We primarily use derivative financial instruments to manage interest rate risk and currency exchange rate risk and to assist customers with their risk management objectives, which may include currency exchange rate risks and interest rate risks. Also, in connection with negotiating credit facilities and certain other services, we often obtain equity warrant assets giving us the right to acquire stock in private, venture-backed companies in the technology and life science/healthcare industries.

Interest rate risk is our primary market risk and can result from timing and volume differences in the repricing of our interest rate sensitive assets and liabilities and changes in market interest rates. To manage interest rate risk on our interest rate sensitive assets, we have entered into interest rate swap contracts to hedge against future changes in interest rates. We designate these interest rate swap contracts as fair value and cash flow hedges.

To manage interest rate risk on our AFS securities portfolio, we enter into pay-fixed, receive-floating interest rate swap contracts to hedge against exposure to changes in the fair value of the securities resulting from changes in interest rates. We designate these interest rate swap contracts as fair value hedges that qualify for hedge accounting under ASC 815, Derivatives and Hedging ("ASC 815") and have elected to account for a portion of them using the last-of-layer method as outlined in ASC 815. We record the fair value hedges in other assets and other liabilities. For qualifying fair value hedges, both the changes in the fair value of the derivative and the portion of the fair value adjustments associated with the last-of-layer attributable to the hedged risk will be recognized into earnings as they occur. Derivative amounts affecting earnings are recognized consistent with the classification of the hedged item in the line item "investment securities" as part of interest income, a component of consolidated net income.

We assess hedge effectiveness under ASC 815 on a quarterly basis to ensure all hedges remain highly effective and hedge accounting under ASC 815 can be applied. In conjunction with the assessment of effectiveness, we assess the hedged item to ensure it is expected to be outstanding at the hedged item’s assumed maturity date and the last-of-layer method of accounting under ASC 815 can be applied. If the hedging relationship no longer exists or no longer qualifies as a hedge per ASC 815, any remaining fair value basis adjustments are allocated to the individual assets in the portfolio and amortized into earnings over a period consistent with the amortization of other discounts and premiums associated with the respective assets. As allowed under GAAP, we applied the "shortcut" method of accounting to a portion of our fair value hedges which assumes there is perfect effectiveness.

The following table summarizes the amortized cost basis of hedged assets that are designated and qualify as fair value hedges and the cumulative amount of fair value hedging adjustments included in the carrying value that have been recorded on our unaudited interim consolidated balance sheets as of June 30, 2021:

(1)These amounts include the amortized cost basis of closed portfolios used to designate hedging relationships in which the hedged item is the last layer expected to be remaining at the end of the hedging relationship. At June 30, 2021, the amortized cost basis of the closed portfolios used in these hedging relationships was $17.5 billion, the amounts of the designated hedged items was $8.8 billion and the cumulative basis adjustments associated with these hedging relationships was $6 million.

To manage interest rate risk on our variable-interest rate loan portfolio, we enter into interest rate swap contracts to hedge against future changes in interest rates by using hedging instruments to lock in future cash inflows that would otherwise be impacted by movements in the market interest rates. We designate these interest rate swap contracts as cash flow hedges that qualify for hedge accounting under ASC 815 and record them in other assets and other liabilities. For qualifying cash flow hedges, changes in the fair value of the derivative are recorded in AOCI and recognized in earnings as the hedged item affects earnings. Derivative amounts affecting earnings are recognized consistent with the classification of the hedged item in the line item "Loans" as part of interest income, a component of consolidated net income.

We assess hedge effectiveness under ASC 815 on a quarterly basis to ensure all hedges remain highly effective and hedge accounting under ASC 815 can be applied. If the hedging relationship no longer exists or no longer qualifies as a hedge per ASC 815, any amounts remaining as gain or loss in AOCI are reclassified into earnings in the line item "Loans" as part of interest income, a component of consolidated net income. As of March 31, 2020, all derivatives previously classified as hedges with notional balances totaling $5.0 billion and a net asset fair value of $228 million were terminated. As of June 30, 2021, the total unrealized gains on terminated cash flow hedges remaining in AOCI was $148 million, $107 million net of tax. The unrealized gains will be reclassified into interest income as the underlying forecasted transactions impact earnings through the original maturity of the hedged forecasted transactions. The total remaining term over which the unrealized gains will be reclassified into earnings is approximately four years.

