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Derivative Financial Instruments
 9 Months Ended
Sep. 30, 2017
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivative Financial Instruments
Derivative Financial Instruments
 
In the normal course of business, the derivative instruments entered into are for trading, market making and risk management purposes. For financial reporting purposes, derivative instruments are designated in one of the following categories: (a) hedging instruments designated as qualifying hedges under derivative and hedge accounting principles, (b) financial instruments held for trading or (c) non-qualifying economic hedges. The derivative instruments held are predominantly swaps, futures, options and forward contracts. All derivatives are stated at fair value. Where we enter into enforceable master netting agreements with counterparties, the master netting agreements permit us to net those derivative asset and liability positions and to offset cash collateral held and posted with the same counterparty.
The following table presents the fair value of derivative contracts by major product type on a gross basis. Gross fair values exclude the effects of both counterparty netting as well as collateral, and therefore are not representative of our exposure. The table below presents the amounts of counterparty netting and cash collateral that have been offset in the consolidated balance sheet, as well as cash and securities collateral posted and received under enforceable master netting agreements that do not meet the criteria for netting. Derivative assets and liabilities which are not subject to an enforceable master netting agreement, or are subject to a netting agreement where an appropriate legal opinion to determine such agreements are enforceable has not been either sought or obtained, have not been netted in the table below. Where we have received or posted collateral under netting agreements where an appropriate legal opinion to determine such agreements are enforceable has not been either sought or obtained, the related collateral also has not been netted in the table below.
 
September 30, 2017
 
December 31, 2016
 
Derivative Assets
 
Derivative Liabilities
 
Derivative Assets
 
Derivative Liabilities
 
(in millions)
Derivatives accounted for as fair value hedges(1)
 
 
 
 
 
 
 
OTC-cleared(2)
$
98

 
$
401

 
$
142

 
$
341

Bilateral OTC(2)
—

 
141

 
—

 
196

Interest rate contracts
98

 
542

 
142

 
537

Derivatives accounted for as cash flow hedges(1)
 
 
 
 
 
 
 
Foreign exchange contracts - bilateral OTC(2)
16

 
—

 
12

 
—

OTC-cleared(2)
—

 
61

 
6

 
57

Bilateral OTC(2)
—

 
24

 
—

 
94

Interest rate contracts
—

 
85

 
6

 
151

Total derivatives accounted for as hedges
114

 
627

 
160

 
688

Trading derivatives not accounted for as hedges(3)
 
 
 
 
 
 
 
Exchange-traded(2)
62

 
105

 
35

 
84

OTC-cleared(2)
10,280

 
8,941

 
15,248

 
14,189

Bilateral OTC(2)
12,204

 
13,445

 
16,045

 
17,480

Interest rate contracts
22,546

 
22,491

 
31,328

 
31,753

Exchange-traded(2)
43

 
36

 
24

 
6

Bilateral OTC(2)
15,568

 
14,749

 
24,020

 
22,645

Foreign exchange contracts
15,611

 
14,785

 
24,044

 
22,651

Equity contracts - bilateral OTC(2)
2,289

 
2,277

 
1,658

 
1,653

Exchange-traded(2)
99

 
33

 
81

 
13

Bilateral OTC(2)
980

 
481

 
1,038

 
867

Precious metals contracts
1,079

 
514

 
1,119

 
880

OTC-cleared(2)
44

 
247

 
227

 
289

Bilateral OTC(2)
946

 
703

 
1,291

 
1,076

Credit contracts
990

 
950

 
1,518

 
1,365

Other non-qualifying derivatives not accounted for as hedges(1)
 
 
 
 
 
 
 
OTC-cleared(2)
338

 
66

 
287

 
41

Bilateral OTC(2)
378

 
140

 
437

 
170

Interest rate contracts
716

 
206

 
724

 
211

Foreign exchange contracts - bilateral OTC(2)
3

 
8

 
—

 
31

Equity contracts - bilateral OTC(2)
1,117

 
115

 
672

 
222

Precious metals contracts - bilateral OTC(2)
—

 
2

 
—

 
—

Credit contracts - bilateral OTC(2)
—

 
18

 
32

 
4

Other contracts - bilateral OTC(2)(4)
7

 
52

 
5

 
14

Total derivatives
44,472

 
42,045

 
61,260

 
59,472

Less: Gross amounts of receivable / payable subject to enforceable master netting agreements(5)(7)
35,791

