| Derivatives |
We use derivatives to manage exposure to market risk, including interest rate risk, credit risk and foreign currency risk, and to assist customers with their risk management objectives. We designate certain derivatives as hedging instruments in a qualifying hedge accounting relationship (fair value or cash flow hedge). Our remaining derivatives consist of economic hedges that do not qualify for hedge accounting and derivatives held for customer accommodation trading, or other purposes. For more information on our derivative activities, see Note 16 (Derivatives) to Financial Statements in our 2017 Form 10-K. Table 14.1 presents the total notional or contractual amounts and fair values for our derivatives. Derivative transactions can be measured in terms of the notional amount, but this amount is not recorded on the balance sheet and is not, when viewed in isolation, a meaningful measure of the risk profile of the instruments. The notional amount is generally not exchanged but is used only as the basis on which interest and other payments are determined. Table 14.1: Notional or Contractual Amounts and Fair Values of Derivatives | | | | | | | | | | | | | | | | | | | | | | September 30, 2018 | | | December 31, 2017 | | | Notional or contractual amount |
| | | | Fair value |
| | Notional or contractual amount |
| | | | Fair value |
| (in millions) | | Derivative assets |
| | Derivative liabilities |
| | | Derivative
assets |
| | Derivative
liabilities |
| Derivatives designated as hedging instruments | | | | | | | | | | | | Interest rate contracts (1) | $ | 184,332 |
| | 2,471 |
| | 650 |
| | 209,677 |
| | 2,492 |
| | 1,092 |
| Foreign exchange contracts (1) | 35,136 |
| | 737 |
| | 1,221 |
| | 34,135 |
| | 1,482 |
| | 1,137 |
| Total derivatives designated as qualifying hedging instruments | | | 3,208 |
| | 1,871 |
| | | | 3,974 |
| | 2,229 |
| Derivatives not designated as hedging instruments | | | | | | | | | | | | Economic hedges: | | | | | | | | | | | | Interest rate contracts (2) | 181,607 |
| | 166 |
| | 375 |
| | 220,558 |
| | 159 |
| | 201 |
| Equity contracts | 15,764 |
| | 929 |
| | 210 |
| | 12,315 |
| | 716 |
| | 138 |
| Foreign exchange contracts | 14,288 |
| | 115 |
| | 116 |
| | 15,976 |
| | 78 |
| | 309 |
| Credit contracts – protection purchased | 101 |
| | 26 |
| | — |
| | 111 |
| | 37 |
| | — |
| Subtotal | | | 1,236 |
| | 701 |
| | | | 990 |
| | 648 |
| Customer accommodation trading and | | | | | | | | | | | | other derivatives: | | | | | | | | | | | | Interest rate contracts | 8,156,678 |
| | 13,426 |
| | 14,518 |
| | 6,434,673 |
| | 14,979 |
| | 14,179 |
| Commodity contracts | 72,559 |
| | 4,205 |
| | 1,716 |
| | 62,530 |
| | 2,354 |
| | 1,335 |
| Equity contracts | 229,905 |
| | 6,894 |
| | 8,514 |
| | 213,750 |
| | 6,291 |
| | 8,363 |
| Foreign exchange contracts | 333,715 |
| | 5,582 |
| | 5,032 |
| | 362,896 |
| | 7,413 |
| | 7,122 |
| Credit contracts – protection sold | 9,185 |
| | 94 |
| | 141 |
| | 9,021 |
| | 147 |
| | 214 |
| Credit contracts – protection purchased | 17,973 |
| | 134 |
| | 177 |
| | 17,406 |
| | 207 |
| | 208 |
| Subtotal | | | 30,335 |
| | 30,098 |
| | | | 31,391 |
| | 31,421 |
| Total derivatives not designated as hedging instruments | | | 31,571 |
| | 30,799 |
| | | | 32,381 |
| | 32,069 |
| Total derivatives before netting | | | 34,779 |
| | 32,670 |
| | | | 36,355 |
| | 34,298 |
| Netting (3) | | | (22,968 | ) | | (24,084 | ) | | | | (24,127 | ) | | (25,502 | ) | Total | | | $ | 11,811 |
| | 8,586 |
| | | | 12,228 |
| | 8,796 |
|
| | (1) | Notional amounts presented exclude $0 million and $500 million of interest rate contracts at September 30, 2018, and December 31, 2017, respectively, for certain derivatives that are combined for designation as a hedge in a single relationship. The notional amount for foreign exchange contracts at September 30, 2018, and December 31, 2017, excludes $11.3 billion and $13.5 billion, respectively, for certain derivatives that are combined for designation as a hedge on a single instrument. |
| | (2) | Includes economic hedge derivatives used to hedge the risk of changes in the fair value of residential MSRs, MLHFS, loans, derivative loan commitments and other interests held. |
| | (3) | Represents balance sheet netting of derivative asset and liability balances, related cash collateral and portfolio level counterparty valuation adjustments. See Table 14.2 for further information. |
