Quarterly report pursuant to Section 13 or 15(d)

Derivatives

v3.5.0.2
Derivatives
 9 Months Ended
Sep. 30, 2016
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivatives
NOTE 2 – Derivatives
 
Derivative Balances

Derivatives are entered into on behalf of customers, for trading, or to support risk management activities. Derivatives used in risk management activities include derivatives that may or may not be designated in qualifying hedge accounting relationships. Derivatives that are not designated in qualifying hedge accounting relationships are referred to as other risk management derivatives. For more information on the Corporation's derivatives and hedging activities, see Note 1 – Summary of Significant Accounting Principles to the Consolidated Financial Statements of the Corporation's 2015 Annual Report on Form 10-K. The following tables present derivative instruments included on the Consolidated Balance Sheet in derivative assets and liabilities at September 30, 2016 and December 31, 2015. Balances are presented on a gross basis, prior to the application of counterparty and cash collateral netting. Total derivative assets and liabilities are adjusted on an aggregate basis to take into consideration the effects of legally enforceable master netting agreements and have been reduced by the cash collateral received or paid.

 
September 30, 2016
 
 
 
Gross Derivative Assets
 
Gross Derivative Liabilities
(Dollars in billions)
Contract/
Notional (1)
 
Trading and Other Risk Management Derivatives
 
Qualifying
Accounting
Hedges
 
Total
 
Trading and Other Risk Management Derivatives
 
Qualifying
Accounting
Hedges
 
Total
Interest rate contracts
 
 
 
 
 
 
 
 
 
 
 
 
 
Swaps
$
17,341.7

 
$
548.5

 
$
10.0

 
$
558.5

 
$
548.0

 
$
0.8

 
$
548.8

Futures and forwards
6,196.4

 
1.3

 
—

 
1.3

 
1.3

 
—

 
1.3

Written options
1,287.7

 
—

 
—

 
—

 
73.4

 
—

 
73.4

Purchased options
1,343.3

 
73.5

 
—

 
73.5

 
—

 
—

 
—

Foreign exchange contracts
 
 
 
 
 
 
 
 
 
 
 
 


Swaps
1,949.9

 
41.4

 
1.2

 
42.6

 
44.3

 
2.9

 
47.2

Spot, futures and forwards
4,191.7

 
41.1

 
1.5

 
42.6

 
41.1

 
0.8

 
41.9

Written options
376.2

 
—

 
—

 
—

 
8.0

 
—

 
8.0

Purchased options
355.0

 
7.6

 
—

 
7.6

 
—

 
—

 
—

Equity contracts
 
 
 
 
 
 
 
 
 
 
 
 


Swaps
194.4

 
3.1

 
—

 
3.1

 
3.5

 
—

 
3.5

Futures and forwards
79.7

 
1.6

 
—

 
1.6

 
1.1

 
—

 
1.1

Written options
463.2

 
—

 
—

 
—

 
25.7

 
—

 
25.7

Purchased options
417.9

 
24.9

 
—

 
24.9

 
—

 
—

 
—

Commodity contracts
 
 
 
 
 
 
 
 
 
 
 
 


Swaps
48.9

 
2.8

 
—

 
2.8

 
5.3

 
—

 
5.3

Futures and forwards
50.5

 
3.5

 
—

 
3.5

 
0.4

 
—

 
0.4

Written options
36.0

 
—

 
—

 
—

 
2.6

 
—

 
2.6

Purchased options
35.7

 
2.5

 
—

 
2.5

 
—

 
—

 
—

Credit derivatives
 
 
 
 
 
 
 
 
 
 
 
 


Purchased credit derivatives:
 
 
 
 
 
 
 
 
 
 
 
 


Credit default swaps
811.8

 
9.1

 
—

 
9.1

 
13.1

 
—

 
13.1

Total return swaps/other
31.5

 
0.2

 
—

 
0.2

 
1.7

 
—

 
1.7

Written credit derivatives:
 
 
 
 
 
 
 
 
 
 
 
 
 
Credit default swaps
803.2

 
13.4

 
—

 
13.4

 
8.2

 
—

 
8.2

Total return swaps/other
43.2

 
1.2

 
—

 
1.2

 
0.4

 
—

 
0.4

Gross derivative assets/liabilities
 
 
$
775.7

 
$
12.7

 
$
788.4

 
$
778.1

 
$
4.5

 
$
782.6

Less: Legally enforceable master netting agreements
 
 
 
(694.0
)
 
 
 
 
 
(694.0
)
Less: Cash collateral received/paid
 
 
 
 
 
 
(46.5
)
 
 
 
 
 
(45.1
)
Total derivative assets/liabilities
 
 
 
 
 
$
47.9

 
 
 
 
 
$
43.5

(1) 
Represents the total contract/notional amount of derivative assets and liabilities outstanding.