 
35,791

 
51,111

 
51,111

Less: Gross amounts of cash collateral received / posted subject to enforceable master netting agreements(6)(7)
4,808

 
3,195

 
5,145

 
3,826

Net amounts of derivative assets / liabilities presented in the balance sheet
3,873

 
3,059

 
5,004

 
4,535

Less: Gross amounts of financial instrument collateral received / posted subject to enforceable master netting agreements but not offset in the consolidated balance sheet
710

 
367

 
787

 
1,050

Net amounts of derivative assets / liabilities
$
3,163

 
$
2,692

 
$
4,217

 
$
3,485

 
(1) 
Derivative assets / liabilities related to cash flow hedges, fair value hedges and derivative instruments held for purposes other than for trading are recorded in other assets / interest, taxes and other liabilities on the consolidated balance sheet.
(2) 
Over-the-counter (OTC) derivatives include derivatives executed and settled bilaterally with counterparties without the use of an organized exchange or central clearing house. The credit risk associated with bilateral OTC derivatives is managed through master netting agreements and obtaining collateral. OTC-cleared derivatives are executed bilaterally in the OTC market but then novated to a central clearing counterparty, whereby the central clearing counterparty becomes the counterparty to both of the original counterparties. Exchange traded derivatives are executed directly on an organized exchange that provides pre-trade price transparency. Credit risk is minimized for OTC-cleared derivatives and exchange traded derivatives through daily margining required by central clearing counterparties.
(3) 
Trading related derivative assets / liabilities are recorded in trading assets / trading liabilities on the consolidated balance sheet.
(4) 
Consists of swap agreements entered into in conjunction with the sales of certain Visa Inc. ("Visa") Class B common shares ("Class B Shares").
(5) 
Represents the netting of derivative receivable and payable balances for the same counterparty under enforceable netting agreements.
(6) 
Represents the netting of cash collateral posted and received by counterparty under enforceable netting agreements.
(7) 
Netting is performed at a counterparty level in cases where enforceable master netting agreements are in place, regardless of the type of derivative instrument. Therefore, we have not attempted to allocate netting to the different types of derivative instruments shown in the table above.
See Note 17, "Guarantee Arrangements, Pledged Assets and Repurchase Agreements," for further information on offsetting related to resale and repurchase agreements and securities borrowing and lending arrangements.
Derivatives Held for Risk Management Purposes  Our risk management policy requires us to identify, analyze and manage risks arising from the activities conducted during the normal course of business. We use derivative instruments as an asset and liability management tool to manage our exposures in interest rate, foreign currency and credit risks in existing assets and liabilities, commitments and forecasted transactions. The accounting for changes in fair value of a derivative instrument will depend on whether the derivative has been designated and qualifies for hedge accounting.
We designate derivative instruments to offset the fair value risk and cash flow risk arising from fixed-rate and floating-rate assets and liabilities as well as forecasted transactions. We assess the hedging relationships, both at the inception of the hedge and on an ongoing basis, using a regression approach to determine whether the designated hedging instrument is highly effective in offsetting changes in the fair value or the cash flows attributable to the hedged risk. Accounting principles for qualifying hedges require us to prepare detailed documentation describing the relationship between the hedging instrument and the hedged item, including, but not limited to, the risk management objective, the hedging strategy and the methods to assess and measure the ineffectiveness of the hedging relationship. We discontinue hedge accounting when we determine that the hedge is no longer highly effective, the hedging instrument is terminated, sold or expired, the designated forecasted transaction is not probable of occurring, or when the designation is removed by us.
Fair Value Hedges  In the normal course of business, we hold fixed-rate loans and securities and issue fixed-rate senior and subordinated debt obligations. The fair value of fixed-rate (U.S. dollar and non-U.S. dollar denominated) assets and liabilities fluctuates in response to changes in interest rates or foreign currency exchange rates. We utilize interest rate swaps, forward and futures contracts and foreign currency swaps to minimize the effect on earnings caused by interest rate and foreign currency volatility. The changes in the fair value of the hedged item designated in a qualifying hedge are captured as an adjustment to the carrying amount of the hedged item (basis adjustment). If the hedging relationship is terminated and the hedged item continues to exist, the basis adjustment is amortized over the remaining life of the hedged item.
We recorded basis adjustments for active fair value hedges which decreased the carrying amount of our debt by $91 million and $104 million at September 30, 2017 and December 31, 2016, respectively. During the three and nine months ended September 30, 2017, respectively, we amortized $1 million and $4 million of basis adjustments related to terminated and/or re-designated fair value hedges of our debt compared with $2 million and $5 million during the three and nine months ended September 30, 2016, respectively. The total accumulated unamortized basis adjustments related to terminated and-or re-designated fair value hedges amounted to increases in the carrying amount of our debt of $8 million and $12 million at September 30, 2017 and December 31, 2016, respectively.
We recorded basis adjustments for active fair value hedges of available-for-sale ("AFS") securities which increased the carrying amount of the securities by $323 million and $258 million at September 30, 2017 and December 31, 2016, respectively.
The following table presents information on gains and losses on derivative instruments designated and qualifying as hedging instruments in fair value hedges and the hedged items in fair value hedges and their locations on the consolidated statement of income:
 
