Derivative Financial Instruments

We use derivative financial instruments to support our clients' needs and to manage our interest-rate and currency risk. In undertaking these activities, we assume positions in both the foreign exchange and interest-rate markets by buying and selling cash instruments and using derivative financial instruments, including foreign exchange forward contracts, foreign exchange options and interest-rate contracts. For information on our derivative instruments, including the related accounting policies, refer to pages 160 to 166 in Note 10 to the consolidated financial statements included under Item 8, Financial Statements and Supplementary Data, in our 2016 Form 10-K.

Derivative financial instruments are also subject to credit and counterparty risk, which we manage by performing credit reviews, maintaining individual counterparty limits, entering into netting arrangements and requiring the receipt of collateral. Cash collateral received from and provided to counterparties in connection with derivative financial instruments is recorded in accrued expenses and other liabilities and other assets, respectively, in our consolidated statement of condition. As of September 30, 2017 and December 31, 2016, we had recorded approximately $1.18 billion and $1.99 billion, respectively, of cash collateral received from counterparties and approximately $1.85 billion and $4.39 billion, respectively, of cash collateral provided to counterparties in connection with derivative financial instruments in our consolidated statement of condition.

Certain of our derivative assets and liabilities as of September 30, 2017 and December 31, 2016 are subject to master netting agreements with our derivative counterparties. Certain of these agreements contain credit risk-related contingent features in which the counterparty has the right to declare us in default and accelerate cash settlement of our net derivative liabilities with the counterparty in the event that our credit rating falls below specified levels. The aggregate fair value of all derivative instruments with credit risk-related contingent features that were in a net liability position as of September 30, 2017 totaled approximately $1.94 billion, against which we provided no underlying collateral. If our credit rating were downgraded below levels specified in the agreements, the maximum additional amount of payments related to termination events that could have been required pursuant to these contingent features, assuming no change in fair value, as of September 30, 2017 was approximately $1.94 billion. Such accelerated settlement would be at fair value and therefore not affect our consolidated results of operations.

Derivatives Not Designated as Hedging Instruments

In connection with our trading activities, we use derivative financial instruments in our role as a financial intermediary and as both a manager and servicer of financial assets, in order to accommodate our clients' investment and risk management needs. In addition, we use derivative financial instruments for risk management purposes as economic hedges, which are not formally designated as accounting hedges, in order to contribute to our overall corporate earnings and liquidity. These activities are designed to generate trading services revenue and to manage volatility in our NII. The level of market risk that we assume is a function of our overall objectives and liquidity needs, our clients' requirements and market volatility. For additional information on derivative not designated as hedging instruments, refer to pages 161 to 162 in Note 10 to the consolidated financial statements included under Item 8, Financial Statements and Supplementary Data, in our 2016 Form 10-K.

Derivatives Designated as Hedging Instruments

In connection with our asset-and-liability management activities, we use derivative financial instruments to manage our interest rate risk and foreign currency risk. Interest rate risk, defined as the sensitivity of income or financial condition to variations in interest rates, is a significant non-trading market risk to which our assets and liabilities are exposed. We manage our interest rate risk by identifying, quantifying and hedging our exposures, using fixed-rate portfolio securities and a variety of derivative financial instruments, most frequently interest-rate swaps. Interest rate swap agreements alter the interest-rate characteristics of specific balance sheet assets or liabilities. We use foreign exchange forward and swap contracts to hedge foreign exchange exposure to various foreign currencies with respect to certain assets and liabilities. Our hedging relationships are formally designated, and qualify for hedge accounting, as fair value, cash flow or net investment hedges. For additional information on derivatives designated as hedging instruments, refer to pages 162 to 166 in Note 10 to the consolidated financial statements included under Item 8, Financial Statements and Supplementary Data, in our 2016 Form 10-K.

Fair Value Hedges

We have entered into interest rate swap agreements to modify our interest income from certain AFS investment securities from a fixed rate to a floating rate. The hedged AFS investment securities included hedged trusts that had a weighted-average life of approximately 4.4 years as of September 30, 2017, compared to 4.5 years as of December 31, 2016.