We enter into foreign exchange forward contracts to economically reduce our foreign exchange exposure risk associated with the net difference between foreign currency denominated assets and liabilities. We do not designate any foreign exchange forward contracts as derivative instruments that qualify for hedge accounting. Gains or losses from changes in currency rates on foreign currency denominated instruments are recorded in the line item “other” as part of noninterest income, a component of consolidated net income. We may experience ineffectiveness in the economic hedging relationship, because the instruments are revalued based upon changes in the currency’s spot rate on the principal value, while the forwards are revalued on a discounted cash flow basis. We record forward agreements in gain positions in other assets and loss positions in other liabilities, while net changes in fair value are recorded in the line item “other” as part of noninterest income, a component of consolidated net income.

Also included in our derivative instruments are equity warrant assets and client forward and option contracts, and client interest rate contracts. For further description of these other derivative instruments, refer to Note 2 — “Summary of Significant Accounting Policies" under Part II, Item 8 of our 2020 Form 10-K.

We are exposed to credit risk if counterparties to our derivative contracts do not perform as expected. We mitigate counterparty credit risk through credit approvals, limits, monitoring procedures and obtaining collateral, as appropriate. With respect to measuring counterparty credit risk for derivative instruments, we measure the fair value of a group of financial assets and financial liabilities on a net risk basis by counterparty portfolio.


	June 30, 2021						December 31, 2020
	Notional or Contractual Amount		Fair Value				Notional or Contractual Amount		Fair Value
(Dollars in millions)			Derivative Assets (1)		Derivative Liabilities (1)				Derivative Assets (1)		Derivative Liabilities (1)
Derivatives designated as hedging instruments:
Interest rate risks:
Interest rate swaps	$	9,775	$	16	$	—	$	—	$	—	$	—
Interest rate swaps	3,025		—		2		—		—		—
Derivatives not designated as hedging instruments:
Currency exchange risks:
Foreign exchange forwards	616		10		—		68		—		—
Foreign exchange forwards	184		—		2		567		—		20
Other derivative instruments:
Equity warrant assets	301		266		—		253		203		—
Client foreign exchange forwards	11,234		165		—		8,026		215		—
Client foreign exchange forwards	10,717		—		153		7,491		—		188
Client foreign currency options	233		2		—		98		2		—
Client foreign currency options	233		—		2		98		—		2
Client interest rate derivatives	1,306		65		—		1,082		68		—
Client interest rate derivatives (2)	1,483		—		59		1,251		—		27
Total derivatives not designated as hedging instruments			508		216				488		237
Total derivatives			$	524	$	218			$	488	$	237

(2)The amount reported reflects reductions of approximately $6 million and $45 million of derivative liabilities at June 30, 2021 and December 31, 2020, respectively, reflecting variation margin treated as settlement of the related derivative fair values for legal and accounting purposes as required by central clearing houses.


