NOTE 13 - DERIVATIVE FINANCIAL INSTRUMENTS

The Company enters into various derivative financial instruments, both in a dealer capacity to facilitate client transactions and as an end user as a risk management tool. ALCO monitors all derivative activities. When derivatives have been entered into with clients, the Company generally manages the risk associated with these derivatives within the framework of its VAR methodology that monitors total daily exposure and seeks to manage the exposure on an overall basis. Derivatives are also used as a risk management tool to hedge the Company’s balance sheet exposure to changes in identified cash flow and fair value risks, either economically or in accordance with hedge accounting provisions. The Company’s Corporate Treasury function is responsible for employing the various hedge accounting strategies to manage these objectives. Additionally, as a normal part of its operations, the Company enters into IRLCs on mortgage loans that are accounted for as freestanding derivatives and has certain contracts containing embedded derivatives that are carried, in their entirety, at fair value. All freestanding derivatives and any embedded derivatives that the Company bifurcates from the host contracts are carried at fair value in the Consolidated Balance Sheets in trading assets and derivative instruments and trading liabilities and derivative instruments. The associated gains and losses are either recognized in AOCI, net of tax, or within the Consolidated Statements of Income, depending upon the use and designation of the derivatives.

Credit and Market Risk Associated with Derivative Instruments

Derivatives expose the Company to counterparty credit risk if counterparties to the derivative contracts do not perform as expected. The Company minimizes the credit risk of derivatives by entering into transactions with counterparties with defined exposure limits based on credit quality that are reviewed periodically by the Company’s Credit Risk Management division. The Company’s derivatives may also be governed by an ISDA or other legally enforceable industry standard master netting agreement, and depending on the nature of the derivative, bilateral collateral agreements. The Company and its subsidiaries are subject to OTC derivative clearing requirements, which require certain derivatives to be cleared through central clearing members in which the Company is required to post initial margin. To further mitigate the risk of non-payment, variation margin is received or paid daily based on the net asset or liability position of the contracts. When the Company has more than one outstanding derivative transaction with a single counterparty, and there exists a legal right of offset with that counterparty, the Company considers its exposure to the counterparty to be the net market value of its derivative positions with that counterparty. If the net market value is positive, then the counterparty asset value also reflects held collateral. At March 31, 2015, these net derivative asset positions were $1.2 billion, representing the $1.8 billion of derivative net gains adjusted for cash and other collateral of $602 million that the Company held in relation to these gain positions. At December 31, 2014, net derivative asset positions were $1.1 billion, representing $1.5 billion of derivative net gains, adjusted for cash and other collateral of $386 million that the Company held in relation to these gain positions.

Derivatives also expose the Company to market risk. Market risk is the adverse effect that a change in market factors, such as interest rates, currency rates, equity prices, commodity prices, or implied volatility, has on the value of a derivative. Under an established risk governance framework, the Company comprehensively manages the market risk associated with its derivatives by establishing and monitoring limits on the types and degree of risk that may be undertaken. The Company continually measures this risk associated with its derivatives designated as trading instruments using a VAR methodology. Other tools and risk measures are also used to actively manage derivatives risk including scenario analysis and stress testing.

Derivative instruments are priced with observable market assumptions at a mid-market valuation point, with appropriate valuation adjustments for liquidity and credit risk. For purposes of valuation adjustments to its derivative positions, the Company has evaluated liquidity premiums that may be demanded by market participants, as well as the credit risk of its counterparties and its own credit. The Company has considered factors such as the likelihood of default by itself and its counterparties, its net exposures, and remaining maturities in determining the appropriate fair value adjustments to recognize. Generally, the expected loss of each counterparty is estimated using the Company’s internal risk rating system. The risk rating system utilizes counterparty-specific PD and LGD estimates to derive the expected loss.

