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Derivative Instruments
3 Months Ended
Mar. 31, 2013
Derivative Instruments And Hedging Activities Disclosure [Abstract]  
Derivative Instruments

Note  12

  Derivative Instruments

The Company recognizes all derivatives in the Consolidated Balance Sheet at fair value in other assets or in other 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”). 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 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 three months ended March 31, 2013, 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 loans and debt. Changes in the fair value of derivatives designated as cash flow hedges are recorded in other comprehensive income (loss) until the cash flows of the hedged items are 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 March 31, 2013, the Company had $371 million (net-of-tax) of realized and unrealized losses on derivatives classified as cash flow hedges recorded in other comprehensive income (loss), compared with $404 million (net-of-tax) at December 31, 2012. The estimated amount to be reclassified from other comprehensive income (loss) into earnings during the remainder of 2013 and the next 12 months are losses of $100 million (net-of-tax) and $133 million (net-of-tax), respectively. This amount 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 three months ended March 31, 2013, 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, and occasionally non-derivative debt instruments, 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 three months ended March 31, 2013. There were no non-derivative debt instruments designated as net investment hedges at March 31, 2013 or December 31, 2012.

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 to-be-announced securities (“TBAs”) and other commitments to sell residential mortgage loans, which are used to economically hedge the interest rate risk related to residential mortgage loans held for sale (“MLHFS”) and unfunded mortgage loan commitments. The Company also enters into interest rate swaps, forward commitments to buy TBAs, U.S. Treasury futures and options on U.S. Treasury futures to economically hedge the change in the fair value of the Company’s MSRs. The Company also enters into foreign currency forwards to economically hedge remeasurement gains and losses the Company recognizes on foreign currency denominated assets and liabilities. 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 with broker-dealers. The Company also has derivative contracts that are created through its operations, including commitments to originate MLHFS 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 summarizes the asset and liability management derivative positions of the Company:

 

     Asset Derivatives      Liability Derivatives  
(Dollars in Millions)    Notional
Value
     Fair
Value
    

Weighted-Average
Remaining
Maturity

In Years

     Notional
Value
     Fair
Value
    

Weighted-Average
Remaining
Maturity

In Years

 

March 31, 2013

                   

Fair value hedges

                   

Interest rate contracts

                   

Receive fixed/pay floating swaps

   $ 500       $ 25         2.84       $       $           

Cash flow hedges

                   

Interest rate contracts

                   

Pay fixed/receive floating swaps

     272         3         9.52         4,288         664         3.21   

Receive fixed/pay floating swaps

     7,000         39         1.60                           

Net investment hedges

                   

Foreign exchange forward contracts

     757         5         .05                           

Other economic hedges

                   

Interest rate contracts

                   

Futures and forwards

                   

Buy

     8,397         66         .08         172         1         .04   

Sell

     3,301         25         .07         11,098         52         .11   

Options

                   

Purchased

     4,325                 .08                           

Written

     5,506         97         .10         10         1         .06   

Receive fixed/pay floating swaps

     3,945         22         10.23                           

Foreign exchange forward contracts

     1,360         3         .01         1,869         13         .02   

Equity contracts

     41                 2.22         27                 2.63   

Credit contracts

     1,096         4         4.70         2,012         11         3.02   
                                           

Total

 

   $ 36,500       $ 289            $ 19,476       $ 742      

December 31, 2012

                   

Fair value hedges

                   

Interest rate contracts

                   

Receive fixed/pay floating swaps

   $ 500       $ 30         3.09       $       $           

Cash flow hedges

                   

Interest rate contracts

                   

Pay fixed/receive floating swaps

     32                 9.88         4,528         718         3.79   

Receive fixed/pay floating swaps

     7,000         45         1.84                           

Net investment hedges

                   

Foreign exchange forward contracts

     758         1         .07                           

Other economic hedges

                   

Interest rate contracts

                   

Futures and forwards

                   

Buy

     11,164         138         .07         2,921         13         .04   

Sell

     6,299         18         .11         12,223         57         .09   

Options

                   

Purchased

     2,435                 .07                           

Written

     4,991         123         .12         4                 .06   

Receive fixed/pay floating swaps

     350         1         10.21         3,775         14         10.21   

Foreign exchange forward contracts

     618         4         .03         1,383         6         .01   

Equity contracts

     31                 2.80         27                 2.46   

Credit contracts

     1,056         3         4.56         1,947         10         3.11   
                                           

Total

   $ 35,234       $ 363            $ 26,808       $ 818      
                                                       

 

The following table summarizes the customer-related derivative positions of the Company:

 

     Asset Derivatives      Liability Derivatives  
(Dollars in Millions)    Notional
Value
     Fair
Value
    