We have entered into interest rate swap agreements to modify our interest expense on eight senior notes and one subordinated note from fixed rates to floating rates. The senior and subordinated notes are hedged with interest rate swap contracts with notional amounts, maturities and fixed-rate coupon terms that effectively hedge the fixed-rate notes. The table below summarizes the maturities and the paid fixed interest rates for the hedged senior and subordinated notes:



September 30, 2017	Maturity	Paid Fixed Interest Rate
Senior Notes
	2020	2.55%
	2021	4.38
	2021	1.95
	2022	2.65
	2023	3.70
	2024	3.30
	2025	3.55
	2026	2.65

Subordinated Notes
	2023	3.10

We have entered into foreign exchange swap contracts to hedge the change in fair value attributable to foreign exchange movements in our foreign currency denominated investment securities and deposits. These forward contracts convert the foreign currency risk to U.S. dollars, thereby mitigating our exposure to fluctuations in the fair value of the securities and deposits attributable to changes in foreign exchange rates.

Cash Flow Hedges

We have entered into foreign exchange contracts to hedge the change in cash flows attributable to foreign exchange movements in foreign currency denominated investment securities. These foreign exchange contracts convert the foreign currency risk to U.S. dollars, thereby mitigating our exposure to fluctuations in the cash flows of the securities attributable to changes in foreign exchange rates.

We have entered into an interest rate swap agreement to hedge the forecasted cash flows associated with LIBOR-indexed floating-rate loans. The interest rate swaps synthetically convert the loan interest receipts from a variable-rate to a fixed-rate, thereby mitigating the risk attributable to changes in the LIBOR benchmark rate. As of September 30, 2017, the maximum maturity date of the underlying loans is approximately 5.0 years.

Net Investment Hedges

We have entered into foreign exchange contracts to protect the net investment in our foreign operations against adverse changes in exchange rates. These forward contracts convert the foreign currency risk to U.S. dollars, thereby mitigating our exposure to fluctuations in the fair value of our net investments in our foreign operations attributable to changes in foreign exchange rates. The changes in fair value of the foreign exchange forward contracts are recorded, net of taxes, in the foreign currency translation component of other comprehensive income. Effectiveness of net investment hedges is based on the overall changes in the fair value of the forward contracts.

The following table presents the aggregate contractual, or notional, amounts of derivative financial instruments entered into in connection with our trading and asset-and-liability management activities as of the dates indicated:



(In millions)	September 30, 2017		December 31, 2016
Derivatives not designated as hedging instruments:
Interest-rate contracts:
Futures	$	14,262	$	13,455
Foreign exchange contracts:
Forward, swap and spot	1,618,670		1,414,765
Options purchased	455		337
Options written	262		202
Futures	—		—
Other:
Stable value contracts	25,351		27,182
Deferred value awards⁽¹⁾⁽²⁾	531		409
Derivatives designated as hedging instruments:
Interest-rate contracts:
Swap agreements	10,616		10,169
Foreign exchange contracts:
Forward and swap	27,429		8,564

⁽¹⁾Represents grants of deferred value awards to employees; refer to discussion in this note under "Derivatives Not Designated as Hedging Instruments."

⁽²⁾ Amount as of December 31, 2016 reflects $249 million related to the acceleration of expense associated with certain cash settled deferred incentive compensation awards.

In connection with our asset-and-liability management activities, we have entered into interest-rate contracts designated as fair value and cash flow hedges to manage our interest rate risk. The following tables present the aggregate notional amounts of these interest rate contracts and the related assets or liabilities being hedged as of the dates indicated:



	September 30, 2017
(In millions)	Fair Value Hedges		Cash Flow Hedges		Total
Investment securities available-for-sale	$	1,323	$	—	$	1,323
Long-term debt⁽¹⁾	8,493		—		8,493
Floating-rate loans	—		800		800
Total	$	9,816	$	800	$	10,616



	December 31, 2016⁽²⁾
(In millions)	Fair Value Hedges
Investment securities available-for-sale	$	1,444
Long-term debt⁽¹⁾	8,725
Total	$	10,169

⁽¹⁾ As of September 30, 2017, these fair value hedges decreased the carrying value of LTD presented in our consolidated statement of condition by $1 million. As of December 31, 2016, these fair value hedges decreased the carrying value of long-term debt presented in our consolidated statement of condition by $15 million.

