Financial Derivatives

6 Months Ended

Jun. 30, 2019

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Financial Derivatives

FINANCIAL DERIVATIVES

We use a variety of financial derivatives as part of our overall asset and liability risk management process to help manage exposure to market (primarily interest rate) and credit risk inherent in our business activities. We also enter into derivatives with customers to facilitate their risk management activities. Derivatives represent contracts between parties that usually require little or no initial net investment and result in one party delivering cash or another type of asset to the other party based on a notional amount and an underlying as specified in the contract.

For more information regarding derivatives see Note 1 Accounting Policies and Note 13 Financial Derivatives in our 2018 Form 10-K.

Table 60: Total Gross Derivatives

	June 30, 2019						December 31, 2018
In millions	Notional / Contract Amount		Asset Fair Value (a)		Liability Fair Value (b)		Notional / Contract Amount		Asset Fair Value (a)		Liability Fair Value (b)
Derivatives used for hedging under GAAP
Interest rate contracts (c):
Fair value hedges	$	31,914					$	30,919	$	7
Cash flow hedges	24,859		$	6	$	1	17,337		1
Foreign exchange contracts:
Net investment hedges	1,052		3				1,012				$	10
Total derivatives designated for hedging under GAAP	$	57,825	$	9	$	1	$	49,268	$	8	$	10
Derivatives not used for hedging under GAAP
Derivatives used for mortgage banking activities (d):
Interest rate contracts:
Swaps	$	48,118	$	12	$	3	$	43,084			$	3
Futures (e)	3,763						10,658
Mortgage-backed commitments	8,478		92		88		5,771		$	47	39
Other	8,449		45		25		6,509		10		3
Subtotal	68,808		149		116		66,022		57		45
Derivatives used for customer-related activities:
Interest rate contracts:
Swaps	233,046		2,812		1,216		218,496		1,352		1,432
Futures (e)	587						914
Mortgage-backed commitments	3,345		7		9		2,246		7		10
Other	22,208		138		41		20,109		77		33
Subtotal	259,186		2,957		1,266		241,765		1,436		1,475
Commodity contracts:
Swaps	4,323		204		200		4,813		244		238
Other	1,547		17		17		1,418		67		67
Subtotal	5,870		221		217		6,231		311		305
Foreign exchange contracts and other	25,494		179		169		23,253		194		192
Subtotal	290,550		3,357		1,652		271,249		1,941		1,972
Derivatives used for other risk management activities:
Foreign exchange contracts and other	9,749		31		233		7,908		75		263
Total derivatives not designated for hedging under GAAP	$	369,107	$	3,537	$	2,001	$	345,179	$	2,073	$	2,280
Total gross derivatives	$	426,932	$	3,546	$	2,002	$	394,447	$	2,081	$	2,290
Less: Impact of legally enforceable master netting agreements			642		642				688		688
Less: Cash collateral received/paid			673		756				341		539
Total derivatives			$	2,231	$	604			$	1,052	$	1,063

(a) Included in Other assets on our Consolidated Balance Sheet.

(b) Included in Other liabilities on our Consolidated Balance Sheet.

(c) Represents primarily swaps.

(d) Includes both residential and commercial mortgage banking activities.

(e) Futures contracts settle in cash daily and, therefore, no derivative asset or derivative liability is recognized on our Consolidated Balance Sheet.

All derivatives are carried on our Consolidated Balance Sheet at fair value. Derivative balances are presented on the Consolidated Balance Sheet on a net basis taking into consideration the effects of legally enforceable master netting agreements and, when appropriate, any related cash collateral exchanged with counterparties. Further discussion regarding the offsetting rights associated with these legally enforceable master netting agreements is included in the Offsetting, Counterparty Credit Risk and Contingent Features section of this Note 9. Any nonperformance risk, including credit risk, is included in the determination of the estimated net fair value of the derivatives.

Derivatives Designated As Hedging Instruments under GAAP

Certain derivatives used to manage interest rate and foreign exchange risk as part of our asset and liability risk management activities are designated as accounting hedges under GAAP. Derivatives hedging the risks associated with changes in the fair value of assets or liabilities are considered fair value hedges, derivatives hedging the variability of expected future cash flows are considered cash flow hedges, and derivatives hedging a net investment in a foreign subsidiary are considered net investment hedges. Designating derivatives as accounting hedges allows for gains and losses on those derivatives to be recognized in the same period and in the same income statement line item as the earnings impact of the hedged items.

