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Derivative Financial Instruments
 6 Months Ended
Jun. 30, 2018
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 also 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.
 
June 30, 2018
 
December 31, 2017
 
Derivative Assets
 
Derivative Liabilities
 
Derivative Assets
 
Derivative Liabilities
 
(in millions)
Derivatives accounted for as fair value hedges(1)
 
 
 
 
 
 
 
OTC-cleared(2)
$
—

 
$
—

 
$
84

 
$
390

Bilateral OTC(2)
—

 
100

 
—

 
134

Interest rate contracts
—

 
100

 
84

 
524

Derivatives accounted for as cash flow hedges(1)
 
 
 
 
 
 
 
Foreign exchange contracts - bilateral OTC(2)
36

 
—

 
10

 
—

OTC-cleared(2)
—

 
—

 
4

 
86

Bilateral OTC(2)
—

 
9

 
—

 
22

Interest rate contracts
—

 
9

 
4

 
108

Total derivatives accounted for as hedges
36

 
109

 
98

 
632

Trading derivatives not accounted for as hedges(3)
 
 
 
 
 
 
 
Exchange-traded(2)
7

 
132

 
6

 
59

OTC-cleared(2)
122

 
14

 
11,905

 
10,526

Bilateral OTC(2)
9,805

 
10,765

 
11,549

 
12,997

Interest rate contracts
9,934

 
10,911

 
23,460

 
23,582

Exchange-traded(2)
1

 
—

 
4

 
—

Bilateral OTC(2)
18,197

 
17,550

 
15,746

 
14,666

Foreign exchange contracts
18,198

 
17,550

 
15,750

 
14,666

Equity contracts - bilateral OTC(2)
2,831

 
2,812

 
2,820

 
2,806

Exchange-traded(2)
104

 
28

 
52

 
108

Bilateral OTC(2)
732

 
674

 
502

 
613

Precious metals contracts
836

 
702

 
554

 
721

OTC-cleared(2)
161

 
156

 
67

 
75

Bilateral OTC(2)
782

 
643

 
589

 
485

Credit contracts
943

 
799

 
656

 
560

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

 
—

 
519

 
60

Bilateral OTC(2)
124

 
282

 
170

 
164

Interest rate contracts
124

 
282

 
689

 
224

Foreign exchange contracts - bilateral OTC(2)
42

 
18

 
—

 
—

Equity contracts - bilateral OTC(2)
968

 
298

 
1,264

 
145

Precious metals contracts - bilateral OTC(2)
—

 
—

 
—

 
1

Credit contracts - bilateral OTC(2)
16

 
11

 
—

 
24

Other contracts - bilateral OTC(2)(4)
8

 
59

 
6

 
52

Total derivatives
33,936

 
33,551

 
45,297

 
43,413

Less: Gross amounts of receivable / payable subject to enforceable master netting agreements(5)(7)
27,075

 
27,075

 
36,394

 
36,394

Less: Gross amounts of cash collateral received / posted subject to enforceable master netting agreements(6)(7)
3,166

 
4,178

 
4,480

 
3,823

Net amounts of derivative assets / liabilities presented in the balance sheet
3,695

 
2,298

 
4,423

 
3,196

Less: Gross amounts of financial instrument collateral received / posted subject to enforceable master netting agreements but not offset in the consolidated balance sheet
663

