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Derivative Financial Instruments
 12 Months Ended
Dec. 31, 2018
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivative Financial Instruments
Derivative Financial Instruments
Northern Trust is a party to various derivative financial instruments that are used in the normal course of business to meet the needs of its clients; as part of its trading activity for its own account; and as part of its risk management activities. These instruments may include foreign exchange contracts, interest rate contracts, total return swap contracts, credit default swap contracts, and swaps related to the sale of certain Visa Class B common shares.

Foreign exchange contracts are agreements to exchange specific amounts of currencies at a future date, at a specified rate of exchange. Foreign exchange contracts are entered into primarily to meet the foreign exchange needs of clients. Foreign exchange contracts are also used for trading and risk management purposes. For risk management purposes, Northern Trust uses foreign exchange contracts to reduce its exposure to changes in foreign exchange rates relating to certain forecasted non-functional currency denominated revenue and expenditure transactions, foreign-currency- denominated assets and liabilities, including debt securities and net investments in non-U.S. affiliates.

Interest rate contracts include swap and option contracts. Interest rate swap contracts involve the exchange of fixed and floating rate interest payment obligations without the exchange of the underlying principal amounts. Northern Trust enters into interest rate swap contracts with its clients and also may utilize such contracts to reduce or eliminate the exposure to changes in the cash flows or fair value of hedged assets or liabilities due to changes in interest rates. Interest rate option contracts may include caps, floors, collars and swaptions, and provide for the transfer or reduction of interest rate risk, typically in exchange for a fee. Northern Trust enters into option contracts as a seller of interest rate protection to clients. Northern Trust receives a fee at the outset of the agreement for the assumption of the risk of an unfavorable change in interest rates. This assumed interest rate risk is then mitigated by entering into an offsetting position with an outside counterparty. Northern Trust may also purchase or enter into option contracts for risk management purposes including to reduce the exposure to changes in the cash flows of hedged assets due to changes in interest rates.

The following table shows the notional and fair values of all derivative financial instruments as of December 31, 2018 and December 31, 2017.

TABLE 114: NOTIONAL AND FAIR VALUES OF DERIVATIVE FINANCIAL INSTRUMENTS
 
DECEMBER 31, 2018
DECEMBER 31, 2017
 
 
FAIR VALUE
 
FAIR VALUE
(In Millions)
NOTIONAL
VALUE

ASSET 1

LIABILITY 2

NOTIONAL
VALUE

ASSET 1

LIABILITY 2

Derivatives Designated as Hedging under GAAP
 
 
 
 
 
 
Interest Rate Contracts
 
 
 
 
 
 
      Fair Value Hedges
$
4,590.4

$
29.8

$
23.3

$
4,473.1

$
31.7

$
18.2

      Cash Flow Hedges
600.0

0.2

1.2

925.0

0.2

1.2

Foreign Exchange Contracts
 
 
 
 
 
 
      Cash Flow Hedges
2,648.2

13.8

57.8

3,289.0

28.4

13.0

      Net Investment Hedges
3,475.1

292.4

14.5

3,011.3

0.6

179.5

Total Derivatives Designated as Hedging under GAAP
$
11,313.7

$
336.2

$
96.8

$
11,698.4

$
60.9

$
211.9

 
 
 
 
 
 
 
Derivatives Not Designated as Hedging under GAAP
 
 
 
 
 
 
Non-Designated Risk Management Derivatives
 
 
 
 
 
 
Foreign Exchange Contracts
$
122.2

$
0.5

$
0.2

$
214.1

$
1.1

$
0.1

Other Financial Derivatives 3
483.4

1.3

32.8

404.7

—

30.4

Total Non-Designated Risk Management Derivatives
$
605.6

$
1.8

$
33.0

$
618.8

$
1.1

$
30.5

 
 
 
 
 
 
 
Client-Related and Trading Derivatives












Foreign Exchange Contracts
$
281,864.4

$
2,159.4

$
2,190.0

$
317,882.5

$
2,527.0

$
2,522.5

Interest Rate Contracts
7,711.2

66.1

68.6

7,418.0

65.1

64.1

Total Client-Related and Trading Derivatives
$
289,575.6

$
2,225.5

$
2,258.6

$
325,300.5

$
2,592.1

$
2,586.6

 
 
 
 
 
 
 
Total Derivatives Not Designated as Hedging under GAAP
$
290,181.2

$
2,227.3

$
2,291.6

$
325,919.3

$
2,593.2

$
2,617.1

 
 
 
 
 
 
