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Derivative Financial Instruments
 12 Months Ended
Dec. 31, 2022
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, and swaps related to the sale of certain Visa Class B common shares. Please refer to Note 1, “Summary of Significant Accounting Policies” for the significant accounting policies for derivative financial instruments.

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 primarily 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, 2022
and 2021.

TABLE 123: NOTIONAL AND FAIR VALUES OF DERIVATIVE FINANCIAL INSTRUMENTS
DECEMBER 31, 2022DECEMBER 31, 2021
FAIR VALUEFAIR 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
$4,622.0 $58.5 $32.7 $4,430.5 $7.6 $8.7 
Foreign Exchange Contracts
Cash Flow Hedges
150.9 7.4 5.7 3,697.9 61.8 12.6 
Net Investment Hedges
3,765.0 283.5 12.7 4,161.8 183.3 12.3 
Total Derivatives Designated as Hedging under GAAP$8,537.9 $349.4 $51.1 $12,290.2 $252.7 $33.6 
Derivatives Not Designated as Hedging under GAAP
Non-Designated Risk Management Derivatives
Foreign Exchange Contracts$55.9 $0.1 $0.1 $109.9 $0.2 $0.6 
Other Financial Derivatives(3)
717.7 0.3 34.8 738.5 — 37.5 
Total Non-Designated Risk Management Derivatives$773.6 $0.4 $34.9 $848.4 $0.2 $38.1 
Client-Related and Trading Derivatives
Foreign Exchange Contracts$288,994.6 $3,219.1 $3,169.0 $315,532.3 $1,962.1 $1,973.3 
Interest Rate Contracts12,378.2 163.5 399.1 11,570.1 132.4 90.2 
Total Client-Related and Trading Derivatives$301,372.8 $3,382.6 $3,568.1 $327,102.4 $2,094.5 $2,063.5 
Total Derivatives Not Designated as Hedging under GAAP$302,146.4 $3,383.0 $3,603.0 $327,950.8 $2,094.7 $2,101.6 
Total Gross Derivatives$310,684.3 $3,732.4 $3,654.1 $340,241.0 $2,347.4 $2,135.2 
Less: Netting(4)
2,810.7 1,865.9 1,533.8 1,283.5 
Total Derivative Financial Instruments$921.7 $1,788.2 $813.6 $851.7 
(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 on 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, and equity price. 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 within the consolidated statements of 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, 2022, 2021, and 2020 as a result of the discontinuance of cash flow hedges of forecasted transactions that were no longer probable of occurring. It is estimated that net gains of $1.7 million will be reclassified into net income within the next twelve months relating to cash flow hedges of foreign-currency-denominated transactions. As of December 31, 2022, 8 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.
The following table provides fair value and cash flow hedge derivative gains and losses recognized in income during the years ended December 31, 2022, 2021 and 2020.

TABLE 124: LOCATION AND AMOUNT OF FAIR VALUE AND CASH FLOW HEDGE DERIVATIVE GAINS AND LOSSES RECORDED IN INCOME
(in Millions)INTEREST INCOMEINTEREST EXPENSEOTHER OPERATING INCOME
For the Year Ended December 31,
202220212020202220212020202220212020
Total amounts on the consolidated statements of income$2,877.7 $1,406.5 $1,643.5 $990.5 $23.8 $200.3 $191.3 $243.9 $194.0 
Gains (Losses) on fair value hedges recognized on
Interest Rate Contracts
Recognized on derivatives82.8 39.1 (66.3)(373.4)(161.6)100.2 — — — 
Recognized on hedged items(82.8)(39.1)66.3 373.4 161.6 (100.2)— — — 
Amounts related to interest settlements on derivatives(4.4)(16.2)(13.2)24.1 57.1 29.9 — — — 
Total gains (losses) recognized on fair value hedges$(4.4)$(16.2)$(13.2)$24.1 $57.1 $29.9 $— $— $— 
Gains (Losses) on cash flow hedges recognized on
Foreign Exchange Contracts
Net gains (losses) reclassified from AOCI to net income$0.6 $10.5 $27.4 $— $— $— $(4.3)$(6.0)$0.2 
Interest Rate Contracts
Net gains (losses) reclassified from AOCI to net income— — 0.5 — — — — — — 
Total gains (losses) reclassified from AOCI to net income on cash flow hedges$0.6 $10.5 $27.9 $— $— $— $(4.3)$(6.0)$0.2 

The following table provides the impact of fair value hedge accounting on the carrying value of the designated hedged items as of December 31, 2022 and 2021.