 
December 31, 2015
 
 
 
Gross Derivative Assets
 
Gross Derivative Liabilities
(Dollars in billions)
Contract/
Notional (1, 2)
 
Trading and Other Risk Management Derivatives
 
Qualifying
Accounting
Hedges
 
Total
 
Trading and Other Risk Management Derivatives
 
Qualifying
Accounting
Hedges
 
Total
Interest rate contracts
 
 
 
 
 
 
 
 
 
 
 
 
 
Swaps
$
21,706.8

 
$
439.6

 
$
7.4

 
$
447.0

 
$
440.8

 
$
1.2

 
$
442.0

Futures and forwards
6,237.6

 
1.1

 
—

 
1.1

 
1.3

 
—

 
1.3

Written options
1,313.8

 
—

 
—

 
—

 
57.6

 
—

 
57.6

Purchased options
1,393.3

 
58.9

 
—

 
58.9

 
—

 
—

 
—

Foreign exchange contracts
 
 
 
 
 
 
 
 
 
 
 
 
 
Swaps
2,149.9

 
49.2

 
0.9

 
50.1

 
52.2

 
2.8

 
55.0

Spot, futures and forwards
4,104.3

 
46.0

 
1.2

 
47.2

 
45.8

 
0.3

 
46.1

Written options
467.2

 
—

 
—

 
—

 
10.6

 
—

 
10.6

Purchased options
439.9

 
10.2

 
—

 
10.2

 
—

 
—

 
—

Equity contracts
 
 
 
 
 
 
 
 
 
 
 
 
 
Swaps
201.2

 
3.3

 
—

 
3.3

 
3.8

 
—

 
3.8

Futures and forwards
72.8

 
2.1

 
—

 
2.1

 
1.2

 
—

 
1.2

Written options
347.6

 
—

 
—

 
—

 
21.1

 
—

 
21.1

Purchased options
320.3

 
23.8

 
—

 
23.8

 
—

 
—

 
—

Commodity contracts
 
 
 
 
 
 
 
 
 
 
 
 
 
Swaps
47.0

 
4.7

 
—

 
4.7

 
7.1

 
—

 
7.1

Futures and forwards
45.6

 
3.8

 
—

 
3.8

 
0.7

 
—

 
0.7

Written options
36.6

 
—

 
—

 
—

 
4.4

 
—

 
4.4

Purchased options
37.4

 
4.2

 
—

 
4.2

 
—

 
—

 
—

Credit derivatives
 
 
 
 
 
 
 
 
 
 
 
 
 
Purchased credit derivatives:
 
 
 
 
 
 
 
 
 
 
 
 
 
Credit default swaps
928.3

 
14.4

 
—

 
14.4

 
14.8

 
—

 
14.8

Total return swaps/other
26.4

 
0.2

 
—

 
0.2

 
1.9

 
—

 
1.9

Written credit derivatives:
 
 
 
 
 
 
 
 
 
 
 
 
 
Credit default swaps
924.1

 
15.3

 
—

 
15.3

 
13.1

 
—

 
13.1

Total return swaps/other
39.7

 
2.3

 
—

 
2.3

 
0.4

 
—

 
0.4

Gross derivative assets/liabilities
 
 
$
679.1

 
$
9.5

 
$
688.6

 
$
676.8

 
$
4.3

 
$
681.1

Less: Legally enforceable master netting agreements (2)
 
 
 
(596.7
)
 
 
 
 
 
(596.7
)
Less: Cash collateral received/paid
 
 
 
 
 
 
(41.9
)
 
 
 
 
 
(45.9
)
Total derivative assets/liabilities
 
 
 
 
 
$
50.0

 
 
 
 
 
$
38.5

(1) 
Represents the total contract/notional amount of derivative assets and liabilities outstanding.
(2) 
The notional amount for certain derivatives has been reduced to reflect the impact of legally closed positions, which had no impact on the net fair value.

Offsetting of Derivatives

The Corporation enters into International Swaps and Derivatives Association, Inc. (ISDA) master netting agreements or similar agreements with substantially all of the Corporation's derivative counterparties. Where legally enforceable, these master netting agreements give the Corporation, in the event of default by the counterparty, the right to liquidate securities held as collateral and to offset receivables and payables with the same counterparty. For purposes of the Consolidated Balance Sheet, the Corporation offsets derivative assets and liabilities and cash collateral held with the same counterparty where it has such a legally enforceable master netting agreement.

The Offsetting of Derivatives table presents derivative instruments included in derivative assets and liabilities on the Consolidated Balance Sheet at September 30, 2016 and December 31, 2015 by primary risk (e.g., interest rate risk) and the platform, where applicable, on which these derivatives are transacted. Exchange-traded derivatives include listed options transacted on an exchange. Over-the-counter (OTC) derivatives include bilateral transactions between the Corporation and a particular counterparty. OTC-cleared derivatives include bilateral transactions between the Corporation and a counterparty where the transaction is cleared through a clearinghouse. Balances are presented on a gross basis, prior to the application of counterparty and cash collateral netting. Total gross derivative assets and liabilities are adjusted on an aggregate basis to take into consideration the effects of legally enforceable master netting agreements which includes reducing the balance for counterparty netting and cash collateral received or paid.

Other gross derivative assets and liabilities in the table represent derivatives entered into under master netting agreements where uncertainty exists as to the enforceability of these agreements under bankruptcy laws in some countries or industries and, accordingly, receivables and payables with counterparties in these countries or industries are reported on a gross basis.

