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, 2021, after taking into account the effects of bilateral collateral and master netting agreements, we had $84 million of derivative assets and $11 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 $2.5 billion and derivative liabilities of $249 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 108 of our 2020 Form 10-K. Our derivative strategies and related risk management objectives are described in Note 8 (“Derivatives and Hedging Activities”) beginning on page 143 of our 2020 Form 10-K.

The following table summarizes the fair values of our derivative instruments on a gross and net basis as of September 30, 2021, and December 31, 2020. 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, 2021						December 31, 2020
			Fair Value						Fair Value
Dollars in millions	Notional Amount		Derivative Assets		Derivative Liabilities		Notional Amount		Derivative Assets		Derivative Liabilities
Derivatives designated as hedging instruments:
Interest rate	$	36,423	$	45	$	11	$	36,135	$	70	$	(3)


Derivatives not designated as hedging instruments:
Interest rate	72,688		909		262		78,424		1,514		291
Foreign exchange	7,378		80		75		6,385		109		103
Commodity	15,090		1,799		1,805		9,702		426		408
Credit	339		—		7		423		1		11
Other (a)	3,652		22		11		4,951		58		16
Total	99,147		2,810		2,160		99,885		2,108		829
Netting adjustments (b)	—		(302)		(1,911)		—		(380)		(675)
Net derivatives in the balance sheet	135,570		2,553		260		136,020		1,798		151
Other collateral (c)	—		(1)		(30)		—		(2)		(11)
Net derivative amounts	$	135,570	$	2,552	$	230	$	136,020	$	1,796	$	140

(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.

(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.


	September 30, 2021
Dollars 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	$	8,077	$	205
Interest rate contracts	Securities Available for Sale(c)	6,280		168



	December 31, 2020
	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	$	8,182	$	416
Interest rate contracts	Securities Available for Sale(c)	2,080		21

(c)These amounts are designed as fair value hedges under the last-of-layer method. The carrying amount represents the amortized costs basis of the prepayable financial assets used to designate hedging relationships in which the hedged item is the last layer expected to be remaining at the end of the relationship. At September 30, 2021, and December 31, 2020, the amortized costs of the closed portfolios in these hedging relationships was $7.7 billion and $2.5 billion, respectively.

Considering the interest rates, yield curves, and notional amounts as of September 30, 2021, we expect to reclassify an estimated $167 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 $6 million of net gains related to terminated cash flow hedges from AOCI to income during the next 12 months. As of September 30, 2021, the maximum length of time over which we hedge forecasted transactions is 5.9 years.


	Location and amount of net gains (losses) recognized in income on fair value and cash flow hedging relationships
Dollars in millions	Interest expense – long-term debt		Interest income – loans		Interest Income - securities		Investment banking and debt placement fees		Interest expense - deposits		Other income
Three months ended September 30, 2021
Total amounts presented in the consolidated statement of income	$	(54)	$	882	$	135	$	235	$	(15)	$	25

Net gains (losses) on fair value hedging relationships
Interest contracts
Recognized on hedged items	37		—		(38)		—		—		—
Recognized on derivatives designated as hedging instruments	(8)		—		39		—		—		—
Net income (expense) recognized on fair value hedges	$	29	—		$	1	—		—		—
Net gain (loss) on cash flow hedging relationships
Interest contracts
Realized gains (losses) (pre-tax) reclassified from AOCI into net income	$	(1)	$	79	$	—	$	(1)	—		—
Net income (expense) recognized on cash flow hedges	$	(1)	$	79	—		$	(1)	—		—

Three months ended September 30, 2020
Total amounts presented in the consolidated statement of income	$	(64)	$	927	$	115	$	146	$	(54)	$	28

Net gains (losses) on fair value hedging relationships
Interest contracts
Recognized on hedged items	$	47	—		—		—		—		—
Recognized on derivatives designated as hedging instruments	(7)		—		—		—		—		—
Net income (expense) recognized on fair value hedges	$	40	—		—		—		—		—
Net gain (loss) on cash flow hedging relationships
Interest contracts
Realized gains (losses) (pre-tax) reclassified from AOCI into net income	$	(1)	$	100	—		—		—		—

Net income (expense) recognized on cash flow hedges	$	(1)	$	100	—		—		—		—


	Location and amount of net gains (losses) recognized in income on fair value and cash flow hedging relationships
Dollars in millions	Interest expense – long-term debt		Interest income – loans		Interest Income - Securities		Investment banking and debt placement fees		Interest expense - deposits		Other income
Nine months ended September 30, 2021
Total amounts presented in the consolidated statement of income	$	(168)	$	2,659	$	398	$	614	$	(52)	$	89

Net gains (losses) on fair value hedging relationships
Interest contracts
Recognized on hedged items	210		—		(147)		—		—		—
Recognized on derivatives designated as hedging instruments	(113)		—		147		—		—		—
Net income (expense) recognized on fair value hedges	$	97	—		—		—		—		—
Net gain (loss) on cash flow hedging relationships
Interest contracts
Realized gains (losses) (pre-tax) reclassified from AOCI into net income	$	(3)	$	253	—		—		—		—
Net income (expense) recognized on cash flow hedges	$	(3)	$	253	—		—		—		—

Nine months ended September 30, 2020
Total amounts presented in the consolidated statement of income	$	(225)	$	2,933	$	365	$	418	$	(319)	$	(27)

Net gains (losses) on fair value hedging relationships
Interest contracts
Recognized on hedged items	$	(252)	—		—		—		—		—
Recognized on derivatives designated as hedging instruments	343		—		—		—		—		—
Net income (expense) recognized on fair value hedges	$	91	—		—		—		—		—
Net gain (loss) on cash flow hedging relationships
Interest contracts
Realized gains (losses) (pre-tax) reclassified from AOCI into net income	$	(3)	$	224	—		—		—		—

Net income (expense) recognized on cash flow hedges	$	(3)	$	224	—		—		—		—

The following tables summarize the pre-tax net gains (losses) on our cash flow hedges for the three- and nine-month periods ended September 30, 2021, and September 30, 2020, 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.


