
Note 11		Derivative Instruments

In the ordinary course of business, the Company enters into derivative transactions to manage various risks and to accommodate the business requirements of its customers. The Company recognizes all derivatives on 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 received or 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 the Company uses to hedge the change in fair value related to interest rate changes of its underlying fixed-rate debt. 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 nine months ended September 30, 2013, and the change in fair value attributed to hedge ineffectiveness was not material.

Cash Flow Hedges These derivatives are interest rate swaps the Company uses to hedge the forecasted cash flows from its 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 remain within other comprehensive income (loss). At September 30, 2013, the Company had $294 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 $30 million (net-of-tax) and $116 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 nine months ended September 30, 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 nine months ended September 30, 2013. There were no non-derivative debt instruments designated as net investment hedges at September 30, 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
September 30, 2013
Fair value hedges
Interest rate contracts
Receive fixed/pay floating swaps	$	500	$	21		2.34	$	–	$	–		–
Cash flow hedges
Interest rate contracts
Pay fixed/receive floating swaps		272		17		9.02		4,288		548		2.71
Receive fixed/pay floating swaps		7,000		31		1.10		–		–		–
Net investment hedges
Foreign exchange forward contracts		–		–		–		925		11		.05
Other economic hedges
Interest rate contracts
Futures and forwards
Buy		4,418		88		.09		34		8		.08
Sell		41		2		.20		6,203		122		.09
Options
Purchased		2,325		–		.07		–		–		–
Written		1,800		34		.09		9		–		.02
Receive fixed/pay floating swaps		3,220		83		10.23		–		–		–
Foreign exchange forward contracts		1,980		4		.02		2,695		6		.02
Equity contracts		8		–		1.72		66		–		1.89
Credit contracts		1,177		4		4.12		2,495		11		4.91

Total	$	22,741	$	284			$	16,715	$	706
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
September 30, 2013
Interest rate contracts
Receive fixed/pay floating swaps	$	13,562	$	736		5.30	$	5,138	$	70		4.98
Pay fixed/receive floating swaps		4,700		76		5.15		14,089		691		5.26
Options
Purchased		3,681		28		4.46		107		1		1.12
Written		107		1		1.12		3,681		28		4.46
Foreign exchange rate contracts
Forwards, spots and swaps		10,392		411		.71		9,688		375		.68
Options
Purchased		367		9		.64		–		–		–
Written		–		–		–		367		9		.64

Total	$	32,809	$	1,261			$	33,070	$	1,174
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):


	Three Months Ended September 30,												Nine Months Ended September 30,
	Gains (Losses) Recognized in Other Comprehensive Income (Loss)						Gains (Losses) Reclassified from Other Comprehensive Income (Loss) into Earnings						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			2013			2012			2013			2012
Asset and Liability Management Positions
Cash flow hedges
Interest rate contracts (a)	$	(11	)	$	(19	)	$	(30	)	$	(33	)	$	22		$	(42	)	$	(88	)	$	(98	)
Net investment hedges
Foreign exchange forward contracts		(29	)		–			–			–			(23	)		(6	)		–			–
Non-derivative debt instruments		–			(11	)		–			–			–			26			–			–

Note:

Ineffectiveness on cash flow and net investment hedges was not material for the three and nine months ended September 30, 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:


	Location of Gains (Losses) Recognized in Earnings		Three Months Ended September 30,						Nine Months Ended September 30,
(Dollars in Millions)	Location of Gains (Losses) Recognized in Earnings		2013			2012			2013			2012
Asset and Liability Management Positions
Fair value hedges (a)
Interest rate contracts		Other noninterest income	$	–		$	2		$	(7	)	$	5
Foreign exchange cross-currency swaps		Other noninterest income		–			–			–			42
Other economic hedges
Interest rate contracts
Futures and forwards		Mortgage banking revenue		33			(44	)		569			67
Purchased and written options		Mortgage banking revenue		54			290			200			689
Receive fixed/pay floating swaps		Mortgage banking revenue		(5	)		48			(264	)		186
Foreign exchange forward contracts		Commercial products revenue		(16	)		(25	)		18			(62	)
Equity contracts		Compensation expense		–			1			1			2
Credit contracts		Other noninterest income/expense		2			(2	)		1			(8	)
Customer-Related Positions
Interest rate contracts
Receive fixed/pay floating swaps		Other noninterest income		13			(16	)		(288	)		(10	)
Pay fixed/receive floating swaps		Other noninterest income		(10	)		19			298			15
Foreign exchange rate contracts
Forwards, spots and swaps		Commercial products revenue		15			13			36			36

(a)

Gains (Losses) on items hedged by interest rate contracts and foreign exchange forward contracts, included in noninterest income (expense), were both zero for the three months ended September 30, 2013, and $(2) million and zero for the three months ended September 30, 2012, respectively. Gains (Losses) on items hedged by interest rate contracts and foreign exchange forward contracts, included in noninterest income (expense), were $7 million and zero for the nine months ended September 30, 2013, respectively, and $(5) million and $(44) million for the nine months ended September 30, 2012, respectively. The ineffective portion was immaterial for the three and nine months ended September 30, 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 arrangements and, where possible, by requiring collateral arrangements. A master netting arrangement 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 arrangements 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 arrangements 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 arrangements are predominately 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 arrangements, 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 arrangements that were in a net liability position at September 30, 2013, was $1.1 billion. At September 30, 2013, the Company had $862 million of cash posted as collateral against this net liability position.