Fair Value Hedges

We enter into receive-fixed, pay-variable interest rate swaps to hedge changes in the fair value of outstanding fixed-rate debt caused by fluctuations in market interest rates. We also enter into pay-fixed, receive-variable interest rate swaps and zero-coupon swaps to hedge changes in the fair value of fixed rate and zero-coupon investment securities caused by fluctuations in market interest rates. Gains and losses on the interest rate swaps designated in these hedge relationships, along with the offsetting gains and losses on the hedged items attributable to the hedged risk, are recognized in current earnings within the same income statement line item.

Cash Flow Hedges

We enter into receive-fixed, pay-variable interest rate swaps to modify the interest rate characteristics of designated commercial loans from variable to fixed in order to reduce the impact of changes in future cash flows due to market interest rate changes. We also periodically enter into forward purchase and sale contracts to hedge the variability of the consideration that will be paid or received related to the purchase or sale of investment securities. The forecasted purchase or sale is consummated upon gross settlement of the forward contract itself. For these cash flow hedges, gains and losses on the interest rate swaps and forward contracts are recorded in AOCI and are then reclassified into earnings in the same period the hedged cash flows affect earnings and within the same income statement line as the hedged cash flows.

In the 12 months that follow June 30, 2019, we expect to reclassify net derivative gains of $115 million pretax, or $91 million after-tax, from AOCI to interest income for both cash flow hedge strategies. This reclassified amount could differ from amounts actually recognized due to changes in interest rates, hedge de-designations and the addition of other hedges subsequent to June 30, 2019. As of June 30, 2019, the maximum length of time over which forecasted transactions are hedged is ten years.

Further detail regarding gains (losses) related to our fair value and cash flow hedge derivatives is presented in the following table.

Table 61: Gains (Losses) Recognized on Fair Value and Cash Flow Hedges in the Consolidated Income Statement (a) (b)

	Location and Amount of Gains (Losses) Recognized in Income
	Interest Income						Interest Expense			Noninterest Income
In millions	Loans			Investment Securities			Borrowed Funds			Other
For the three months ended June 30, 2019
Total amounts on the Consolidated Income Statement	$	2,672		$	629		$	484		$	367
Gains (losses) on fair value hedges recognized on:
Hedged items (c)				$	116		$	(523	)
Derivatives				$	(113	)	$	485
Amounts related to interest settlements on derivatives				$	5		$	9
Gains (losses) on cash flow hedges (d):
Amount of derivative gains (losses) reclassified from AOCI	$	(12	)	$	1					$	3
For the three months ended June 30, 2018
Total amounts on the Consolidated Income Statement	$	2,345		$	557		$	408		$	334
Gains (losses) on fair value hedges recognized on:
Hedged items (c)				$	(24	)	$	100
Derivatives				$	27		$	(125	)
Amounts related to interest settlements on derivatives				$	1		$	7
Gains (losses) on cash flow hedges (d):
Amount of derivative gains (losses) reclassified from AOCI	$	11		$	3					$	5
For the six months ended June 30, 2019
Total amounts on the Consolidated Income Statement	$	5,274		$	1,249		$	965		$	675
Gains (losses) on fair value hedges recognized on:
Hedged items (c)				$	174		$	(797	)
Derivatives				$	(168	)	$	713
Amounts related to interest settlements on derivatives				$	10		$	20
Gains (losses) on cash flow hedges (d):
Amount of derivative gains (losses) reclassified from AOCI	$	(20	)	$	2					$	18
For the six months ended June 30, 2018
Total amounts on the Consolidated Income Statement	$	4,573		$	1,069		$	752		$	579
Gains (losses) on fair value hedges recognized on:
Hedged items				$	(114	)	$	470
Derivatives				$	119		$	(495	)
Amounts related to interest settlements on derivatives				$	(2	)	$	33
Gains (losses) on cash flow hedges (d):
Amount of derivative gains (losses) reclassified from AOCI	$	37		$	7					$	7

(a) For all periods presented, there were no components of derivative gains or losses excluded from the assessment of hedge effectiveness for any of the fair value or cash flow hedge strategies.

(b) All cash flow and fair value hedge derivatives were interest rate contracts for the periods presented.