 
Total Gross Derivatives
$
301,494.9

$
2,563.5

$
2,388.4

$
337,617.7

$
2,654.1

$
2,829.0

Less: Netting 4
 
1,357.1

1,796.3

 
1,860.0

1,621.4

Total Derivative Financial Instruments
 
$
1,206.4

$
592.1

 
$
794.1

$
1,207.6


(1)    Derivative assets are reported in other assets on the consolidated balance sheets.
(2)    Derivative liabilities are reported in other liabilities on the consolidated balance sheets.
(3)    This line includes swaps related to sales of certain Visa Class B common shares and total return swap contracts.
(4)    See further detail in Note 27 - Offsetting of Assets and Liabilities.
Notional amounts of derivative financial instruments do not represent credit risk, and are not recorded in the consolidated balance sheets. They are used merely to express the volume of this activity. Northern Trust’s credit-related risk of loss is limited to the positive fair value of the derivative instrument, net of any collateral received, which is significantly less than the notional amount.

Hedging Derivative Instruments Designated Under GAAP. Northern Trust uses derivative instruments to hedge its exposure to foreign currency, interest rate, equity price, and credit risk. Certain hedging relationships are formally designated and qualify for hedge accounting under GAAP as fair value, cash flow or net investment hedges. Other derivatives that are entered into for risk management purposes as economic hedges are not formally designated as hedges and changes in fair value are recognized currently in other operating income (see below section “Derivative Instruments Not Designated as Hedging under GAAP”).
Fair Value Hedges. Derivatives are designated as fair value hedges to limit Northern Trust’s exposure to changes in the fair value of assets and liabilities due to movements in interest rates.
Cash Flow Hedges. Derivatives are also designated as cash flow hedges in order to minimize the variability in cash flows of earning assets or forecasted transactions caused by movements in interest or foreign exchange rates.
There were no material gains or losses reclassified into earnings during the years ended December 31, 2018, 2017, and 2016 as a result of the discontinuance of forecasted transactions that were no longer probable of occurring. It is estimated that net gains of $3.1 million and $1.4 million will be reclassified into net income within the next twelve months relating to cash flow hedges of foreign-currency-denominated transactions and cash flow hedges of foreign-currency-denominated debt securities, respectively. It is estimated that a net loss of $1.2 million will be reclassified into net income upon the receipt of interest payments on earning assets within the next twelve months relating to cash flow hedges of available for sale debt securities. As of December 31, 2018, 23 months was the maximum length of time over which the exposure to variability in future cash flows of forecasted foreign-currency-denominated transactions was being hedged. There was no ineffectiveness recognized in earnings for cash flow hedges during the years ended December 31, 2017 and 2016.
The following table provides fair value and cash flow hedge derivative gains and losses recognized in income during the years ended December 31, 2018, 2017 and 2016.

TABLE 115: LOCATION AND AMOUNT OF FAIR VALUE AND CASH FLOW HEDGE DERIVATIVE GAINS AND LOSSES RECORDED IN INCOME
 
 
Location and Amount of Derivative Gain/(Loss) Recognized in Income
(in Millions)
 
Interest Income
 
Interest Expense
 
Other Operating Income
 
Other Operating Expense
For the Year Ended December 31,
 
2018

2017

2016

 
2018

2017

2016

 
2018

2017

2016

 
2018

2017

2016

Total amounts on the consolidated statements of income
 
$
2,321.4

$
1,769.4

$
1,416.9

 
$
698.7

$
340.2

$
182.0

 
$
127.5

$
157.5

$
241.2

 
$
330.6

$
331.6

$
364.4

Gains/(Losses) on fair value hedges recognized on
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest Rate Contracts
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Recognized on derivatives
 
13.9

8.8

80.6

 
(9.5
)
(24.3
)
(33.9
)
 
—

—

—

 
—

—

—

Recognized on hedged items
 
(13.9
)
(8.8
)
(80.6
)
 
9.5

24.3

33.9

 
—

—

—

 
—

—

—

Amounts related to interest settlements on derivatives
 
17.8

(9.6
)
(16.9
)
 
7.9

27.7

38.9

 
—

—

—

 
—

—

—

Total gain/(loss) recognized on fair value hedges
 
$
17.8

$
(9.6
)
$
(16.9
)

$
7.9

$
27.7

$
38.9


$
—

$
—

$
—


$
—

$
—

$
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gains/(Losses) on cash flow hedges recognized on
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign Exchange Contracts
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net gain/(loss) reclassified from AOCI to net income
 
