Derivatives and Hedging Activities

3 Months Ended

Mar. 31, 2014

Derivative Instruments And Hedging Activities Disclosure [Abstract]

Derivatives and Hedging Activities

8. Derivatives and Hedging Activities

The Company uses derivative financial instruments (derivatives) to manage exposures to various market risks. Derivatives derive their value from an underlying variable or multiple variables, including interest rate, foreign exchange, and equity index or price. These instruments enable end users to increase, reduce or alter exposure to various market risks and, for that reason, are an integral component of the Company's market risk management. The Company does not engage in derivatives for trading purposes.For information on the Company's derivative instruments and the related accounting policies, refer to Note 12 on pages 87 – 90 of the Annual Report.

In relation to the Company's credit risk, under the terms of the derivative agreements it has with its various counterparties, the Company is not required to either immediately settle any outstanding liability balances or post collateral upon the occurrence of a specified credit risk-related event. Based on the assessment of credit risk of the Company's derivative counterparties as of March 31, 2014 and December 31, 2013, the Company does not have derivative positions that warrant credit valuation adjustments.

The Company's derivatives are carried at fair value on the Consolidated Balance Sheets. Refer to Note 3 on pages 68 – 71 of the Annual Report for a description of the Company's methodology for determining the fair value of derivatives.

The following table summarizes the total fair value, excluding interest accruals, of derivative assets and liabilities as of March 31, 2014 and December 31, 2013:

		Other Assets				Other Liabilities
		Fair Value				Fair Value
(Millions)		2014		2013		2014		2013
Derivatives designated as hedging instruments:
Interest rate contracts
	Fair value hedges	$	412	$	455	$	11	$	2
Total return contract
	Fair value hedge		―		8		2		―
Foreign exchange contracts
	Net investment hedges		62		174		180		116
Total derivatives designated as hedging instruments			474		637		193		118
Derivatives not designated as hedging instruments:
	Foreign exchange contracts, including certain embedded derivatives(a)		126		64		54		95
Total derivatives not designated as hedging instruments			126		64		54		95
Total derivatives, gross			600		701		247		213
Cash collateral netting(b)			(295)		(336)		(12)		―
Derivative asset and derivative liability netting(c)			(54)		(36)		(54)		(36)
Total derivatives, net(d)		$	251	$	329	$	181	$	177

• Includes foreign currency derivatives embedded in certain operating agreements.
• Represents the offsetting of derivative instruments and the right to reclaim cash collateral (a receivable) or the obligation to return cash collateral (a payable) arising from derivative instrument(s) executed with the same counterparty under an enforceable master netting arrangement.Additionally, the Company posted $50 million and $26 million as of March 31,2014 and December 31, 2013, respectively, as initial margin on its centrally cleared interest rate swaps; such amounts are not netted against the derivative balances.
• Represents the amount of netting of derivative assets and derivative liabilities executed with the same counterparty under an enforceable master netting arrangement.
• The Company has no individually significant derivative counterparties and therefore, no significant risk exposure to any single derivative counterparty. The total net derivative assets and derivative liabilities are presented within other assets and other liabilities on the Company's Consolidated Balance Sheets.

A majority of the Company's derivative assets and liabilities as of March 31, 2014and December 31, 2013are subject to master netting agreements with its derivative counterparties. In addition, the Company has no derivative amounts subject to enforceable master netting arrangements that are not offset on the Company's Consolidated Balance Sheets.

Derivative Financial Instruments that Qualify for Hedge Accounting

Refer to Note 12 on pages 89 – 90 of the Annual Report for information on derivatives that qualify for hedge accounting.

Fair Value Hedges

Interest Rate Contracts

The Company is exposed to interest rate risk associated with its fixed-rate long-term debt. The Company uses interest rate swaps to economically convert certain fixed-rate long-term debt obligations to floating-rate obligations at the time of issuance. As of March 31, 2014and December 31,2013, the Company hedged $15.9 billion and $14.7 billion, respectively, of its fixed-rate debt to floating-rate debt using interest rate swaps.

Total Return Contract

The Company hedges its exposure to changes in the fair value of its equity investment in ICBC in local currency. The Company uses a total return contract (TRC)to transfer this exposure to its derivative counterparty. As of March 31, 2014and December 31, 2013, the fair value of the equity investment in ICBC was $66million (107.5 million shares) and $122million (180.7 million shares), respectively.To the extent the hedge is effective, the gain or loss on the TRC offsets the loss or gain on the investment in ICBC. Any difference between the changes in the fair value of the derivative and the hedged item results in hedge ineffectiveness and is recognized in other expenses in the Consolidated Statements of Income.

The following table summarizes the impact on the Consolidated Statements of Income associated with the Company's hedges ofits fixed-rate long-term debtand its investment in ICBC for the three months endedMarch 31:

For the Three Months Ended March 31: (Millions)
	Gains (losses) recognized in income
	Derivative contract					Hedged item					Net hedge
		Amount					Amount				ineffectiveness
Derivative relationship	Income Statement Line Item	2014		2013		Income Statement Line Item	2014		2013		2014		2013
Interest rate contracts	Other expenses	$	(51)	$	(104)	Other expenses	$	51	$	110	$	―	$	6
Total return contract	Other non-interest revenues		13		4	Other non-interest revenues		(13)		(4)		―		―

The Company also recognized a net reduction in interest expense on long-term debt of $69million and $112million for the three months endedMarch 31, 2014 and 2013, respectively, primarily related to the net settlements (interest accruals) on the Company's interest rate derivatives designated as fair value hedges.

Net Investment Hedges

The effective portion of the gain or (loss) on net investment hedges, net of taxes, recorded in AOCI as part of the cumulative translation adjustment was $(17) million and $(56)million for the three months ended March 31, 2014 and 2013, respectively.Any ineffective portion of the gain or (loss) on net investment hedges is recognized in other expenses during the period of change. No ineffectiveness associated with net investment hedges was reclassified from AOCI into income during the three months endedMarch 31, 2014 and 2013. During the three months ended March 31, 2014 and 2013, the Company reclassified $17 million and nil, respectively, from AOCI to earnings as a component of other expenses.

Derivatives Not Designated as Hedges

For information on derivatives not designated as hedges, refer to Note 12 on page 90 of the Annual Report.

The following table summarizes the impact on pretax earnings of derivatives not designated as hedges, as reported on the Consolidated Statements of Income for thethree months ended March 31:

	Pretax gains
		Amount
Description (Millions)	Income Statement Line Item	2014		2013
Foreign exchange contracts (a)	Other non-interest revenues	$	―	$	1
	Other expenses		134		171
Total		$	134	$	172

• Foreign exchange contracts include embedded foreign currency derivatives. Gains on these embedded derivatives are included in other expenses.