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Derivative Financial Instruments
 12 Months Ended
Dec. 31, 2020
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivative Financial Instruments Derivative Financial Instruments
We use derivative financial instruments to support our clients' needs and to manage our interest rate and currency risks. These financial instruments consist of FX contracts such as forwards, futures and options contracts; interest rate contracts such as interest rate swaps (cross currency and single currency) and futures; and other derivative contracts. Derivative instruments used for risk management purposes that are highly effective in offsetting the risk being hedged are generally designated as hedging instruments in hedge accounting relationships, while others are economic hedges and not designated in hedge accounting relationships. Derivatives in hedge accounting relationships are disclosed according to the type of hedge, such as, fair value, cash flow, or net investment. Derivatives designated as hedging instruments in hedge accounting relationships are carried at fair value with change in fair value recognized in the consolidated statement of income or OCI, as appropriate. Derivatives not designated in hedge accounting relationships include those derivatives entered into to support client needs and derivatives used to manage interest rate or foreign currency risk associated with certain assets and liabilities. Such derivatives are carried at fair value with changes in fair value recognized in the consolidated statement of income.
Derivatives Not Designated as Hedging Instruments
We provide foreign exchange forward contracts and options in support of our client needs, and also act as a dealer in the currency markets. As part of our trading 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 and interest rate options, interest rate forward contracts, and interest rate futures. The entire change in the fair value of our non-hedging derivatives utilized in our trading activities are recorded in foreign exchange trading services revenue, and the entire change in fair value of our non-hedging derivatives utilized in our asset-and-liability management activities are recorded in net interest income.
We enter into stable value wrap derivative contracts with unaffiliated stable value funds that
allow a stable value fund to provide book value coverage to its participants. These derivatives contracts qualify as guarantees as described in Note 12.
We grant deferred cash awards to certain of our employees as part of our employee incentive compensation plans. We account for these awards as derivative financial instruments, as the underlying referenced shares are not equity instruments of ours. The fair value of these derivatives is referenced to the value of units in State Street-sponsored investment funds or funds sponsored by other unrelated entities. We re-measure these derivatives to fair value quarterly, and record the change in value in compensation and employee benefits expenses in our consolidated statement of income.
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 for certain assets and liabilities. At both the inception of the hedge and on an ongoing basis, we formally assess and document the effectiveness of a derivative designated in a hedging relationship and the likelihood that the derivative will be an effective hedge in future periods. We discontinue hedge accounting prospectively when we determine that the derivative is no longer highly effective in offsetting changes in fair value or cash flows of the underlying risk being hedged, the derivative expires, terminates or is sold, or management discontinues the hedge designation.
The risk management objective of a highly effective hedging strategy that qualifies for hedge accounting must be formally documented. The hedge documentation includes the derivative hedging instrument, the asset or liability or forecasted transaction, type of risk being hedged and method for assessing hedge effectiveness of the derivative prospectively and retrospectively. We use quantitative methods including regression analysis and cumulative dollar offset method, comparing the change in the fair value of the derivative to the change in fair value or the cash flows of the hedged item. We may also utilize qualitative methods such as matching critical terms and evaluation of any changes in those critical terms. Effectiveness is assessed and documented quarterly and if determined that the derivative is not highly effective at hedging the designated risk hedge accounting is discontinued.
Fair Value Hedges
Derivatives designated as fair value hedges are utilized to mitigate the risk of changes in the fair values of recognized assets and liabilities, including long-term debt, AFS securities, and foreign currency investment securities. We use interest rate or FX
contracts in this manner to manage our exposure to changes in the fair value of hedged items caused by changes in interest rates or FX rates.
Changes in the fair value of the derivative and changes in fair value of the hedged item due to changes in the hedged risk are recognized in earnings in the same line item. If a hedge is terminated, but the hedged item was not derecognized, all remaining adjustments to the carrying amount of the hedged item are amortized over a period that is consistent with the amortization of other discounts or premiums associated with the hedged item.
Cash Flow Hedges
Derivatives designated as cash flow hedges are utilized to offset the variability of cash flows of recognized assets or liabilities or forecasted transactions. We have entered into FX contracts to hedge the change in cash flows attributable to FX movements in foreign currency denominated investment securities. Additionally, we have entered into interest rate swap agreements 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.