Table 14.2 provides information on the gross fair values of derivative assets and liabilities, the balance sheet netting adjustments and the resulting net fair value amount recorded on our balance sheet, as well as the non-cash collateral associated with such arrangements. We execute substantially all of our derivative transactions under master netting arrangements and reflect all derivative balances and related cash collateral subject to enforceable master netting arrangements on a net basis within the balance sheet. The “Gross amounts recognized” column in the following table includes $31.4 billion and $29.2 billion of gross derivative assets and liabilities, respectively, at September 30, 2018, and $30.0 billion and $29.9 billion, respectively, at December 31, 2017, with counterparties subject to enforceable master netting arrangements that are carried on the balance sheet net of offsetting amounts. The remaining gross derivative assets and liabilities of $3.4 billion and $3.5 billion, respectively, at September 30, 2018, and $6.4 billion and $4.4 billion, respectively, at December 31, 2017, include those with counterparties subject to master netting arrangements for which we have not assessed the enforceability because they are with counterparties where we do not currently have positions to offset, those subject to master netting arrangements where we have not been able to confirm the enforceability and those not subject to master netting arrangements. As such, we do not net derivative balances or collateral within the balance sheet for these counterparties. We determine the balance sheet netting adjustments based on the terms specified within each master netting arrangement. We disclose the balance sheet netting amounts within the column titled “Gross amounts offset in consolidated balance sheet.” Balance sheet netting adjustments are determined at the counterparty level for which there may be multiple contract types. For disclosure purposes, we allocate these netting adjustments to the contract type for each counterparty proportionally based upon the “Gross amounts recognized” by counterparty. As a result, the net amounts disclosed by contract type may not represent the actual exposure upon settlement of the contracts. We do not net non-cash collateral that we receive and pledge on the balance sheet. For disclosure purposes, we present the fair value of this non-cash collateral in the column titled “Gross amounts not offset in consolidated balance sheet (Disclosure-only netting)” within the table. We determine and allocate the Disclosure-only netting amounts in the same manner as balance sheet netting amounts. The “Net amounts” column within Table 14.2 represents the aggregate of our net exposure to each counterparty after considering the balance sheet and Disclosure-only netting adjustments. We manage derivative exposure by monitoring the credit risk associated with each counterparty using counterparty specific credit risk limits, using master netting arrangements and obtaining collateral. Derivative contracts executed in over-the-counter markets include bilateral contractual arrangements that are not cleared through a central clearing organization but are typically subject to master netting arrangements. The percentage of our bilateral derivative transactions outstanding at period end in such markets, based on gross fair value, is provided within the following table. Other derivative contracts executed in over-the-counter or exchange-traded markets are settled through a central clearing organization and are excluded from this percentage. In addition to the netting amounts included in the table, we also have balance sheet netting related to resale and repurchase agreements that are disclosed within Note 12 (Guarantees, Pledged Assets and Collateral, and Other Commitments). Table 14.2: Gross Fair Values of Derivative Assets and Liabilities
| | | | | | | | | | | | | | | | | | | | (in millions) | Gross amounts recognized |
| | Gross amounts offset in consolidated balance sheet (1) |
| | Net amounts in consolidated balance sheet |
| | Gross amounts not offset in consolidated balance sheet (Disclosure-only netting) (2) |
| | Net amounts |
| | Percent exchanged in over-the-counter market (3) |
| September 30, 2018 | | | | | | | | | | | | Derivative assets | | | | | | | | | | | | Interest rate contracts | $ | 16,063 |
| | (10,905 | ) | | 5,158 |
| | (104 | ) | | 5,054 |
| | 98 | % | Commodity contracts | 4,205 |
| | (1,165 | ) | | 3,040 |
| | (2 | ) | | 3,038 |
| | 92 |
| Equity contracts | 7,823 |
| | (5,646 | ) | | 2,177 |
| | (494 | ) | | 1,683 |
| | 74 |
| Foreign exchange contracts | 6,434 |
| | (5,036 | ) | | 1,398 |
| | (33 | ) | | 1,365 |
| | 100 |
| Credit contracts – protection sold | 94 |
| | (92 | ) | | 2 |
| | — |
| | 2 |
| | 13 |
| Credit contracts – protection purchased | 160 |
| | (124 | ) | | 36 |
| | (2 | ) | | 34 |
| | 90 |
| Total derivative assets | $ | 34,779 |
| | (22,968 | ) | | 11,811 |
| | (635 | ) | | 11,176 |
| | | Derivative liabilities | | | | | | | | | | | | Interest rate contracts | $ | 15,543 |
| | (11,982 | ) | | 3,561 |
| | (306 | ) | | 3,255 |
| | 98 | % | Commodity contracts | 1,716 |
| | (823 | ) | | 893 |
| | — |
| | 893 |
| | 55 |
| Equity contracts | 8,724 |
| | (5,949 | ) | | 2,775 |
| | (235 | ) | | 2,540 |
| | 84 |
| Foreign exchange contracts | 6,369 |
| | (5,023 | ) | | 1,346 |
| | (61 | ) | | 1,285 |
| | 100 |
| Credit contracts – protection sold | 141 |
| | (140 | ) | | 1 |
| | (1 | ) | | — |
| | 84 |
| Credit contracts – protection purchased | 177 |
| | (167 | ) | | 10 |
| | — |
| | 10 |
| | 9 |
| Total derivative liabilities | $ | 32,670 |
| | (24,084 | ) | | 8,586 |
| | (603 | ) | | 7,983 |
| | | December 31, 2017 | | | | | | | | | | | | Derivative assets | | | | | | | | | | | | Interest rate contracts | $ | 17,630 |
