9. Derivative financial instruments

As part of managing interest rate risk, the Company enters into interest rate swap agreements to modify the repricing characteristics of certain portions of the Company’s portfolios of earning assets and interest-bearing liabilities. The Company designates interest rate swap agreements utilized in the management of interest rate risk as either fair value hedges or cash flow hedges. Interest rate swap agreements are generally entered into with counterparties that meet established credit standards and most contain master netting, collateral and/or settlement provisions protecting the at-risk party. Based on adherence to the Company’s credit standards and the presence of the netting, collateral or settlement provisions, the Company believes that the credit risk inherent in these contracts was not significant as of September 30, 2018.

The net effect of interest rate swap agreements was to decrease net interest income by $8 million and $12 million for the three-month and nine-month periods ended September 30, 2018, respectively, compared with increases of $7 million and $18 million for the three-month and nine-month periods ended September 30, 2017, respectively.

9. Derivative financial instruments, continued

Information about interest rate swap agreements entered into for interest rate risk management purposes summarized by type of financial instrument the swap agreements were intended to hedge follows:

	Notional		Average		Weighted- Average Rate						Estimated Fair
	Amount		Maturity		Fixed			Variable			Value Gain (a)
	(In thousands)		(In years)								(In thousands)
September 30, 2018
Fair value hedges:
Fixed rate long-term borrowings (b)	$	5,200,000		2.7		2.45	%		2.76	%	$	1,458
Cash flow hedges:
Interest payments on variable rate commercial real estate loans (b)(c)		10,550,000		1.4		1.52	%		2.11	%		988
Total	$	15,750,000		1.8							$	2,446
December 31, 2017
Fair value hedges:
Fixed rate long-term borrowings (b)	$	4,550,000		2.9		2.27	%		2.09	%	$	573
Cash flow hedges:
Interest payments on variable rate commercial real estate loans (b)(d)		4,850,000		2.0		1.52	%		1.36	%		66
Total	$	9,400,000		2.5							$	639

(a)

Certain clearinghouse exchanges consider payments by counterparties for variation margin on derivative instruments to be settlements of those positions. The impact of such treatment at September 30, 2018 and December 31, 2017 was a reduction of the estimated fair value losses on interest rate swap agreements designated as fair value hedges of $110.3 million and $41.1 million, respectively, and on interest rate swap agreements designated as cash flow hedges of $36.1 million and $16.3 million, respectively.

(b)	Under the terms of these agreements, the Company receives settlement amounts at a fixed rate and pays at a variable rate.

(c)	Includes notional amount and terms of $7.7 billion of forward-starting interest rate swap agreements that will become effective in 2019 and 2020 upon maturity of a like amount of other swap agreements.

(d)	Includes notional amount and terms of $2.0 billion of forward-starting interest rate swap agreements that will become effective in 2019 upon maturity of a like amount of other swap agreements.

The Company utilizes commitments to sell residential and commercial real estate loans to hedge the exposure to changes in the fair value of real estate loans held for sale. Such commitments have generally been designated as fair value hedges. The Company also utilizes commitments to sell real estate loans to offset the exposure to changes in fair value of certain commitments to originate real estate loans for sale.

Derivative financial instruments used for trading account purposes included interest rate contracts, foreign exchange and other option contracts, foreign exchange forward and spot contracts, and financial futures. Interest rate contracts entered into for trading account purposes had notional values of $40.3 billion and $29.9 billion at September 30, 2018 and December 31, 2017, respectively. The notional amounts of foreign currency and other option and futures contracts entered into for trading account purposes aggregated $869 million and $530 million at September 30, 2018 and December 31, 2017, respectively.

9. Derivative financial instruments, continued

Information about the fair values of derivative instruments in the Company’s consolidated balance sheet and consolidated statement of income follows:

	Asset Derivatives				Liability Derivatives
	Fair Value				Fair Value
	September 30,		December 31,		September 30,		December 31,
	2018		2017		2018		2017
	(In thousands)
Derivatives designated and qualifying as hedging instruments
Interest rate swap agreements (a)	$	2,446	$	639	$	—	$	—
Commitments to sell real estate loans (a)		5,832		734		546		283
		8,278		1,373		546		283
Derivatives not designated and qualifying as hedging instruments
Mortgage-related commitments to originate real estate loans for sale (a)		5,625		8,797		1,439		494
Commitments to sell real estate loans (a)		5,795		2,526		250		1,019
Trading:
Interest rate contracts (b)		62,472		74,164		299,791		132,104
Foreign exchange and other option and futures contracts (b)		9,270		5,657		8,942		5,286
		83,162		91,144		310,422		138,903
Total derivatives	$	91,440	$	92,517	$	310,968	$	139,186

(a)	Asset derivatives are reported in other assets and liability derivatives are reported in other liabilities.

(b)

Asset derivatives are reported in trading account assets and liability derivatives are reported in other liabilities. The impact of variation margin payments at September 30, 2018 and December 31, 2017 was a reduction of the estimated fair value of interest rate contracts in the trading account in an asset position of $302.4 million and $136.2 million, respectively, and in a liability position of $2.7 million and $12.2 million, respectively.

