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Derivatives and Hedging Activities
 9 Months Ended
Sep. 30, 2018
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivatives and Hedging Activities 7. Derivatives and Hedging Activities

We are a party to various derivative instruments, mainly through our subsidiary, KeyBank. The primary derivatives that we use are interest rate swaps, caps, floors, and futures; foreign exchange contracts; commodity derivatives; and credit derivatives. Generally, these instruments help us manage exposure to interest rate risk, mitigate the credit risk inherent in our loan portfolio, hedge against changes in foreign currency exchange rates, and meet client financing and hedging needs.

At September 30, 2018, after taking into account the effects of bilateral collateral and master netting agreements, we had $48 million of derivative assets and a positive $3 million of derivative liabilities that relate to contracts entered into for hedging purposes. As of the same date, after taking into account the effects of bilateral collateral and master netting agreements and a reserve for potential future losses, we had derivative assets of $700 million and derivative liabilities of $446 million that were not designated as hedging instruments. These positions are primarily comprised of derivative contracts entered into for client accommodation purposes.

Additional information regarding our accounting policies for derivatives is provided in Note 1 (“Summary of Significant Accounting Policies”) under the heading “Derivatives and Hedging” beginning on page 105 of our 2017 Form 10-K. Our derivative strategies and related risk management objectives are described in Note 9 (“Derivatives and Hedging Activities”) beginning on page 143 of our 2017 Form 10-K.

Fair Values, Volume of Activity, and Gain/Loss Information Related to Derivative Instruments

The following table summarizes the fair values of our derivative instruments on a gross and net basis as of September 30, 2018, and December 31, 2017. The derivative asset and liability balances are presented on a gross basis, prior to the application of bilateral collateral and master netting agreements, but after the variation margin payments with central clearing organizations have been applied as settlement, as applicable. Total derivative assets and liabilities are adjusted to take into account the impact of legally enforceable master netting agreements that allow us to settle all derivative contracts with a single counterparty on a net basis and to offset the net derivative position with the related cash collateral. Securities collateral related to legally enforceable master netting
agreements is not offset on the balance sheet. Our derivative instruments are included in “accrued income and other assets” or “accrued expenses and other liabilities” on the balance sheet, as follows:
 
September 30, 2018
 
December 31, 2017
 
 
Fair Value
 
 
Fair Value
in millions
Notional
Amount
Derivative
Assets
Derivative
Liabilities
 
Notional
Amount
Derivative
Assets
Derivative
Liabilities
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
Interest rate
$
27,445

$
38

$
(4
)
 
$
26,176

$
81

$
46

Foreign exchange
254

2

1

 
302

1

4

Total
27,699

40

(3
)
 
26,478

82

50

Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
Interest rate
65,617

272

449

 
61,390

641

474

Foreign exchange
7,695

100

92

 
8,317

129

120

Commodity
2,235

491

481

 
1,687

255

246

Credit
401

—

3

 
315

1

4

Other (a)
1,795

7

3

 
2,006

4

13

Total
77,743

870

1,028

 
73,715

1,030

857

Netting adjustments (b)
—

(162
)
(582
)
 
—

(443
)
(616
)
Net derivatives in the balance sheet
105,442

748

443

 
100,193

669

291

Other collateral (c)
—

(1
)
(50
)
 
—

(5
)
(84
)
Net derivative amounts
$
105,442

$
747

$
393

 
$
100,193

$
664

$
207

 
 
 
 
 
 
 
 
(a)
Other derivatives include interest rate lock commitments and forward sale commitments related to our residential mortgage banking activities, forward purchase and sales contracts consisting of contractual commitments associated with “to be announced” securities and when-issued securities, and when-issued security transactions in connection with an “at-the-market” equity offering program.
(b)
Netting adjustments represent the amounts recorded to convert our derivative assets and liabilities from a gross basis to a net basis in accordance with the applicable accounting guidance.
(c)
Other collateral represents the amount that cannot be used to offset our derivative assets and liabilities from a gross basis to a net basis in accordance with the applicable accounting guidance. The other collateral consists of securities and is exchanged under bilateral collateral and master netting agreements that allow us to offset the net derivative position with the related collateral. The application of the other collateral cannot reduce the net derivative position below zero. Therefore, excess other collateral, if any, is not reflected above.

Fair value hedges. During the nine-month period ended September 30, 2018, we did not exclude any portion of fair value hedging instruments from the assessment of hedge effectiveness.

The following table summarizes the amounts that were recorded on the balance sheet as of September 30, 2018, related to cumulative basis adjustments for fair value hedges.