Changes in fair value of the derivatives designated as cash flow hedges are initially recorded in AOCI and then reclassified into earnings in the same period or periods during which the hedged forecasted transaction affects earnings and are presented in the same income statement line item as the earnings effect of the hedged item. If the hedge relationship is terminated, the change in fair value on the derivative recorded in AOCI is reclassified into earnings consistent with the timing of the hedged item. For hedge relationships that are discontinued because a forecasted transaction is not expected to occur according to the original hedge terms, any related derivative values recorded in AOCI are immediately recognized in earnings. As of December 31, 2020, the maximum maturity date of the underlying loans is approximately 3.7 years.
Net Investment Hedges
Derivatives categorized as net investment hedges are entered into to protect the net investment in our foreign operations against adverse changes in exchange rates. We use FX forward contracts to convert the foreign currency risk to U.S. dollars to mitigate our exposure to fluctuations in FX rates. The changes in fair value of the FX forward contracts are recorded, net of taxes, in the foreign currency translation component of OCI.
The following table presents the aggregate contractual, or notional, amounts of derivative financial instruments including those entered into for trading and asset-and-liability management activities as of the dates indicated:
(In millions)December 31, 2020December 31, 2019
Derivatives not designated as hedging instruments:
Interest rate contracts:
Futures$2,842 $4,368 
Foreign exchange contracts:
Forward, swap and spot2,640,989 2,378,808 
Options purchased946 1,581 
Options written661 1,110 
Futures1,980 1,040 
Other:
Stable value contracts(1)
32,359 26,895 
Deferred value awards(2)
332 389 
Derivatives designated as hedging instruments:
Interest rate contracts:
Swap agreements7,449 15,196 
Foreign exchange contracts:
Forward and swap5,221 3,176 
(1) The notional value of the stable value contracts represents our maximum exposure. However, exposure to various stable value contracts is generally contractually limited to substantially lower amounts than the notional values.
(2) Represents grants of deferred value awards to employees; refer to discussion in this note under "Derivatives Not Designated as Hedging Instruments."
Notional amounts are provided here as an indication of the volume of our derivative activity and serve as a reference to calculate the fair values of the derivative.
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 11.
Derivative Assets(1)
Derivative Liabilities(2)
(In millions)December 31, 2020December 31, 2019December 31, 2020December 31, 2019
Derivatives not designated as hedging instruments:
Foreign exchange contracts$25,939 $15,140 $25,811 $15,054 
Other derivative contracts— — 157 182 
Total$25,939 $15,140 $25,968 $15,236 
Derivatives designated as hedging instruments:
Foreign exchange contracts$4 $— $116 $96 
Interest rate contracts1 8 42 49 
Total$5 $8 $158 $145 
(1) Derivative assets are included within other assets in our consolidated statement of condition.
(2) 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:
Years Ended December 31,
202020192018
(In millions)
Location of Gain (Loss) on
Derivative in Consolidated
Statement of Income
Amount of Gain (Loss) on Derivative Recognized in Consolidated Statement of Income
Derivatives not designated as hedging instruments:
Foreign exchange contractsForeign exchange trading services revenue$922 $630 $723 
Foreign exchange contracts
Interest expense(1)
63 (153)(41)
Interest rate contractsForeign exchange trading services revenue3 (3)(6)
Interest rate contracts
Software and processing fees(1)
— — (1)
Other derivative contractsForeign exchange trading services revenue— — 5 
Other derivative contractsCompensation and employee benefits(189)(205)(171)
Total$799 $269 $509 
(1) 2018 includes approximately $15 million of swap costs related to the first quarter of 2018 that were reclassified from software and processing fees to interest expense.