Dollars 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
Three months ended September 30, 2021
Cash Flow Hedges
Interest rate	$	(2)	Interest income — Loans	$	79
Interest rate	—		Interest expense — Long-term debt	(1)
Interest rate	4		Investment banking and debt placement fees	(1)


Total	$	2		$	77
Three months ended September 30, 2020
Cash Flow Hedges
Interest rate	$	5	Interest income — Loans	$	100
Interest rate	—		Interest expense — Long-term debt	(1)
Interest rate	10		Investment banking and debt placement fees	—


Total	$	15		$	99


Dollars 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)
Nine months ended September 30, 2021
Cash Flow Hedges
Interest rate	$	(144)	Interest income — Loans	$	253
Interest rate	2		Interest expense — Long-term debt	(3)
Interest rate	9		Investment banking and debt placement fees	—
Net Investment Hedges
Foreign exchange contracts	—		Other Income	—
Total	$	(133)		$	250
Nine months ended September 30, 2020
Cash Flow Hedges
Interest rate	$	629	Interest income — Loans	$	224
Interest rate	(6)		Interest expense — Long-term debt	(3)
Interest rate	(10)		Investment banking and debt placement fees	—
Net Investment Hedges
Foreign exchange contracts	—		Other Income	—
Total	$	613		$	221


	Three months ended September 30, 2021								Three months ended September 30, 2020
Dollars 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	—		—		$	8		$	5	—		$	(1)	$	4
Foreign exchange	12		—		—		12			9		—		—		9
Commodity	4		—		—		4			5		—		—		5
Credit	1		—		$	(9)	(8)			4		—		(8)		(4)
Other	—		$	—	—		—			—		$	28	(8)		20
Total net gains (losses)	$	25	$	—	$	(9)	$	16		$	23	$	28	$	(17)	$	34


	Nine months ended September 30, 2021								Nine months ended September 30, 2020
Dollars 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	$	19	—		$	1	$	20		$	23	—		$	(10)	$	13
Foreign exchange	34		—		—		34			29		—		—		29
Commodity	12		—		—		12			13		—		—		13
Credit	5		—		(27)		(22)			(6)		—		(20)		(26)
Other	—		$	13	(22)		(9)			—		$	36	17		53
Total net gains (losses)	$	70	$	13	$	(48)	$	35		$	59	$	36	$	(13)	$	82

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 $49 million was netted against derivative assets on the balance sheet at September 30, 2021, compared to $63 million of cash collateral netted against derivative assets at December 31, 2020. The cash collateral netted against derivative liabilities totaled $1.6 billion at September 30, 2021, and $232 million at December 31, 2020. 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 147 of our 2020 Form 10-K under the heading “Counterparty Credit Risk.”

counterparty credit risk. At September 30, 2021, we had gross exposure of $159 million to broker-dealers and banks. We had net exposure of $175 million after the application of master netting agreements and cash collateral, where such qualifying agreements exist. We had net exposure of $173 million after considering $2 million of additional collateral held in the form of securities.

most cases, we mitigate our credit exposure by cross-collateralizing these transactions to the underlying loan collateral. For transactions that are not clearable, we mitigate our market risk by buying and selling U.S. Treasuries and Eurodollar futures or entering into offsetting positions. Due to the cross-collateralization to the underlying loan, we typically do not exchange cash or marketable securities collateral in connection with these transactions. To address the risk of default associated with these contracts, we have established a CVA reserve (included in

potential future exposures, expected recovery rates, and market-implied probabilities of default. At September 30, 2021, we had gross exposure of $2.5 billion 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 $2.4 billion on our derivatives with these counterparties after the application of master netting agreements, collateral, and the related reserve.

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 $7 million as of September 30, 2021, and $9 million as of December 31, 2020. Our credit derivative portfolio consists of 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 148 of our 2020 Form 10-K under the heading “Credit Derivatives.”

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, 2021, 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, 2021, 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 $1.7 billion, which was comprised of $194 million in derivative assets and $1.9 billion in derivative liabilities. We had $1.6 billion in cash and securities collateral posted to cover those positions as of September 30, 2021. There were no derivative contracts with credit risk contingent features held by KeyCorp at September 30, 2021.

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, 2021, and December 31, 2020. 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, 2021, and December 31, 2020, 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, 2021, and December 31, 2020. 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.

KeyBank’s long-term senior unsecured credit rating was four ratings above noninvestment grade at Moody’s and S&P as of September 30, 2021, and December 31, 2020. If KeyBank’s ratings had been downgraded below investment grade as of September 30, 2021, or December 31, 2020, payments of $4 million and $2 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, 2021, or December 31, 2020, 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.