| | (11,929 | ) | | 5,701 |
| | (145 | ) | | 5,556 |
| | 99 | % | Commodity contracts | 2,354 |
| | (966 | ) | | 1,388 |
| | (4 | ) | | 1,384 |
| | 88 |
| Equity contracts | 7,007 |
| | (4,233 | ) | | 2,774 |
| | (596 | ) | | 2,178 |
| | 76 |
| Foreign exchange contracts | 8,973 |
| | (6,656 | ) | | 2,317 |
| | (25 | ) | | 2,292 |
| | 100 |
| Credit contracts – protection sold | 147 |
| | (145 | ) | | 2 |
| | — |
| | 2 |
| | 10 |
| Credit contracts – protection purchased | 244 |
| | (198 | ) | | 46 |
| | (3 | ) | | 43 |
| | 89 |
| Total derivative assets | $ | 36,355 |
| | (24,127 | ) | | 12,228 |
| | (773 | ) | | 11,455 |
| | | Derivative liabilities | | | | | | | | | | | | Interest rate contracts | $ | 15,472 |
| | (13,226 | ) | | 2,246 |
| | (1,078 | ) | | 1,168 |
| | 99 | % | Commodity contracts | 1,335 |
| | (648 | ) | | 687 |
| | (1 | ) | | 686 |
| | 76 |
| Equity contracts | 8,501 |
| | (4,041 | ) | | 4,460 |
| | (400 | ) | | 4,060 |
| | 85 |
| Foreign exchange contracts | 8,568 |
| | (7,189 | ) | | 1,379 |
| | (204 | ) | | 1,175 |
| | 100 |
| Credit contracts – protection sold | 214 |
| | (204 | ) | | 10 |
| | (9 | ) | | 1 |
| | 85 |
| Credit contracts – protection purchased | 208 |
| | (194 | ) | | 14 |
| | — |
| | 14 |
| | 9 |
| Total derivative liabilities | $ | 34,298 |
| | (25,502 | ) | | 8,796 |
| | (1,692 | ) | | 7,104 |
| | |
| | (1) | Represents amounts with counterparties subject to enforceable master netting arrangements that have been offset in the consolidated balance sheet, including related cash collateral and portfolio level counterparty valuation adjustments. Counterparty valuation adjustments were $243 million and $245 million related to derivative assets and $108 million and $95 million related to derivative liabilities at September 30, 2018, and December 31, 2017, respectively. Cash collateral totaled $2.9 billion and $4.1 billion, netted against derivative assets and liabilities, respectively, at September 30, 2018, and $2.7 billion and $4.2 billion, respectively, at December 31, 2017. |
| | (2) | Represents the fair value of non-cash collateral pledged and received against derivative assets and liabilities with the same counterparty that are subject to enforceable master netting arrangements. U.S. GAAP does not permit netting of such non-cash collateral balances in the consolidated balance sheet but requires disclosure of these amounts. |
| | (3) | Represents derivatives executed in over-the-counter markets that are not settled through a central clearing organization. Over-the-counter percentages are calculated based on gross amounts recognized as of the respective balance sheet date. The remaining percentage represents derivatives settled through a central clearing organization, which are executed in either over-the-counter or exchange-traded markets. |
Fair Value and Cash Flow Hedges For fair value hedges, we use interest rate swaps to convert certain of our fixed-rate long-term debt and time certificates of deposit to floating rates to hedge our exposure to interest rate risk. We also enter into cross-currency swaps, cross-currency interest rate swaps and forward contracts to hedge our exposure to foreign currency risk and interest rate risk associated with the issuance of non-U.S. dollar denominated long-term debt. In addition, we use interest rate swaps, cross-currency swaps, cross-currency interest rate swaps and forward contracts to hedge against changes in fair value of certain investments in available-for-sale debt securities due to changes in interest rates, foreign currency rates, or both. We also use interest rate swaps to hedge against changes in fair value for certain mortgage loans held for sale. For cash flow hedges, we use interest rate swaps to hedge the variability in interest payments received on certain floating-rate commercial loans and paid on certain floating-rate debt due to changes in the contractually specified interest rate. We estimate $309 million pre-tax of deferred net losses primarily related to cash flow hedges in OCI at September 30, 2018, will be reclassified into net interest income during the next twelve months. The deferred losses expected to be reclassified into net interest income are primarily related to discontinued hedges of floating rate loans. We are hedging our foreign exposure to the variability of future cash flows for all forecasted transactions for a maximum of 8 years. For more information on our accounting hedges, see Note 1 (Summary of Significant Accounting Policies) and Note 16 (Derivatives) to Financial Statements in our 2017 Form 10-K. Table 14.3 shows the net gains (losses) related to derivatives in fair value and cash flow hedging relationships. Table 14.3: Gains (Losses) Recognized in Consolidated Statement of Income on Fair Value and Cash Flow Hedging Relationships | | | | | | | | | | | | | | | | | | | Net interest income | | | Noninterest income |
| | (in millions) | Debt securities |
| Loans |
| Mortgage loans held for sale |
| Deposits |
| Long-term debt |
| | Other |
| Total |
| Quarter ended September 30, 2018 | | | | | | | | | Total amounts presented in the consolidated statement of income | $ | 3,595 |