	Amount of Gain (Loss) Recognized
	Three Months Ended September 30, 2018					Three Months Ended September 30, 2017
	Derivative			Hedged Item		Derivative			Hedged Item
	(In thousands)
Derivatives in fair value hedging relationships
Interest rate swap agreements:
Fixed rate long-term borrowings (a)	$	(12,568	)		12,607	$	(13,509	)		14,026
Derivatives not designated as hedging instruments
Trading:
Interest rate contracts (b)	$	(1,348	)			$	(418	)
Foreign exchange and other option and futures contracts (b)		782					1,362
Total	$	(566	)			$	944

9. Derivative financial instruments, continued

	Amount of Gain (Loss) Recognized
	Nine Months Ended September 30, 2018					Nine Months Ended September 30, 2017
	Derivative			Hedged Item		Derivative			Hedged Item
	(In thousands)
Derivatives in fair value hedging relationships
Interest rate swap agreements:
Fixed rate long-term borrowings (a)	$	(68,315	)		68,861	$	(23,423	)		23,049
Derivatives not designated as hedging instruments
Trading:
Interest rate contracts (b)	$	(5,639	)			$	2,363
Foreign exchange and other option and futures contracts (b)		5,778					4,766
Total	$	139				$	7,129

(a)

Effective January 1, 2018, reported as an adjustment to interest expense. Prior to 2018, reported as other revenues from operations.

(b)

Reported as trading account and foreign exchange gains.

	Carrying Amount of the Hedged Item				Cumulative Amount of Fair Value Hedging Adjustment Increasing (Decreasing) the Carrying Amount of the Hedged Item
	September 30,		December 31,		September 30,			December 31,
	2018		2017		2018			2017
	(In thousands)
Location in the Consolidated Balance Sheet of the Hedged Items in Fair Value Hedges

Long-term debt	$	5,085,610	$	4,504,029	$	(108,994	)	$	(40,133	)

The amount of gain (loss) resulting from hedge ineffectiveness recognized in the consolidated statement of income associated with derivatives designated as cash flow hedges was not material during the three months and nine months ended September 30, 2018 and 2017.

The Company also has commitments to sell and commitments to originate residential and commercial real estate loans that are considered derivatives. The Company designates certain of the commitments to sell real estate loans as fair value hedges of real estate loans held for sale. The Company also utilizes commitments to sell real estate loans to offset the exposure to changes in the fair value of certain commitments to originate real estate loans for sale. As a result of these activities, net unrealized pre-tax gains related to hedged loans held for sale, commitments to originate loans for sale and commitments to sell loans were approximately $18 million and $16 million at September 30, 2018 and December 31, 2017, respectively. Changes in unrealized gains and losses are included in mortgage banking revenues and, in general, are realized in subsequent periods as the related loans are sold and commitments satisfied.

The Company does not offset derivative asset and liability positions in its consolidated financial statements. The Company’s exposure to credit risk by entering into derivative contracts is mitigated through master netting agreements and collateral posting or settlement requirements. Master netting agreements covering interest rate and foreign exchange contracts with the same party include a right to set-off that becomes enforceable in the event of default, early termination or under other specific conditions.

9. Derivative financial instruments, continued

The aggregate fair value of derivative financial instruments in a liability position and the net liability positions with counterparties, which are subject to enforceable master netting arrangements, was $3 million and $13 million at September 30, 2018 and December 31, 2017, respectively. The Company was required to post collateral relating to those positions of $3 million and $12 million at September 30, 2018 and December 31, 2017, respectively. Certain of the Company’s derivative financial instruments contain provisions that require the Company to maintain specific credit ratings from credit rating agencies to avoid higher collateral posting requirements. If the Company’s debt rating were to fall below specified ratings, the counterparties of the derivative financial instruments could demand immediate incremental collateralization on those instruments in a net liability position. The aggregate fair value of all derivative financial instruments with such credit risk-related contingent features in a net liability position on September 30, 2018 was not significant. If the credit risk-related contingent features had been triggered on September 30, 2018, the Company would not have been required to post any additional collateral to counterparties.

The aggregate fair value of derivative financial instruments in an asset position and the net asset positions with counterparties, which are subject to enforceable master netting arrangements, was $49 million and $13 million at September 30, 2018 and December 31, 2017, respectively. Counterparties posted collateral relating to those positions of $46 million and $12 million at September 30, 2018 and December 31, 2017, respectively. Trading account interest rate swap agreements entered into with customers are subject to the Company’s credit risk standards and often contain collateral provisions.

In addition to the derivative contracts noted above, the Company clears certain derivative transactions through a clearinghouse, rather than directly with counterparties. Those transactions cleared through a clearinghouse require initial margin collateral and variation margin payments depending on the contracts being in a net asset or liability position. The amount of initial margin collateral posted by the Company was $48 million and $52 million at September 30, 2018 and December 31, 2017, respectively. The fair value asset and liability amounts of derivative contracts at September 30, 2018 have been reduced by variation margin payments treated as settlements of $302 million and $149 million, respectively. Variation margin on derivative contracts not treated as settlements continues to represent collateral posted or received by the Company.