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Financial Derivatives

9 Months Ended

Sep. 30, 2020

Derivative Instruments and Hedging Activities Disclosure [Abstract]

FINANCIAL DERIVATIVES

We use a variety of financial derivatives to both mitigate exposure to market (primarily interest rate) and credit risk inherent in our business activities, as well as, to facilitate customer risk management activities. We manage these risks as part of our overall asset and liability management process and through our credit policies and procedures. 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.

Derivative transactions are often measured in terms of notional amount, but this amount is generally not exchanged and it is not recorded on the balance sheet. The notional amount is the basis to which the underlying is applied to determine required payments under the derivative contract. The underlying is a referenced interest rate (commonly LIBOR), security price, credit spread or other index. Residential and commercial real estate loan commitments associated with loans to be sold also qualify as derivative instruments.

For more information regarding derivatives see Note 1 Accounting Policies and Note 13 Financial Derivatives in our 2019 Form 10-K.

The following table presents the notional amounts and gross fair values of all derivative assets and liabilities held by us.

Table 76: Total Gross Derivatives (a)



	September 30, 2020						December 31, 2019
In millions	Notional / Contract Amount		Asset Fair Value (b)		Liability Fair Value (c)		Notional / Contract Amount		Asset Fair Value (b)		Liability Fair Value (c)
Derivatives used for hedging
Interest rate contracts (d):
Fair value hedges	$	27,007					$	30,663
Cash flow hedges	20,229		$	9			23,642		$	6
Foreign exchange contracts:
Net investment hedges	1,160		33				1,102				$	6
Total derivatives designated for hedging	$	48,396	$	42			$	55,407	$	6	$	6
Derivatives not used for hedging
Derivatives used for mortgage banking activities (e):
Interest rate contracts:
Swaps	$	55,056					$	52,007	$	1
Futures (f)	2,809						3,487
Mortgage-backed commitments	13,460		$	139	$	82	7,738		60		$	44
Other	3,580		7		5		3,134		32		23
Total interest rate contracts	74,905		146		87		66,366		93		67
Derivatives used for customer-related activities:
Interest rate contracts:
Swaps	278,984		6,167		1,717		249,075		2,769		1,187
Futures (f)	1,252						703
Mortgage-backed commitments	4,187		12		11		3,721		2		6
Other	22,057		231		83		21,379		113		33
Total interest rate contracts	306,480		6,410		1,811		274,878		2,884		1,226
Commodity contracts:
Swaps	5,566		397		375		5,204		234		229
Other	3,042		100		100		4,203		72		72
Total commodity contracts	8,608		497		475		9,407		306		301
Foreign exchange contracts and other	25,044		211		208		27,120		204		162
Total derivatives for customer-related activities	340,132		7,118		2,494		311,405		3,394		1,689
Derivatives used for other risk management activities:
Foreign exchange contracts and other	10,107		37		129		10,201		9		257
Total derivatives not designated for hedging	$	425,144	$	7,301	$	2,710	$	387,972	$	3,496	$	2,013
Total gross derivatives	$	473,540	$	7,343	$	2,710	$	443,379	$	3,502	$	2,019
Less: Impact of legally enforceable master netting agreements			864		864				690		690
Less: Cash collateral received/paid			1,699		1,308				616		790
Total derivatives			$	4,780	$	538			$	2,196	$	539


(a)	Centrally cleared derivatives are settled in cash daily and result in no derivative asset or derivative liability being recognized on our Consolidated Balance Sheet.


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


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


(d)	Represents primarily swaps.


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


(f)	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 13. 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

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. 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 September 30, 2020, we expect to reclassify net derivative gains of $402 million pretax, or $310 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 September 30, 2020. As of September 30, 2020, 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 77: 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 September 30, 2020
Total amounts on the Consolidated Income Statement	$	2,116		$	490		$	118		$	457
Gains (losses) on fair value hedges recognized on:
Hedged items (c)				$	(13	)	$	141
Derivatives				$	14		$	(166	)
Amounts related to interest settlements on derivatives				$	(3	)	$	149
Gains (losses) on cash flow hedges (d):
Amount of derivative gains (losses) reclassified from AOCI	$	118		$	16
For the three months ended September 30, 2019
Total amounts on the Consolidated Income Statement	$	2,678		$	617		$	468		$	342
Gains (losses) on fair value hedges recognized on:
Hedged items (c)				$	76		$	(271	)
Derivatives				$	(73	)	$	235
Amounts related to interest settlements on derivatives				$	4		$	16
Gains (losses) on cash flow hedges (d):
Amount of derivative gains (losses) reclassified from AOCI	$	2		$	3
For the nine months ended September 30, 2020
Total amounts on the Consolidated Income Statement	$	6,853		$	1,599		$	619		$	1,071
Gains (losses) on fair value hedges recognized on:
Hedged items (c)				$	224		$	(1,300	)
Derivatives				$	(219	)	$	1,220
Amounts related to interest settlements on derivatives				$	(7	)	$	341
Gains (losses) on cash flow hedges (d):
Amount of derivative gains (losses) reclassified from AOCI	$	262		$	19					$	1
For the nine months ended September 30, 2019
Total amounts on the Consolidated Income Statement	$	7,952		$	1,866		$	1,433		$	1,017
Gains (losses) on fair value hedges recognized on:
Hedged items (c)				$	250		$	(1,068	)
Derivatives				$	(241	)	$	948
Amounts related to interest settlements on derivatives				$	14		$	36
Gains (losses) on cash flow hedges (d):
Amount of derivative gains (losses) reclassified from AOCI	$	(18	)	$	5					$	18