| 11,116 |
| 210 |
| (1,499 | ) | (1,667 | ) | | 633 |
| 12,388 |
| Gains (losses) on fair value hedging relationships | | | | | | | | | Interest contracts | | | | | | | | | Amounts related to interest settlements on derivatives (1) | (34 | ) | — |
| (1 | ) | (10 | ) | 39 |
| | — |
| (6 | ) | Recognized on derivatives | 386 |
| — |
| 10 |
| (58 | ) | (1,119 | ) | | — |
| (781 | ) | Recognized on hedged items | (410 | ) | — |
| (12 | ) | 61 |
| 1,101 |
| | — |
| 740 |
| Foreign exchange contracts | | | | | | | | | Amounts related to interest settlements on derivatives (1)(2) | 8 |
| — |
| — |
| — |
| (118 | ) | | — |
| (110 | ) | Recognized on derivatives (3) | 2 |
| — |
| — |
| — |
| (58 | ) | | (139 | ) | (195 | ) | Recognized on hedged items | (3 | ) | — |
| — |
| — |
| 126 |
| | 139 |
| 262 |
| Net income (expense) recognized on fair value hedges | (51 | ) | — |
| (3 | ) | (7 | ) | (29 | ) | | — |
| (90 | ) | | | | | | | | | | Gains (losses) on cash flow hedging relationships | | | | | | | | | Interest contracts | | | | | | | | | Realized gains (losses) (pre-tax) reclassified from cumulative OCI into net income (4) | — |
| (78 | ) | — |
| — |
| — |
| | — |
| (78 | ) | Foreign exchange contracts | | | | | | | | | Realized gains (losses) (pre-tax) reclassified from cumulative OCI into net income (4) | $ | — |
| — |
| — |
| — |
| (1 | ) | | — |
| (1 | ) | Net income (expense) recognized on cash flow hedges | $ | — |
| (78 | ) | — |
| — |
| (1 | ) | | — |
| (78 | ) | Nine months ended September 30, 2018 | | | | | | | | | Total amounts presented in the consolidated statement of income | $ | 10,603 |
| 32,607 |
| 587 |
| (3,857 | ) | (4,901 | ) | | 1,720 |
| 36,759 |
| Gains (losses) on fair value hedging relationships | | | | | | | | | Interest contracts | | | | | | | | | Amounts related to interest settlements on derivatives (1) | (158 | ) | — |
| (3 | ) | (35 | ) | 291 |
| | — |
| 95 |
| Recognized on derivatives | 1,692 |
| 1 |
| 21 |
| (248 | ) | (4,331 | ) | | — |
| (2,865 | ) | Recognized on hedged items | (1,730 | ) | (1 | ) | (27 | ) | 233 |
| 4,215 |
| | — |
| 2,690 |
| Foreign exchange contracts | | | | | | | | | Amounts related to interest settlements on derivatives (1)(2) | 23 |
| — |
| — |
| — |
| (300 | ) | | — |
| (277 | ) | Recognized on derivatives (3) | 8 |
| — |
| — |
| — |
| (132 | ) | | (889 | ) | (1,013 | ) | Recognized on hedged items | (5 | ) | — |
| — |
| — |
| 153 |
| | 820 |
| 968 |
| Net income (expense) recognized on fair value hedges | (170 | ) | — |
| (9 | ) | (50 | ) | (104 | ) | | (69 | ) | (402 | ) | | | | | | | | | | Gains (losses) on cash flow hedging relationships | | | | | | | | | Interest contracts | | | | | | | | | Realized gains (losses) (pre-tax) reclassified from cumulative OCI into net income (4) | — |
| (215 | ) | — |
| — |
| — |
| | — |
| (215 | ) | Foreign exchange contracts | | | | | | | | | Realized gains (losses) (pre-tax) reclassified from cumulative OCI into net income (4) | — |
| — |
| — |
| — |
| (1 | ) | | — |
| (1 | ) | Net income (expense) recognized on cash flow hedges | $ | — |
| (215 | ) | — |
| — |
| (1 | ) |
| — |
| (216 | ) |
| | | | | | | | | | | | | | | | | | (continued from previous page) | | | | | | | | | | Net interest income | | | Noninterest income |
| | (in millions) | Debt securities |
| Loans |
| Mortgage loans held for sale |
| Deposits |
| Long-term debt |
| | Other |
| Total |
| Quarter ended September 30, 2017 | | | | | | | | | Total amounts presented in the consolidated statement of income | $ | 3,253 |
| 10,522 |
| 217 |
| (869 | ) | (1,391 | ) | | 199 |
| 11,931 |
| | | | | | | | | | Gains (losses) on fair value hedging relationships | | | | | | | | | Interest contracts | | | | | | | | | Amounts related to interest settlements on derivatives (1) | (110 | ) | — |
| (1 | ) | 25 |
| 246 |
| | — |
| 160 |
| Recognized on derivatives | (6 | ) | — |
| — |
| 1 |
| (162 | ) | | — |
| (167 | ) | Recognized on hedged items | (5 | ) | — |
| (2 | ) | — |
| 164 |
| | — |
| 157 |
| Foreign exchange contracts |
|
|
|
|
|
|
|
|
|
| |
|
| | Amounts related to interest settlements on derivatives (1)(2) | 4 |
| — |
| — |
| — |
| (60 | ) | | — |
| (56 | ) | Recognized on derivatives (3) | — |
| — |
| — |
| — |
| (32 | ) | | 851 |
| 819 |
| Recognized on hedged items | — |
| — |
| — |
| — |
| 15 |
| | (790 | ) | (775 | ) | Net income (expense) recognized on fair value hedges | (117 | ) | — |
| (3 | ) | 26 |
| 171 |
| | 61 |
| 138 |
| | | | | | | | | | Gains (losses) on cash flow hedging relationships | | | | | | | | | Interest contracts | | | | | | | | | Realized gains (losses) (pre-tax) reclassified from cumulative OCI into net income (4) | — |
| 107 |
| — |
| — |
| (2 | ) | | — |
| 105 |
| Foreign exchange contracts | | | | | | | | | Realized gains (losses) (pre-tax) reclassified from cumulative OCI into net income (4) | — |
| — |
| — |
| — |
| — |
| | — |
| — |
| Net income (expense) recognized on cash flow hedges | $ | — |
| 107 |
| — |
| — |
| (2 | ) | | — |
| 105 |
| Nine months ended September 30, 2017 | | | | | | | | | Total amounts presented in the consolidated statement of income | $ | 9,652 |
