We primarily use derivatives to manage exposure to market risk, interest rate risk, credit risk and foreign currency risk, and to assist customers with their risk management objectives. Derivative transactions are 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.

Our asset/liability management approach to interest rate, foreign currency and certain other risks includes the use of derivatives. Such derivatives are typically designated as fair value or cash flow hedges, or economic hedge derivatives for those that do not qualify for hedge accounting. This helps minimize significant, unplanned fluctuations in earnings, fair values of assets and liabilities, and cash flows caused by interest rate, foreign currency and other market value volatility. This approach involves modifying the repricing characteristics of certain assets and liabilities so that changes in interest rates, foreign currency and other exposures do not have a significantly adverse effect on the net interest margin, cash flows and earnings. As a result of fluctuations in these exposures, hedged assets and liabilities will gain or lose market value. In a fair value or economic hedge, the effect of this unrealized gain or loss will generally be offset by the gain or loss on the derivatives linked to the hedged assets and liabilities. In a cash flow hedge, where we manage the variability of cash payments due to interest rate fluctuations by the effective use of derivatives linked to hedged assets and liabilities, the unrealized gain or loss on the derivatives or the hedged asset or liability is generally not reflected in earnings.

We also offer various derivatives, including interest rate, commodity, equity, credit and foreign exchange contracts, to our customers but usually offset our exposure from such contracts by purchasing other financial contracts. The customer accommodations and any offsetting financial contracts are treated as free-standing derivatives. Free-standing derivatives also include derivatives we enter into for risk management that do not otherwise qualify for hedge accounting, including economic hedge derivatives. To a lesser extent, we take positions based on market expectations or to benefit from price differentials between financial instruments and markets. Additionally, free-standing derivatives include embedded derivatives that are required to be accounted for separately from their host contracts.

The following table presents the total notional or contractual amounts and fair values for derivatives designated as qualifying hedge contracts, which are used as asset/liability management hedges, and free-standing derivatives (economic hedges) not designated as hedging instruments that are recorded on the balance sheet in other assets or other liabilities. Customer accommodation, trading and other free-standing derivatives are recorded on the balance sheet at fair value in trading assets or other liabilities.


						September 30, 2012					December 31, 2011
					Notional or			Fair value		Notional or		Fair value
					contractual			Asset	Liability	contractual		Asset	Liability
(in millions)						amount	derivatives		derivatives		amount	derivatives	derivatives
Derivatives designated as hedging instruments
	Interest rate contracts (1)				$	91,830		7,869	2,884		87,537	8,423	2,769
	Foreign exchange contracts					26,617		1,761	177		22,269	1,523	572
Total derivatives designated as
	qualifying hedging instruments							9,630	3,061			9,946	3,341
Derivatives not designated as hedging instruments
	Free-standing derivatives (economic hedges):
		Interest rate contracts (2)				374,049		2,119	2,702		377,497	2,318	2,011
		Equity contracts				75		-	50		-	-	-
		Foreign exchange contracts				1,882		7	136		5,833	250	3
		Credit contracts - protection purchased				33		-	-		125	3	-
		Other derivatives				2,327		-	91		2,367	-	117
			Subtotal					2,126	2,979			2,571	2,131
	Customer accommodation, trading and other
		free-standing derivatives:
		Interest rate contracts				2,799,763		70,312	71,397		2,425,144	81,336	83,834
		Commodity contracts				91,159		3,627	3,823		77,985	4,351	4,234
		Equity contracts				73,746		4,161	4,211		68,778	3,768	3,661
		Foreign exchange contracts				184,871		2,707	2,274		140,704	3,151	2,803
		Credit contracts - protection sold				28,255		321	3,257		38,403	319	5,178
		Credit contracts - protection purchased				30,835		1,899	340		36,156	3,254	276
			Subtotal					83,027	85,302			96,179	99,986
Total derivatives not designated as hedging instruments								85,153	88,281			98,750	102,117
Total derivatives before netting								94,783	91,342			108,696	105,458
Netting (3)								(64,706)	(73,966)			(81,143)	(89,990)
				Total			$	30,077	17,376			27,553	15,468

We use interest rate swaps to convert certain of our fixed-rate long-term debt and CDs 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 mortgages held for sale. The entire derivative gain or loss is included in the assessment of hedge effectiveness for all fair value hedge relationships, except for those involving foreign-currency denominated securities available for sale and long-term debt hedged with foreign currency forward derivatives for which the component of the derivative gain or loss related to the changes in the difference between the spot and forward price is excluded from the assessment of hedge effectiveness.