For purposes of determining the CVA, the Company incorporates market-based views of counterparty default probabilities derived from observed credit spreads in the CDS market when data of acceptable quality was available. For purposes of estimating the Company’s own credit risk on derivative liability positions, the DVA, the Company utilizes market-based probabilities of default from observed credit spreads of Company-specific CDS. Additionally, counterparty exposure is evaluated by offsetting derivatives positions that are subject to legally enforceable master netting arrangements, as well as by considering the amount of marketable collateral securing the positions. All counterparties and defined exposure limits are explicitly approved under established internal policies and procedures. Counterparties are regularly reviewed and appropriate action is taken to adjust the exposure to certain counterparties as necessary. The Company adjusted the net fair value of its derivative contracts for estimates of net counterparty credit risk by approximately $3 million and $7 million at March 31, 2015 and December 31, 2014, respectively.

Currently, the majority of the Company’s derivatives contain contingencies that relate to the creditworthiness of the Bank. These contingencies, which are contained in industry standard master netting agreements, may be considered events of default. Should the Bank be in default under any of these provisions, the Bank’s counterparties would be permitted to close-out net, at amounts that would approximate the then-fair values of the derivatives, resulting in a single sum due by one party to the other. The counterparties would have the right to apply any collateral posted by the Bank against any net amount owed by the Bank. Additionally, certain of the Company’s derivative liability positions, totaling $1.2 billion and $1.1 billion in fair value at March 31, 2015 and December 31, 2014, respectively, contain provisions conditioned on downgrades of the Bank’s credit rating. These provisions, if triggered, would either give rise to an ATE that permits the counterparties to close-out net and apply collateral or, where a CSA is present, require the Bank to post additional collateral. At March 31, 2015, the Bank carried senior long-term debt ratings of A3/A-/BBB+ from Moody’s, S&P, and Fitch, respectively. At March 31, 2015, ATEs have been triggered for less than $1 million in fair value liabilities. The maximum additional liability that could be triggered from ATEs was approximately $29 million at March 31, 2015. At March 31, 2015, $1.2 billion in fair value of derivative liabilities were subject to CSAs, against which the Bank has posted $1.1 billion in collateral, primarily in the form of cash. At March 31, 2015, if requested by the counterparty pursuant to the terms of the CSA, the Bank would be required to post additional collateral of approximately $22 million against these contracts if the Bank were downgraded to Baa3/BBB-. Further downgrades to Ba1/BB+ or below do not contain predetermined collateral posting levels.

Notional and Fair Value of Derivative Positions

The following tables present the Company’s derivative positions at March 31, 2015 and December 31, 2014. The notional amounts in the tables are presented on a gross basis and have been classified within asset derivatives or liability derivatives based on the estimated fair value of the individual contract at March 31, 2015 and December 31, 2014. Gross positive and gross negative fair value amounts associated with respective notional amounts are presented without consideration of any netting agreements, including collateral arrangements. Net fair value derivative amounts are adjusted on an aggregate basis, where applicable, to take into consideration the effects of legally enforceable master netting agreements, including any cash collateral received or paid, and are recognized in trading assets and derivative instruments or trading liabilities and derivative instruments on the Consolidated Balance Sheets. For contracts constituting a combination of options that contain a written option and a purchased option (such as a collar), the notional amount of each option is presented separately, with the purchased notional amount generally being presented as an asset derivative and the written notional amount being presented as a liability derivative. For contracts that contain a combination of options, the fair value is generally presented as a single value with the purchased notional amount if the combined fair value is positive, and with the written notional amount, if the combined fair value is negative.



	March 31, 2015
	Asset Derivatives						Liability Derivatives
(Dollars in millions)		Notional Amounts		Fair Value			Notional Amounts		Fair Value
Derivative instruments designated in cash flow hedging relationships ¹
Interest rate contracts hedging floating rate loans			$16,800		$173			$—		$—
Derivative instruments designated in fair value hedging relationships ²
Interest rate contracts hedging fixed rate debt		4,700		48			600		—
Interest rate contracts hedging brokered CDs		30		—			—		—
Total		4,730		48			600		—
Derivative instruments not designated as hedging instruments ³
Interest rate contracts hedging:
MSRs		7,379		280			11,891		86
LHFS, IRLCs ⁴		2,435		9			4,528		24
Trading activity ⁵		62,171		2,554			62,002		2,371
Foreign exchange rate contracts hedging trading activity		2,838		174			2,899		168
Credit contracts hedging:
Loans		—		—			310		4
Trading activity ⁶		2,564		23			2,771		24
Equity contracts hedging trading activity ⁵		21,462		2,671			27,822		2,953
Other contracts:
IRLCs and other ⁷		3,436		45			122		8
Commodities		443		90			438		90
Total		102,728		5,846			112,783		5,728
Total derivative instruments			$124,258		$6,067			$113,383		$5,728

