Annual report pursuant to Section 13 and 15(d)

Derivatives

v3.10.0.1
Derivatives
12 Months Ended
Dec. 31, 2018
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivatives 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. The following tables present derivative instruments included on the Consolidated Balance Sheet in derivative assets and liabilities at December 31, 2018 and 2017. 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 cash collateral received or paid.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2018
 
 
 
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
$
15,977.9

 
$
141.0

 
$
3.2

 
$
144.2

 
$
138.9

 
$
2.0

 
$
140.9

Futures and forwards
3,656.6

 
4.7

 

 
4.7

 
5.0

 

 
5.0

Written options
1,584.9

 

 

 

 
28.6

 

 
28.6

Purchased options
1,614.0

 
30.8

 

 
30.8

 

 

 

Foreign exchange contracts
 
 
 
 
 
 


 
 
 
 

 


Swaps
1,704.8

 
38.8

 
1.4

 
40.2

 
42.2

 
2.3

 
44.5

Spot, futures and forwards
4,276.0

 
39.8

 
0.4

 
40.2

 
39.3

 
0.3

 
39.6

Written options
256.7

 

 

 

 
5.0

 

 
5.0

Purchased options
240.4

 
4.6

 

 
4.6

 

 

 

Equity contracts
 
 
 
 
 
 


 
 
 
 

 


Swaps
253.6

 
7.7

 

 
7.7

 
8.4

 

 
8.4

Futures and forwards
100.0

 
2.1

 

 
2.1

 
0.3

 

 
0.3

Written options
597.1

 

 

 

 
27.5

 

 
27.5

Purchased options
549.4

 
36.0

 

 
36.0

 

 

 

Commodity contracts
 

 
 
 
 
 


 
 
 
 

 


Swaps
43.1

 
2.7

 

 
2.7

 
4.5

 

 
4.5

Futures and forwards
51.7

 
3.2

 

 
3.2

 
0.5

 

 
0.5

Written options
27.5

 

 

 

 
2.2

 

 
2.2

Purchased options
23.4

 
1.7

 

 
1.7

 

 

 

Credit derivatives (2, 3)
 

 
 
 
 

 


 
 
 
 

 


Purchased credit derivatives:
 

 
 
 
 

 


 
 
 
 

 


Credit default swaps
408.1

 
5.3

 

 
5.3

 
4.9

 

 
4.9

Total return swaps/options
84.5

 
0.4

 

 
0.4

 
1.0

 

 
1.0

Written credit derivatives:
 
 
 
 
 

 


 
 
 
 

 


Credit default swaps
371.9

 
4.4

 

 
4.4

 
4.3

 

 
4.3

Total return swaps/options
87.3

 
0.6

 

 
0.6

 
0.6

 

 
0.6

Gross derivative assets/liabilities
 
 
$
323.8

 
$
5.0

 
$
328.8

 
$
313.2

 
$
4.6

 
$
317.8

Less: Legally enforceable master netting agreements
 

 


 
 

 
(252.7
)
 
 

 
 

 
(252.7
)
Less: Cash collateral received/paid
 

 
 

 
 

 
(32.4
)
 
 

 
 

 
(27.2
)
Total derivative assets/liabilities
 

 
 

 
 

 
$
43.7

 
 

 
 

 
$
37.9

(1) 
Represents the total contract/notional amount of derivative assets and liabilities outstanding.
(2) 
The net derivative liability and notional amount of written credit derivatives for which the Corporation held purchased credit derivatives with identical underlying referenced names were $185 million and $342.8 billion at December 31, 2018.
(3) 
Derivative assets and liabilities for credit default swaps (CDS) reflect a central clearing counterparty’s amendments to legally re-characterize daily cash variation margin from collateral, which secures an outstanding exposure, to settlement, which discharges an outstanding exposure, effective in 2018.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2017
 
 
 
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
$
15,416.4

 
$
175.1

 
$
2.9

 
$
178.0

 
$
172.5

 
$
1.7

 
$
174.2

Futures and forwards
4,332.4

 
0.5

 

 
0.5

 
0.5

 

 
0.5

Written options
1,170.5

 

