Income.

In conjunction with the sale of the processing business in 2009, the Bancorp received warrants and issued put options, which are accounted for as free-standing derivatives. The put options expired as a result of the Vantiv, Inc. initial public offering in March of 2012. Refer to Note 20 for further discussion of significant inputs and assumptions used in the valuation of the warrants.

In conjunction with the sale of Visa, Inc. Class B shares in 2009, the Bancorp entered into a total return swap in which the Bancorp will make or receive payments based on subsequent changes in the conversion rate of the Class B shares into Class A shares. This total return swap is accounted for as a free-standing derivative. See Note 20 for further discussion of significant inputs and assumptions used in the valuation of this instrument.

The Bancorp entered into certain derivatives (forwards, futures and options) related to its foreign exchange business. These derivative contracts were not designated against specific assets or liabilities or to forecasted transactions. Therefore, these instruments did not qualify for hedge accounting. The Bancorp economically hedged the exposures related to these derivative contracts by entering into offsetting contracts with approved, reputable, independent counterparties with substantially similar terms. Revaluation gains and losses on these foreign currency derivative contracts were recorded within other noninterest income in the Condensed Consolidated Statements of Income.

The net gains (losses) recorded in the Condensed Consolidated Statements of Income relating to free-standing derivative instruments used for risk management and other business purposes are summarized in the following table:

	Condensed Consolidated		For the three months		For the nine months
	Statements of		ended September 30,		ended September 30,
($ in millions)	Income Caption		2012	2011	2012	2011
Interest rate contracts:
Forward contracts related to mortgage loans held for sale	Mortgage banking net revenue	$	(59)	(57)	(42)	(136)
Interest rate contracts related to MSR portfolio	Mortgage banking net revenue		32	235	75	337
Interest rate swaps related to long-term debt	Other noninterest income		1	2	2	6
Foreign exchange contracts:
Foreign exchange contracts for trading purposes	Other noninterest income		(1)	-	(1)	-
Equity contracts:
Stock warrants associated with sale of the processing business	Other noninterest income		(16)	(3)	85	22
Put options associated with sale of the processing business	Other noninterest income		-	6	1	8
Swap associated with sale of Visa, Inc. Class B shares	Other noninterest income		(1)	(17)	(30)	(30)

The majority of the free-standing derivative instruments the Bancorp enters into are for the benefit of its commercial customers. These derivative contracts are not designated against specific assets or liabilities on the Bancorp's Condensed Consolidated Balance Sheets or to forecasted transactions and, therefore, do not qualify for hedge accounting. These instruments include foreign exchange derivative contracts entered into for the benefit of commercial customers involved in international trade to hedge their exposure to foreign currency fluctuations and commodity contracts to hedge such items as natural gas and various other derivative contracts. The Bancorp may economically hedge significant exposures related to these derivative contracts entered into for the benefit of customers by entering into offsetting contracts with approved, reputable, independent counterparties with substantially matching terms. The Bancorp hedges its interest rate exposure on commercial customer transactions by executing offsetting swap agreements with primary dealers. Revaluation gains and losses on interest rate, foreign exchange, commodity and other commercial customer derivative contracts are recorded as a component of corporate banking revenue in the Condensed Consolidated Statements of Income.

The Bancorp enters into risk participation agreements, under which the Bancorp assumes credit exposure relating to certain underlying interest rate derivative contracts. The Bancorp only enters into these risk participation agreements in instances in which the Bancorp has participated in the loan that the underlying interest rate derivative contract was designed to hedge. The Bancorp will make payments under these agreements if a customer defaults on its obligation to perform under the terms of the underlying interest rate derivative contract. As of September 30, 2012, December 31, 2011 and September 30, 2011, the total notional amount of the risk participation agreements was $971 million, $808 million and $722 million, respectively, and the fair value was a liability of $2 million at September 30, 2012, December 31, 2011 and September 30, 2011, which is included in interest rate contracts for customers. As of September 30, 2012, the risk participation agreements had an average life of 2.8 years.

The Bancorp's maximum exposure in the risk participation agreements is contingent on the fair value of the underlying interest rate derivative contracts in an asset position at the time of default. The Bancorp monitors the credit risk associated with the underlying customers in the risk participation agreements through the same risk grading system currently utilized for establishing loss reserves in its loan and lease portfolio.

The net gains (losses) recorded in the Condensed Consolidated Statements of Income relating to free-standing derivative instruments used for customer accommodation are summarized in the following table:

			For the three months		For the nine months
	Condensed Consolidated		ended September 30,		ended September 30,
($ in millions)	Statements of Income Caption		2012	2011	2012	2011
Interest rate contracts:
Interest rate contracts for customers (contract revenue)	Corporate banking revenue	$	7	7	20	22
Interest rate contracts for customers (credit losses)	Other noninterest expense		(1)	-	(2)	(12)
Interest rate contracts for customers (credit portion of
fair value adjustment)	Other noninterest expense		2	-	5	10
Interest rate lock commitments	Mortgage banking net revenue		166	100	341	156
Commodity contracts:
Commodity contracts for customers (contract revenue)	Corporate banking revenue		1	3	6	6
Commodity contracts for customers (credit portion of
fair value adjustment)	Other noninterest expense		1	(1)	1	-
Foreign exchange contracts:
Foreign exchange contracts - customers (contract revenue)	Corporate banking revenue		16	17	49	48
Foreign exchange contracts - customers (credit portion of
fair value adjustment)	Other noninterest expense		1	(3)	2	(2)