(c) Includes an insignificant amount of fair value hedge adjustments primarily related to discontinued borrowed funds hedge relationships.

(d)

For all periods presented, there were no gains or losses from cash flow hedge derivatives reclassified to income because it became probable that the original forecasted transaction would not occur.

Detail regarding the impact of fair value hedge accounting on the carrying value of the hedged items is presented in the following table.

Table 62: Hedged Items - Fair Value Hedges

 

	June 30, 2019				December 31, 2018
In millions	Carrying Value of the Hedged Items		Cumulative Fair Value Hedge Adjustment included in the Carrying Value of Hedged Items (a)		Carrying Value of the Hedged Items		Cumulative Fair Value Hedge Adjustment included in the Carrying Value of Hedged Items (a)
Investment securities - available for sale (b)	$	6,836	$	63	$	6,216	$	(103	)
Borrowed funds	$	27,960	$	537	$	27,121	$	(260	)

(a) Includes $(.4) billion and $(.5) billion of fair value hedge adjustments primarily related to discontinued borrowed funds hedge relationships for June 30, 2019 and December 31, 2018, respectively.

(b) Carrying value shown represents amortized cost.

Net Investment Hedges

We enter into foreign currency forward contracts to hedge non-U.S. dollar net investments in foreign subsidiaries against adverse changes in foreign exchange rates. We assess whether the hedging relationship is highly effective in achieving offsetting changes in the value of the hedge and hedged item by qualitatively verifying that the critical terms of the hedge and hedged item match at the inception of the hedging relationship and on an ongoing basis. Net investment hedge derivatives are classified as foreign exchange contracts. There were no components of derivative gains or losses excluded from the assessment of the hedge effectiveness for all periods presented. Gains on net investment hedge derivatives recognized in OCI were $32 million and $14 million for the three and six months ended June 30, 2019, respectively, compared with $69 million and $30 million for the three and six months ended June 30, 2018, respectively.

Derivatives Not Designated As Hedging Instruments under GAAP

We also enter into derivatives that are not designated as accounting hedges under GAAP. For additional information on derivatives not designated as hedging instruments under GAAP, see Note 13 Financial Derivatives in our 2018 Form 10-K.

Further detail regarding the gains (losses) on derivatives not designated in hedging relationships is presented in the following table.

Table 63: Gains (Losses) on Derivatives Not Designated for Hedging under GAAP

	Three months ended June 30						Six months ended June 30
In millions	2019			2018			2019			2018
Derivatives used for mortgage banking activities:
Interest rate contracts (a)	$	218		$	(18	)	$	346		$	(132	)
Derivatives used for customer-related activities:
Interest rate contracts	41			25			39			81
Foreign exchange contracts and other (b)	30			13			53			57
Gains (losses) from customer-related activities (c)	71			38			92			138
Derivatives used for other risk management activities:
Foreign exchange contracts and other (c)	(10		)	147			(64		)	130
Total gains (losses) from derivatives not designated as hedging instruments	$	279		$	167		$	374		$	136

(a) Included in Residential mortgage, Corporate services and Other noninterest income on our Consolidated Income Statement.

(b) Includes an insignificant amount of gains (losses) on commodity contracts for all periods presented.

(c) Included in Other noninterest income on our Consolidated Income Statement.

Offsetting, Counterparty Credit Risk and Contingent Features

We generally utilize a net presentation on the Consolidated Balance Sheet for those derivative financial instruments entered into with counterparties under legally enforceable master netting agreements. The master netting agreements reduce credit risk by permitting the closeout netting of all outstanding derivative instruments under the master netting agreement with the same counterparty upon the occurrence of an event of default. The master netting agreement also may require the exchange of cash or marketable securities to collateralize either party’s net position. For additional information on derivative offsetting, counterparty credit risk and contingent features, see Note 13 Financial Derivatives in our 2018 Form 10-K.

Table 64 shows the impact legally enforceable master netting agreements had on our derivative assets and derivative liabilities as of June 30, 2019 and December 31, 2018. The table includes cash collateral held or pledged under legally enforceable master netting agreements. The table also includes the fair value of any securities collateral held or pledged under legally enforceable master netting agreements. Cash and securities collateral amounts are included in the table only to the extent of the related net derivative fair values.