Gain (Loss) on Derivative
 
Gain (Loss) on Hedged Items
 
Net Ineffective Gain (Loss) Recognized
  
Interest Income
(Expense)
 
Other Income (Loss)
 
Interest Income
(Expense)
 
Other Income (Loss)
 
Other Income (Loss)
 
(in millions)
Three Months Ended September 30, 2017
 
 
 
 
 
 
 
 
 
Interest rate contracts/AFS Securities
$
(28
)
 
$
2

 
$
88

 
$
(2
)
 
$
—

Interest rate contracts/long-term debt
2

 
(5
)
 
(63
)
 
3

 
(2
)
Total
$
(26
)
 
$
(3
)
 
$
25

 
$
1

 
$
(2
)
 
 
 
 
 
 
 
 
 
 
Three Months Ended September 30, 2016
 
 
 
 
 
 
 
 
 
Interest rate contracts/AFS Securities
$
(38
)
 
$
26

 
$
92

 
$
(37
)
 
$
(11
)
Interest rate contracts/long-term debt
8

 
(27
)
 
(34
)
 
26

 
(1
)
Total
$
(30
)
 
$
(1
)
 
$
58

 
$
(11
)
 
$
(12
)
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2017
 
 
 
 
 
 
 
 
 
Interest rate contracts/AFS Securities
$
(95
)
 
$
(59
)
 
$
268

 
$
62

 
$
3

Interest rate contracts/long-term debt
14

 
14

 
(197
)
 
(13
)
 
1

Total
$
(81
)
 
$
(45
)
 
$
71

 
$
49

 
$
4

 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2016
 
 
 
 
 
 
 
 
 
Interest rate contracts/AFS Securities
$
(133
)
 
$
(1,027
)
 
$
281

 
$
965

 
$
(62
)
Interest rate contracts/long-term debt
23

 
71

 
(95
)
 
(70
)
 
1

Total
$
(110
)
 
$
(956
)
 
$
186

 
$
895

 
$
(61
)
 
 
 
 
 
 
 
 
 
 

Cash Flow Hedges  We own or issue floating rate financial instruments and enter into forecasted transactions that give rise to variability in future cash flows. As a part of our risk management strategy, we use interest rate swaps, currency swaps and futures contracts to mitigate risk associated with variability in the cash flows. Changes in fair value of a derivative instrument associated with the effective portion of a qualifying cash flow hedge are recognized initially in other comprehensive income (loss). When the cash flows being hedged materialize and are recorded in income or expense, the associated gain or loss from the hedging derivative previously recorded in accumulated other comprehensive income (loss) ("AOCI") is reclassified into earnings in the same accounting period in which the designated forecasted transaction or hedged item affects earnings. If a cash flow hedge of a forecasted transaction is de-designated because it is no longer highly effective, or if the hedge relationship is terminated, the cumulative gain or loss on the hedging derivative to that date will continue to be reported in AOCI unless it is probable that the hedged forecasted transaction will not occur by the end of the originally specified time period as documented at the inception of the hedge, at which time the cumulative gain or loss is released into earnings.
At September 30, 2017 and December 31, 2016, active cash flow hedge relationships extend or mature through July 2036. During the three and nine months ended September 30, 2017, respectively, $5 million and $11 million of losses related to terminated and/or re-designated cash flow hedge relationships were amortized to earnings from AOCI compared with losses of $5 million and $14 million during the three and nine months ended September 30, 2016, respectively. During the next twelve months, we expect to amortize $22 million of remaining losses to earnings resulting from these terminated and/or re-designated cash flow hedges. The interest accrual related to the hedging instruments is recognized in interest income.
The following table presents information on gains and losses on derivative instruments designated and qualifying as hedging instruments in cash flow hedges (including amounts recognized in AOCI from all terminated cash flow hedges) and their locations on the consolidated statement of income:
 