 

 

 
35.5

 

 
35.5

Purchased options
1,184.5

 
37.6

 

 
37.6

 

 

 

Foreign exchange contracts
 
 
 

 
 

 
 

 
 

 
 

 
 

Swaps
2,011.1

 
35.6

 
2.2

 
37.8

 
36.1

 
2.7

 
38.8

Spot, futures and forwards
3,543.3

 
39.1

 
0.7

 
39.8

 
39.1

 
0.8

 
39.9

Written options
291.8

 

 

 

 
5.1

 

 
5.1

Purchased options
271.9

 
4.6

 

 
4.6

 

 

 

Equity contracts
 

 
 

 
 

 
 

 
 

 
 

 
 

Swaps
265.6

 
4.8

 

 
4.8

 
4.4

 

 
4.4

Futures and forwards
106.9

 
1.5

 

 
1.5

 
0.9

 

 
0.9

Written options
480.8

 

 

 

 
23.9

 

 
23.9

Purchased options
428.2

 
24.7

 

 
24.7

 

 

 

Commodity contracts
 

 
 

 
 

 
 

 
 

 
 

 
 

Swaps
46.1

 
1.8

 

 
1.8

 
4.6

 

 
4.6

Futures and forwards
47.1

 
3.5

 

 
3.5

 
0.6

 

 
0.6

Written options
21.7

 

 

 

 
1.4

 

 
1.4

Purchased options
22.9

 
1.4

 

 
1.4

 

 

 

Credit derivatives (2)
 

 
 

 
 

 
 

 
 

 
 

 
 

Purchased credit derivatives:
 

 
 

 
 

 
 

 
 

 
 

 
 

Credit default swaps
470.9

 
4.1

 

 
4.1

 
11.1

 

 
11.1

Total return swaps/options
54.1

 
0.1

 

 
0.1

 
1.3

 

 
1.3

Written credit derivatives:
 

 
 

 
 

 
 

 
 
 
 

 
 

Credit default swaps
448.2

 
10.6

 

 
10.6

 
3.6

 

 
3.6

Total return swaps/options
55.2

 
0.8

 

 
0.8

 
0.2

 

 
0.2

Gross derivative assets/liabilities
 

 
$
345.8

 
$
5.8

 
$
351.6

 
$
340.8

 
$
5.2

 
$
346.0

Less: Legally enforceable master netting agreements
 

 
 

 
 

 
(279.2
)
 
 

 
 

 
(279.2
)
Less: Cash collateral received/paid
 

 
 

 
 

 
(34.6
)
 
 

 
 

 
(32.5
)
Total derivative assets/liabilities
 

 
 

 
 

 
$
37.8

 
 

 
 

 
$
34.3

(1) 
Represents the total contract/notional amount of derivative assets and liabilities outstanding.
(2) 
The net derivative asset and notional amount of written credit derivatives for which the Corporation held purchased credit derivatives with identical underlying referenced names were $6.4 billion and $435.1 billion at December 31, 2017.
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 following table presents derivative instruments included in derivative assets and liabilities on the Consolidated Ba
lance Sheet at December 31, 2018 and 2017 by primary risk (e.g., interest rate risk) and the platform, where applicable, on which these derivatives are transacted. 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 include reducing the balance for counterparty netting and cash collateral received or paid.
For more information on offsetting of securities financing agreements, see Note 10 – Federal Funds Sold or Purchased, Securities Financing Agreements, Short-term Borrowings and Restricted Cash.
 
 
 
 
 
 
 
 
Offsetting of Derivatives (1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivative
Assets
 
Derivative Liabilities
 
Derivative
Assets
 
Derivative Liabilities
(Dollars in billions)
December 31, 2018
 
December 31, 2017
Interest rate contracts
 

 
 

 
 

 
 

Over-the-counter
$
174.2

 
$
169.4

 
$
211.7

 
$
206.0

Over-the-counter cleared
4.8

 
4.0

 
1.9

 
1.8

Foreign exchange contracts
 
 
 
 
 
 
 