⁽²⁾As of December 31, 2016, there were no interest-rate contracts designated as cash flow hedges.

The following table presents the contractual and weighted-average interest rates for long-term debt, which include the effects of the fair value hedges presented in the table above, for the periods indicated:



	Three Months Ended September 30,
	2017				2016
	Contractual Rates		Rate Including Impact of Hedges		Contractual Rates		Rate Including Impact of Hedges
Long-term debt	3.30	%	2.67	%	3.37	%	2.27	%

	Nine Months Ended September 30,
	2017				2016
	Contractual Rates		Rate Including Impact of Hedges		Contractual Rates		Rate Including Impact of Hedges
Long-term debt	3.35	%	2.61	%	3.41	%	2.24	%

The following tables present the fair value of derivative financial instruments, excluding the impact of master netting agreements, recorded in our consolidated statement of condition as of the dates indicated. The impact of master netting agreements is provided in Note 8 to the consolidated financial statements in this Form 10-Q.



	Derivative Assets⁽¹⁾
	Fair Value
(In millions)	September 30, 2017		December 31, 2016
Derivatives not designated as hedging instruments:
Foreign exchange contracts	$	11,667	$	15,982
Total	$	11,667	$	15,982

Derivatives designated as hedging instruments:
Foreign exchange contracts	$	70	$	502
Interest-rate contracts	3		68
Total	$	73	$	570

⁽¹⁾ Derivative assets are included within other assets in our consolidated statement of condition.



	Derivative Liabilities⁽¹⁾
	Fair Value
(In millions)	September 30, 2017		December 31, 2016
Derivatives not designated as hedging instruments:
Foreign exchange contracts	$	11,506	$	15,881
Other derivative contracts	319		380
Total	$	11,825	$	16,261

Derivatives designated as hedging instruments:
Foreign exchange contracts	$	77	$	75
Interest-rate contracts	107		348
Total	$	184	$	423

⁽¹⁾ Derivative liabilities are included within other liabilities in our consolidated statement of condition.

The following tables present the impact of our use of derivative financial instruments on our consolidated statement of income for the periods indicated:



	Location of Gain (Loss) on Derivative in Consolidated Statement of Income	Amount of Gain (Loss) on Derivative Recognized in Consolidated Statement of Income
		Three Months Ended September 30,						Nine Months Ended September 30,
(In millions)		2017			2016			2017			2016
Derivatives not designated as hedging instruments:
Foreign exchange contracts	Trading services revenue	$	152		$	161		$	485		$	477
Interest-rate contracts	Processing fees and other revenue	—			—			—			1
Foreign exchange contracts	Processing fees and other revenue	(9		)	(3		)	(11		)	(13		)
Interest-rate contracts	Trading services revenue	(2		)	(1		)	7			(6		)
Credit derivative contracts	Trading services revenue	—			—			—			(1		)
Other derivative contracts	Trading services revenue	—			1			—			(2		)
Other derivative contracts	Compensation and employee benefits	(25		)	41			(120		)	168
Total		$	116		$	199		$	361		$	624



	Location of Gain (Loss) on Derivative in Consolidated Statement of Income	Amount of Gain (Loss) on Derivative Recognized in Consolidated Statement of Income						Hedged Item in Fair Value Hedging Relationship	Location of Gain (Loss) on Hedged Item in Consolidated Statement of Income	Amount of Gain (Loss) on Hedged Item Recognized in Consolidated Statement of Income
		Three Months Ended September 30,								Three Months Ended September 30,
(In millions)		2017			2016					2017			2016
Derivatives designated as fair value hedges:
Foreign exchange contracts	Processing fees and other revenue	$	19		$	24		Investment securities	Processing fees and other revenue	$	(19	)	$	(24	)
Foreign exchange contracts	Processing fees and other revenue	200			1			FX deposit	Processing fees and other revenue	(200		)	(1		)
Interest-rate contracts	Processing fees and other revenue	9			22			Available-for-sale securities	Processing fees and other revenue⁽¹⁾	(9		)	(22		)
Interest-rate contracts	Processing fees and other revenue	(8		)	(79		)	Long-term debt	Processing fees and other revenue	5			78
Total		$	220		$	(32	)			$	(223	)	$	31