		Three months ended June 30,				Six months ended June 30,
(Dollars in millions)	Statement of income location	2021		2020		2021		2020
Derivatives designated as hedging instruments:
Interest rate risks:
Amounts reclassified from AOCI into income	Interest income - loans	$	16	$	16	$	31	$	18
Change in fair value of interest rate swaps hedging investment securities	Interest income - investment securities taxable	(14)		—		4		—
Change in fair value of hedged investment securities	Interest income - investment securities taxable	4		—		(13)		—
Net gains associated with interest rate risk derivatives		$	6	$	16	$	22	$	18
Derivatives not designated as hedging instruments:
Currency exchange risks:
Gains (losses) on revaluations of internal foreign currency instruments, net	Other noninterest income	$	7	$	11	(21)		$	3
(Losses) gains on internal foreign exchange forward contracts, net	Other noninterest income	(6)		(9)		21		(1)
Net gains associated with internal currency risk		$	1	$	2	$	—	$	2
Other derivative instruments:
Gains (losses) on revaluations of client foreign currency instruments, net	Other noninterest income	$	17	$	5	$	15	$	(3)
(Losses) gains on client foreign exchange forward contracts, net	Other noninterest income	(12)		(7)		(10)		1
Net gains (losses) associated with client currency risk		$	5	$	(2)	$	5	$	(2)
Net gains on equity warrant assets	Gains on equity warrant assets, net	$	122	$	27	$	344	$	40
Net (losses) gains on other derivatives	Other noninterest income	$	(2)	$	—	$	2	$	(5)

Certain of our derivative and other financial instruments are subject to enforceable master netting arrangements with our counterparties. These agreements provide for the net settlement of multiple contracts with a single counterparty through a single payment, in a single currency, in the event of default on or termination of any one contract.


	Gross Amounts of Recognized Assets		Gross Amounts offset in the Statement of Financial Position		Net Amounts of Assets Presented in the Statement of Financial Position		Gross Amounts Not Offset in the Statement of Financial Position but Subject to Master Netting Arrangements				Net Amount
(Dollars in millions)							Financial Instruments		Cash Collateral Received (1)
June 30, 2021
Derivative assets:
Interest rate swaps	$	16	$	—	$	16	$	(2)	$	—	$	14
Foreign exchange forwards	175		—		175		(48)		(31)		96
Foreign currency options	2		—		2		(1)		—		1
Client interest rate derivatives	65		—		65		(62)		(3)		—
Total derivative assets	258		—		258		(113)		(34)		111
Reverse repurchase, securities borrowing, and similar arrangements	762		—		762		(762)		—		—
Total	$	1,020	$	—	$	1,020	$	(875)	$	(34)	$	111
December 31, 2020
Derivative assets:
Interest rate swaps	$	—	$	—	$	—	$	—	$	—	$	—
Foreign exchange forwards	215		—		215		(76)		(21)		118
Foreign currency options	2		—		2		(1)		—		1
Client interest rate derivatives	68		—		68		(68)		—		—
Total derivative assets	285		—		285		(145)		(21)		119
Reverse repurchase, securities borrowing, and similar arrangements	227		—		227		(227)		—		—
Total	$	512	$	—	$	512	$	(372)	$	(21)	$	119


	Gross Amounts of Recognized Liabilities		Gross Amounts offset in the Statement of Financial Position		Net Amounts of Liabilities Presented in the Statement of Financial Position		Gross Amounts Not Offset in the Statement of Financial Position but Subject to Master Netting Arrangements				Net Amount
(Dollars in millions)							Financial Instruments		Cash Collateral Pledged (1)
June 30, 2021
Derivative liabilities:
Interest rate swaps	$	2	$	—	$	2	$	(2)	$	—	$	—
Foreign exchange forwards	155		—		155		(54)		(42)		59
Foreign currency options	2		—		2		—		(1)		1
Client interest rate derivatives	59		—		59		(37)		(21)		1
Total derivative liabilities	218		—		218		(93)		(64)		61
Repurchase, securities lending, and similar arrangements	—		—		—		—		—		—
Total	$	218	$	—	$	218	$	(93)	$	(64)	$	61
December 31, 2020
Derivative liabilities:
Interest rate swaps	$	—	$	—	$	—	$	—	$	—	$	—
Foreign exchange forwards	208		—		208		(84)		(45)		79
Foreign currency options	2		—		2		(1)		—		1
Client interest rate derivatives	27		—		27		—		(26)		1
Total derivative liabilities	237		—		237		(85)		(71)		81
Repurchase, securities lending, and similar arrangements	—		—		—		—		—		—
Total	$	237	$	—	$	237	$	(85)	$	(71)	$	81