Also included in the table is financial instruments collateral related to legally enforceable master netting agreements that represents securities collateral received or pledged and cash and securities collateral held and posted at third-party custodians. These amounts are not offset on the Consolidated Balance Sheet but are shown as a reduction to total derivative assets and liabilities in the table to derive net derivative assets and liabilities.

For more information on offsetting of securities financing agreements, see Note 9 – Federal Funds Sold or Purchased, Securities Financing Agreements and Short-term Borrowings.

Offsetting of Derivatives
 
 
 
 
 
 
 
 
September 30, 2016
 
December 31, 2015
(Dollars in billions)
Derivative
Assets
 
Derivative
Liabilities
 
Derivative
Assets
 
Derivative
Liabilities
Interest rate contracts
 
 
 
 
 
 
 
Over-the-counter
$
370.8

 
$
359.1

 
$
309.3

 
$
297.2

Over-the-counter cleared
258.5

 
259.8

 
197.0

 
201.7

Foreign exchange contracts
 
 
 
 
 
 
 
Over-the-counter
89.5

 
94.0

 
103.2

 
107.5

Over-the-counter cleared
0.4

 
0.3

 
0.1

 
0.1

Equity contracts
 

 
 
 
 

 
 
Over-the-counter
15.1

 
13.5

 
16.6

 
14.0

Exchange-traded (1)
11.6

 
14.3

 
10.0

 
9.2

Commodity contracts
 
 
 
 
 
 
 
Over-the-counter
4.1

 
5.4

 
7.3

 
8.9

Exchange-traded (1)
1.3

 
1.4

 
1.8

 
1.8

Over-the-counter cleared
—

 
—

 
0.1

 
0.1

Credit derivatives
 

 
 

 
 

 
 

Over-the-counter
17.3

 
17.0

 
24.6

 
22.9

Over-the-counter cleared
5.9

 
5.8

 
6.5

 
6.4

Total gross derivative assets/liabilities, before netting


 


 
 
 
 
Over-the-counter
496.8

 
489.0

 
461.0

 
450.5

Exchange-traded (1)
12.9

 
15.7

 
11.8

 
11.0

Over-the-counter cleared
264.8

 
265.9

 
203.7

 
208.3

Less: Legally enforceable master netting agreements and cash collateral received/paid
 
 
 
 
 
 
 
Over-the-counter
(466.4
)
 
(463.6
)
 
(426.6
)
 
(425.7
)
Exchange-traded (1)
(9.7
)
 
(9.7
)
 
(8.7
)
 
(8.7
)
Over-the-counter cleared
(264.4
)
 
(265.8
)
 
(203.3
)
 
(208.2
)
Derivative assets/liabilities, after netting
34.0

 
31.5

 
37.9

 
27.2

Other gross derivative assets/liabilities
13.9

 
12.0

 
12.1

 
11.3

Total derivative assets/liabilities
47.9

 
43.5

 
50.0

 
38.5

Less: Financial instruments collateral (2)
(14.6
)
 
(14.1
)
 
(13.9
)
 
(6.5
)
Total net derivative assets/liabilities
$
33.3

 
$
29.4

 
$
36.1

 
$
32.0

(1)
The notional amount for certain derivatives has been reduced to reflect the impact of legally closed positions, which had no impact on the net fair value.
(2)
These amounts are limited to the derivative asset/liability balance and, accordingly, do not include excess collateral received/pledged.
ALM and Risk Management Derivatives

The Corporation's ALM and risk management activities include the use of derivatives to mitigate risk to the Corporation including derivatives designated in qualifying hedge accounting relationships and derivatives used in other risk management activities. Interest rate, foreign exchange, equity, commodity and credit contracts are utilized in the Corporation's ALM and risk management activities.

The Corporation maintains an overall interest rate risk management strategy that incorporates the use of interest rate contracts, which are generally non-leveraged generic interest rate and basis swaps, options, futures and forwards, to minimize significant fluctuations in earnings caused by interest rate volatility. The Corporation's goal is to manage interest rate sensitivity and volatility so that movements in interest rates do not significantly adversely affect earnings or capital. As a result of interest rate fluctuations, hedged fixed-rate assets and liabilities appreciate or depreciate in fair value. Gains or losses on the derivative instruments that are linked to the hedged fixed-rate assets and liabilities are expected to substantially offset this unrealized appreciation or depreciation.

Market risk, including interest rate risk, can be substantial in the mortgage business. Market risk is the risk that values of mortgage assets or revenues will be adversely affected by changes in market conditions such as interest rate movements. To mitigate the interest rate risk in mortgage banking production income, the Corporation utilizes forward loan sale commitments and other derivative instruments, including purchased options, and certain debt securities. The Corporation also utilizes derivatives such as interest rate options, interest rate swaps, forward settlement contracts and eurodollar futures to hedge certain market risks of mortgage servicing rights (MSRs). For more information on MSRs, see Note 17 – Mortgage Servicing Rights.