Total gross derivative instruments, before netting					$6,067					$5,728
Less: Legally enforceable master netting agreements				(4,062		)			(4,062		)
Less: Cash collateral received/paid				(530		)			(1,114		)
Total derivative instruments, after netting					$1,475					$552

¹See “Cash Flow Hedges” in this Note for further discussion.

² See “Fair Value Hedges” in this Note for further discussion.

³ See “Economic Hedging and Trading Activities” in this Note for further discussion.

⁴ Amount includes $576 million of notional amounts related to interest rate futures. These futures contracts settle in cash daily, one day in arrears. The derivative asset or liability associated with the one day lag is included in the fair value column of this table.

⁵ Amounts include $10.4 billion and $554 million of notional amounts related to interest rate futures and equity futures, respectively. These futures contracts settle in cash daily, one day in arrears. The derivative asset or liability associated with the one day lag are included in the fair value column of this table. Amounts also include notional amounts related to interest rate swaps hedging fixed rate debt.

⁶ Asset and liability amounts each include $7 million and $4 million of notional amounts from purchased and written credit risk participation agreements, respectively, whose notional is calculated as the notional of the derivative participated adjusted by the relevant RWA conversion factor.

⁷ Includes $49 million notional amount that is based on the number of Visa Class B shares, 3.2 million, the conversion ratio from Class B shares to Class A shares, and the Class A share price at the derivative inception date of May 28, 2009. This derivative was established upon the sale of Class B shares in the second quarter of 2009. See Note 12, “Guarantees” for additional information.



	December 31, 2014
	Asset Derivatives						Liability Derivatives
(Dollars in millions)		Notional Amounts		Fair Value			Notional Amounts		Fair Value
Derivative instruments designated in cash flow hedging relationships ¹
Interest rate contracts hedging floating rate loans			$18,150		$208			$2,850		$8
Derivative instruments designated in fair value hedging relationships ²
Interest rate contracts hedging fixed rate debt		2,700		30			2,600		1
Interest rate contracts hedging brokered CDs		30		—			—		—
Total		2,730		30			2,600		1
Derivative instruments not designated as hedging instruments³
Interest rate contracts hedging:
MSRs		5,172		163			8,807		30
LHFS, IRLCs ⁴		1,840		4			4,923		23
Trading activity ⁵		61,049		2,405			61,065		2,225
Foreign exchange rate contracts hedging trading activity		2,429		104			2,414		100
Credit contracts hedging:
Loans		—		—			392		5
Trading activity ⁶		2,282		20			2,452		20
Equity contracts hedging trading activity ⁵		21,875		2,809			28,128		3,090
Other contracts:
IRLCs and other ⁷		2,231		25			139		5
Commodities		381		71			374		70
Total		97,259		5,601			108,694		5,568
Total derivative instruments			$118,139		$5,839			$114,144		$5,577

Total gross derivative instruments, before netting					$5,839					$5,577
Less: Legally enforceable master netting agreements				(4,083		)			(4,083		)
Less: Cash collateral received/paid				(449		)			(1,032		)
Total derivative instruments, after netting					$1,307					$462

¹See “Cash Flow Hedges” in this Note for further discussion.

² See “Fair Value Hedges” in this Note for further discussion.

³See “Economic Hedging and Trading Activities” in this Note for further discussion.

⁴ Amount includes $791 million of notional amounts related to interest rate futures. These futures contracts settle in cash daily, one day in arrears. The derivative asset or liability associated with the one day lag is included in the fair value column of this table.