Gain (Loss)
Recognized
in AOCI on
Derivative
(Effective
Portion)
Location of 
Gain (Loss) 
Reclassified
from AOCI into Income 
(Effective Portion)
 
Gain (Loss)
Reclassed
From AOCI
into Income
(Effective
Portion)
 
Location of Gain
(Loss) Recognized
in Income on the Derivative
(Ineffective Portion and
Amount Excluded from Effectiveness Testing)
 
Gain (Loss)
Recognized
in Income
on the
Derivative
(Ineffective
Portion)
 
2017
 
2016
 
 
2017
 
2016
 
 
2017
 
2016
 
(in millions)
Three Months Ended September 30,
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate contracts
$
(3
)
 
$
11

 
Interest income (expense)
 
$
(5
)
 
$
(5
)
 
Other income (loss)
 
$
—

 
$
—

Total
$
(3
)
 
$
11

 
 
 
$
(5
)
 
$
(5
)
 
 
 
$
—

 
$
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30,
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate contracts
$
(14
)
 
$
(89
)
 
Interest income (expense)
 
$
(11
)
 
$
(14
)
 
Other income (loss)
 
$
—

 
$
—

Total
$
(14
)
 
$
(89
)
 
 
 
$
(11
)
 
$
(14
)
 
 
 
$
—

 
$
—


Trading Derivatives and Non-Qualifying Hedging Activities  In addition to risk management, we enter into derivative instruments, including buy- and sell-protection credit derivatives, for trading and market making purposes, to repackage risks and structure trades to facilitate clients' needs for various risk taking and risk modification purposes. We manage our risk exposure by entering into offsetting derivatives with other financial institutions to mitigate the market risks, in part or in full, arising from our trading activities with our clients. In addition, we also enter into buy-protection credit derivatives with other market participants to manage our counterparty credit risk exposure. Where we enter into derivatives for trading purposes, realized and unrealized gains and losses are recognized in trading revenue. Prior to the sale of our remaining Mortgage Servicing Rights ("MSRs") portfolio during the fourth quarter of 2016, we used forward purchases or sales of to-be-announced ("TBA") securities to economically hedge our MSRs. Changes in the fair value of TBA positions, which were considered derivatives, were recorded in residential mortgage banking revenue (expense). Credit losses arising from counterparty risk on over-the-counter derivative instruments and offsetting buy protection credit derivative positions are recognized as an adjustment to the fair value of the derivatives and are recorded in trading revenue.
Our non-qualifying hedging and other activities include:
•
Derivative contracts related to the fixed-rate long-term debt issuances and hybrid instruments, including all structured notes and deposits, for which we have elected fair value option accounting. These derivative contracts are non-qualifying hedges but are considered economic hedges.
•
Credit default swaps which are designated as economic hedges against the credit risks within our loan portfolio. In the event of an impairment loss occurring in a loan that is economically hedged, the impairment loss is recognized as provision for credit losses while the gain on the credit default swap is recorded as other income (loss).
•
Swap agreements entered into in conjunction with the sales of certain Visa Class B Shares to a third party to retain the litigation risk associated with the Class B Shares sold until the related litigation is settled and the Class B Shares can be converted into Class A common shares ("Class A Shares"). See Note 17, "Guarantee Arrangements, Pledged Assets and Repurchase Agreements," for additional information.
Derivative instruments designated as economic hedges that do not qualify for hedge accounting are recorded at fair value through profit and loss. Realized and unrealized gains and losses on economic hedges are recognized in gain on instruments designated at fair value and related derivatives, other income (loss) or residential mortgage banking revenue (expense) while the derivative asset or liability positions are reflected as other assets or other liabilities.
The following table presents information on gains and losses on derivative instruments held for trading purposes and their locations on the consolidated statement of income:
 
Location of Gain (Loss)
Recognized in Income on Derivatives
Amount of Gain (Loss) Recognized in Income on Derivatives
Three Months Ended September 30,
 
Nine Months Ended September 30,
2017
 
2016
 
2017
 
2016
 
 
(in millions)
Interest rate contracts
Trading revenue
$
(52
)
 