 
September 30, 2018
in millions
Balance sheet line item in which the hedge item is included
Carrying amount of hedged item (a)
Hedge accounting basis adjustment (b)
Interest rate contracts
Long-term debt
$
9,442

$
(145
)
Interest rate contracts
Certificate of deposit ($100,000 or more)
344

(1
)
Interest rate contracts
Other time deposits
178

—

 
 
 
 
(a)
The carrying amount represents the portion of the liability designated as the hedged item.
(b)
Basis adjustment includes $10 million related to de-designated hedged items no longer in qualifying fair value hedging relationships.

Cash flow hedges. During the nine-month period ended September 30, 2018, we did not exclude any portion of cash flow hedging instruments from the assessment of hedge effectiveness.

Considering the interest rates, yield curves, and notional amounts as of September 30, 2018, we expect to reclassify an estimated $45 million of after-tax net gains on derivative instruments designated as cash flow hedges from AOCI to income during the next 12 months. In addition, we expect to reclassify approximately $45 million of net losses related to terminated cash flow hedges from AOCI to income during the next 12 months. As of September 30, 2018, the maximum length of time over which we hedge forecasted transactions is 10 years.

The following tables summarize the effect of fair value and cash flow hedge accounting on the income statement for the three- and nine-month periods ended September 30, 2018, and September 30, 2017.

 
Location and amount of net gains (losses) recognized in income on fair value and cash flow hedging relationships (a)
in millions
Interest expense – long-term debt
Interest income – loans
Interest expense - deposits
Other income
Three months ended September 30, 2018
 
 
 
 
Total amounts presented in the consolidated statement of income
$
(108
)
$
1,025

$
(140
)
$
23

 
 
 
 
 
Net gains (losses) on fair value hedging relationships
 
 
 
 
Interest contracts
 
 
 
 
Recognized on hedged items
41

—

—

—

Recognized on derivatives designated as hedging instruments
(46
)
—

—

—

Net income (expense) recognized on fair value hedges
(5
)
—

—

—

Net gain (loss) on cash flow hedging relationships
 
 
 
 
Interest contracts
 
 
 
 
Realized gains (losses) (pre-tax) reclassified from AOCI into net income
(2
)
(15
)
—

—

Net income (expense) recognized on cash flow hedges
$
(2
)
$
(15
)
—

—

 
 
 
 
 
Three months ended September 30, 2017
 
 
 
 
Total amounts presented in the consolidated statement of income
$
(86
)
$
928

$
(72
)
$
21

 
 
 
 
 
Net gains (losses) on fair value hedging relationships
 
 
 
 
Interest contracts
 
 
 
 
Recognized on hedged items
—

—

—

20

Recognized on derivatives designated as hedging instruments
10

—

—

(19
)
Net income (expense) recognized on fair value hedges
10

—

—

1

Net gain (loss) on cash flow hedging relationships
 
 
 
 
Interest contracts
 
 
 
 
Realized gains (losses) (pre-tax) reclassified from AOCI into net income
(1
)
1

—

—

Gains (losses) (before tax) recognized in income for hedge ineffectiveness
—

—

—

—

Net income (expense) recognized on cash flow hedges
$
(1
)
$
1

—

—

 
 
 
 
 
 
Location and amount of net gains (losses) recognized in income on fair value and cash flow hedging relationships (a)
in millions
Interest expense – long-term debt
Interest income – loans
Interest expense - deposits
Other income
Nine months ended September 30, 2018
 
 
 
 
Total amounts presented in the consolidated statement of income
$
(302
)
$
2,965

$
(343
)
$
143

 
 
 
 
 
Net gains (losses) on fair value hedging relationships
 
 
 
 
Interest contracts
 
 
 
 
Recognized on hedged items
134

—

1

—

Recognized on derivatives designated as hedging instruments
(140
)
—

—

—

Net income (expense) recognized on fair value hedges
(6
)
—

1

—

Net gain (loss) on cash flow hedging relationships
 
 
 
 
Interest contracts
 
 
 
 
Realized gains (losses) (pre-tax) reclassified from AOCI into net income
(2
)
(42
)
—

—

Net income (expense) recognized on cash flow hedges
$
(2
)
$
(42
)
—

—

 
 
 
 
 
Nine months ended September 30, 2017
 
 
 
 
Total amounts presented in the consolidated statement of income
$
(228
)
$
2,753

$
(196
)
$
138

 
 
 
 
 
Net gains (losses) on fair value hedging relationships
 
 
 
 
Interest contracts
 
 
 
 
Recognized on hedged items
—

—

—

50

Recognized on derivatives designated as hedging instruments
42

—

—

(49
)
Net income (expense) recognized on fair value hedges
42

—

—

1

Net gain (loss) on cash flow hedging relationships
 
 
 
 
Interest contracts
 
 
 
 
Realized gains (losses) (pre-tax) reclassified from AOCI into net income
(3
)
21

—

—

Gains (losses) (before tax) recognized in income for hedge ineffectiveness
—

—

—

—

Net income (expense) recognized on cash flow hedges
$
(3
)
$
21

—

—

 
 
 
 
 

(a)
Prior period gain or loss amounts were not restated to conform to the new hedge accounting guidance adopted in 2018.