⁵ Amounts include $10.3 billion and $563 million of notional amounts related to interest rate futures and equity futures, respectively. These futures contracts settle in cash daily, one day in arrears. The derivative asset or liability associated with the one day lag is included in the fair value column of this table. Amounts also include notional amounts related to interest rate swaps hedging fixed rate debt.

⁶ Asset and liability amounts both include $4 million of notional amounts from purchased and written interest rate swap risk participation agreements, respectively, whose notional is calculated as the notional of the interest rate swap participated adjusted by the relevant RWA conversion factor.

Impact of Derivative Instruments on the Consolidated Statements of Income and Shareholders’ Equity

The impacts of derivatives on the Consolidated Statements of Income and the Consolidated Statements of Shareholders’ Equity for the three months ended March 31 are presented below. The impacts are segregated between derivatives that are designated in hedge accounting relationships and those that are used for economic hedging or trading purposes, with further identification of the underlying risks in the derivatives and the hedged items, where appropriate. The tables do not disclose the financial impact of the activities that these derivative instruments are intended to hedge.



	Three Months Ended March 31, 2015
(Dollars in millions)	Amount of pre-tax gain recognized in OCI on Derivatives (Effective Portion)		Classification of gain reclassified from AOCI into Income (Effective Portion)	Amount of pre-tax gain reclassified from AOCI into Income (Effective Portion)
Derivative instruments in cash flow hedging relationships:
Interest rate contracts hedging floating rate loans ¹		$125	Interest and fees on loans		$35

¹During the three months ended March 31, 2015, the Company also reclassified $19 million of pre-tax gains from AOCI into net interest income. These gains related to hedging relationships that have been previously terminated or de-designated and are reclassified into earnings consistent with the pattern of net cash flows expected to be recognized.



	Three Months Ended March 31, 2015
(Dollars in millions)	Amount of gain on Derivatives recognized in Income		Amount of loss on related Hedged Items recognized in Income			Amount of gain/(loss) recognized in Income on Hedges (Ineffective Portion)
Derivative instruments in fair value hedging relationships:
Interest rate contracts hedging fixed rate debt ¹		$14		($14	)		$—
Interest rate contracts hedging brokered CDs ¹	—		—			—
Total		$14		($14	)		$—

¹Amounts are recognized in trading income in the Consolidated Statements of Income.



(Dollars in millions)	Classification of (loss)/gain recognized in Income on Derivatives	Amount of (loss)/gain recognized in Income on Derivatives during the Three Months Ended March 31, 2015
Derivative instruments not designated as hedging instruments:
Interest rate contracts hedging:
MSRs	Mortgage servicing related income		$88
LHFS, IRLCs	Mortgage production related income	(43		)
Trading activity	Trading income	15
Foreign exchange rate contracts hedging trading activity	Trading income	56
Credit contracts hedging trading activity	Trading income	6
Equity contracts hedging trading activity	Trading income	3
Other contracts - IRLCs	Mortgage production related income	81
Total			$206



	Three Months Ended March 31, 2014
(Dollars in millions)	Amount of pre-tax gain recognized in OCI on Derivatives (Effective Portion)		Classification of gain reclassified from AOCI into Income (Effective Portion)	Amount of pre-tax gain reclassified from AOCI into Income (Effective Portion)
Derivative instruments in cash flow hedging relationships:
Interest rate contracts hedging floating rate loans¹		$23	Interest and fees on loans		$76

¹During the three months ended March 31, 2014, the Company also reclassified $26 million pre-tax gains from AOCI into net interest income. These gains related to hedging relationships that have been previously terminated or de-designated and are reclassified into earnings consistent with the pattern of net cash flows expected to be recognized.



	Three Months Ended March 31, 2014
(Dollars in millions)	Amount of gain on Derivatives recognized in Income		Amount of loss on related Hedged Items recognized in Income			Amount of gain/(loss )recognized in Income on Hedges (Ineffective Portion)
Derivative instruments in fair value hedging relationships:
Interest rate contracts hedging fixed rate debt ¹		$9		($9	)		$—

¹Amounts are recognized in trading income in the Consolidated Statements of Income.



