Derivatives

6 Months Ended

Jun. 30, 2020

Derivative Instrument Detail [Abstract]

Derivatives

Derivative instruments may be used by the Company as part of its internal risk management programs or may be offered to customers. All derivative instruments are carried at fair value and changes in fair value are reported in earnings as they occur. Credit risk is also considered in determining fair value. Deterioration in the credit rating of customer or other counterparties reduced the fair value of asset contracts. Deterioration of our credit rating could decrease the fair value of our derivative liabilities.

When bilateral netting agreements or similar arrangements exist between the Company and its counterparties that create a single legal claim or obligation to pay or receive the net amount in settlement of the individual derivative contracts, the Company reports derivative assets and liabilities on a net by derivative contract type by counterparty basis.

Derivative contracts may require the Company to provide or receive cash margin as collateral for derivative assets and liabilities. Derivative assets and liabilities are reported net of cash margin when certain conditions are met. In addition, derivative contracts executed with customers under Customer Risk Management Programs may be secured by non-cash collateral in conjunction with a credit agreement with that customer. Access to collateral in the event of default is reasonably assured.

None of these derivative contracts have been designated as hedging instruments for accounting purposes.

Customer Risk Management Programs

BOK Financial offers programs to permit its customers to manage various risks, including fluctuations in energy, cattle and other agricultural products, interest rates and foreign exchange rates with derivative contracts. Customers may also manage interest rate risk through interest rate swaps used by borrowers to modify interest rate terms of their loans. Derivative contracts are executed between the customers and BOK Financial. Offsetting contracts are executed between BOK Financial and other selected counterparties to minimize the risk of changes in commodity prices, interest rates or foreign exchange rates. The counterparty contracts are identical to customer contracts, except for a fixed pricing spread or fee paid to BOK Financial as profit and compensation for administrative costs and credit risk which is recognized over the life of the contracts and included in Other operating revenue – Brokerage and trading revenue in the Consolidated Statements of Earnings.

Trading

BOK Financial may offer derivative instruments such as to-be-announced securities to mortgage banking customers to enable them to manage their market risk or to mitigate the Company's market risk of holding trading securities. Changes in the fair value of derivative instruments for trading purposes or used to mitigate the market risk of holding trading securities are included in Other operating revenue – Brokerage and trading revenue.

Internal Risk Management Programs

BOK Financial may use derivative contracts in managing its interest rate sensitivity, as part of its economic hedge of the change in the fair value of mortgage servicing rights. Changes in the fair value of derivative instruments used in managing interest rate sensitivity and as part of the economic hedge of changes in the fair value of mortgage servicing rights are included in Other operating revenue – Gain (loss) on derivatives, net in the Consolidated Statements of Earnings.

As discussed in Note 5, certain derivative contracts not designated as hedging instruments related to mortgage loan commitments and forward sales contracts are included in Residential mortgage loans held for sale on the Consolidated Balance Sheets. See Note 5 for additional discussion of notional, fair value and impact on earnings of these contracts.

The following table summarizes the fair values of derivative contracts recorded as “derivative contracts” assets and liabilities in the balance sheet at June 30, 2020 (in thousands):


	Assets
	Notional¹		Gross Fair Value		Netting Adjustments		Net Fair Value Before Cash Collateral		Cash Collateral		Fair Value Net of Cash Collateral
Customer risk management programs:
Interest rate contracts	2,772,027		140,157		(42)		140,115		—		140,115
Energy contracts	2,912,225		434,455		(199,805)		234,650		(155,160)		79,490
Agricultural contracts	13,183		59		(35)		24		—		24
Foreign exchange contracts	283,424		281,801		—		281,801		(507)		281,294
Equity option contracts	75,987		1,097		—		1,097		(286)		811
Total customer risk management programs	6,056,846		857,569		(199,882)		657,687		(155,953)		501,734
Trading	50,132,348		219,647		(91,830)		127,817		—		127,817
Internal risk management programs	865,964		23,823		(1,821)		22,002		—		22,002
Total derivative contracts	$	57,055,158	$	1,101,039	$	(293,533)	$	807,506	$	(155,953)	$	651,553

	Liabilities
	Notional¹		Gross Fair Value		Netting Adjustments		Net Fair Value Before Cash Collateral		Cash Collateral		Fair Value Net of Cash Collateral
Customer risk management programs:
Interest rate contracts	2,772,027		140,509		(42)		140,467		(129,094)		11,373
Energy contracts	2,718,690		408,813		(199,805)		209,008		(3,298)		205,710
Agricultural contracts	13,191		50		(35)		15		(15)		—
Foreign exchange contracts	270,594		269,013		—		269,013		—		269,013
Equity option contracts	75,987		1,097		—		1,097		—		1,097
Total customer risk management programs	5,850,489		819,482		(199,882)		619,600		(132,407)		487,193
Trading	52,408,519		213,170		(91,830)		121,340		—		121,340
Internal risk management programs	168,491		3,308		(1,821)		1,487		—		1,487
Total derivative contracts	$	58,427,499	$	1,035,960	$	(293,533)	$	742,427	$	(132,407)	$	610,020

¹ Notional amounts for commodity contracts are converted into dollar-equivalent amounts based on dollar prices at the inception of the contract.