The Corporation uses foreign exchange contracts to manage the foreign exchange risk associated with certain foreign currency-denominated assets and liabilities, as well as the Corporation's investments in non-U.S. subsidiaries. Foreign exchange contracts, which include spot and forward contracts, represent agreements to exchange the currency of one country for the currency of another country at an agreed-upon price on an agreed-upon settlement date. Exposure to loss on these contracts will increase or decrease over their respective lives as currency exchange and interest rates fluctuate.

The Corporation enters into derivative commodity contracts such as futures, swaps, options and forwards as well as non-derivative commodity contracts to provide price risk management services to customers or to manage price risk associated with its physical and financial commodity positions. The non-derivative commodity contracts and physical inventories of commodities expose the Corporation to earnings volatility. Fair value accounting hedges provide a method to mitigate a portion of this earnings volatility.

The Corporation purchases credit derivatives to manage credit risk related to certain funded and unfunded credit exposures. Credit derivatives include credit default swaps (CDS), total return swaps and swaptions. These derivatives are recorded on the Consolidated Balance Sheet at fair value with changes in fair value recorded in other income.

Derivatives Designated as Accounting Hedges

The Corporation uses various types of interest rate, commodity and foreign exchange derivative contracts to protect against changes in the fair value of its assets and liabilities due to fluctuations in interest rates, commodity prices and exchange rates (fair value hedges). The Corporation also uses these types of contracts and equity derivatives to protect against changes in the cash flows of its assets and liabilities, and other forecasted transactions (cash flow hedges). The Corporation hedges its net investment in consolidated non-U.S. operations determined to have functional currencies other than the U.S. Dollar using forward exchange contracts and cross-currency basis swaps, and by issuing foreign currency-denominated debt (net investment hedges).

Fair Value Hedges

The table below summarizes information related to fair value hedges for the three and nine months ended September 30, 2016 and 2015, including hedges of interest rate risk on long-term debt that were acquired as part of a business combination and redesignated at that time. At redesignation, the fair value of the derivatives was positive. As the derivatives mature, the fair value will approach zero. As a result, ineffectiveness will occur and the fair value changes in the derivatives and the long-term debt being hedged may be directionally the same in certain scenarios. Based on a regression analysis, the derivatives continue to be highly effective at offsetting changes in the fair value of the long-term debt attributable to interest rate risk.

Derivatives Designated as Fair Value Hedges
 
 
 
 
 
 
Gains (Losses)
Three Months Ended September 30
 
Nine Months Ended September 30
 
2016
 
2016
(Dollars in millions)
Derivative
 
Hedged
Item
 
Hedge
Ineffectiveness
 
Derivative
 
Hedged
Item
 
Hedge
Ineffectiveness
Interest rate risk on long-term debt (1)
$
(758
)
 
$
580

 
$
(178
)
 
$
3,166

 
$
(3,654
)
 
$
(488
)
Interest rate and foreign currency risk on long-term debt (1)
16

 
(10
)
 
6

 
360

 
(369
)
 
(9
)
Interest rate risk on available-for-sale securities (2)
235

 
(250
)
 
(15
)
 
(131
)
 
80

 
(51
)
Price risk on commodity inventory (3)
6

 
(6
)
 
—

 
—

 
—

 
—

Total
$
(501
)
 
$
314

 
$
(187
)
 
$
3,395

 
$
(3,943
)
 
$
(548
)
 
 
 
 
 
 
 
 
 
 
 
 
 
2015
 
2015
Interest rate risk on long-term debt (1)
$
1,921

 
$
(2,111
)
 
$
(190
)
 
$
724

 
$
(1,362
)
 
$
(638
)
Interest rate and foreign currency risk on long-term debt (1)
(138
)
 
125

 
(13
)
 
(1,394
)
 
1,311

 
(83
)
Interest rate risk on available-for-sale securities (2)
(6
)
 
(1
)
 
(7
)
 
39

 
(49
)
 
(10
)
Price risk on commodity inventory (3)
2

 
(2
)
 
—

 
15

 
(11
)
 
4

Total
$
1,779

 
$
(1,989
)
 
$
(210
)
 
$
(616
)
 
$
(111
)
 
$
(727
)
(1) 
Amounts are recorded in interest expense on long-term debt and in other income.
(2) 
Amounts are recorded in interest income on debt securities.
(3) 
Amounts relating to commodity inventory are recorded in trading account profits.

Cash Flow and Net Investment Hedges

The table below summarizes certain information related to cash flow hedges and net investment hedges for the three and nine months ended September 30, 2016 and 2015. Of the $800 million after-tax net loss ($1.3 billion on a pretax basis) on derivatives in accumulated OCI at September 30, 2016, $245 million after-tax ($392 million on a pretax basis) is expected to be reclassified into earnings in the next 12 months. These net losses reclassified into earnings are expected to primarily reduce net interest income related to the respective hedged items. Amounts related to price risk on restricted stock awards reclassified from accumulated OCI are recorded in personnel expense. For terminated cash flow hedges, the time period over which substantially all of the forecasted transactions are hedged is approximately seven years, with a maximum length of time for certain forecasted transactions of 20 years.

