Financial Derivatives

9 Months Ended

Sep. 30, 2023

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Financial Derivatives

FINANCIAL DERIVATIVES

We use a variety of financial derivatives to both mitigate exposure to market (primarily interest rate) and credit risks 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, 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 16 Financial Derivatives in our 2022 Form 10-K.

able 73 presents the notional and gross fair value amounts of all derivative assets and liabilities held by us.

During the second quarter, in anticipation of LIBOR’s cessation on June 30, 2023, LIBOR-indexed interest-rate swap contracts with central clearing counterparties were subject to a conversion process whereby an individual LIBOR swap contract was exchanged for a SOFR replacement swap contract, along with one or more overlay swap contracts replicating the final LIBOR cash flows on the original swap contract. The swap contracts exchanged were substantially economically equivalent. Conversion-related valuation differences were settled in cash on the conversion dates and were not material. The SOFR replacement and overlay swaps are considered separate contracts, and the overlay swaps will result in a gross-up of the notional amounts presented until those swaps mature upon settlement of the final LIBOR payment. The majority of overlay swaps matured during the third quarter of 2023.

Table 73: Total Gross Derivatives (a)

	September 30, 2023						December 31, 2022
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:
Fair value hedges (d)	$	29,523					$	24,231
Cash flow hedges (d)	35,241				$	2	40,310				$	1
Cash flow hedges - other (e)	25,000		$	222	281
Foreign exchange contracts:
Net investment hedges	1,168		22				1,120		$	24
Total derivatives designated for hedging	$	90,932	$	244	$	283	$	65,661	$	24	$	1
Derivatives not used for hedging
Derivatives used for mortgage banking activities (f):
Interest rate contracts:
Swaps (g)	$	45,056			$	4	$	47,908	$	7	$	1
Futures (h)	8,860						5,537
Mortgage-backed commitments	4,750		$	77	73		4,516		85		89
Other	16,588		51		21		18,017		90		14
Total interest rate contracts	75,254		128		98		75,978		182		104
Derivatives used for customer-related activities:
Interest rate contracts:
Swaps (g)	420,301		2,170		6,579		354,150		1,597		5,397
Futures (h)	41						32
Mortgage-backed commitments	3,675		27		11		2,799		10		6
Other	28,734		292		285		29,071		334		321
Total interest rate contracts	452,751		2,489		6,875		386,052		1,941		5,724
Commodity contracts:
Swaps	6,558		477		504		5,792		1,003		1,067
Other	2,894		71		73		4,488		205		202
Total commodity contracts	9,452		548		577		10,280		1,208		1,269
Foreign exchange contracts and other	31,358		312		277		30,512		366		293
Total derivatives for customer-related activities	493,561		3,349		7,729		426,844		3,515		7,286
Derivatives used for other risk management activities:
Foreign exchange contracts and other	17,427		117		110		12,785		47		227
Total derivatives not designated for hedging	$	586,242	$	3,594	$	7,937	$	515,607	$	3,744	$	7,617
Total gross derivatives	$	677,174	$	3,838	$	8,220	$	581,268	$	3,768	$	7,618
Less: Impact of legally enforceable master netting agreements			1,396		1,396				1,523		1,523
Less: Cash collateral received/paid			1,593		1,599				714		1,571
Total derivatives			$	849	$	5,225			$	1,531	$	4,524

(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)Represents caps and floors.

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

(g)At September 30, 2023, the gross-up of the notional amounts due to overlay swap contracts used for mortgage banking and customer-related activities were $0.4 billion and $22.6 billion, respectively

(h)Futures contracts are settled in cash daily and result in no derivative asset or derivative liability being 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 and Counterparty Credit Risk section of this Note 12. 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 and interest rate caps and floors 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 hedging instruments 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, 2023, we expect to reclassify net derivative losses of $1.5 billion pretax, or $1.1 billion after-tax, from AOCI to interest income for these 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, 2023. As of September 30, 2023, the maximum length of time over which forecasted transactions are hedged is eight years.

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

Table 74: 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, 2023
Total amounts in the Consolidated Income Statement	$	4,643	$	892	$	993	$	94
Gains (losses) on fair value hedges recognized on:
Hedged items (c)			$	(156)	$	416
Derivatives			$	158	$	(421)
Amounts related to interest settlements on derivatives			$	8	$	(167)
Gains (losses) on cash flow hedges (d):
Amount of derivative gains (losses) reclassified from accumulated other comprehensive income	$	(418)	$	(8)
For the three months ended September 30, 2022
Total amounts in the Consolidated Income Statement	$	3,138	$	715	$	317	$	317
Gains (losses) on fair value hedges recognized on:
Hedged items (c)			$	(85)	$	696
Derivatives			$	86	$	(706)
Amounts related to interest settlements on derivatives			$	(1)	$	1
Gains (losses) on cash flow hedges (d):
Amount of derivative gains (losses) reclassified from accumulated other comprehensive income	$	(122)	$	(7)
For the nine months ended September 30, 2023
Total amounts on the Consolidated Income Statement	$	13,424	$	2,660	$	2,679	$	481
Gains (losses) on fair value hedges recognized on:
Hedged items (c)			$	(157)	$	551
Derivatives			$	163	$	(569)
Amounts related to interest settlements on derivatives			$	20	$	(427)
Gains (losses) on cash flow hedges (d):
Amount of derivative gains (losses) reclassified from accumulated other comprehensive income	$	(1,108)	$	(21)
For the nine months ended September 30, 2022
Total amounts on the Consolidated Income Statement	$	7,935	$	1,890	$	542	$	705
Gains (losses) on fair value hedges recognized on:
Hedged items (c)			$	(131)	$	2,073
Derivatives			$	135	$	(2,101)
Amounts related to interest settlements on derivatives			$	(4)	$	185
Gains (losses) on cash flow hedges (d):
Amount of derivative gains (losses) reclassified from accumulated other comprehensive income	$	(5)	$	3

