Derivative Instruments
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Jun. 30, 2011
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Derivative Instruments |
Note 12 Derivative Instruments
The Company recognizes all derivatives in the consolidated
balance sheet at fair value as other assets or liabilities. On
the date the Company enters into a derivative contract, the
derivative is designated as either a hedge of the fair value of
a recognized asset or liability (“fair value hedge”);
a hedge of a forecasted transaction or the variability of cash
flows to be paid related to a recognized asset or liability
(“cash flow hedge”); a hedge of the volatility of an
investment in foreign operations driven by changes in foreign
currency exchange rates (“net investment hedge”); or a
designation is not made as it is a customer-related transaction,
an economic hedge for asset/liability risk management purposes
or another stand-alone derivative created through the
Company’s operations (“free-standing derivative”).
Of the Company’s $36.0 billion of total notional
amount of asset and liability management positions at
June 30, 2011, $8.6 billion was designated as a fair
value, cash flow or net investment hedge. When a derivative is
designated as a fair value, cash flow or net investment hedge,
the Company performs an assessment, at inception and, at a
minimum, quarterly thereafter, to determine the effectiveness of
the derivative in offsetting changes in the value or cash flows
of the hedged item(s).
Fair Value
Hedges These
derivatives are primarily interest rate swaps that hedge the
change in fair value related to interest rate changes of
underlying fixed-rate debt and junior subordinated debentures.
Changes in the fair value of derivatives designated as fair
value hedges, and changes in the fair value of the hedged items,
are recorded in earnings. All fair value hedges were highly
effective for the six months ended June 30, 2011, and the
change in fair value attributed to hedge ineffectiveness was not
material.
Cash Flow
Hedges These
derivatives are interest rate swaps that are hedges of the
forecasted cash flows from the underlying variable-rate debt.
Changes in the fair value of derivatives designated as cash flow
hedges are recorded in other comprehensive income (loss) until
expense from the cash flows of the hedged items is realized. If
a derivative designated as a cash flow hedge is terminated or
ceases to be highly effective, the gain or loss in other
comprehensive income (loss) is amortized to earnings over the
period the forecasted hedged transactions impact earnings. If a
hedged forecasted transaction is no longer probable, hedge
accounting is ceased and any gain or loss included in other
comprehensive income (loss) is reported in earnings immediately,
unless the forecasted transaction is at least reasonably
possible of occurring, whereby the amounts within other
comprehensive income (loss) remain. At June 30, 2011, the
Company had $424 million
(net-of-tax)
of realized and unrealized losses on derivatives classified as
cash flow hedges recorded in other comprehensive income (loss),
compared with $414 million
(net-of-tax)
at December 31, 2010. The estimated amount to be
reclassified from other comprehensive income (loss) into
earnings during the remainder of 2011 and the next
12 months is a loss of $69 million
(net-of-tax)
and $134 million
(net-of-tax),
respectively. This includes gains and losses related to hedges
that were terminated early for which the forecasted transactions
are still probable. All cash flow hedges were highly effective
for the six months ended June 30, 2011, and the change in
fair value attributed to hedge ineffectiveness was not material.
Net Investment
Hedges The Company
uses forward commitments to sell specified amounts of certain
foreign currencies to hedge the volatility of its investment in
foreign operations driven by fluctuations in foreign currency
exchange rates. The ineffectiveness on all net investment hedges
was not material for the six months ended June 30, 2011.
Other Derivative
Positions The
Company enters into free-standing derivatives to mitigate
interest rate risk and for other risk management purposes. These
derivatives include forward commitments to sell residential
mortgage loans, which are used to economically hedge the
interest rate risk related to residential mortgage loans held
for sale. The Company also enters into U.S. Treasury
futures, options on U.S. Treasury futures contracts,
interest rate swaps and forward commitments to buy residential
mortgage loans to economically hedge the change in the fair
value of the Company’s residential MSRs. In addition, the
Company acts as a seller and buyer of interest rate derivatives
and foreign exchange contracts for its customers. To mitigate
the market and liquidity risk associated with these customer
derivatives, the Company enters into similar offsetting
positions. The Company also has derivative contracts that are
created through its operations, including commitments to
originate mortgage loans held for sale and certain derivative
financial guarantee contracts.
For additional information on the Company’s purpose for
entering into derivative transactions and its overall risk
management strategies, refer to “Management Discussion and
Analysis — Use of Derivatives to Manage Interest Rate
and Other Risks” which is incorporated by reference into
these Notes to Consolidated Financial Statements.
The following table provides information on the fair value of
the Company’s derivative positions:
Note:
The fair value of asset and liability derivatives are included
in Other assets and Other liabilities on the Consolidated
Balance Sheet, respectively.
The following table summarizes the asset and liability
management derivative positions of the Company:
The following table summarizes the customer-related derivative
positions of the Company:
The table below shows the effective portion of the gains
(losses) recognized in other comprehensive income (loss) and the
gains (losses) reclassified from other comprehensive income
(loss) into earnings
(net-of-tax):
Note:
Ineffectiveness on cash flow and net investment hedges was not
material for the three months and six months ended June 30,
2011 and 2010.
The table below shows the gains (losses) recognized in earnings
for fair value hedges, other economic hedges and the
customer-related positions:
Derivatives are subject to credit risk associated with
counterparties to the derivative contracts. The Company measures
that credit risk based on its assessment of the probability of
counterparty default and includes that within the fair value of
the derivative. The Company manages counterparty credit risk
through diversification of its derivative positions among
various counterparties, by entering into master netting
agreements where possible and by requiring collateral agreements
which allow the Company to call for immediate, full collateral
coverage when credit-rating thresholds are triggered by
counterparties.
The Company’s collateral agreements are bilateral and,
therefore, contain provisions that require collateralization of
the Company’s net liability derivative positions. Required
collateral coverage is based on certain net liability thresholds
and contingent upon the Company’s credit rating from two of
the nationally recognized statistical rating organizations. If
the Company’s credit rating were to fall below credit
ratings thresholds established in the collateral agreements, the
counterparties to the derivatives could request immediate full
collateral coverage for derivatives in net liability positions.
The aggregate fair value of all derivatives under collateral
agreements that were in a net liability position at
June 30, 2011, was $1.4 billion. At June 30, 2011, the
Company had $894 million of cash posted as collateral against
this net liability position.
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