Table 64 includes over-the-counter (OTC) derivatives and OTC derivatives cleared through a central clearing house. OTC derivatives represent contracts executed bilaterally with counterparties that are not settled through an organized exchange or cleared through a central clearing house. The majority of OTC derivatives are governed by the International Swaps and Derivatives Association (ISDA) documentation or other legally enforceable master netting agreements. OTC cleared derivatives represent contracts executed bilaterally with counterparties in the OTC market that are novated to a central clearing house who then becomes our counterparty. OTC cleared derivative instruments are typically settled in cash each day based on the prior day value.

Table 64: Derivative Assets and Liabilities Offsetting

In millions			Amounts Offset on the Consolidated Balance Sheet							Securities Collateral Held/Pledged Under Master Netting Agreements
	Gross Fair Value		Fair Value Offset Amount		Cash Collateral		Net Fair Value					Net Amounts
June 30, 2019
Derivative assets
Interest rate contracts:
Over-the-counter cleared	$	23					$	23				$	23
Over-the-counter	3,089		$	383	$	638	2,068			$	176	1,892
Commodity contracts	221		134		32		55					55
Foreign exchange and other contracts	213		125		3		85					85
Total derivative assets	$	3,546	$	642	$	673	$	2,231	(a)	$	176	$	2,055
Derivative liabilities
Interest rate contracts:
Over-the-counter cleared	$	28					$	28				$	28
Over-the-counter	1,355		$	514	$	695	146					146
Commodity contracts	217		73		1		143					143
Foreign exchange and other contracts	402		55		60		287					287
Total derivative liabilities	$	2,002	$	642	$	756	$	604	(b)			$	604
December 31, 2018
Derivative assets
Interest rate contracts:
Over-the-counter cleared	$	29					$	29				$	29
Over-the-counter	1,472		$	450	$	117	905			$	25	880
Commodity contracts	311		76		210		25					25
Foreign exchange and other contracts	269		162		14		93					93
Total derivative assets	$	2,081	$	688	$	341	$	1,052	(a)	$	25	$	1,027
Derivative liabilities
Interest rate contracts:
Over-the-counter cleared	$	24					$	24				$	24
Over-the-counter	1,496		$	557	$	489	450			$	11	439
Commodity contracts	305		56		17		232					232
Foreign exchange and other contracts	465		75		33		357					357
Total derivative liabilities	$	2,290	$	688	$	539	$	1,063	(b)	$	11	$	1,052

(a) Represents the net amount of derivative assets included in Other assets on our Consolidated Balance Sheet.

(b) Represents the net amount of derivative liabilities included in Other liabilities on our Consolidated Balance Sheet.

In addition to using master netting agreements and other collateral agreements to reduce credit risk associated with derivative instruments, we also seek to manage credit risk by evaluating credit ratings of counterparties and by using internal credit analysis, limits and monitoring procedures.

At June 30, 2019, we held cash, U.S. government securities and mortgage-backed securities totaling $1.0 billion under master netting agreements and other collateral agreements to collateralize net derivative assets due from counterparties, and we pledged cash totaling $1.4 billion under these agreements to collateralize net derivative liabilities owed to counterparties and to meet initial margin requirements. These totals may differ from the amounts presented in the preceding offsetting table because these totals may include collateral exchanged under an agreement that does not qualify as a master netting agreement or because the total amount of collateral held or pledged exceeds the net derivative fair values with the counterparty as of the balance sheet date due to timing or other factors, such as initial margin. To the extent not netted against the derivative fair values under a master netting agreement, the receivable for cash pledged is included in Other assets and the obligation for cash held is included in Other liabilities on our Consolidated Balance Sheet. Securities held from counterparties are not recognized on our balance sheet. Likewise securities we have pledged to counterparties remain on our balance sheet.

Certain derivative agreements contain various credit-risk related contingent provisions, such as those that require our debt to maintain a specified credit rating from one or more of the major credit rating agencies. If our debt ratings were to fall below such specified ratings, the counterparties to the derivative instruments could request immediate payment or demand immediate and ongoing full collateralization on derivative instruments in net liability positions. The aggregate fair value of all derivative instruments with credit-risk-related contingent features that were in a net liability position on June 30, 2019 was $1.5 billion for which we had posted collateral of $1.1 billion in the normal course of business. The maximum additional amount of collateral we would have been required to post if the credit-risk-related contingent features underlying these agreements had been triggered on June 30, 2019 would be $.4 billion.