
Note 13		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 fair value hedge, cash flow hedge, 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.

Cash Flow Hedges These derivatives are interest rate swaps the Company uses to hedge the forecasted cash flows from its underlying variable-rate 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 March 31, 2019, the Company had $51 million (net-of-tax) of realized and unrealized gains on derivatives classified as cash flow hedges recorded in other comprehensive income (loss), compared with $112 million (net-of-tax) of realized and unrealized gains at December 31, 2018. The estimated amount to be reclassified from other comprehensive income (loss) into earnings during the remainder of 2019 and the next 12 months are gains of $10 million (net-of-tax) and $11 million (net-of-tax), respectively. All cash flow hedges were highly effective for the three months ended March 31, 2019.

Net Investment Hedges The Company uses forward commitments to sell specified amounts of certain foreign currencies, and non-derivative debt instruments, to hedge the volatility of its net investment in foreign operations driven by fluctuations in foreign currency exchange rates. The carrying amount of non-derivative debt instruments designated as net investment hedges was $1.1 billion at March 31, 2019 and December 31, 2018.

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 mortgage loans held for sale (“MLHFS”) and unfunded mortgage loan commitments. The Company also enters into interest rate swaps, swaptions, forward commitments to buy TBAs, U.S. Treasury and Eurodollar 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. The Company mitigates the market and liquidity risk associated with these customer derivatives by entering into similar offsetting positions with broker-dealers, or on a portfolio basis by entering into other derivative or non-derivative financial instruments that partially or fully offset the exposure from these customer-related positions. The Company’s customer derivatives and related hedges are monitored and reviewed by the Company’s Market Risk Committee, which establishes policies for market risk management, including exposure limits for each portfolio. The Company also has derivative contracts that are created through its operations, including certain unfunded mortgage loan commitments and swap agreements related to the sale of a portion of its Class B common shares of Visa Inc. Refer to Note 15 for further information on these swap agreements.

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, 2019
Fair value hedges
Interest rate contracts
Receive fixed/pay floating swaps	$	1,300	$	–		4.77	$	–	$	–		–
Cash flow hedges
Interest rate contracts
Pay fixed/receive floating swaps		3,892		10		5.48		6,450		3		1.29
Net investment hedges
Foreign exchange forward contracts		447		2		.05		–		–		–
Other economic hedges
Interest rate contracts
Futures and forwards
Buy		5,062		34		.30		2,357		5		.04
Sell		2,936		21		.04		15,268		62		.47
Options
Purchased		9,945		97		3.26		300		–		5.00
Written		1,105		30		.09		1,006		20		1.98
Receive fixed/pay floating swaps		7,101		–		10.61		2,226		–		11.27
Pay fixed/receive floating swaps		1,801		–		12.22		4,844		–		6.25
Foreign exchange forward contracts		324		1		.04		362		2		.04
Equity contracts		66		–		.21		70		–		.30
Credit contracts		2,377		1		3.25		5,257		3		4.00
Other (a)		210		3		.02		1,749		77		1.10
Total	$	36,566	$	199			$	39,889	$	172
December 31, 2018
Cash flow hedges
Interest rate contracts
Pay fixed/receive floating swaps	$	7,422	$	8		3.11	$	4,320	$	–		1.77
Net investment hedges
Foreign exchange forward contracts		209		5		.05		223		1		.05
Other economic hedges
Interest rate contracts
Futures and forwards
Buy		2,839		27		.07		1,140		5		.05
Sell		994		3		.06		13,968		30		.72
Options
Purchased		5,080		88		10.77		–		–		–
Written		584		16		.09		3		–		.09
Receive fixed/pay floating swaps		3,605		–		14.80		4,333		–		6.97
Pay fixed/receive floating swaps		4,333		–		6.97		1,132		–		7.64
Foreign exchange forward contracts		549		7		.03		75		1		.05
Equity contracts		19		1		.82		104		2		.45
Credit contracts		2,318		–		3.50		4,923		2		4.04
Other (a)		1		–		.01		1,458		84		1.50
Total	$	27,953	$	155			$	31,679	$	125

(a)

Includes derivative liability swap agreements related to the sale of a portion of the Company’s Class B common shares of Visa Inc. The Visa swap agreements had a total notional value, fair value and weighted average remaining maturity of $1.5 billion, $74 million and 1.25 years at March 31, 2019, respectively, compared to $1.5 billion, $84 million and 1.50 years at December 31, 2018, respectively. In addition, includes short-term underwriting purchase and sale commitments with total asset and liability notional values of $210 million at March 31, 2019, and $1 million at December 31, 2018.