Net investment hedges. We enter into foreign currency forward contracts to hedge our exposure to changes in the carrying value of our investments as a result of changes in the related foreign exchange rates. At September 30, 2018, AOCI reflected unrecognized, after-tax gains totaling $43 million related to cumulative changes in the fair value of our net investment hedges, which offset the unrecognized, after-tax foreign currency losses on net investment balances. We did not exclude any portion of our hedging instruments from the assessment of hedge effectiveness during the nine-month period ended September 30, 2018.

The following tables summarize the pre-tax net gains (losses) on our cash flow and net investment hedges for the three- and nine-month periods ended September 30, 2018, and September 30, 2017, and where they are recorded on the income statement. The table includes net gains (losses) recognized in OCI during the period and net gains (losses) reclassified from OCI into income during the current period.
in millions
Net Gains (Losses)
Recognized in OCI
Income Statement Location of Net Gains (Losses)
Reclassified From OCI Into Income
Net Gains
(Losses) Reclassified
From OCI Into Income(a)
Net Gains (Losses) Recognized in Other Income(a)
Three months ended September 30, 2018
 
 
 
 
Cash Flow Hedges
 
 
 
 
Interest rate
$
(32
)
Interest income — Loans
$
(15
)
$
—

Interest rate
(1
)
Interest expense — Long-term debt
(2
)
—

Interest rate
1

Investment banking and debt placement fees
—

—

Net Investment Hedges
 
 
 
 
Foreign exchange contracts
(2
)
Other Income
—

—

Total
$
(34
)
 
$
(17
)
$
—

Three months ended September 30, 2017
 
 
 
 
Cash Flow Hedges
 
 
 
 
Interest rate
$
(1
)
Interest income — Loans
$
1

$
—

Interest rate
(1
)
Interest expense — Long-term debt
(1
)
—

Interest rate
(1
)
Investment banking and debt placement fees
—

—

Net Investment Hedges
 
 
 
 
Foreign exchange contracts
(12
)
Other Income
—

—

Total
$
(15
)
 
$
—

$
—

 
 
 
 
 
in millions
Net Gains (Losses)
Recognized in OCI
Income Statement Location of Net Gains (Losses)
Reclassified From OCI Into Income
Net Gains
(Losses) Reclassified
From OCI Into Income(a)
Net Gains (Losses) Recognized in Other Income(a)
Nine months ended September 30, 2018
 
 
 
 
Cash Flow Hedges
 
 
 
 
Interest rate
$
(178
)
Interest income — Loans
$
(42
)
$
—

Interest rate
3

Interest expense — Long-term debt
(2
)
—

Interest rate
2

Investment banking and debt placement fees
—

—

Net Investment Hedges
 
 
 
 
Foreign exchange contracts
8

Other Income
—

—

Total
$
(165
)
 
$
(44
)
$
—

Nine months ended September 30, 2017
 
 
 
 
Cash Flow Hedges
 
 
 
 
Interest rate
$
(1
)
Interest income — Loans
$
21

$
—

Interest rate
(1
)
Interest expense — Long-term debt
(3
)
—

Interest rate
(1
)
Investment banking and debt placement fees
—

—

Net Investment Hedges
 
 
 
 
Foreign exchange contracts
(22
)
Other Income
—

—

Total
$
(25
)
 
$
18

$
—

 
 
 
 
 
(a)
Prior period gain or loss amounts were not restated to conform to the new hedge accounting guidance adopted in 2018.

Nonhedging instruments

The following tables summarize the pre-tax net gains (losses) on our derivatives that are not designated as hedging instruments for the three- and nine-month periods ended September 30, 2018, and September 30, 2017, and where they are recorded on the income statement.
 
