Derivatives and Hedging Activities

3 Months Ended

Mar. 31, 2019

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 March 31, 2019, after taking into account the effects of bilateral collateral and master netting agreements, we had $37 million of derivative assets and $5 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 $489 million and derivative liabilities of $198 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 103 of our 2018 Form 10-K. Our derivative strategies and related risk management objectives are described in Note 8 (“Derivatives and Hedging Activities”) beginning on page 132 of our 2018 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 March 31, 2019, and December 31, 2018. 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:

	March 31, 2019								December 31, 2018
			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	$	32,840	$	24		$	10		$	28,546	$	50		$	(10	)
Foreign exchange	122		—			—			122		2			—
Total	32,962		24			10			28,668		52			(10		)
Derivatives not designated as hedging instruments:
Interest rate	65,136		505			227			63,454		365			307
Foreign exchange	5,664		76			68			6,829		104			95
Commodity	6,622		233			223			2,002		333			323
Credit	415		1			3			226		1			1
Other (a)	3,266		11			8			1,466		9			7
Total	81,103		826			529			73,977		812			733
Netting adjustments (b)	—		(324		)	(336		)	—		(333		)	(337		)
Net derivatives in the balance sheet	114,065		526			203			102,645		531			386
Other collateral (c)	—		(2		)	(46		)	—		(2		)	(33		)
Net derivative amounts	$	114,065	$	524		$	157		$	102,645	$	529		$	353

(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 other customized derivative contracts.

(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 three-month period ended March 31, 2019, we did not exclude any portion of fair value hedging instruments from the assessment of hedge effectiveness.

The following tables summarize the amounts that were recorded on the balance sheet as of March 31, 2019, and December 31, 2018, related to cumulative basis adjustments for fair value hedges.

	March 31, 2019
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	$	9,400	$	87
Interest rate contracts	Certificate of deposit ($100,000 or more)	340		—
Interest rate contracts	Other time deposits	176		—
	December 31, 2018
	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	$	9,363	$	(6	)
Interest rate contracts	Certificate of deposit ($100,000 or more)	343		(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 adjustments related to de-designated hedged items that no longer qualify as fair value hedges reduced the hedge accounting basis adjustment by $10 million and $10 million at March 31, 2019, and December 31, 2018, respectively,

Cash flow hedges. During the three-month period ended March 31, 2019, 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 March 31, 2019, we expect to reclassify an estimated $22 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 $17 million of net losses related to terminated cash flow hedges from AOCI to income during the next 12 months. As of March 31, 2019, 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-month periods ended March 31, 2019, and March 31, 2018.

	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 March 31, 2019
Total amounts presented in the consolidated statement of income	$	(120	)	$	1,066		$	(202	)	$	10
Net gains (losses) on fair value hedging relationships
Interest contracts
Recognized on hedged items	(93		)	—			—			—
Recognized on derivatives designated as hedging instruments	82			—			—			—
Net income (expense) recognized on fair value hedges	(11		)	—			—			—
Net gain (loss) on cash flow hedging relationships
Interest contracts
Realized gains (losses) (pre-tax) reclassified from AOCI into net income	(1		)	(24		)	—			—
Net income (expense) recognized on cash flow hedges	$	(1	)	$	(24	)	—			—
Three months ended March 31, 2018
Total amounts presented in the consolidated statement of income	$	(92	)	$	940		$	(91	)	$	21
Net gains (losses) on fair value hedging relationships
Interest contracts
Recognized on hedged items	71			—			—			—
Recognized on derivatives designated as hedging instruments	(69		)	—			—			—
Net income (expense) recognized on fair value hedges	2			—			—			—
Net gain (loss) on cash flow hedging relationships
Interest contracts
Realized gains (losses) (pre-tax) reclassified from AOCI into net income	(1		)	(2		)	—			—
Net income (expense) recognized on cash flow hedges	$	(1	)	$	(2	)	—			—

(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 March 31, 2019, AOCI reflected unrecognized, after-tax gains totaling $26 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 three-month period ended March 31, 2019.

The following tables summarize the pre-tax net gains (losses) on our cash flow and net investment hedges for the three-month periods ended March 31, 2019, and March 31, 2018, 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			Net Gains (Losses) Recognized in Other Income
Three months ended March 31, 2019
Cash Flow Hedges
Interest rate	$	115		Interest income — Loans	$	(24	)	$	—
Interest rate	(1		)	Interest expense — Long-term debt	(1		)	—
Interest rate	(5		)	Investment banking and debt placement fees	—			—
Net Investment Hedges
Foreign exchange contracts	(3		)	Other Income	—			—
Total	$	106			$	(25	)	$	—
Three months ended March 31, 2018
Cash Flow Hedges
Interest rate	$	(88	)	Interest income — Loans	$	(2	)	—
Interest rate	2			Interest expense — Long-term debt	(1		)	—
Net Investment Hedges
Foreign exchange contracts	—			Other Income	—			—
Total	$	(86	)		$	(3	)	—

Nonhedging instruments

The following table summarizes the pre-tax net gains (losses) on our derivatives that are not designated as hedging instruments for the three-month periods ended March 31, 2019, and March 31, 2018, and where they are recorded on the income statement.