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, 2019
Interest rate contracts
Receive fixed/pay floating swaps	$	60,918	$	1,140		6.53	$	50,227	$	220		3.76
Pay fixed/receive floating swaps		48,506		172		3.65		58,611		519		6.41
Other (a)		6,056		1		3.59		6,601		2		3.06
Options
Purchased		44,629		34		1.36		1,296		42		9.33
Written		1,396		43		8.92		41,960		33		1.25
Futures
Buy		1,085		1		1.28		–		–		–
Sell		–		–		–		3,634		3		.40
Foreign exchange rate contracts
Forwards, spots and swaps		26,279		597		1.08		26,515		585		1.25
Options
Purchased		1,763		30		.86		–		–		–
Written		–		–		–		1,763		30		.86
Credit contracts		30		–		5.23		756		1		5.23
Total	$	190,662	$	2,018			$	191,363	$	1,435
December 31, 2018
Interest rate contracts
Receive fixed/pay floating swaps	$	42,054	$	754		6.73	$	60,731	$	456		4.32
Pay fixed/receive floating swaps		60,970		288		3.90		40,499		420		6.57
Other (a)		5,777		2		3.77		6.496		2		2.72
Options
Purchased		41,711		51		1.54		1,940		30		1.98
Written		2,060		32		2.07		39,538		51		1.44
Futures
Buy		460		–		1.58		–		–		–
Sell		–		–		–		6,190		1		.59
Foreign exchange rate contracts
Forwards, spots and swaps		26,210		681		.91		25,571		663		.88
Options
Purchased		2,779		47		.75		–		–		–
Written		–		–		–		2,779		47		.75
Total	$	182,021	$	1,855			$	183,744	$	1,670

(a)

Primarily represents floating rate interest rate swaps that pay based on differentials between specified interest rate indexes.

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)	2019			2018			2019		2018
Asset and Liability Management Positions
Cash flow hedges
Interest rate contracts	$	(55	)	$	64		$	6	$	(2	)
Net investment hedges
Foreign exchange forward contracts		2			16			–		–
Non-derivative debt instruments		16			(34	)		–		–

Note:

The Company does not exclude components from effectiveness testing for cash flow and net investment hedges.

The table below shows the effect of fair value and cash flow hedge accounting included in interest expense on the Consolidated Statement of Income for the three months ended March 31:


(Dollars in Millions)	2019			2018
Total amount of interest expense presented in the Consolidated Statement of Income	$	1,092		$	623

Asset and Liability Management Positions
Fair value hedges
Interest rate contract derivatives		(21	)		(43	)
Hedged items		21			43
Cash Flow hedges
Interest rate contract derivatives		(8	)		3

Note:

The Company does not exclude components from effectiveness testing for fair value and cash flow hedges. The Company did not reclassify gains or losses into earnings as a result of the discontinuance of cash flow hedges during the three months ended March 31, 2019 and 2018.

The table below shows cumulative hedging adjustments and the carrying amount of assets (liabilities) designated in fair value hedges:


	Carrying Amount of the Hedged Assets (Liabilities)				Cumulative Hedging Adjustment (a)
(Dollars in Millions)	March 31, 2019		December 31, 2018		March 31, 2019		December 31, 2018
Line Item in the Consolidated Balance Sheet
Long-term Debt	$	1,318	$	–	$	3	$	(27	)

(a)

The cumulative hedging adjustment related to discontinued hedging relationships at March 31, 2019 and December 31, 2018 was $(17) million and $(27) million, respectively.

The table below shows the gains (losses) recognized in earnings for 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	2019			2018
Asset and Liability Management Positions
Other economic hedges
Interest rate contracts
Futures and forwards	Mortgage banking revenue	$	(17	)	$	58
Purchased and written options	Mortgage banking revenue		67			42
Swaps	Mortgage banking revenue		111			(110	)
Foreign exchange forward contracts	Other noninterest income		(6	)		(12	)
Equity contracts	Compensation expense		(1	)		(1	)
Other	Other noninterest income		1			–
Customer-Related Positions
Interest rate contracts
Swaps	Commercial products revenue		20			3
Purchased and written options	Commercial products revenue		4			–
Futures	Commercial products revenue		(1	)		8
Foreign exchange rate contracts
Forwards, spots and swaps	Commercial products revenue		18			23
Credit contracts	Commercial products revenue		(3	)		–

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 derivative positions that are centrally cleared through clearinghouses, 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 generally require the counterparty to deliver collateral (typically cash or U.S. Treasury and agency securities) equal to the Company’s net derivative receivable, subject to minimum transfer and credit rating requirements.

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 net liability thresholds and may be 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 additional collateral coverage up to and including full collateral coverage for derivatives in a net liability position. The aggregate fair value of all derivatives under collateral arrangements that were in a net liability position at March 31, 2019, was $353 million. At March 31, 2019, the Company had $271 million of cash posted as collateral against this net liability position.