We use statistical regression analysis to assess hedge effectiveness, both at inception of the hedging relationship and on an ongoing basis. The regression analysis involves regressing the periodic change in fair value of the hedging instrument against the periodic changes in fair value of the asset or liability being hedged due to changes in the hedged risk(s). The assessment includes an evaluation of the quantitative measures of the regression results used to validate the conclusion of high effectiveness.

The following table shows the net gains (losses) recognized in the income statement related to derivatives in fair value hedging relationships.


			Interest rate			Foreign exchange		Total net
			contracts hedging:			contracts hedging:		gains
								(losses)
			Securities	Mortgages		Securities		on fair
			available	held for	Long-term	available	Long-term	value
(in millions)			for sale	sale	debt	for sale	debt	hedges

Quarter ended September 30, 2012
Gains (losses) recorded in net interest income		$	(115)	-	415	-	55	355

Gains (losses) recorded in noninterest income
	Recognized on derivatives		(19)	(7)	(67)	(115)	502	294
	Recognized on hedged item		24	4	26	130	(515)	(331)
	Recognized on fair value hedges (ineffective portion) (1)	$	5	(3)	(41)	15	(13)	(37)

Quarter ended September 30, 2011
Gains (losses) recorded in net interest income		$	(123)	-	413	(4)	104	390

Gains (losses) recorded in noninterest income
	Recognized on derivatives		(1,163)	(20)	2,651	44	(1,118)	394
	Recognized on hedged item		1,166	17	(2,477)	(45)	1,151	(188)
	Recognized on fair value hedges (ineffective portion) (1)	$	3	(3)	174	(1)	33	206

Nine months ended September 30, 2012
Gains (losses) recorded in net interest income		$	(340)	1	1,281	(4)	186	1,124

Gains (losses) recorded in noninterest income
	Recognized on derivatives		(229)	(13)	267	71	351	447
	Recognized on hedged item		222	6	(186)	(32)	(393)	(383)
	Recognized on fair value hedges (ineffective portion) (1)	$	(7)	(7)	81	39	(42)	64

Nine months ended September 30, 2011
Gains (losses) recorded in net interest income		$	(336)	-	1,264	(8)	299	1,219

Gains (losses) recorded in noninterest income
	Recognized on derivatives		(1,274)	(20)	2,742	90	477	2,015
	Recognized on hedged item		1,208	17	(2,564)	(96)	(478)	(1,913)
	Recognized on fair value hedges (ineffective portion) (1)	$	(66)	(3)	178	(6)	(1)	102

We hedge floating-rate debt against future interest rate increases by using interest rate swaps, caps, floors and futures to limit variability of cash flows due to changes in the benchmark interest rate. We also use interest rate swaps and floors to hedge the variability in interest payments received on certain floating-rate commercial loans, due to changes in the benchmark interest rate. Gains and losses on derivatives that are reclassified from OCI to interest income and interest expense in the current period are included in the line item in which the hedged item's effect on earnings is recorded. All parts of gain or loss on these derivatives are included in the assessment of hedge effectiveness. We assess hedge effectiveness using regression analysis, both at inception of the hedging relationship and on an ongoing basis. The regression analysis involves regressing the periodic changes in cash flows of the hedging instrument against the periodic changes in cash flows of the forecasted transaction being hedged due to changes in the hedged risk(s). The assessment includes an evaluation of the quantitative measures of the regression results used to validate the conclusion of high effectiveness.

Based upon current interest rates, we estimate that $381 million (pre tax) of deferred net gains on derivatives in OCI at September 30, 2012, will be reclassified into interest income and interest expense during the next twelve months. Future changes to interest rates may significantly change actual amounts reclassified to earnings. We are hedging our exposure to the variability of future cash flows for all forecasted transactions for a maximum of 6 years for both hedges of floating-rate debt and floating-rate commercial loans.