| 31,021 |
| 590 |
| (2,082 | ) | (3,813 | ) | | 1,045 |
| 36,413 |
| | | | | | | | | | Gains (losses) on fair value hedging relationships | | | | | | | | | Interest contracts | | | | | | | | | Amounts related to interest settlements on derivatives (1) | (363 | ) | (1 | ) | (4 | ) | 29 |
| 1,041 |
| | — |
| 702 |
| Recognized on derivatives | (167 | ) | — |
| (11 | ) | 30 |
| (325 | ) | | — |
| (473 | ) | Recognized on hedged items | 121 |
| — |
| 4 |
| (22 | ) | 322 |
| | — |
| 425 |
| Foreign exchange contracts | | | | | | | | | Amounts related to interest settlements on derivatives (1)(2) | 10 |
| — |
| — |
| — |
| (142 | ) | | — |
| (132 | ) | Recognized on derivatives (3) | 11 |
| — |
| — |
| — |
| (187 | ) | | 2,727 |
| 2,551 |
| Recognized on hedged items | (7 | ) | — |
| — |
| — |
| 215 |
| | (2,485 | ) | (2,277 | ) | Net income (expense) recognized on fair value hedges | (395 | ) | (1 | ) | (11 | ) | 37 |
| 924 |
| | 242 |
| 796 |
| | | | | | | | | | Gains (losses) on cash flow hedging relationships | | | | | | | | | Interest contracts | | | | | | | | | Realized gains (losses) (pre-tax) reclassified from cumulative OCI into net income (4) | — |
| 468 |
| — |
| — |
| (8 | ) | | — |
| 460 |
| Foreign exchange contracts | | | | | | | | | Realized gains (losses) (pre-tax) reclassified from cumulative OCI into net income (4) | — |
| — |
| — |
| — |
| — |
| | — |
| — |
| Net income (expense) recognized on cash flow hedges | $ | — |
| 468 |
| — |
| — |
| (8 | ) | | — |
| 460 |
|
| | (1) | Includes $11 million and $35 million for third quarter and first nine months of 2018, respectively, and includes $12 million and $22 million for the third quarter and first nine months of 2017, respectively which represents changes in fair value due to the passage of time associated with the non-zero fair value amount at hedge inception. |
| | (2) | The third quarter and first nine months of 2018 included $(5) million and $(3) million, respectively, and the third quarter and first nine months of 2017 included $(1) million, and $(2) million, respectively, of the time value component recognized as net interest income (expense) on forward derivatives hedging foreign currency debt securities and long-term debt that were excluded from the assessment of hedge effectiveness. |
| | (3) | For certain fair value hedges of foreign currency risk, changes in fair value of cross-currency swaps attributable to changes in cross-currency basis spreads are excluded from the assessment of hedge effectiveness and recorded in other comprehensive income. See Note 20 (Other Comprehensive Income) for the amounts recognized in other comprehensive income. |
| | (4) | See Note 20 (Other Comprehensive Income) for details of amounts reclassified to net income. |
Table 14.4 shows the carrying amount and associated cumulative basis adjustment related to the application of hedge accounting that is included in the carrying amount of hedged assets and liabilities in fair value hedging relationships.
Table 14.4: Hedged Items in Fair Value Hedging Relationship | | | | | | | | | | | | | Hedged Items Currently Designated | | | Hedged Items No Longer Designated (1) | | (in millions) | Carrying Amount of Assets/(Liabilities) (2)(4) |
| Hedge Accounting Basis Adjustment Assets/(Liabilities) (3) |
| | Carrying Amount of Assets/(Liabilities) (4) |
| Hedge Accounting Basis Adjustment
Assets/(Liabilities) |
| September 30, 2018 | | | | | | Available-for-sale debt securities (5) | $ | 29,736 |
| (1,008 | ) | | 4,947 |
| 261 |
| Loans | — |
| — |
| | — |
| — |
| Mortgage loans held for sale | 681 |
| (6 | ) | | — |
| — |
| Deposits | (45,282 | ) | 383 |
| | — |
| — |
| Long-term debt | (127,072 | ) | 2,223 |
| | (808 | ) | 10 |
| December 31, 2017 | | | | | | Available-for-sale debt securities (5) | 32,498 |
| 870 |
| | 5,221 |
| 343 |
| Loans | 140 |
| (1 | ) | | — |
| — |
| Mortgage loans held for sale | 465 |
| (1 | ) | | — |
| — |
| Deposits | (23,679 | ) | 158 |
| | — |
| — |
| Long-term debt | (128,950 | ) | (2,154 | ) | | (1,953 | ) | 16 |
|
| | (1) | Represents hedged items no longer designated in qualifying fair value hedging relationships for which an associated basis adjustment exists at the balance sheet date. |
| | (2) | Does not include the carrying amount of hedged items where only foreign currency risk is the designated hedged risk. The carrying amount excluded for debt securities is $1.3 billion and $(6.4) billion for long-term debt as of September 30, 2018 and $1.5 billion for debt securities and for long-term debt is $(7.7) billion as of December 31, 2017. |
| | (3) | The balance includes $1.5 billion and $49 million of debt securities and long-term debt cumulative basis adjustments as of September 30, 2018, respectively, and $2.1 billion and $297 million of debt securities and long-term debt cumulative basis adjustments as of December 31, 2017, respectively, on terminated hedges whereby the hedged items have subsequently been re-designated into existing hedges. |