 
394

 
742

 
370

Net amounts of derivative assets / liabilities
$
3,032

 
$
1,904

 
$
3,681

 
$
2,826

 
(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 obtaining collateral and enforceable master netting agreements. 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 each of the original counterparties. Exchange traded derivatives are executed directly on an organized exchange. Credit risk is minimized for OTC-cleared derivatives and exchange traded derivatives through daily margining requirements. During the first quarter of 2018, a central clearing counterparty amended its rules for OTC-cleared interest rate derivatives to legally re-characterize daily variation margin payments to be settlement payments as opposed to cash collateral posted. The impact of reflecting the rule change for this central clearing counterparty as of December 31, 2017 would have been a reduction in gross derivative assets and liabilities of approximately $11.5 billion and $10.3 billion, respectively, with corresponding decreases in the related counterparty and cash collateral netting.
(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 allocated netting to the different types of derivative instruments shown in the table above.
See Note 18, "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 our exposure to changes in fair value 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 $184 million and $132 million at June 30, 2018 and December 31, 2017, respectively. During the three and six months ended June 30, 2018, respectively, we amortized nil and $1 million of basis adjustments related to terminated and/or re-designated fair value hedges of our debt compared with $1 million and $3 million during the three and six months ended June 30, 2017, respectively. The total accumulated unamortized basis adjustments related to terminated and/or re-designated fair value hedges amounted to a decrease in the carrying amount of our debt of $7 million at June 30, 2018 and an increase of $7 million at December 31, 2017.
We recorded basis adjustments for active fair value hedges of available-for-sale ("AFS") securities which decreased the carrying amount of the securities by $96 million at June 30, 2018 and increased the carrying amount of the securities by $279 million at December 31, 2017.
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
  
Net Interest Income
 
Other Income
 
Net Interest Income
 
Other Income
 
Other Income
 
(in millions)
Three Months Ended June 30, 2018
 
 
 
 
 
 
 
 
 
Interest rate contracts / AFS Securities
$
(10
)
 
$
125

 
$
89

 
$
(117
)
 
$
8

Interest rate contracts / long-term debt
(14
)
 
(7
)
 
(53
)
 
4

 
(3
)
Total
$
(24
)
 
$
118

 
$
36

 
$
(113
)
 
$
5

 
 
 
 
 
 
 
 
 
 
Three Months Ended June 30, 2017
 
 
 
 
 
 
 
 
 
Interest rate contracts / AFS Securities
$
(36
)
 
$
(147
)
 
$
91

 
$
147

 
$
—

Interest rate contracts / long-term debt
4

 
32

 
(68
)
 
(30
)
 
2

Total
$
(32
)
 
$
(115
)
 
$
23

 
$
117

 
$
2

 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30, 2018
 
 
 
 
 
 
 
 
 
Interest rate contracts / AFS Securities
$
(33
)
 
$
487

 
$
176

 
$
(474
)
 
$
13

Interest rate contracts / long-term debt
(20
)
 
(67
)
 
(110
)
 
65

 
(2
)
Total
$
(53
)
 
$
420

 
$
66

 
$
(409
)
 
$
11

 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30, 2017
 
 
 
 
 
 
 
 
 
Interest rate contracts / AFS Securities
$
(67
)
 
$
(61
)
 
$
180

 
$
64

 
$
3

Interest rate contracts / long-term debt
12

 
19

 
(134
)
 
(16
)
 
3

Total
$
(55
)
 
$
(42
)
 
$
46

 
$
48

 
$
6


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. 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 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 June 30, 2018 and December 31, 2017, active cash flow hedge relationships extend or mature through July 2036. During the three and six months ended June 30, 2018, respectively, $5 million and $9 million of losses related to terminated and/or re-designated cash flow hedge relationships were amortized to earnings from AOCI compared with losses of $3 million and $6 million during the three and six months ended June 30, 2017, respectively. During the next twelve months, we expect to amortize $21 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)
 
2018
 
2017
 
 
2018
 
2017
 
 
2018
 
2017
 
(in millions)
Three Months Ended June 30,
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
$
(1
)
 
$
—

 
Net interest income
 
$
—

 
$
—

 
Other income
 
$
—

 
$
—

Interest rate contracts
$
9

 
$
(9
)
 
Net interest income
 
$
(5
)
 
$
(3
)
 
Other income
 
$
—

 
$
—

Total
$
8

 
$
(9
)
 
 
 
$
(5
)
 
$
(3
)
 
 
 
$
—

 
$
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30,
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
$
(6
)
 