	Location of Gain (Loss) on Derivative in Consolidated Statement of Income	Amount of Gain (Loss) on Derivative Recognized in Consolidated Statement of Income						Hedged Item in Fair Value Hedging Relationship	Location of Gain (Loss) on Hedged Item in Consolidated Statement of Income	Amount of Gain (Loss) on Hedged Item Recognized in Consolidated Statement of Income
		Nine Months Ended September 30,								Nine Months Ended September 30,
		2017			2016					2017			2016
Derivatives designated as fair value hedges:
Foreign exchange contracts	Processing fees and other revenue	$	21		$	43		Investment securities	Processing fees and other revenue	$	(21	)	$	(43	)
Foreign exchange contracts	Processing fees and other revenue	1,282			247			FX deposit	Processing fees and other revenue	(1,282		)	(247		)
Interest-rate contracts	Processing fees and other revenue	23			(15		)	Available-for-sale securities	Processing fees and other revenue⁽²⁾	(21		)	15
Interest-rate contracts	Processing fees and other revenue	37			297			Long-term debt	Processing fees and other revenue	(39		)	(282		)
Total		$	1,363		$	572				$	(1,363	)	$	(557	)

⁽¹⁾ In the three months ended September 30, 2017 and 2016, $4 million and $13 million, respectively, of net unrealized (losses) gains on AFS investment securities designated in fair value hedges were recognized in OCI.

⁽²⁾ In the nine months ended September 30, 2017 and 2016, $13 million and $(9) million, respectively, of net unrealized (losses) gains on AFS investment securities designated in fair value hedges were recognized in OCI.

Differences between the gains (losses) on the derivative and the gains (losses) on the hedged item, excluding any amounts recorded in NII, represent hedge ineffectiveness.



	Amount of Gain (Loss) on Derivative Recognized in Other Comprehensive Income						Location of Gain (Loss) Reclassified from OCI to Consolidated Statement of Income	Amount of Gain (Loss) Reclassified from OCI to Consolidated Statement of Income				Location of Gain (Loss) on Derivative Recognized in Consolidated Statement of Income	Amount of Gain (Loss) on Derivative Recognized in Consolidated Statement of Income
	Three Months Ended September 30,							Three Months Ended September 30,					Three Months Ended September 30,
(In millions)	2017			2016				2017		2016			2017		2016
Derivatives designated as cash flow hedges:
Interest-rate contracts	$	(1	)	$	—		Net interest income	$	—	$	—	Net interest income	$	—	$	—
Foreign exchange contracts	(1		)	(65		)	Net interest income	—		—		Net interest income	5		6
Total	$	(2	)	$	(65	)		$	—	$	—		$	5	$	6

Derivatives designated as net investment hedges:
Foreign exchange contracts	$	(47	)	$	4		Gains (Losses) related to investment securities, net	$	—	$	—	Gains (Losses) related to investment securities, net	$	—	$	—
Total	$	(47	)	$	4			$	—	$	—		$	—	$	—

	Amount of Gain (Loss) on Derivative Recognized in Other Comprehensive Income						Location of Gain (Loss) Reclassified from OCI to Consolidated Statement of Income	Amount of Gain (Loss) Reclassified from OCI to Consolidated Statement of Income				Location of Gain (Loss) on Derivative Recognized in Consolidated Statement of Income	Amount of Gain (Loss) on Derivative Recognized in Consolidated Statement of Income
	Nine Months Ended September 30,							Nine Months Ended September 30,					Nine Months Ended September 30,
(In millions)	2017			2016				2017		2016			2017		2016
Derivatives designated as cash flow hedges:
Interest-rate contracts	$	(2	)	$	—		Net interest income	$	—	$	—	Net interest income	$	—	$	—
Foreign exchange contracts	(93		)	(293		)	Net interest income	—		—		Net interest income	18		17
Total	$	(95	)	$	(293	)		$	—	$	—		$	18	$	17

Derivatives designated as net investment hedges:
Foreign exchange contracts	$	(148	)	$	55		Gains (Losses) related to investment securities, net	$	—	$	—	Gains (Losses) related to investment securities, net	$	—	$	—
Total	$	(148	)	$	55			$	—	$	—		$	—	$	—