| | (4) | Represents the full carrying amount of the hedged asset or liability item as of the balance sheet date, except for circumstances in which only a portion of the asset or liability was designated as the hedged item in which case only the portion designated is presented. |
| | (5) | Carrying amount represents the amortized cost. |
Derivatives Not Designated as Hedging Instruments We use economic hedge derivatives to hedge the risk of changes in the fair value of certain residential MLHFS, residential MSRs measured at fair value, derivative loan commitments and other interests held. We also use economic hedge derivatives to mitigate the periodic earnings volatility caused by mismatches between the changes in fair value of the hedged item and hedging instrument recognized on our fair value accounting hedges. The resulting gain or loss on these economic hedge derivatives is reflected in mortgage banking noninterest income, net gains (losses) from equity investments and other noninterest income. The derivatives used to hedge MSRs measured at fair value, resulted in net derivative gains (losses) of $(501) million and $(2.0) billion in the third quarter and first nine months of 2018, respectively, and $240 million and $599 million in the third quarter and first nine months of 2017, respectively which are included in mortgage banking noninterest income. The aggregate fair value of these derivatives was a net liability of $185 million at September 30, 2018, and net asset of $89 million at December 31, 2017. The change in fair value of these derivatives for each period end is due to changes in the underlying market indices and interest rates as well as the purchase and sale of derivative financial instruments throughout the period as part of our dynamic MSR risk management process. Loan commitments for mortgage loans that we intend to sell are considered derivatives. The aggregate fair value of derivative loan commitments on the balance sheet was a net negative fair value of $7 million and a positive fair value of $17 million at September 30, 2018, and December 31, 2017, respectively, and is included in the caption “Interest rate contracts” under “Customer accommodation trading and other derivatives” in Table 14.1 in this Note. For more information on economic hedges and other derivatives, see Note 16 (Derivatives) to Financial Statements in our 2017 Form 10-K. Table 14.5 shows the net gains (losses) recognized by income statement lines, related to derivatives not designated as hedging instruments. Table 14.5: Gains (Losses) on Derivatives Not Designated as Hedging Instruments | | | | | | | | | | | | | | Noninterest income | | (in millions) | Mortgage banking |
| Net gains (losses) from equity securities |
| Net gains (losses) from trading activities |
| Other |
| Total |
| Quarter ended September 30, 2018 | | | | | | Net gains (losses) recognized on economic hedges derivatives: | | | | | | Interest contracts (1) | $ | (334 | ) | — |
| — |
| (1 | ) | (335 | ) | Equity contracts | — |
| (719 | ) | — |
| 8 |
| (711 | ) | Foreign exchange contracts | — |
| — |
| — |
| 78 |
| 78 |
| Credit contracts | — |
| — |
| — |
| 4 |
| 4 |
| Subtotal (2) | (334 | ) | (719 | ) | — |
| 89 |
| (964 | ) | Net gains (losses) recognized on customer accommodation trading and other derivatives: | | | | | | Interest contracts (3) | (67 | ) | — |
| 298 |
| (1 | ) | 230 |
| Equity contracts | — |
| — |
| (1,147 | ) | (112 | ) | (1,259 | ) | Foreign exchange contracts | — |
| — |
| 258 |
| — |
| 258 |
| Credit contracts | — |
| — |
| (28 | ) | — |
| (28 | ) | Commodity contracts | — |
| — |
| 14 |
| — |
| 14 |
| Other | — |
| — |
| — |
| — |
| — |
| Subtotal | (67 | ) | — |
| (605 | ) | (113 | ) | (785 | ) | Net gains (losses) recognized related to derivatives not designated as hedging instruments | $ | (401 | ) | (719 | ) | (605 | ) | (24 | ) | (1,749 | ) | Nine months ended September 30, 2018 | | | | | | Net gains (losses) recognized on economic hedges derivatives: | | | | | | Interest contracts (1) | $ | (1,114 | ) | — |
| — |
| 5 |
| (1,109 | ) | Equity contracts | — |
| (1,317 | ) | — |
| 13 |
| (1,304 | ) | Foreign exchange contracts | — |
| — |
| — |
| 405 |
| 405 |
| Credit contracts | — |
| — |
| — |
| (2 | ) | (2 | ) | Subtotal (2) | (1,114 | ) | (1,317 | ) | — |
| 421 |
| (2,010 | ) | Net gains (losses) recognized on customer accommodation trading and other derivatives: | | | | | | Interest contracts (3) | (372 | ) | — |
| 865 |
| (1 | ) | 492 |
| Equity contracts | — |
| — |
| (33 | ) | (378 | ) | (411 | ) | Foreign exchange contracts | — |
| — |
| 659 |
| — |
| 659 |
| Credit contracts | — |
| — |
| (22 | ) | — |
| (22 | ) | Commodity contracts | — |
| — |
| 88 |
| — |
| 88 |
| Other | — |
| — |
| — |
| — |
| — |
| Subtotal | (372 | ) | — |
| 1,557 |
| (379 | ) | 806 |
| Net gains (losses) recognized related to derivatives not designated as hedging instruments | $ | (1,486 | ) | (1,317 | ) | 1,557 |
| 42 |
| (1,204 | ) |
(continued on following page) | | | | | | | | | | | | | (continued from previous page) | | | Noninterest income | | (in millions) | Mortgage banking |
| Net gains (losses) from equity securities |
| Net gains (losses) from trading activities |
| Other |
| Total |