$
97

 
$
(249
)
 
$
(413
)
Interest rate contracts
Residential mortgage banking revenue (expense)
—

 
(3
)
 
—

 
40

Foreign exchange contracts
Trading revenue
116

 
(243
)
 
185

 
(15
)
Equity contracts
Trading revenue
1

 
2

 
—

 
5

Precious metals contracts
Trading revenue
50

 
35

 
161

 
64

Credit contracts
Trading revenue
(41
)
 
(40
)
 
(87
)
 
(102
)
Total
 
$
74

 
$
(152
)
 
$
10

 
$
(421
)

The following table presents information on gains and losses on derivative instruments held for non-qualifying hedging and other activities and their locations on the consolidated statement of income:
 
Location of Gain (Loss)
Recognized in Income on Derivatives
Amount of Gain (Loss) Recognized in Income on Derivatives
Three Months Ended September 30,
 
Nine Months Ended September 30,
2017
 
2016
 
2017
 
2016
 
 
(in millions)
Interest rate contracts
Gain (loss) on instruments designated at fair value and related derivatives
$
14

 
$
(6
)
 
$
89

 
$
319

Foreign exchange contracts
Gain (loss) on instruments designated at fair value and related derivatives
8

 
6

 
11

 
26

Equity contracts
Gain (loss) on instruments designated at fair value and related derivatives
342

 
194

 
863

 
226

Credit contracts
Other income (loss)
(9
)
 
(23
)
 
(39
)
 
(64
)
Other contracts(1)
Other income (loss)
(5
)
 
—

 
(7
)
 
—

Total
 
$
350

 
$
171

 
$
917

 
$
507

 

(1) 
Consists of swap agreements entered into in conjunction with the sales of certain Visa Class B Shares.
Credit-Risk Related Contingent Features  We enter into total return swap, interest rate swap, cross-currency swap and credit default swap contracts, amongst others, which contain provisions that require us to maintain a specific credit rating from each of the major credit rating agencies. Sometimes the derivative instrument transactions are a part of broader structured product transactions. If our credit ratings were to fall below the current ratings, the counterparties to our derivative instruments could demand us to post additional collateral. The amount of additional collateral required to be posted will depend on whether we are downgraded by one or more notches. The aggregate fair value of all derivative instruments with credit-risk related contingent features that were in a liability position at September 30, 2017 was $1,044 million, for which we had posted collateral of $738 million. The aggregate fair value of all derivative instruments with credit-risk-related contingent features that were in a liability position at December 31, 2016 was $586 million, for which we had posted collateral of $581 million. Substantially all of the collateral posted is in the form of cash or securities available-for-sale. See Note 17, "Guarantee Arrangements, Pledged Assets and Repurchase Agreements," for further details.
The following table presents the amount of additional collateral that we would be required to post (from the current collateral level) related to derivative instruments with credit-risk related contingent features if our long term ratings were downgraded by one or two notches. A downgrade by a single rating agency that does not result in a rating lower than a preexisting corresponding rating provided by another rating agency will generally not result in additional collateral.
 
One-notch downgrade
 
Two-notch downgrade
 
(in millions)
Amount of additional collateral to be posted upon downgrade
$
40

 
$
41


Notional Value of Derivative Contracts  The following table summarizes the notional values of derivative contracts:

September 30, 2017
 
December 31, 2016
 
(in millions)
Interest rate:
 
 
 
Futures and forwards
$
830,442

 
$
501,635

Swaps
2,367,130

 
2,142,183

Options written
52,585

 
74,741

Options purchased
69,476

 
87,020

 
3,319,633

 
2,805,579

Foreign exchange:
 
 
 
Swaps, futures and forwards
908,523

 
965,301

Options written
28,088

 
52,845

Options purchased
29,921

 
53,260

Spot
45,123

 
34,565

 
1,011,655

 
1,105,971

Commodities, equities and precious metals:
 
 
 
Swaps, futures and forwards
55,672

 
49,555

Options written
26,603

 
19,495

Options purchased
38,166

 
30,632

 
120,441

 
99,682

Credit derivatives
95,914

 
123,714

Other contracts(1)
594

 
184

Total
$
4,548,237

 
$
4,135,130

 
(1) 
Consists of swap agreements entered into in conjunction with the sales of certain Visa Class B Shares.