(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 related to discontinued 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 78: Hedged Items - Fair Value Hedges



	September 30, 2020				December 31, 2019
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)	$	3,237	$	59	$	5,666	$	59
Borrowed funds	$	28,326	$	1,850	$	28,616	$	548


(a)	Includes $(.2) billion and $(.3) billion of fair value hedge adjustments primarily related to discontinued borrowed funds hedge relationships for September 30, 2020 and December 31, 2019, 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 (losses) on net investment hedge derivatives recognized in OCI were $(42) million and $38 million for the three and nine months ended September 30, 2020, respectively, compared with $36 million and $50 million for the same periods in 2019.

Derivatives Not Designated As Hedging Instruments

For additional information on derivatives not designated as hedging instruments under GAAP, see Note 13 Financial Derivatives in our 2019 Form 10-K.

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

Table 79: Gains (Losses) on Derivatives Not Designated for Hedging



	Three months ended September 30					Nine months ended September 30
In millions	2020			2019		2020			2019
Derivatives used for mortgage banking activities:
Interest rate contracts (a)	$	20		$	184	$	799		$	530
Derivatives used for customer-related activities:
Interest rate contracts	59			45		99			84
Foreign exchange contracts and other (b)	43			11		83			64
Gains (losses) from customer-related activities (c)	102			56		182			148
Derivatives used for other risk management activities:
Foreign exchange contracts and other (c)	(106		)	103		(1		)	39
Total gains (losses) from derivatives not designated as hedging instruments	$	16		$	343	$	980		$	717


(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 2019 Form 10-K.

Table 80 shows the impact legally enforceable master netting agreements had on our derivative assets and derivative liabilities as of September 30, 2020 and December 31, 2019. 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 80 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 directly 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 80: Derivative Assets and Liabilities Offsetting



In millions			Amounts Offset on the Consolidated Balance Sheet							Securities Collateral Held/Pledged Under Master Netting Agreements
In millions	Gross Fair Value		Fair Value Offset Amount		Cash Collateral		Net Fair Value					Net Amounts
September 30, 2020
Derivative assets
Interest rate contracts:
Over-the-counter cleared	$	31					$	31				$	31
Over-the-counter	6,534		$	433	$	1,673	4,428			$	616	3,812
Commodity contracts	497		299		14		184					184
Foreign exchange and other contracts	281		132		12		137			1		136
Total derivative assets	$	7,343	$	864	$	1,699	$	4,780	(a)	$	617	$	4,163
Derivative liabilities
Interest rate contracts:
Over-the-counter cleared	$	23					$	23				$	23
Over-the-counter	1,875		$	589	$	1,159	127					127
Commodity contracts	475		206		59		210					210
Foreign exchange and other contracts	337		69		90		178					178
Total derivative liabilities	$	2,710	$	864	$	1,308	$	538	(b)			$	538
December 31, 2019
Derivative assets
Interest rate contracts:
Over-the-counter cleared	$	14					$	14				$	14
Over-the-counter	2,969		$	365	$	593	2,011			$	215	1,796
Commodity contracts	306		198		18		90					90
Foreign exchange and other contracts	213		127		5		81					81
Total derivative assets	$	3,502	$	690	$	616	$	2,196	(a)	$	215	$	1,981
Derivative liabilities
Interest rate contracts:
Over-the-counter cleared	$	14					$	14				$	14
Over-the-counter	1,279		$	475	$	692	112					112
Commodity contracts	301		152		17		132					132
Foreign exchange and other contracts	425		63		81		281					281
Total derivative liabilities	$	2,019	$	690	$	790	$	539	(b)			$	539


(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 September 30, 2020, we held cash, U.S. government securities and mortgage-backed securities totaling $2.6 billion under master netting agreements and other collateral agreements to collateralize net derivative assets due from counterparties, and we pledged cash totaling $2.1 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 September 30, 2020 was $2.9 billion for which we had posted collateral of $2.6 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 September 30, 2020 would be $.3 billion.