| Quarter ended September 30, 2017 | | | | | | Net gains (losses) recognized on economic hedges derivatives: | | | | | | Interest contracts (1) | $ | 138 |
| — |
| — |
| (19 | ) | 119 |
| Equity contracts | — |
| (490 | ) | — |
| 1 |
| (489 | ) | Foreign exchange contracts | — |
| — |
| — |
| (300 | ) | (300 | ) | Credit contracts | — |
| — |
| — |
| (6 | ) | (6 | ) | Subtotal (2) | 138 |
| (490 | ) | — |
| (324 | ) | (676 | ) | Net gains (losses) recognized on customer accommodation trading and other derivatives: | | | | | | Interest contracts (3) | 152 |
| — |
| 17 |
| — |
| 169 |
| Equity contracts | — |
| — |
| (851 | ) | — |
| (851 | ) | Foreign exchange contracts | — |
| — |
| 155 |
| — |
| 155 |
| Credit contracts | — |
| — |
| (31 | ) | — |
| (31 | ) | Commodity contracts | — |
| — |
| 63 |
| — |
| 63 |
| Other | — |
| — |
| — |
| 8 |
| 8 |
| Subtotal | 152 |
| — |
| (647 | ) | 8 |
| (487 | ) | Net gains (losses) recognized related to derivatives not designated as hedging instruments | $ | 290 |
| (490 | ) | (647 | ) | (316 | ) | (1,163 | ) | Nine months ended September 30, 2017 | | | | | | Net gains (losses) recognized on economic hedges derivatives: | | | | | | Interest contracts (1) | $ | 480 |
| — |
| — |
| (64 | ) | 416 |
| Equity contracts | — |
| (1,164 | ) | — |
| (11 | ) | (1,175 | ) | Foreign exchange contracts | — |
| — |
| — |
| (834 | ) | (834 | ) | Credit contracts | — |
| — |
| — |
| 8 |
| 8 |
| Subtotal (2) | 480 |
| (1,164 | ) | — |
| (901 | ) | (1,585 | ) | Net gains (losses) recognized on customer accommodation trading and other derivatives: | | | | | | Interest contracts (3) | 599 |
| — |
| 80 |
| — |
| 679 |
| Equity contracts | — |
| — |
| (2,525 | ) | — |
| (2,525 | ) | Foreign exchange contracts | — |
| — |
| 356 |
| — |
| 356 |
| Credit contracts | — |
| — |
| (59 | ) | — |
| (59 | ) | Commodity contracts | — |
| — |
| 138 |
| — |
| 138 |
| Other | — |
| — |
| — |
| 22 |
| 22 |
| Subtotal | 599 |
| — |
| (2,010 | ) | 22 |
| (1,389 | ) | Net gains (losses) recognized related to derivatives not designated as hedging instruments | $ | 1,079 |
| (1,164 | ) | (2,010 | ) | (879 | ) | (2,974 | ) |
| | (1) | Includes gains (losses) on the derivatives used as economic hedges of MSRs measured at fair value, derivative loan commitments and mortgage loans held for sale. |
| | (2) | Includes hedging gains (losses) of $10 million and $46 million for the third quarter and first nine months of 2018, respectively, and $(18) million and $(64) million for the third quarter and first nine months of 2017, respectively, which partially offset hedge accounting ineffectiveness. |
| | (3) | Amounts presented in mortgage banking noninterest income are gains on derivative loan commitments. |
Credit Derivatives Credit derivative contracts are arrangements whose value is derived from the transfer of credit risk of a reference asset or entity from one party (the purchaser of credit protection) to another party (the seller of credit protection). We use credit derivatives to assist customers with their risk management objectives. We may also use credit derivatives in structured product transactions or liquidity agreements written to special purpose vehicles. The maximum exposure of sold credit derivatives is managed through posted collateral, purchased credit derivatives and similar products in order to achieve our desired credit risk profile. This credit risk management provides an ability to recover a significant portion of any amounts that would be paid under the sold credit derivatives. We would be required to perform under sold credit derivatives in the event of default by the referenced obligors. Events of default include events such as bankruptcy, capital restructuring or lack of principal and/or interest payment. In certain cases, other triggers may exist, such as the credit downgrade of the referenced obligors or the inability of the special purpose vehicle for which we have provided liquidity to obtain funding. Table 14.6 provides details of sold and purchased credit derivatives. Table 14.6: Sold and Purchased Credit Derivatives | | | | | | | | | | | | | | | | | | | | | | | | | Notional amount | | | | (in millions) | Fair value liability |
| | Protection sold (A) |
| | Protection sold – non- investment grade |
| | Protection purchased with identical underlyings (B) |
| | Net protection sold (A) - (B) |
| | Other protection purchased |
| | Range of maturities | September 30, 2018 | | | | | | | | | | | | | | Credit default swaps on: | | | | | | | | | | | | | | Corporate bonds | $ | 23 |
| | 1,906 |
| | 391 |
| | 1,266 |
| | 640 |
| | 1,300 |
| | 2018 - 2027 | Structured products | 55 |
| | 148 |
| | 143 |
| | 130 |
| | 18 |
| | 114 |
| | 2022 - 2047 | Credit protection on: | | | | | | | | | | | | | | Default swap index | — |
| | 2,194 |
| | 453 |
| | 308 |
| | 1,886 |
| | 3,824 |
| | 2018 - 2028 | Commercial mortgage-backed securities index | 53 |
| | 402 |
| | 122 |
| | 375 |
| | 27 |
| | 51 |
| | 2047 - 2058 | Asset-backed securities index | 9 |
| | 43 |
| | 43 |
| | 42 |
| | 1 |
| | 1 |
| | 2045 - 2046 | Other | 1 |
| | 4,492 |
| | 4,372 |
| | — |
| | 4,492 |
| | 10,663 |