Three months ended September 30, 2018
 
Three months ended September 30, 2017
in millions
Corporate
services
income
Consumer mortgage income
Other income
Total
 
Corporate services income
Consumer mortgage income
Other income
Total
NET GAINS (LOSSES)
 
 
 
 
 
 
 
 
 
Interest rate
$
8

$
—

$
2

$
10

 
$
5

—

$
1

$
6

Foreign exchange
10

—

—

10

 
10

—

—

10

Commodity
—

—

—

—

 
1

—

—

1

Credit
—

—

(7
)
(7
)
 
—

—

(6
)
(6
)
Other
—

1

1

2

 
—

$
(1
)
7

6

Total net gains (losses)
$
18

$
1

$
(4
)
$
15

 
$
16

$
(1
)
$
2

$
17

 
 
 
 
 
 
 
 
 
 
 
Nine months ended September 30, 2018
 
Nine months ended September 30, 2017
in millions
Corporate
services
income
Consumer mortgage income
Other income
Total
 
Corporate services income
Consumer mortgage income
Other income
Total
NET GAINS (LOSSES)
 
 
 
 
 
 
 
 
 
Interest rate
$
28

$
—

$
4

$
32

 
$
21

—

$
(1
)
$
20

Foreign exchange
32

—

—

32

 
31

—

—

31

Commodity
6

—

—

6

 
4

—

—

4

Credit
2

—

(26
)
(24
)
 
1

—

(16
)
(15
)
Other
—

1

13

14

 
—

$
—

(4
)
(4
)
Total net gains (losses)
$
68

$
1

$
(9
)
$
60

 
$
57

$
—

$
(21
)
$
36

 
 
 
 
 
 
 
 
 
 

Counterparty Credit Risk

We use several means to mitigate and manage exposure to credit risk on derivative contracts. We enter into bilateral collateral and master netting agreements that provide for the net settlement of all contracts with a single counterparty in the event of default. Additionally, we monitor counterparty credit risk exposure on each contract to determine appropriate limits on our total credit exposure across all product types. We review our collateral positions on a daily basis and exchange collateral with our counterparties in accordance with standard ISDA documentation, central clearing rules, and other related agreements. We hold collateral in the form of cash and highly rated securities issued by the U.S. Treasury, government-sponsored enterprises, or GNMA. Cash collateral of $116 million was included in derivative assets on the balance sheet at September 30, 2018, compared to $23 million of cash collateral netted against derivative assets at December 31, 2017. The cash collateral netted against derivative liabilities totaled $304 million at September 30, 2018, and $150 million at December 31, 2017.

The following table summarizes the fair value of our derivative assets by type at the dates indicated. These assets represent our gross exposure to potential loss after taking into account the effects of bilateral collateral and master netting agreements and other means used to mitigate risk.
in millions
September 30, 2018

December 31, 2017

Interest rate
$
189

$
401

Foreign exchange
61

77

Commodity
376

163

Credit
(1
)
1

Other
7

4

Derivative assets before collateral
632

646

Less: Related collateral
(116
)
(23
)
Total derivative assets
$
748

$
669

 
 
 


We enter into derivative transactions with two primary groups: broker-dealers and banks, and clients. Given that these groups have different economic characteristics, we have different methods for managing counterparty credit exposure and credit risk.

We enter into transactions with broker-dealers and banks for various risk management purposes. At September 30, 2018, we had gross exposure of $148 million to broker-dealers and banks. We had net exposure of $215 million after the application of master netting agreements and cash collateral, where such qualifying agreements exist. We had net exposure of $205 million after considering $10 million of additional collateral held in the form of securities.

We enter into transactions with clients to accommodate their business needs. Due to the smaller size and magnitude of the individual contracts with clients, we generally do not exchange collateral in connection with these derivative transactions. To address the risk of default associated with the uncollateralized contracts, we have established a credit valuation adjustment (included in “accrued income and other assets”) in the amount of $4 million at September 30, 2018, which we estimate to be the potential future losses on amounts due from client counterparties in the event of default. At September 30, 2018, we had gross exposure of $592 million to client counterparties and other entities that are not broker-dealers or banks for derivatives that have associated master netting agreements. We had net exposure of $534 million on our derivatives with these counterparties after the application of master netting agreements, collateral, and the related reserve. 




Credit Derivatives

We are a buyer and, under limited circumstances, may be a seller of credit protection through the credit derivative market. We purchase credit derivatives to manage the credit risk associated with swap obligations as well as exposures to debt securities.

The following table summarizes the fair value of our credit derivatives purchased and sold by type as of September 30, 2018, and December 31, 2017. The fair value of credit derivatives presented below does not take into account the effects of bilateral collateral or master netting agreements.
 