The following table shows the carrying amount and associated cumulative basis adjustments related to the application of hedge accounting that is included in the carrying amount of hedged assets and liabilities in fair value hedging relationships:
December 31, 2020
Hedged Items Currently Designated
Hedged Items No Longer Designated(1)
(In millions)
Carrying Amount of Assets and Liabilities
Cumulative Hedge Accounting Basis Adjustments
Carrying Amount of Assets and Liabilities
Cumulative Hedge Accounting Basis Adjustments
Long-term debt$496 $3 $10,023 $688 
Available-for-sale securities2,330 45 — — 
Total$2,826 $48 $10,023 $688 
December 31, 2019
Hedged Items Currently Designated
Hedged Items No Longer Designated(1)
(In millions)Carrying Amount of Assets and LiabilitiesCumulative Hedge Accounting Basis AdjustmentsCarrying Amount of Assets and LiabilitiesCumulative Hedge Accounting Basis Adjustments
Long-term debt$9,769 $164 $1,199 $(8)
Available-for-sale securities940 49 — — 
Total$10,709 $213 $1,199 $(8)
(1) Represents hedged items no longer designated in qualifying fair value hedging relationships for which an associated basis adjustment exists at the balance sheet date.
As of December 31, 2020 and December 31, 2019, the total notional amount of the interest rate swaps of fair value hedges was $2.60 billion and $10.20 billion, respectively.
The following tables present the impact of our use of derivative financial instruments on our consolidated statement of income for the periods indicated:
Years Ended December 31,Years Ended December 31,
202020192018202020192018
(In millions)
Location of Gain (Loss) on Derivative in Consolidated Statement of Income
Amount of Gain
(Loss) on Derivative
Recognized in
Consolidated
Statement of Income
Hedged Item in Fair Value Hedging Relationship
Location of Gain (Loss) on Hedged Item in Consolidated Statement of Income
Amount of Gain
(Loss) on Hedged
Item Recognized in
Consolidated
Statement of Income
Derivatives designated as fair value hedges:
Foreign exchange contractsSoftware and processing fees$— $— $(74)Investment securitiesSoftware and processing fees
$— $— $74 
Foreign exchange contractsSoftware and processing fees
— — (328)Foreign exchange depositSoftware and processing fees
— — 328 
Interest rate contractsNet interest income1 (4)31 
Available-for-sale securities(1)
Net interest income
(4)2 (32)
Interest rate contractsNet interest income566 266 (58)Long-term debtNet interest income(559)(255)49 
Total$567 $262 $(429)$(563)$(253)$419 
(1) In 2020, 2019 and 2018, $3 million, $18 million and $24 million, respectively, of net unrealized gains on AFS investment securities designated in fair value hedges were recognized in OCI.
Years Ended December 31,Years Ended December 31,
202020192018Location of Gain or (Loss) Reclassified from Accumulated Other Comprehensive Income into Income202020192018
(In millions)Amount of Gain or (Loss) Recognized in Other Comprehensive Income on DerivativeAmount of Gain or (Loss) Reclassified from Accumulated Other Comprehensive Income into Income
Derivatives designated as cash flow hedges:
Interest rate contracts$176 $8 $(12)Net interest income$49 $(10)$(1)
Foreign exchange contracts(22)43 (12)Net interest income23 27 27 
Total derivatives designated as cash flow hedges$154 $51 $(24)$72 $17 $26 
Derivatives designated as net investment hedges:
Foreign exchange contracts$(250)$30 $81 Gains (Losses) related to investment securities, net$— $— $— 
Total derivatives designated as net investment hedges(250)30 81 — — — 
Total$(96)$81 $57 $72 $17 $26 

Derivatives Netting and Credit Contingencies
Netting
Derivatives receivable and payable as well as cash collateral from the same counterparty are netted in the consolidated statement of condition for those counterparties with whom we have legally binding master netting agreements in place. In addition to cash collateral received and transferred presented on a net basis, we also receive and transfer collateral in the form of securities, which mitigate credit risk but are not eligible for netting. Additional information on netting is provided in Note 11.
Credit Contingencies
Certain of our derivatives are subject to master netting agreements with our derivative counterparties containing credit risk-related contingent features, which requires us to maintain an investment grade credit rating with the various credit rating agencies. If our rating falls below investment grade, we would be in violation of the provisions, and counterparties to the derivatives could request immediate payment or demand full overnight collateralization on derivatives instruments in net liability positions. The aggregate fair value of all derivatives with credit contingent features and in a liability position as of December 31, 2020 totaled approximately $3.91 billion, against which we provided $1.69 billion of collateral in the normal course of business. If our credit related contingent features underlying these agreements were triggered as of December 31, 2020, the maximum additional collateral we would be required to post to our counterparties is approximately $2.22 billion.