(Dollars in millions)	Classification of gain/(loss) recognized in Income on Derivatives	Amount of gain/(loss) recognized in Income on Derivatives during the Three Months Ended March 31, 2014
Derivative instruments not designated as hedging instruments:
Interest rate contracts hedging:
MSRs	Mortgage servicing related income		$55
LHFS, IRLCs	Mortgage production related income	(34		)
Trading activity	Trading income	14
Foreign exchange rate contracts hedging trading activity	Trading income	5
Credit contracts hedging trading activity	Trading income	4
Equity contracts hedging trading activity	Trading income	1
Other contracts - IRLCs	Mortgage production related income	60
Total			$105

Netting of Derivative Instruments

The Company has various financial assets and financial liabilities that are subject to enforceable master netting agreements or similar agreements. The Company's securities borrowed or purchased under agreements to resell, and securities sold under agreements to repurchase, that are subject to enforceable master netting agreements or similar agreements, are discussed in Note 2, "Federal Funds Sold and Securities Financing Activities." The Company enters into ISDA or other legally enforceable industry standard master netting agreements with derivative counterparties. Under the terms of the master netting agreements, all transactions between the Company and the counterparty constitute a single business relationship such that in the event of default, the nondefaulting party is entitled to set off claims and apply property held by that party in respect of any transaction against obligations owed. Any payments, deliveries, or other transfers may be applied against each other and netted.

The following tables present total gross derivative instrument assets and liabilities at March 31, 2015 and December 31, 2014, which are adjusted to reflect the effects of legally enforceable master netting agreements and cash collateral received or paid on the net amount reported in the Consolidated Balance Sheets. Also included in the tables are financial instrument collateral related to legally enforceable master netting agreements that represents securities collateral received or pledged and customer cash collateral held at third party custodians. These amounts are not offset on the Consolidated Balance Sheets but are shown as a reduction to total derivative instrument assets and liabilities to derive net derivative instrument assets and liabilities. These amounts are limited to the derivative asset/liability balance, and accordingly, do not include excess collateral received/pledged.



(Dollars in millions)	Gross Amount		Amount Offset		Net Amount Presented in Consolidated Balance Sheets			Held/Pledged Financial Instruments		Net Amount
March 31, 2015
Derivative instrument assets:
Derivatives subject to master netting arrangement or similar arrangement		$5,408		$4,172		$1,236			$72		$1,164
Derivatives not subject to master netting arrangement or similar arrangement	45		—		45			—		45
Exchange traded derivatives	614		420		194			—		194
Total derivative instrument assets		$6,067		$4,592		$1,475	¹		$72		$1,403

Derivative instrument liabilities:
Derivatives subject to master netting arrangement or similar arrangement		$5,185		$4,756		$429			$27		$402
Derivatives not subject to master netting arrangement or similar arrangement	119		—		119			—		119
Exchange traded derivatives	424		420		4			—		4
Total derivative instrument liabilities		$5,728		$5,176		$552	²		$27		$525

December 31, 2014
Derivative instruments assets:
Derivatives subject to master netting arrangement or similar arrangement		$5,127		$4,095		$1,032			$63		$969
Derivatives not subject to master netting arrangement or similar arrangement	25		—		25			—		25
Exchange traded derivatives	687		437		250			—		250
Total derivative instrument assets		$5,839		$4,532		$1,307	¹		$63		$1,244

Derivative instrument liabilities:
Derivatives subject to master netting arrangement or similar arrangement		$5,001		$4,678		$323			$12		$311
Derivatives not subject to master netting arrangement or similar arrangement	133		—		133			—		133
Exchange traded derivatives	443		437		6			—		6
Total derivative instrument liabilities		$5,577		$5,115		$462	²		$12		$450

¹ At March 31, 2015, $1.5 billion, net of $530 million offsetting cash collateral, is recognized in trading assets and derivative instruments within the Company's Consolidated Balance Sheets.

At December 31, 2014, $1.3 billion, net of $449 million offsetting cash collateral, is recognized in trading assets and derivative instruments within the Company's Consolidated Balance Sheets.