(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 75: Hedged Items - Fair Value Hedges

 

	September 30, 2023				December 31, 2022
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)	$	1,874	$	(282)	$	2,376	$	(121)
Borrowed funds	$	25,959	$	(1,834)	$	21,781	$	(1,283)

(a)Includes less than $(0.1) billion of fair value hedge adjustments primarily related to discontinued borrowed funds hedge relationships at both September 30, 2023 and December 31, 2022.

(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 the periods presented. Net gains (losses) on net investment hedge derivatives recognized in OCI were $44 million and $(2) million for the three and nine months ended September 30, 2023, respectively, and insignificant for both the three and nine months ended September 30, 2022.

Derivatives Not Designated As Hedging Instruments

For additional information on derivatives not designated as hedging instruments under GAAP, see Note 16 Financial Derivatives in our 2022 Form 10-K.

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

Table 76: Gains (Losses) on Derivatives Not Designated for Hedging

	Three months ended September 30				Nine months ended September 30
In millions	2023		2022		2023		2022
Derivatives used for mortgage banking activities:
Interest rate contracts (a)	$	(224)	$	(245)	$	(301)	$	(700)
Derivatives used for customer-related activities:
Interest rate contracts	11		65		46		231
Foreign exchange contracts and other	31		(2)		145		22
Gains from customer-related activities (b)	42		63		191		253
Derivatives used for other risk management activities:
Foreign exchange contracts and other (b)	129		309		(85)		572
Total gains (losses) from derivatives not designated as hedging instruments	$	(53)	$	127	$	(195)	$	125

(a)Included in Residential and commercial mortgage noninterest income on our Consolidated Income Statement.

(b)Included in Capital markets and advisory and Other noninterest income on our Consolidated Income Statement.

Offsetting and Counterparty Credit Risk

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 and counterparty credit risk, see Note 16 Financial Derivatives in our 2022 Form 10-K.

Table 77 shows the impact legally enforceable master netting agreements had on our derivative assets and derivative liabilities at September 30, 2023 and December 31, 2022. 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 77 includes OTC derivatives not settled through an exchange (“OTC derivatives”) and OTC derivatives cleared through a central clearing house (“OTC cleared derivatives”). 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 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 that then becomes our counterparty. OTC cleared derivative instruments are typically settled in cash each day based on the prior day value.

Table 77: 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
September 30, 2023
Derivative assets
Interest rate contracts:
Over-the-counter cleared	$	43					$	43				$	43
Over-the-counter	2,796		$	1,014	$	1,318	464			$	116	348
Commodity contracts	548		250		71		227			2		225
Foreign exchange and other contracts	451		132		204		115					115
Total derivative assets	$	3,838	$	1,396	$	1,593	$	849	(a)	$	118	$	731
Derivative liabilities
Interest rate contracts:
Over-the-counter cleared	$	30					$	30				$	30
Over-the-counter	7,226		$	811	$	1,567	4,848			$	87	4,761
Commodity contracts	577		459		31		87					87
Foreign exchange and other contracts	387		126		1		260					260
Total derivative liabilities	$	8,220	$	1,396	$	1,599	$	5,225	(b)	$	87	$	5,138
December 31, 2022
Derivative assets
Interest rate contracts:
Over-the-counter cleared	$	23					$	23				$	23
Over-the-counter	2,100		$	974	$	630	496			$	34	462
Commodity contracts	1,208		335		2		871					871
Foreign exchange and other contracts	437		214		82		141					141
Total derivative assets	$	3,768	$	1,523	$	714	$	1,531	(a)	$	34	$	1,497
Derivative liabilities
Interest rate contracts:
Over-the-counter cleared	$	28					$	28				$	28
Over-the-counter	5,801		$	625	$	1,041	4,135			$	78	4,057
Commodity contracts	1,269		679		520		70			4		66
Foreign exchange and other contracts	520		219		10		291					291
Total derivative liabilities	$	7,618	$	1,523	$	1,571	$	4,524	(b)	$	82	$	4,442

(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, 2023, cash and debt securities (primarily agency mortgage-backed securities) totaling $2.5 billion were pledged to us under master netting agreements and other collateral agreements to collateralize net derivative assets due from counterparties and to

meet initial margin requirements, and we pledged cash and debt securities (primarily agency mortgage-backed securities) totaling $2.6 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 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 pledged to us by counterparties are not recognized on our balance sheet. Likewise, securities we have pledged to counterparties remain on our balance sheet.

Credit-Risk Contingent Features

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 following table presents the aggregate fair value of derivative instruments with credit-risk-related contingent features, the associated collateral posted in the normal course of business and the maximum amount of collateral we would be required to post if the credit-risk-related contingent features underlying these agreements had been triggered on September 30, 2023 and December 31, 2022.

Table 78: Credit-Risk Contingent Features

In billions	September 30, 2023		December 31, 2022
Net derivative liabilities with credit-risk contingent features	$	6.5	$	5.8
Collateral posted	1.7		1.7
Maximum additional amount of collateral exposure	$	4.8	$	4.1