September 30, 2018
 
December 31, 2017
in millions
Purchased
Sold
Net
 
Purchased
Sold
Net
Single-name credit default swaps
$
(1
)
—

$
(1
)
 
$
(1
)
—

$
(1
)
Traded credit default swap indices
(1
)
—

(1
)
 
(2
)
—

(2
)
Other
—

(1
)
(1
)
 
—

—

—

Total credit derivatives
$
(2
)
(1
)
$
(3
)
 
$
(3
)
—

$
(3
)
 
 
 
 
 
 
 
 

The majority of transactions represented by the “other” category shown in the above table consist of risk participation agreements as described in Note 9. Derivatives and Hedging Activities of our 2017 Form 10-K under the heading “Credit Derivatives.” In addition, the other category includes credit default swap options in which we are given the right, but not the obligation, to purchase credit protection on a stated entity for a specified period of time.

The following table provides information on the types of credit derivatives sold by us and held on the balance sheet at September 30, 2018, and December 31, 2017. The notional amount represents the maximum amount that the seller could be required to pay. The payment/performance risk assessment is based on the default probabilities for the underlying reference entities’ debt obligations using a Moody’s credit ratings matrix known as Moody’s “Idealized” Cumulative Default Rates. The payment/performance risk shown in the table represents a weighted-average of the default probabilities for all reference entities in the respective portfolios. These default probabilities are directly correlated to the probability that we will have to make a payment under the credit derivative contracts.
 
September 30, 2018
 
December 31, 2017
dollars in millions
Notional
Amount
Average
Term
(Years)
Payment /
Performance
Risk
 
Notional
Amount
Average
Term
(Years)
Payment /
Performance
Risk
Other
$
12

2.47

5.01
%
 
$
15

3.08

6.64
%
Total credit derivatives sold
$
12

—

—

 
$
15

—

—

 
 
 
 
 
 
 
 


Credit Risk Contingent Features

We have entered into certain derivative contracts that require us to post collateral to the counterparties when these contracts are in a net liability position. The amount of collateral to be posted is based on the amount of the net liability and thresholds generally related to our long-term senior unsecured credit ratings with Moody’s and S&P. Collateral requirements also are based on minimum transfer amounts, which are specific to each Credit Support Annex (a component of the ISDA Master Agreement) that we have signed with the counterparties. In a limited number of instances, counterparties have the right to terminate their ISDA Master Agreements with us if our ratings fall below a certain level, usually investment-grade level (i.e., “Baa3” for Moody’s and “BBB-” for S&P). At September 30, 2018, KeyBank’s rating was “A3” with Moody’s and “A-” with S&P, and KeyCorp’s rating was “Baa1” with Moody’s and “BBB+” with S&P. As of September 30, 2018, the aggregate fair value of all derivative contracts with credit risk contingent features (i.e., those containing collateral posting or termination provisions based on our ratings) held by KeyBank that were in a net liability position totaled $335 million, which was comprised of $144 million in derivative assets and $479 million in derivative liabilities. We had $317 million in cash and securities collateral posted to cover those positions as of September 30, 2018. There were no derivative contracts with credit risk contingent features held by KeyCorp at September 30, 2018.

The following table summarizes the additional cash and securities collateral that KeyBank would have been required to deliver under the ISDA Master Agreements had the credit risk contingent features been triggered for the derivative contracts in a net liability position as of September 30, 2018, and December 31, 2017. The additional collateral amounts were calculated based on scenarios under which KeyBank’s ratings are downgraded one, two, or three ratings as of September 30, 2018, and December 31, 2017, and take into account all collateral already posted. A similar calculation was performed for KeyCorp, and no additional collateral would have been required as
of September 30, 2018, and December 31, 2017. For more information about the credit ratings for KeyBank and KeyCorp, see the discussion under the heading “Factors affecting liquidity” in the section entitled “Liquidity risk management” in Item 2 of this report.
 
September 30, 2018
 
December 31, 2017
in millions
Moody’s
S&P
 
Moody’s
S&P
KeyBank’s long-term senior unsecured credit ratings
A3

A-

 
A3

A-

One rating downgrade
$
1

$
1

 
$
2

$
2

Two rating downgrades
1

1

 
2

2

Three rating downgrades
1

1

 
2

2



KeyBank’s long-term senior unsecured credit rating was four ratings above noninvestment grade at Moody’s and S&P as of September 30, 2018, and December 31, 2017. If KeyBank’s ratings had been downgraded below investment grade as of September 30, 2018, or December 31, 2017, payments of up to $2 million and $12 million, respectively, would have been required to either terminate the contracts or post additional collateral for those contracts in a net liability position, taking into account all collateral already posted. If KeyCorp’s ratings had been downgraded below investment grade as of September 30, 2018, or December 31, 2017, no payments would have been required to either terminate the contracts or post additional collateral for those contracts in a net liability position, taking into account all collateral already posted.