² At March 31, 2015, $552 million, net of $1.1 billion offsetting cash collateral, is recognized in trading liabilities and derivative instruments within the Company's Consolidated Balance Sheets. At December 31, 2014, $462 million, net of $1.0 billion offsetting cash collateral, is recognized in trading liabilities and derivative instruments within the Company's Consolidated Balance Sheets.

Credit Derivative Instruments

As part of SunTrust's trading businesses, the Company enters into contracts that are, in form or substance, written guarantees: specifically, CDS, risk participations, and TRS. The Company accounts for these contracts as derivatives and, accordingly, recognizes these contracts at fair value, with changes in fair value recognized in trading income in the Consolidated Statements of Income.

The Company writes CDS, which are agreements under which the Company receives premium payments from its counterparty for protection against an event of default of a reference asset. In the event of default under the CDS, the Company would either settle net cash or make a cash payment to its counterparty and take delivery of the defaulted reference asset, from which the Company may recover all, a portion, or none of the credit loss, depending on the performance of the reference asset. Events of default, as defined in the CDS agreements, are generally triggered upon the failure to pay and similar events related to the issuer(s) of the reference asset. At March 31, 2015 and December 31, 2014, all written CDS contracts reference single name corporate credits or corporate credit indices. When the Company has written CDS, it has generally entered into offsetting CDS for the underlying reference asset, under which the Company paid a premium to its counterparty for protection against an event of default on the reference asset. The counterparties to these purchased CDS are generally of high creditworthiness and typically have ISDA master netting agreements in place that subject the CDS to master netting provisions, thereby mitigating the risk of non-payment to the Company. As such, at March 31, 2015, the Company did not have any material risk of making a non-recoverable payment on any written CDS. During 2015 and 2014, the only instances of default on written CDS were driven by credit indices with constituent credit default. In all cases where the Company made resulting cash payments to settle, the Company collected like amounts from the counterparties to the offsetting purchased CDS.

At March 31, 2015 and December 31, 2014, the written CDS had remaining terms of five years and four years, respectively. The fair values of written CDS were $3 million and $1 million at March 31, 2015 and December 31, 2014, respectively. The maximum guarantees outstanding at March 31, 2015 and December 31, 2014, as measured by the gross notional amounts of written CDS, were $284 million and $20 million, respectively, which represent the curtailment of a mirror purchase CDS positions. At March 31, 2015 and December 31, 2014, the gross notional amounts of purchased CDS contracts were $494 million and $190 million, respectively. The fair values of purchased CDS were $9 million and $5 million at March 31, 2015 and December 31, 2014, respectively.

The Company has also entered into TRS contracts on loans. The Company’s TRS business consists of matched trades, such that when the Company pays depreciation on one TRS, it receives the same amount on the matched TRS. To mitigate its credit risk, the Company typically receives initial cash collateral from the counterparty upon entering into the TRS and is entitled to additional collateral if the fair value of the underlying reference assets deteriorates. There were $2.3 billion of outstanding TRS notional balances at both March 31, 2015 and December 31, 2014. The fair values of the TRS assets and liabilities at March 31, 2015 were $20 million and $15 million, respectively, and related collateral held at March 31, 2015 was $381 million. The fair values of the TRS assets and liabilities at December 31, 2014 were $19 million and $14 million, respectively, and related collateral held at December 31, 2014 was $373 million. For additional information on the Company's TRS contracts, see Note 8, "Certain Transfers of Financial Assets and Variable Interest Entities."

The Company writes risk participations, which are credit derivatives, whereby the Company has guaranteed payment to a dealer counterparty in the event the counterparty experiences a loss on a derivative, such as an interest rate swap, due to a failure to pay by the counterparty’s customer (the “obligor”) on that derivative. The Company monitors its payment risk on its risk participations by monitoring the creditworthiness of the obligors, which is based on the normal credit review process the Company would have performed had it entered into the derivative directly with the obligors. The obligors are all corporations or partnerships. The Company continues to monitor the creditworthiness of the obligors and the likelihood of payment could change at any time due to unforeseen circumstances. To date, no material losses have been incurred related to the Company’s written risk participations. At March 31, 2015, the remaining terms on these risk participations generally ranged from zero to eight years, with a weighted average on the maximum estimated exposure of five years. The Company’s maximum estimated exposure to written risk participations, as measured by projecting a maximum value of the guaranteed derivative instruments based on interest rate curve simulations and assuming 100% default by all obligors on the maximum values, was approximately $31 million at both March 31, 2015 and December 31, 2014. The fair values of the written risk participations were immaterial at both March 31, 2015 and December 31, 2014. As part of its trading activities, the Company may enter into purchased risk participations to mitigate credit exposure to a derivative counterparty.