Derivatives Designated as Cash Flow and Net Investment Hedges
 
 
 
 
 
 
 
Three Months Ended September 30
 
Nine Months Ended September 30
 
2016
 
2016
(Dollars in millions, amounts pretax)
Gains (Losses) Recognized in Accumulated OCI on Derivatives
 
Gains (Losses) in Income Reclassified from Accumulated OCI
 
Hedge Ineffectiveness and Amounts Excluded from Effectiveness Testing (1)
 
Gains (Losses) Recognized in Accumulated OCI on Derivatives
 
Gains (Losses) in Income Reclassified from Accumulated OCI
 
Hedge Ineffectiveness and Amounts Excluded from Effectiveness Testing (1)
Cash flow hedges
 
 
 
 
 
 
 
 
 
 
 
Interest rate risk on variable-rate portfolios
$
(8
)
 
$
(119
)
 
$
(4
)
 
$
50

 
$
(447
)
 
$
2

Price risk on restricted stock awards (2)
85

 
(8
)
 
—

 
(114
)
 
(61
)
 
—

Total
$
77

 
$
(127
)
 
$
(4
)
 
$
(64
)
 
$
(508
)
 
$
2

Net investment hedges
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange risk
$
214

 
$
2

 
$
(68
)
 
$
173

 
$
3

 
$
(234
)
 
 
 
 
 
 
 
 
 
 
 
 
 
2015
 
2015
Cash flow hedges
 
 
 
 
 
 
 
 
 
 
 
Interest rate risk on variable-rate portfolios
$
94

 
$
(254
)
 
$
4

 
$
99

 
$
(768
)
 
$
3

Price risk on restricted stock awards (2)
(112
)
 
30

 
—

 
(141
)
 
57

 
—

Total
$
(18
)
 
$
(224
)
 
$
4

 
$
(42
)
 
$
(711
)
 
$
3

Net investment hedges
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange risk
$
1,407

 
$
14

 
$
(98
)
 
$
2,397

 
$
98

 
$
(185
)
(1) 
Amounts related to cash flow hedges represent hedge ineffectiveness and amounts related to net investment hedges represent amounts excluded from effectiveness testing.
(2) 
The hedge gain (loss) recognized in accumulated OCI is primarily related to the change in the Corporation's stock price for the period.
Other Risk Management Derivatives

Other risk management derivatives are used by the Corporation to reduce certain risk exposures. These derivatives are not qualifying accounting hedges because either they did not qualify for or were not designated as accounting hedges. The table below presents gains (losses) on these derivatives for the three and nine months ended September 30, 2016 and 2015. These gains (losses) are largely offset by the income or expense that is recorded on the hedged item.

Other Risk Management Derivatives
 
 
 
 
Gains (Losses)
Three Months Ended September 30
 
Nine Months Ended September 30
(Dollars in millions)
2016
 
2015
 
2016
 
2015
Interest rate risk on mortgage banking income (1)
$
57

 
$
474

 
$
882

 
$
380

Credit risk on loans (2)
(7
)
 
24

 
(103
)
 
(34
)
Interest rate and foreign currency risk on ALM activities (3)
(262
)
 
(527
)
 
(1,970
)
 
(202
)
Price risk on restricted stock awards (4)
199

 
(229
)
 
(569
)
 
(473
)
Other
—

 
22

 
40

 
15

(1) 
Net gains (losses) on these derivatives are recorded in mortgage banking income as they are used to mitigate the interest rate risk related to MSRs, interest rate lock commitments (IRLCs) and mortgage loans held-for-sale (LHFS), all of which are measured at fair value with changes in fair value recorded in mortgage banking income. The net gains on IRLCs related to the origination of mortgage loans that are held-for-sale, which are not included in the table but are considered derivative instruments, were $185 million and $514 million for the three and nine months ended September 30, 2016 compared to $184 million and $611 million for the same periods in 2015.
(2) 
Primarily related to derivatives that are economic hedges of credit risk on loans. Net gains (losses) on these derivatives are recorded in other income.
(3) 
Primarily related to hedges of debt securities carried at fair value and hedges of foreign currency-denominated debt. Gains (losses) on these derivatives and the related hedged items are recorded in other income.
(4) 
Gains (losses) on these derivatives are recorded in personnel expense.

Transfers of Financial Assets with Risk Retained through Derivatives

The Corporation enters into certain transactions involving the transfer of financial assets that are accounted for as sales where substantially all of the economic exposure to the transferred financial assets is retained through derivatives (e.g., interest rate and/or credit), but the Corporation does not retain control over the assets transferred. Through September 30, 2016 and December 31, 2015, the Corporation transferred $6.9 billion and $7.9 billion of primarily non-U.S. government-guaranteed mortgage-backed securities (MBS) to a third-party trust and received gross cash proceeds of $6.9 billion and $7.9 billion at the transfer dates. At September 30, 2016 and December 31, 2015, the fair value of these securities was $6.7 billion and $7.2 billion. Derivative assets of $28 million and $24 million and liabilities of $30 million and $29 million were recorded at September 30, 2016 and December 31, 2015, and are included in credit derivatives in the derivative instruments table on page 103.