	Three months ended March 31, 2019									Three months ended March 31, 2018
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	)	$	6		$	9	—	$	2		$	11
Foreign exchange	10		—	—			10			11		—	—			11
Commodity	1		—	—			1			3		—	—			3
Credit	1		—	(7		)	(6		)	2		—	(5		)	(3		)
Other	—		—	1			1			—		—	(4		)	(4		)
Total net gains (losses)	$	20	—	$	(8	)	$	12		$	25	—	$	(7	)	$	18

Counterparty Credit Risk

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 $68 million was netted against derivative assets on the balance sheet at March 31, 2019, compared to $33 million of cash collateral netted against derivative assets at December 31, 2018. The cash collateral netted against derivative liabilities totaled $80 million at March 31, 2019, and $37 million at December 31, 2018. Our means of mitigating and managing exposure to credit risk on derivative contracts is described in Note 8 (“Derivatives and Hedging Activities”) beginning on page 136 of our 2018 Form 10-K under the heading “Counterparty Credit Risk.”

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	March 31, 2019		December 31, 2018
Interest rate	$	438	$	308
Foreign exchange	49		60
Commodity	96		187
Credit	—		—
Other	11		9
Derivative assets before collateral	594		564
Less: Related collateral	68		33
Total derivative assets	$	526	$	531

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 March 31, 2019, we had gross exposure of $244 million to broker-dealers and banks. We had net exposure of $87 million after the application of master netting agreements and cash collateral, where such qualifying agreements exist. We had net exposure of $83 million after considering $4 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 $5 million at March 31, 2019, which we estimate to be the potential future losses on amounts due from client counterparties in the event of default. At March 31, 2019, we had gross exposure of $490 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 $439 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 specific commercial lending and swap obligations as well as exposures to debt securities. Our credit derivative portfolio was in a net liability position of $2 million as of March 31, 2019, and $1 million as of December 31, 2018. Our credit derivative portfolio consists of single-name credit default swaps, traded credit default swap indices, and risk participation agreements. Additional descriptions of our credit derivatives are provided in Note 8 (“Derivatives and Hedging Activities”) beginning on page 137 of our 2018 Form 10-K under the heading “Credit Derivatives.”

The following table provides information on the types of credit derivatives sold by us and held on the balance sheet at March 31, 2019, and December 31, 2018. The sold credit derivatives represented in the following table include only Risk Participation Agreements; there were no traded indexes sold. The notional amount represents the maximum amount that the seller could be required to pay. The payment/performance risk assessment at March 31, 2019, is based on the internal probability of default of the reference entity consistent with our Fair Value Methodology. The payment/performance risk shown in the table represents a weighted-average of the default probabilities for all reference entities. These default probabilities are directly correlated to the probability that we will have to make a payment under the credit derivative contracts.

	March 31, 2019					December 31, 2018
dollars in millions	Notional Amount		Average Term (Years)	Payment / Performance Risk		Notional Amount		Average Term (Years)	Payment / Performance Risk
Other	$	64	14.06	2.98	%	$	22	13.43	17.18	%
Total credit derivatives sold	$	64	—	—		$	22	—	—

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 March 31, 2019, 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 March 31, 2019, 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 $78 million, which was comprised of $70 million in derivative assets and $148 million in derivative liabilities. We had $6 million in cash and securities collateral posted to cover those positions as of March 31, 2019. There were no derivative contracts with credit risk contingent features held by KeyCorp at March 31, 2019.

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 March 31, 2019, and December 31, 2018. The additional collateral amounts were calculated based on scenarios under which KeyBank’s ratings are downgraded one, two, or three ratings as of March 31, 2019, and December 31, 2018, 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 March 31, 2019, and December 31, 2018. 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.

	March 31, 2019				December 31, 2018
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	$	2	$	2	$	2	$	2
Two rating downgrades	2		2		2		2
Three rating downgrades	2		2		2		2

KeyBank’s long-term senior unsecured credit rating was four ratings above noninvestment grade at Moody’s and S&P as of March 31, 2019, and December 31, 2018. If KeyBank’s ratings had been downgraded below investment grade as of March 31, 2019, or December 31, 2018, payments of less than $1 million and $4 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 March 31, 2019, or December 31, 2018, 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.