Cash Flow Hedging Instruments

The Company utilizes a comprehensive risk management strategy to monitor sensitivity of earnings to movements in interest rates. Specific types of funding and principal amounts hedged are determined based on prevailing market conditions and the shape of the yield curve. In conjunction with this strategy, the Company may employ various interest rate derivatives as risk management tools to hedge interest rate risk from recognized assets and liabilities or from forecasted transactions. The terms and notional amounts of derivatives are determined based on management’s assessment of future interest rates, as well as other factors.

Interest rate swaps have been designated as hedging the exposure to the benchmark interest rate risk associated with floating rate loans. At March 31, 2015, the hedge maturities for hedges of floating rate loans ranged from zero to five years, with the weighted average being 2.5 years. Ineffectiveness on these hedges was immaterial for all periods presented. At March 31, 2015, $208 million of the deferred net gains on derivatives that are recognized in AOCI are expected to be reclassified to net interest income over the next twelve months in connection with the recognition of interest income on these hedged items. The amount to be reclassified into income includes both active and terminated or de-designated cash flow hedges. The Company may choose to terminate or de-designate a hedging relationship in this program due to a change in the risk management objective for that specific hedge item, which may arise in conjunction with an overall balance sheet management strategy.

Fair Value Hedging Instruments

The Company enters into interest rate swap agreements as part of the Company’s risk management objectives for hedging its exposure to changes in fair value due to changes in interest rates. These hedging arrangements convert Company-issued fixed rate, long-term debt to floating rates. Consistent with this objective, the Company reflects the accrued contractual interest on the hedged item and the related swaps as part of current period interest expense. There were no components of derivative gains or losses excluded in the Company’s assessment of hedge effectiveness related to the fair value hedges.

Economic Hedging Instruments and Trading Activities

In addition to designated hedge accounting relationships, the Company also enters into derivatives as an end user to economically hedge risks associated with certain non-derivative and derivative instruments, along with entering into derivatives in a trading capacity with its clients.

The primary risks that the Company economically hedges are interest rate risk, foreign exchange risk, and credit risk. Economic hedging objectives are accomplished by entering into offsetting derivatives either on an individual basis or collectively on a macro basis and generally accomplish the Company’s goal of mitigating the targeted risk.

The Company utilizes interest rate derivatives to mitigate exposures from various instruments, including:


•	MSRs. The Company hedges these instruments with a combination of mortgage and interest rate derivatives, including forward and option contracts, futures, and forward rate agreements.


•	IRLCs and mortgage LHFS. The Company hedges these instruments using forward contracts, futures, and option contracts.

The Company is exposed to volatility and changes in foreign exchange rates associated with certain commercial loans. To hedge against this foreign exchange rate risk, the Company enters into foreign exchange rate contracts that provide for the future receipt and delivery of foreign currency at previously agreed-upon terms.

The Company enters into CDS to hedge credit risk associated with certain loans held within its Wholesale Banking segment. The Company accounts for these contracts as derivatives and, accordingly, recognizes these contracts at fair value, with changes in fair value recognized in other noninterest income in the Consolidated Statements of Income.

Trading activity primarily includes interest rate swaps, equity derivatives, CDS, futures, options, foreign currency contracts, and commodities. These derivatives are entered into in a dealer capacity to facilitate client transactions, or are utilized as a risk management tool by the Company as an end user (predominantly in certain macro-hedging strategies). The macro-hedging strategies are focused on managing the Company’s overall interest rate risk exposure that is not otherwise hedged by derivatives or in connection with specific hedges and, therefore, the Company does not specifically associate individual derivatives with specific assets or liabilities.