Sales and Trading Revenue

The Corporation enters into trading derivatives to facilitate client transactions and to manage risk exposures arising from trading account assets and liabilities. It is the Corporation's policy to include these derivative instruments in its trading activities which include derivatives and non-derivative cash instruments. The resulting risk from these derivatives is managed on a portfolio basis as part of the Corporation's Global Markets business segment. The related sales and trading revenue generated within Global Markets is recorded in various income statement line items including trading account profits and net interest income as well as other revenue categories.

Sales and trading revenue includes changes in the fair value and realized gains and losses on the sales of trading and other assets, net interest income, and fees primarily from commissions on equity securities. Revenue is generated by the difference in the client price for an instrument and the price at which the trading desk can execute the trade in the dealer market. For equity securities, commissions related to purchases and sales are recorded in the "Other" column in the Sales and Trading Revenue table. Changes in the fair value of these securities are included in trading account profits. For debt securities, revenue, with the exception of interest associated with the debt securities, is typically included in trading account profits. Unlike commissions for equity securities, the initial revenue related to broker-dealer services for debt securities is typically included in the pricing of the instrument rather than being charged through separate fee arrangements. Therefore, this revenue is recorded in trading account profits as part of the initial mark to fair value. For derivatives, the majority of revenue is included in trading account profits. In transactions where the Corporation acts as agent, which include exchange-traded futures and options, fees are recorded in other income.

The table below, which includes both derivatives and non-derivative cash instruments, identifies the amounts in the respective income statement line items attributable to the Corporation's sales and trading revenue in Global Markets, categorized by primary risk, for the three and nine months ended September 30, 2016 and 2015. The difference between total trading account profits in the table below and in the Consolidated Statement of Income represents trading activities in business segments other than Global Markets. This table includes debit valuation and funding valuation adjustment (DVA/FVA) gains (losses). Global Markets results in Note 18 – Business Segment Information are presented on a fully taxable-equivalent (FTE) basis. The table below is not presented on an FTE basis.

Sales and Trading Revenue
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended September 30
 
Nine Months Ended September 30
 
2016
 
2016
(Dollars in millions)
Trading
Account
Profits
 
Net Interest Income
 
Other (1)
 
Total
 
Trading
Account
Profits
 
Net Interest Income
 
Other (1)
 
Total
Interest rate risk
$
514

 
$
304

 
$
82

 
$
900

 
$
1,438

 
$
1,063

 
$
207

 
$
2,708

Foreign exchange risk
319

 
(4
)
 
(39
)
 
276

 
1,003

 
(7
)
 
(111
)
 
885

Equity risk
461

 
30

 
467

 
958

 
1,478

 
11

 
1,574

 
3,063

Credit risk
597

 
639

 
123

 
1,359

 
1,218

 
1,910

 
380

 
3,508

Other risk
43

 
7

 
10

 
60

 
264

 
(19
)
 
35

 
280

Total sales and trading revenue
$
1,934

 
$
976

 
$
643

 
$
3,553

 
$
5,401

 
$
2,958

 
$
2,085

 
$
10,444

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2015
 
2015
Interest rate risk
$
405

 
$
333

 
$
50

 
$
788

 
$
1,269

 
$
924

 
$
(327
)
 
$
1,866

Foreign exchange risk
310

 
(4
)
 
(36
)
 
270

 
1,052

 
(6
)
 
(99
)
 
947

Equity risk
558

 
38

 
547

 
1,143

 
1,795

 
15

 
1,638

 
3,448

Credit risk
84

 
614

 
99

 
797

 
825

 
1,776

 
406

 
3,007

Other risk
114

 
(24
)
 
24

 
114

 
371

 
(62
)
 
51

 
360

Total sales and trading revenue
$
1,471

 
$
957

 
$
684

 
$
3,112

 
$
5,312

 
$
2,647

 
$
1,669

 
$
9,628

(1) 
Represents amounts in investment and brokerage services and other income that are recorded in Global Markets and included in the definition of sales and trading revenue. Includes investment and brokerage services revenue of $485 million and $1.6 billion for the three and nine months ended September 30, 2016 and $568 million and $1.7 billion for the same periods in 2015.

Credit Derivatives

The Corporation enters into credit derivatives primarily to facilitate client transactions and to manage credit risk exposures. Credit derivatives derive value based on an underlying third-party referenced obligation or a portfolio of referenced obligations and generally require the Corporation, as the seller of credit protection, to make payments to a buyer upon the occurrence of a pre-defined credit event. Such credit events generally include bankruptcy of the referenced credit entity and failure to pay under the obligation, as well as acceleration of indebtedness and payment repudiation or moratorium. For credit derivatives based on a portfolio of referenced credits or credit indices, the Corporation may not be required to make payment until a specified amount of loss has occurred and/or may only be required to make payment up to a specified amount.