The following table shows the net gains (losses) recognized related to derivatives in cash flow hedging relationships.


			Quarter	Nine months
	ended September 30,			ended September 30,
(in millions)		2012	2011	2012	2011
Gains (pre tax) recognized in OCI on derivatives	$	24	68	63	205
Gains (pre tax) reclassified from cumulative OCI into net interest income		89	141	295	454
Losses (pre tax) recognized in noninterest income on derivatives (1)		(1)	(4)	(2)	(6)

We use free-standing derivatives (economic hedges), in addition to debt securities available for sale, to hedge the risk of changes in the fair value of certain residential MHFS, certain loans held for investment, residential MSRs measured at fair value, derivative loan commitments and other interests held. The resulting gain or loss on these economic hedges is reflected in mortgage banking noninterest income and other noninterest income. Changes in fair value of debt securities available for sale (unrealized gains and losses) are not included in servicing income, but are reported in cumulative OCI (net of tax) or, upon sale, are reported in net gains (losses) on debt securities available for sale.

The derivatives used to hedge MSRs measured at fair value, which include swaps, swaptions, constant maturity mortgages, forwards, Eurodollar and Treasury futures and options contracts, resulted in net derivative gains of $1.6 billion and $3.7 billion, respectively, in the third quarter and first nine months of 2012 and net derivative gains of $3.2 billion and $4.6 billion, respectively, in the same periods of 2011, which are included in mortgage banking noninterest income. The aggregate fair value of these derivatives was a net asset of $1.1 billion at September 30, 2012, and a net asset of $1.4 billion at December 31, 2011. 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.

Interest rate lock commitments for residential mortgage loans that we intend to sell are considered free-standing derivatives. Our interest rate exposure on these derivative loan commitments, as well as substantially all residential MHFS, is hedged with free-standing derivatives (economic hedges) such as swaps, forwards and options, Eurodollar futures and options, and Treasury futures, forwards and options contracts. The commitments, free-standing derivatives and residential MHFS are carried at fair value with changes in fair value included in mortgage banking noninterest income. For the fair value measurement of interest rate lock commitments we include, at inception and during the life of the loan commitment, the expected net future cash flows related to the associated servicing of the loan. Fair value changes subsequent to inception are based on changes in fair value of the underlying loan resulting from the exercise of the commitment and changes in the probability that the loan will not fund within the terms of the commitment (referred to as a fall-out factor). The value of the underlying loan is affected primarily by changes in interest rates and the passage of time. However, changes in investor demand can also cause changes in the value of the underlying loan value that cannot be hedged. The aggregate fair value of derivative loan commitments in the balance sheet was a net asset of $1.2 billion at September 30, 2012, and a net asset of $478 million at December 31, 2011, and is included in the caption “Interest rate contracts” under “Customer accommodation, trading and other free-standing derivatives” in the first table in this Note.

We also enter into various derivatives primarily to provide derivative products to customers. To a lesser extent, we take positions based on market expectations or to benefit from price differentials between financial instruments and markets. These derivatives are not linked to specific assets and liabilities in the balance sheet or to forecasted transactions in an accounting hedge relationship and, therefore, do not qualify for hedge accounting. We also enter into free-standing derivatives for risk management that do not otherwise qualify for hedge accounting. They are carried at fair value with changes in fair value recorded as other noninterest income.

Free-standing derivatives also include embedded derivatives that are required to be accounted for separately from their host contract. We periodically issue hybrid long-term notes and CDs where the performance of the hybrid instrument notes is linked to an equity, commodity or currency index, or basket of such indices. These notes contain explicit terms that affect some or all of the cash flows or the value of the note in a manner similar to a derivative instrument and therefore are considered to contain an “embedded” derivative instrument. The indices on which the performance of the hybrid instrument is calculated are not clearly and closely related to the host debt instrument. The “embedded” derivative is separated from the host contract and accounted for as a free-standing derivative. Additionally, we may invest in hybrid instruments that contain embedded derivatives, such as credit derivatives, that are not clearly and closely related to the host contract. In such instances, we either elect fair value option for the hybrid instrument or separate the embedded derivative from the host contract and account for the host contract and derivative separately.