| | 2018 - 2038 | Total credit derivatives | $ | 141 |
| | 9,185 |
| | 5,524 |
| | 2,121 |
| | 7,064 |
| | 15,953 |
| | | December 31, 2017 | | | | | | | | | | | | | | Credit default swaps on: | | | | | | | | | | | | | | Corporate bonds | $ | 35 |
| | 2,007 |
| | 510 |
| | 1,575 |
| | 432 |
| | 946 |
| | 2018 - 2027 | Structured products | 86 |
| | 267 |
| | 252 |
| | 232 |
| | 35 |
| | 153 |
| | 2022 - 2047 | Credit protection on: | | | | | | | | | | | | | | Default swap index | — |
| | 2,626 |
| | 540 |
| | 308 |
| | 2,318 |
| | 3,932 |
| | 2018 - 2027 | Commercial mortgage-backed securities index | 83 |
| | 423 |
| | — |
| | 401 |
| | 22 |
| | 87 |
| | 2047 - 2058 | Asset-backed securities index | 9 |
| | 42 |
| | — |
| | 42 |
| | — |
| | 1 |
| | 2045 - 2046 | Other | 1 |
| | 3,656 |
| | 3,306 |
| | — |
| | 3,656 |
| | 9,840 |
| | 2018 - 2031 | Total credit derivatives | $ | 214 |
| | 9,021 |
| | 4,608 |
| | 2,558 |
| | 6,463 |
| | 14,959 |
| | |
Protection sold represents the estimated maximum exposure to loss that would be incurred under an assumed hypothetical circumstance, where the value of our interests and any associated collateral declines to zero, without any consideration of recovery or offset from any economic hedges. We believe this hypothetical circumstance to be a remote possibility and accordingly, this required disclosure is not an indication of expected loss. The amounts under non-investment grade represent the notional amounts of those credit derivatives on which we have a higher risk of being required to perform under the terms of the credit derivative and are a function of the underlying assets. We consider the risk of performance to be high if the underlying assets under the credit derivative have an external rating that is below investment grade or an internal credit default grade that is equivalent thereto. We believe the net protection sold, which is representative of the net notional amount of protection sold and purchased with identical underlyings, in combination with other protection purchased, is more representative of our exposure to loss than either non-investment grade or protection sold. Other protection purchased represents additional protection, which may offset the exposure to loss for protection sold, that was not purchased with an identical underlying of the protection sold.
Credit-Risk Contingent Features Certain of our derivative contracts contain provisions whereby if the credit rating of our debt were to be downgraded by certain major credit rating agencies, the counterparty could demand additional collateral or require termination or replacement of derivative instruments in a net liability position. The aggregate fair value of all derivative instruments with such credit-risk-related contingent features that are in a net liability position was $7.7 billion at September 30, 2018, and $8.3 billion at December 31, 2017, for which we posted $5.9 billion and $7.1 billion, respectively, in collateral in the normal course of business. A credit rating below investment grade is the credit-risk-related contingent feature that if triggered requires the maximum amount of collateral to be posted. If the credit rating of our debt had been downgraded below investment grade, on September 30, 2018, or December 31, 2017, we would have been required to post additional collateral of $1.8 billion or $1.2 billion, respectively, or potentially settle the contract in an amount equal to its fair value. Some contracts require that we provide more collateral than the fair value of derivatives that are in a net liability position if a downgrade occurs.
Counterparty Credit Risk By using derivatives, we are exposed to counterparty credit risk if counterparties to the derivative contracts do not perform as expected. If a counterparty fails to perform, our counterparty credit risk is equal to the amount reported as a derivative asset on our balance sheet. The amounts reported as a derivative asset are derivative contracts in a gain position, and to the extent subject to legally enforceable master netting arrangements, net of derivatives in a loss position with the same counterparty and cash collateral received. We minimize counterparty credit risk through credit approvals, limits, monitoring procedures, executing master netting arrangements and obtaining collateral, where appropriate. To the extent the master netting arrangements and other criteria meet the applicable requirements, including determining the legal enforceability of the arrangement, it is our policy to present derivative balances and related cash collateral amounts net on the balance sheet. We incorporate credit valuation adjustments (CVA) to reflect counterparty credit risk in determining the fair value of our derivatives. Such adjustments, which consider the effects of enforceable master netting agreements and collateral arrangements, reflect market-based views of the credit quality of each counterparty. Our CVA calculation is determined based on observed credit spreads in the credit default swap market and indices indicative of the credit quality of the counterparties to our derivatives. |