Credit derivative instruments where the Corporation is the seller of credit protection and their expiration are summarized in the table below. These instruments are classified as investment and non-investment grade based on the credit quality of the underlying referenced obligation. The Corporation considers ratings of BBB- or higher as investment grade. Non-investment grade includes non-rated credit derivative instruments. The Corporation discloses internal categorizations of investment grade and non-investment grade consistent with how risk is managed for these instruments.
Credit Derivative Instruments
 
 
 
September 30, 2016
 
Carrying Value
(Dollars in millions)
Less than
One Year
 
One to
Three Years
 
Three to
Five Years
 
Over Five
Years
 
Total
Credit default swaps:
 
 
 
 
 
 
 
 
 
Investment grade
$
22

 
$
59

 
$
526

 
$
918

 
$
1,525

Non-investment grade
461

 
1,241

 
1,175

 
3,797

 
6,674

Total
483

 
1,300

 
1,701

 
4,715

 
8,199

Total return swaps/other:
 
 
 
 
 
 
 
 
 
Investment grade
13

 
—

 
—

 
—

 
13

Non-investment grade
305

 
27

 
2

 
3

 
337

Total
318

 
27

 
2

 
3

 
350

Total credit derivatives
$
801

 
$
1,327

 
$
1,703

 
$
4,718

 
$
8,549

Credit-related notes:
 
 
 
 
 
 
 
 
 
Investment grade
$
1

 
$
57

 
$
589

 
$
1,486

 
$
2,133

Non-investment grade
55

 
58

 
85

 
1,204

 
1,402

Total credit-related notes
$
56

 
$
115

 
$
674

 
$
2,690

 
$
3,535

 
Maximum Payout/Notional
Credit default swaps:
 
 
 
 
 
 
 
 
 
Investment grade
$
156,227

 
$
210,797

 
$
142,483

 
$
33,151

 
$
542,658

Non-investment grade
86,898

 
97,759

 
53,549

 
22,347

 
260,553

Total
243,125

 
308,556

 
196,032

 
55,498

 
803,211

Total return swaps/other:
 
 
 
 
 
 
 
 
 
Investment grade
12,623

 
—

 
—

 
—

 
12,623

Non-investment grade
24,299

 
5,485

 
591

 
230

 
30,605

Total
36,922

 
5,485

 
591

 
230

 
43,228

Total credit derivatives
$
280,047

 
$
314,041

 
$
196,623

 
$
55,728

 
$
846,439

 
 
 
 
 
 
 
 
 
 
 
December 31, 2015
 
Carrying Value
Credit default swaps:
 
 
 
 
 
 
 
 
 
Investment grade
$
84

 
$
481

 
$
2,203

 
$
680

 
$
3,448

Non-investment grade
672

 
3,035

 
2,386

 
3,583

 
9,676

Total
756

 
3,516

 
4,589

 
4,263

 
13,124

Total return swaps/other:
 
 
 
 
 
 
 
 
 
Investment grade
5

 
—

 
—

 
—

 
5

Non-investment grade
171

 
236

 
8

 
2

 
417

Total
176

 
236

 
8

 
2

 
422

Total credit derivatives
$
932

 
$
3,752

 
$
4,597

 
$
4,265

 
$
13,546

Credit-related notes:
 
 
 
 
 
 
 
 
 
Investment grade
$
267

 
$
57

 
$
444

 
$
2,203

 
$
2,971

Non-investment grade
61

 
118

 
117

 
1,264

 
1,560

Total credit-related notes
$
328

 
$
175

 
$
561

 
$
3,467

 
$
4,531

 
Maximum Payout/Notional
Credit default swaps:
 
 
 
 
 
 
 
 
 
Investment grade
$
149,177

 
$
280,658

 
$
178,990

 
$
26,352

 
$
635,177

Non-investment grade
81,596

 
135,850

 
53,299

 
18,221

 
288,966

Total
230,773

 
416,508

 
232,289

 
44,573

 
924,143

Total return swaps/other:
 
 
 
 
 
 
 
 
 
Investment grade
9,758

 
—

 
—

 
—

 
9,758

Non-investment grade
20,917

 
6,989

 
1,371

 
623

 
29,900

Total
30,675

 
6,989

 
1,371

 
623

 
39,658

Total credit derivatives
$
261,448

 
$
423,497

 
$
233,660

 
$
45,196

 
$
963,801

     
The notional amount represents the maximum amount payable by the Corporation for most credit derivatives. However, the Corporation does not monitor its exposure to credit derivatives based solely on the notional amount because this measure does not take into consideration the probability of occurrence. As such, the notional amount is not a reliable indicator of the Corporation's exposure to these contracts. Instead, a risk framework is used to define risk tolerances and establish limits to help ensure that certain credit risk-related losses occur within acceptable, predefined limits.

The Corporation manages its market risk exposure to credit derivatives by entering into a variety of offsetting derivative contracts and security positions. For example, in certain instances, the Corporation may purchase credit protection with identical underlying referenced names to offset its exposure. The carrying value and notional amount of written credit derivatives for which the Corporation held purchased credit derivatives with identical underlying referenced names and terms were $4.9 billion and $623.0 billion at September 30, 2016, and $8.2 billion and $706.0 billion at December 31, 2015.