67.4

19.3

6.4

 
—

—

—

 
3.9

5.0

(6.4
)
 
—

(0.1
)
(0.9
)
Interest Rate Contracts
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net gain/(loss) reclassified from AOCI to net income
 
(0.2
)
0.3

2.8

 
—

—

—

 
—

—

—

 
—

—

—

Total gain/(loss) reclassified from AOCI to net income on cash flow hedges
 
$
67.2

$
19.6

$
9.2


$
—

$
—

$
—


$
3.9

$
5.0

$
(6.4
)

$
—

$
(0.1
)
$
(0.9
)


The following table provides the impact of fair value hedge accounting on the carrying value of the designated hedged items as of December 31, 2018.

TABLE 116: HEDGED ITEMS IN FAIR VALUE HEDGES
 
DECEMBER 31, 2018
(In Millions)
CARRYING VALUE OF THE HEDGED ITEMS

 
CUMULATIVE HEDGE ACCOUNTING BASIS ADJUSTMENT 1

Available for Sale Debt Securities 2
$
3,831.6

 
$
99.4

Senior Notes and Long-Term Subordinated Debt
1,248.8

 
29.3

 
 
 
 
Total
$
5,080.4

 
$
128.7

(1)    There are no amounts related to discontinued hedging relationships.
(2)    Carrying value represents amortized cost.

Net Investment Hedges. Certain foreign exchange contracts and qualifying non-derivative instruments are designated as net investment hedges to minimize Northern Trust’s exposure to variability in the foreign currency translation of net investments in non-U.S. branches and subsidiaries. For net investment hedges, there was no ineffectiveness recorded for these hedges during the years ended December 31, 2017 and 2016. Net investment hedge gains of $173.0 million and losses of $223.2 million were recognized in AOCI related to foreign exchange contracts for the years ended December 31, 2018 and December 31, 2017, respectively.
Derivative Instruments Not Designated as Hedging under GAAP. Northern Trust’s derivative instruments that are not designated as hedging under GAAP include derivatives for purposes of client-related and trading activities, as well as other risk management purposes. These activities consist principally of providing foreign exchange services to clients in connection with Northern Trust’s global custody business. However, in the normal course of business, Northern Trust also engages in trading of currencies for its own account.
Non-designated risk management derivatives include foreign exchange contracts entered into to manage the foreign currency risk of non-U.S.-dollar-denominated assets and liabilities, the net investment in certain non-U.S. affiliates, commercial loans, and forecasted foreign-currency-denominated transactions. Swaps related to the sale of certain Visa Class B common shares were entered into which retain the risks associated with the ultimate conversion of the Visa Class B common shares into shares of Visa Class A common shares. Credit default swaps were entered into to manage the credit risk associated with certain loans and loan commitments. Total return swaps are entered into to manage the equity price risk associated with certain investments.
The following table provides the location and amount of gains and losses recorded in the consolidated statements of income for the years ended December 31, 2018, 2017, and 2016 for derivative instruments not designated as hedges under GAAP.

TABLE 117: LOCATION AND AMOUNT OF GAINS AND LOSSES RECORDED IN INCOME FOR DERIVATIVES NOT DESIGNATED AS HEDGING UNDER GAAP
(In Millions)
LOCATION OF DERIVATIVE GAIN / (LOSS) RECOGNIZED IN INCOME
AMOUNT OF DERIVATIVE GAIN / (LOSS) RECOGNIZED IN INCOME
2018
2017
2016
Non-designated risk management derivatives
 
 
 
 
Foreign Exchange Contracts
Other Operating Income
$
(4.1
)
$
8.2

$
(6.7
)
Other Financial Derivatives (1)
Other Operating Income
(19.2
)
(13.3
)
(6.1
)
Gains/(Losses) from non-designated risk management derivatives
 
$
(23.3
)
$
(5.1
)
$
(12.8
)
 
 
 
 
 
Client-related and trading derivatives
 
 
 
 
Foreign Exchange Contracts
Foreign Exchange Trading Income
307.2

209.9

236.6

Interest Rate Contracts
Security Commissions and Trading Income
7.7

10.7

11.4

Gains/(Losses) from client-related and trading derivatives
 
$
314.9

$
220.6

$
248.0

 
 
 
 
 
Total gains/(losses) from derivatives not designated as hedging under GAAP
 
$
291.6

$
215.5

$
235.2

(1) This line includes swaps related to the sale of certain Visa Class B common shares, credit default swap contracts, and total return swap contracts.