Weighted-Average
Remaining
Maturity

In Years

     Notional
Value
     Fair
Value
    

Weighted-Average
Remaining
Maturity

In Years

 

March 31, 2013

                   

Interest rate contracts

                   

Receive fixed/pay floating swaps

   $ 16,441       $ 985         4.93       $ 1,383       $ 18         7.09   

Pay fixed/receive floating swaps

     1,169         17         8.24         16,745         942         4.90   

Options

                   

Purchased

     3,171         18         4.96         28                 4.17   

Written

     28                 4.17         3,124         18         5.02   

Foreign exchange rate contracts

                   

Forwards, spots and swaps

     10,018         443         .56         9,827         415         .55   

Options

                   

Purchased

     249         4         .48                           

Written

                             249         4         .48   
                                           

Total

   $ 31,076       $ 1,467            $ 31,356       $ 1,397      

December 31, 2012

                   

Interest rate contracts

                   

Receive fixed/pay floating swaps

   $ 16,671       $ 1,085         4.78       $ 1,090       $ 15         9.30   

Pay fixed/receive floating swaps

     928         14         11.12         16,923         1,042         4.74   

Options

                   

Purchased

     3,046         16         5.24         28                 4.42   

Written

     286                 .75         2,788         16         5.68   

Foreign exchange rate contracts

                   

Forwards, spots and swaps

     12,186         322         .43         11,861         286         .44   

Options

                   

Purchased

     323         6         .55                           

Written

                             323         6         .55   
                                           

Total

   $ 33,440       $ 1,443            $ 33,013       $ 1,365      
                                                       

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) for the three months ended March 31:

 

     Gains (Losses)
Recognized in
Other
Comprehensive
Income (Loss)
     Gains (Losses)
Reclassified
from Other
Comprehensive
Income (Loss)
into Earnings
 
(Dollars in Millions)        2013          2012          2013         2012  

Asset and Liability Management Positions

            

Cash flow hedges

            

Interest rate contracts (a)

   $       $ 1       $ (33   $ (33

Net investment hedges

            

Foreign exchange forward contracts

     23         (6               
                                    

 

Note: Ineffectiveness on cash flow and net investment hedges was not material for the three months ended March 31, 2013 and 2012.
(a) Gains (Losses) reclassified from other comprehensive income (loss) into interest income on loans and interest expense on long-term debt.

 

 

The table below shows the gains (losses) recognized in earnings for fair value hedges, other economic hedges and the customer-related positions for the three months ended March 31:

 

(Dollars in Millions)   

Location of Gains (Losses)

Recognized in Earnings

     2013     2012  

Asset and Liability Management Positions

       

Fair value hedges (a)

       

Interest rate contracts

     Other noninterest income       $ (2   $   

Foreign exchange cross-currency swaps

     Other noninterest income                42   

Other economic hedges

       

Interest rate contracts

       

Futures and forwards

     Mortgage banking revenue         236        169   

Purchased and written options

     Mortgage banking revenue         129        154   

Receive fixed/pay floating swaps

     Mortgage banking revenue         (40     (57

Foreign exchange forward contracts

     Commercial products revenue         8        (17

Equity contracts

     Compensation expense                (1

Credit contracts

     Other noninterest income/expense         (1     (6

Customer-Related Positions

       

Interest rate contracts

       

Receive fixed/pay floating swaps

     Other noninterest income         (96     (140

Pay fixed/receive floating swaps

     Other noninterest income         96        139   

Foreign exchange rate contracts

       

Forwards, spots and swaps

     Commercial products revenue         7        21   
                           

 

(a) Gains (Losses) on items hedged by interest rate contracts and foreign exchange forward contracts, included in noninterest income (expense), were $2 million and zero for the three months ended March 31, 2013, respectively, and less than $1 million and $(44) million for the three months ended March 31, 2012, respectively. The ineffective portion was immaterial for the three months ended March 31, 2013 and 2012.

Derivatives are subject to credit risk associated with counterparties to the derivative contracts. The Company measures that credit risk using a credit valuation adjustment and includes it 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 and, where possible, by requiring collateral agreements. A master netting agreement allows two counterparties, who have multiple derivative contracts with each other, the ability to net settle amounts under all contracts, including any related collateral, through a single payment and in a single currency. Collateral agreements require the counterparty to deliver, on a daily basis, collateral (typically cash or U.S. Treasury and agency securities) equal to the Company’s net derivative receivable. For highly-rated counterparties, the collateral agreements may include minimum dollar thresholds, but allow for 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 March 31, 2013, was $1.3 billion. At March 31, 2013, the Company had $1.1 billion of cash posted as collateral against this net liability position.