$
—

 
Net interest income
 
$
—

 
$
—

 
Other income
 
$
—

 
$
—

Interest rate contracts
12

 
(11
)
 
Net interest income
 
(9
)
 
(6
)
 
Other income
 
—

 
—

Total
$
6

 
$
(11
)
 
 
 
$
(9
)
 
$
(6
)
 
 
 
$
—

 
$
—


Trading Derivatives and Non-Qualifying Hedging Activities  In addition to risk management, we also enter into derivative contracts, including buy- and sell-protection credit derivatives, for the purposes of trading and market making, or repackaging risks to form structured trades to meet clients' risk taking objectives. Additionally, we buy or sell securities and use derivatives to mitigate the market risks arising from our trading activities with our clients that exceed our risk appetite. We also use buy-protection credit derivatives 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. Counterparty credit risk associated with OTC derivatives, including risk-mitigating buy protection credit derivatives, 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.
•
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 18, "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 (loss) on instruments designated at fair value and related derivatives or other income 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 June 30,
 
Six Months Ended June 30,
2018
 
2017
 
2018
 
2017
 
 
(in millions)
Interest rate contracts
Trading revenue
$
126

 
$
(177
)
 
$
329

 
$
(197
)
Foreign exchange contracts
Trading revenue
28

 
126

 
(72
)
 
69

Equity contracts
Trading revenue
2

 
(2
)
 
(1
)
 
(1
)
Precious metals contracts
Trading revenue
85

 
51

 
215

 
111

Credit contracts
Trading revenue
(1
)
 
(46
)
 
(4
)
 
(46
)
Total
 
$
240

 
$
(48
)
 
$
467

 
$
(64
)
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 June 30,
 
Six Months Ended June 30,
2018
 
2017
 
2018
 
2017
 
 
(in millions)
Interest rate contracts
Gain (loss) on instruments designated at fair value and related derivatives
$
(54
)
 
$
72

 
$
(216
)
 
$
75

Foreign exchange contracts
Gain (loss) on instruments designated at fair value and related derivatives
(8
)
 
(6
)
 
(10
)
 
3

Equity contracts
Gain (loss) on instruments designated at fair value and related derivatives
167

 
161

 
(172
)
 
521

Credit contracts
Other income
12

 
2

 
10

 
(30
)
Other contracts(1)
Other income
(12
)
 
(2
)
 
(14
)
 
(2
)
Total
 
$
105

 
$
227

 
$
(402
)
 
$
567

 

(1) 
Consists of swap agreements entered into in conjunction with the sales of certain Visa Class B Shares.
Credit-Risk Related Contingent Features  The majority of our derivative contracts 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 June 30, 2018 was $1,025 million, for which we had posted collateral of $665 million. The aggregate fair value of all derivative instruments with credit-risk-related contingent features that were in a liability position at December 31, 2017 was $1,063 million, for which we had posted collateral of $758 million. Substantially all of the collateral posted is in the form of cash or securities available-for-sale. See Note 18, "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
$
25

 
$
46


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

June 30, 2018
 
December 31, 2017
 
(in millions)
Interest rate:
 
 
 
Futures and forwards
$
937,672

 
$
735,757

Swaps
3,009,143

 
2,687,273

Options written
100,512

 
77,144

Options purchased
117,847

 
93,042

 
4,165,174

 
3,593,216

Foreign exchange:
 
 
 
Swaps, futures and forwards
1,061,194

 
924,163

Options written
29,417

 
25,911

Options purchased
29,916

 
26,617

Spot
40,302

 
19,401

 
1,160,829

 
996,092

Commodities, equities and precious metals:
 
 
 
Swaps, futures and forwards
53,437

 
38,709

Options written
33,847

 
31,631

Options purchased
45,720

 
43,202

 
133,004

 
113,542

Credit derivatives
91,081

 
90,290

Other contracts(1)
748

 
644

Total
$
5,550,836

 
$
4,793,784

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