The following table summarizes the fair values of derivative contracts recorded as “derivative contracts” assets and liabilities in the balance sheet at December 31, 2019 (in thousands):


	Assets
	Notional ¹		Gross Fair Value		Netting Adjustments		Net Fair Value Before Cash Collateral		Cash Collateral		Fair Value Net of Cash Collateral
Customer risk management programs:
Interest rate contracts	2,464,478		49,100		(1,839)		47,261		—		47,261
Energy contracts	2,151,096		144,906		(107,591)		37,315		(38)		37,277
Agricultural contracts	16,118		1,522		(22)		1,500		—		1,500
Foreign exchange contracts	214,119		213,007		—		213,007		—		213,007
Equity option contracts	81,455		3,233		—		3,233		(660)		2,573
Total customer risk management programs	4,927,266		411,768		(109,452)		302,316		(698)		301,618
Trading	69,721,932		131,561		(115,949)		15,612		—		15,612
Internal risk management programs	1,268,180		6,226		(81)		6,145		—		6,145
Total derivative contracts	$	75,917,378	$	549,555	$	(225,482)	$	324,073	$	(698)	$	323,375

	Liabilities
	Notional ¹		Gross Fair Value		Netting Adjustments		Net Fair Value Before Cash Collateral		Cash Collateral		Fair Value Net of Cash Collateral
Customer risk management programs:
Interest rate contracts	2,464,478		49,194		(1,839)		47,355		(43,932)		3,423
Energy contracts	2,105,391		139,311		(107,591)		31,720		(6,031)		25,689
Agricultural contracts	16,139		1,507		(22)		1,485		(1,485)		—
Foreign exchange contracts	207,919		207,020		—		207,020		—		207,020
Equity option contracts	81,455		3,233		—		3,233		—		3,233
Total customer risk management programs	4,875,382		400,265		(109,452)		290,813		(51,448)		239,365
Trading	65,144,388		125,535		(115,949)		9,586		—		9,586
Internal risk management programs	380,401		3,121		(81)		3,040		(863)		2,177
Total derivative contracts	$	70,400,171	$	528,921	$	(225,482)	$	303,439	$	(52,311)	$	251,128

¹ Notional amounts for commodity contracts are converted into dollar-equivalent amounts based on dollar prices at the inception of the contract.

The following summarizes the pre-tax net gains (losses) on derivative instruments and where they are recorded in the income statement (in thousands):


	Three Months Ended
	June 30, 2020						June 30, 2019
	Brokerage and Trading Revenue		Gain (Loss) on Derivatives, Net		Brokerage and Trading Revenue		Gain (Loss)on Derivatives, Net
Customer risk management programs:
Interest rate contracts
To-be-announced residential mortgage-backed securities	$	—	$	—	$	2,212	$	—
Interest rate swaps	746		—		942		—
Energy contracts	5,383		—		2,086		—
Agricultural contracts	6		—		4		—
Foreign exchange contracts	107		—		100		—
Equity option contracts	—		—		—		—
Total customer risk management programs	6,242		—		5,344		—
Trading¹	32,577		—		8,030		—
Internal risk management programs	—		21,885		—		11,150
Total derivative contracts	$	38,819	$	21,885	$	13,374	$	11,150

¹Represents changes in fair value of to-be-announced securities and other derivative instruments held to mitigate market risk of trading securities portfolio, which is offset by changes in fair value of trading securities also include in Brokerage and Trading Revenue in the Consolidated Statements of Earnings.



	Six Months Ended
	June 30, 2020						June 30, 2019
	Brokerage and Trading Revenue		Gain (Loss) on Derivatives, Net		Brokerage and Trading Revenue		Gain (Loss) on Derivatives, Net
Customer risk management programs:
Interest rate contracts
To-be-announced residential mortgage-backed securities	$	—	$	—	$	7,912	$	—
Interest rate swaps	1,688		—		1,535		—
Energy contracts	7,390		—		2,312		—
Agricultural contracts	21		—		8		—
Foreign exchange contracts	365		—		254		—
Equity option contracts	—		—		—		—
Total customer risk management programs	9,464		—		12,021		—
Trading¹	(8,078)		—		735		—
Internal risk management programs	—		40,305		—		15,817
Total derivative contracts	$	1,386	$	40,305	$	12,756	$	15,817