The following table shows the net gains recognized in the income statement related to derivatives not designated as hedging instruments.


							Quarter		Nine months
							ended Sept. 30,		ended Sept. 30,
(in millions)							2012	2011	2012	2011
Net gains (losses) recognized on free-standing derivatives (economic hedges):
	Interest rate contracts
		Recognized in noninterest income:
			Mortgage banking (1)			$	(1,356)	277	(2,182)	528
			Other (2)				(7)	(133)	(40)	(153)
	Equity contracts (2)						-	-	1	(5)
	Foreign exchange contracts (2)						(37)	267	(38)	(102)
	Credit contracts (2)						(3)	(5)	(13)	(13)
					Subtotal		(1,403)	406	(2,272)	255
Net gains (losses) recognized on customer accommodation, trading
	and other free-standing derivatives:
		Interest rate contracts
			Recognized in noninterest income:
				Mortgage banking (3)			2,794	1,645	6,336	2,804
				Other (4)			136	(95)	466	195
		Commodity contracts (4)					(72)	(25)	(116)	76
		Equity contracts (4)					99	378	20	855
		Foreign exchange contracts (4)					131	219	380	526
		Credit contracts (4)					(29)	(382)	(18)	(338)
		Other (4)					-	(4)	-	(5)
					Subtotal		3,059	1,736	7,068	4,113
	Net gains recognized related to derivatives not designated
		as hedging instruments				$	1,656	2,142	4,796	4,368

We use credit derivatives primarily 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 the noted 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.


					Notional amount
						Protection		Protection
						sold -		purchased	Net
						non-		with	protection	Other
				Fair value	Protection	investment		identical	sold	protection	Range of
(in millions)				liability	sold (A)	grade	underlyings (B)		(A) - (B)	purchased	maturities
September 30, 2012
Credit default swaps on:
	Corporate bonds		$	303	17,020	9,242		10,662	6,358	8,459	2012-2021
	Structured products			2,300	3,252	2,869		1,282	1,970	740	2016-2056
Credit protection on:
	Default swap index			20	3,219	663		2,967	252	629	2012-2017
	Commercial mortgage-
		backed securities index		569	1,173	360		688	485	704	2049-2052
	Asset-backed securities index			61	67	67		6	61	133	2037-2046
Other				4	3,524	3,524		143	3,381	4,271	2012-2056
	Total credit derivatives		$	3,257	28,255	16,725		15,748	12,507	14,936

December 31, 2011
Credit default swaps on:
	Corporate bonds		$	1,002	24,634	14,043		13,329	11,305	9,404	2012-2021
	Structured products			3,308	4,691	4,300		2,194	2,497	1,335	2016-2056
Credit protection on:
	Default swap index			68	3,006	843		2,341	665	912	2012-2017
	Commercial mortgage-backed securities index			713	1,357	458		19	1,338	1,403	2049-2052
	Asset-backed securities index			76	83	83		8	75	116	2037-2046
Other				11	4,632	4,090		481	4,151	4,673	2012-2056
	Total credit derivatives		$	5,178	38,403	23,817		18,372	20,031	17,843

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 an extremely 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.

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 $17.6 billion at September 30, 2012, and $17.1 billion at December 31, 2011, respectively, for which we posted $15.7 billion and$15.0 billion, respectively, in collateral in the normal course of business. If the credit rating of our debt had been downgraded below investment grade, which is the credit-risk-related contingent feature that if triggered requires the maximum amount of collateral to be posted, on September 30, 2012, or December 31, 2011, we would have been required to post additional collateral of $1.9 billion or $2.1 billion, respectively, or potentially settle the contract in an amount equal to its fair value.

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 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, derivatives balances and related cash collateral amounts are shown net in the balance sheet. Counterparty credit risk related to derivatives is considered in determining fair value and our assessment of hedge effectiveness.