TABLE 125: HEDGED ITEMS IN FAIR VALUE HEDGES
DECEMBER 31, 2022DECEMBER 31, 2021
(In Millions)CARRYING VALUE OF THE HEDGED ITEMS
CUMULATIVE HEDGE ACCOUNTING BASIS ADJUSTMENT(1)(3)
CARRYING VALUE OF THE HEDGED ITEMS
CUMULATIVE HEDGE ACCOUNTING BASIS ADJUSTMENT(2)(3)
Available for Sale Debt Securities(4)
$1,820.8 $(60.2)$1,677.4 $11.1 
Senior Notes and Long-Term Subordinated Debt2,746.2 (294.0)2,745.6 59.5 
Total$4,567.0 $(354.2)$4,423.0 $70.6 
(1) The cumulative hedge accounting basis adjustment includes $7.3 million related to discontinued hedging relationships of AFS debt securities as of December 31, 2022. There are no amounts related to discontinued hedging relationships in the cumulative hedge accounting basis adjustment of senior notes and long-term debt as of December 31, 2022.
(2) The cumulative hedge accounting basis adjustment includes $9.6 million related to discontinued hedging relationships of AFS debt securities as of December 31, 2021. There were no amounts related to discontinued hedging relationships in the cumulative hedge accounting basis adjustment of senior notes and long-term debt as of December 31, 2021.
(3) Positive (negative) amounts related to AFS securities represent cumulative fair value hedge basis adjustments that will reduce (increase) net interest income in future periods. Positive (negative) amounts related to Senior Notes and Long-Term Subordinated Debt represent cumulative fair value hedge basis adjustments that will increase (reduce) net interest income in future periods.
(4) Carrying value represents amortized cost.

Net Investment Hedges. Certain foreign exchange contracts 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. Net investment hedge gains of $278.7 million and $186.6 million were recognized in AOCI related to foreign exchange contracts for the years ended December 31, 2022 and 2021, 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 sales of certain Visa Class B common shares were entered into pursuant to which Northern Trust retains the risks associated with the ultimate
conversion of the Visa Class B common shares into Visa Class A common shares. Total return swaps are entered into to manage the equity price risk associated with certain investments.
Changes in the fair value of derivative instruments not designated as hedges under GAAP are recognized currently in income. The following table provides the location and amount of gains and losses recorded on the consolidated statements of income for the years ended December 31, 2022, 2021, and 2020 for derivative instruments not designated as hedges under GAAP.

TABLE 126: LOCATION AND AMOUNT OF GAINS AND LOSSES RECORDED IN INCOME FOR DERIVATIVES NOT DESIGNATED AS HEDGING UNDER GAAP
(In Millions)DERIVATIVE GAINS (LOSSES) LOCATION RECOGNIZED IN INCOMEAMOUNT OF DERIVATIVE GAINS (LOSSES) RECOGNIZED IN INCOME
202220212020
Non-designated risk management derivatives
Foreign Exchange ContractsOther Operating Income$(3.1)$1.2 $6.4 
Other Financial Derivatives(1)
Other Operating Income(22.2)(21.3)(18.3)
Gains (Losses) from non-designated risk management derivatives$(25.3)$(20.1)$(11.9)
Client-related and trading derivatives
Foreign Exchange ContractsForeign Exchange Trading Income$288.6 $292.6 $290.4 
Interest Rate ContractsSecurity Commissions and Trading Income9.6 15.7 22.4 
Gains (Losses) from client-related and trading derivatives$298.2 $308.3 $312.8 
Total gains (losses) from derivatives not designated as hedging under GAAP$272.9 $288.2 $300.9 
(1) This line includes swaps related to the sale of certain Visa Class B common shares and total return swap contracts.