Credit-related notes in the table on page 111 include investments in securities issued by collateralized debt obligation (CDO), collateralized loan obligation (CLO) and credit-linked note vehicles. These instruments are primarily classified as trading securities. The carrying value of these instruments equals the Corporation's maximum exposure to loss. The Corporation is not obligated to make any payments to the entities under the terms of the securities owned.

Credit-related Contingent Features and Collateral

The Corporation executes the majority of its derivative contracts in the OTC market with large, international financial institutions, including broker-dealers and, to a lesser degree, with a variety of non-financial companies. A significant majority of the derivative transactions are executed on a daily margin basis. Therefore, events such as a credit rating downgrade (depending on the ultimate rating level) or a breach of credit covenants would typically require an increase in the amount of collateral required of the counterparty, where applicable, and/or allow the Corporation to take additional protective measures such as early termination of all trades. Further, as previously discussed on page 103, the Corporation enters into legally enforceable master netting agreements which reduce risk by permitting the closeout and netting of transactions with the same counterparty upon the occurrence of certain events.

A majority of the Corporation's derivative contracts contain credit risk-related contingent features, primarily in the form of ISDA master netting agreements and credit support documentation that enhance the creditworthiness of these instruments compared to other obligations of the respective counterparty with whom the Corporation has transacted. These contingent features may be for the benefit of the Corporation as well as its counterparties with respect to changes in the Corporation's creditworthiness and the mark-to-market exposure under the derivative transactions. At September 30, 2016 and December 31, 2015, the Corporation held cash and securities collateral of $86.1 billion and $78.9 billion, and posted cash and securities collateral of $70.6 billion and $62.7 billion in the normal course of business under derivative agreements. This excludes cross-product margining agreements where clients are permitted to margin on a net basis for both derivative and secured financing arrangements.

In connection with certain OTC derivative contracts and other trading agreements, the Corporation can be required to provide additional collateral or to terminate transactions with certain counterparties in the event of a downgrade of the senior debt ratings of the Corporation or certain subsidiaries. The amount of additional collateral required depends on the contract and is usually a fixed incremental amount and/or the market value of the exposure.

At September 30, 2016, the amount of collateral, calculated based on the terms of the contracts, that the Corporation and certain subsidiaries could be required to post to counterparties but had not yet posted to counterparties was approximately $2.5 billion, including $1.6 billion for Bank of America, N.A. (BANA).

Some counterparties are currently able to unilaterally terminate certain contracts, or the Corporation or certain subsidiaries may be required to take other action such as find a suitable replacement or obtain a guarantee. At September 30, 2016, the current liability recorded for these derivative contracts was $44 million.

The table below presents the amount of additional collateral that would have been contractually required by derivative contracts and other trading agreements at September 30, 2016 if the rating agencies had downgraded their long-term senior debt ratings for the Corporation or certain subsidiaries by one incremental notch and by an additional second incremental notch.

Additional Collateral Required to Be Posted Upon Downgrade
 
September 30, 2016
(Dollars in millions)
One incremental notch
 
Second incremental notch
Bank of America Corporation
$
792

 
$
2,506

Bank of America, N.A. and subsidiaries (1)
611

 
2,045

(1) 
Included in Bank of America Corporation collateral requirements in this table.

The table below presents the derivative liabilities that would be subject to unilateral termination by counterparties and the amounts of collateral that would have been contractually required at September 30, 2016 if the long-term senior debt ratings for the Corporation or certain subsidiaries had been lower by one incremental notch and by an additional second incremental notch.

Derivative Liabilities Subject to Unilateral Termination Upon Downgrade
 
September 30, 2016
(Dollars in millions)
One incremental notch
 
Second incremental notch
Derivative liabilities
$
1,014

 
$
3,935

Collateral posted
703

 
3,649



Valuation Adjustments on Derivatives

The table below presents credit valuation adjustment (CVA), DVA and FVA gains (losses) on derivatives, which are recorded in trading account profits, on a gross and net of hedge basis for the three and nine months ended September 30, 2016 and 2015. For more information on the valuation adjustments on derivatives, see Note 2 – Derivatives to the Consolidated Financial Statements of the Corporation's 2015 Annual Report on Form 10-K

Valuation Adjustments on Derivatives
 
 
 
 
 
 
Gains (Losses)
Three Months Ended September 30
 
Nine Months Ended September 30
 
2016
 
2015
 
2016
 
2015
(Dollars in millions)
Gross
Net
 
Gross
Net
 
Gross
Net
 
Gross
Net
Derivative assets (CVA) (1)
$
280

$
66

 
$
(138
)
$
67

 
$
45

$
151

 
$
85

$
174

Derivative assets/liabilities (FVA) (1)
42

51

 
(48
)
(48
)
 
9

20

 
17

17

Derivative liabilities (DVA) (1)
(125
)
(103
)
 
132

66

 
106

(60
)
 
141

16

(1) 
At September 30, 2016 and December 31, 2015, cumulative CVA reduced the derivative assets balance by $1.3 billion and $1.4 billion, cumulative FVA reduced the net derivative assets balance by $472 million and $481 million, and cumulative DVA reduced the derivative liabilities balance by $856 million and $750 million, respectively.