Over-the-counter
82.5

 
86.3

 
78.7

 
80.8

Over-the-counter cleared
0.9

 
0.9

 
0.9

 
0.7

Equity contracts
 
 
 
 
 
 
 
Over-the-counter
24.6

 
14.6

 
18.3

 
16.2

Exchange-traded
16.1

 
15.1

 
9.1

 
8.5

Commodity contracts
 
 
 
 
 
 
 
Over-the-counter
3.5

 
4.5

 
2.9

 
4.4

Exchange-traded
1.0

 
0.9

 
0.7

 
0.8

Credit derivatives
 
 
 
 
 
 
 
Over-the-counter
7.7

 
8.2

 
9.1

 
9.6

Over-the-counter cleared
2.5

 
2.3

 
6.1

 
6.0

Total gross derivative assets/liabilities, before netting
 
 
 
 
 
 
 
Over-the-counter
292.5

 
283.0

 
320.7

 
317.0

Exchange-traded
17.1

 
16.0

 
9.8

 
9.3

Over-the-counter cleared
8.2

 
7.2

 
8.9

 
8.5

Less: Legally enforceable master netting agreements and cash collateral received/paid
 
 
 
 
 
 
 
Over-the-counter
(264.4
)
 
(259.2
)
 
(296.9
)
 
(294.6
)
Exchange-traded
(13.5
)
 
(13.5
)
 
(8.6
)
 
(8.6
)
Over-the-counter cleared
(7.2
)
 
(7.2
)
 
(8.3
)
 
(8.5
)
Derivative assets/liabilities, after netting
32.7

 
26.3

 
25.6

 
23.1

Other gross derivative assets/liabilities (2)
11.0

 
11.6

 
12.2

 
11.2

Total derivative assets/liabilities
43.7

 
37.9

 
37.8

 
34.3

Less: Financial instruments collateral (3)
(16.3
)
 
(8.6
)
 
(11.2
)
 
(10.4
)
Total net derivative assets/liabilities
$
27.4

 
$
29.3

 
$
26.6

 
$
23.9

(1) 
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. Exchange-traded derivatives include listed options transacted on an exchange.
(2) 
Consists of derivatives entered into under master netting agreements where the enforceability of these agreements is uncertain under bankruptcy laws in some countries or industries.
(3) 
Amounts are limited to the derivative asset/liability balance and, accordingly, do not include excess collateral received/pledged. Financial instruments collateral includes securities collateral received or pledged and cash securities held and posted at third-party custodians that are not offset on the Consolidated Balance Sheet but shown as a reduction to derive net derivative assets and liabilities.
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 in the mortgage business 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 MSRs. For more information on MSRs, see Note 20 – Fair Value Measurements.
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 purchases credit derivatives to manage credit risk related to certain funded and unfunded credit exposures. Credit derivatives include 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 and foreign exchange derivative contracts to protect against changes in the fair value of its assets and liabilities due to fluctuations in interest rates and exchange rates (fair value hedges). The Corporation also uses these types of contracts 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 2018, 2017 and 2016.
 
 
 
 
 
 
 
 
 
 
 
 
Gains and Losses on Derivatives Designated as Fair Value Hedges
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivative
 
Hedged Item
(Dollars in millions)
2018
 
2017
 
2016
 
2018
 
2017
 
2016
Interest rate risk on long-term debt (1)
$
(1,538
)
 
$
(1,537
)
 
$
(1,488
)
 
$
1,429

 
$
1,045

 
$
646

Interest rate and foreign currency risk on long-term debt (2)
(1,187
)
 
1,811

 
(941
)
 
1,079

 
(1,767
)
 
944

Interest rate risk on available-for-sale securities (3)
(52
)
 
(67
)
 
227

 
50

 
35

 
(286
)
Total
$
(2,777
)

$
207


$
(2,202
)

$
2,558


$
(687
)

$
1,304


(1) 
Amounts are recorded in interest expense in the Consolidated Statement of Income. In 2017 and 2016, amounts representing hedge ineffectiveness were losses of $492 million and $842 million.
(2) 
In 2018, 2017 and 2016, the derivative amount includes losses of $992 million, gains of $2.2 billion and losses of $910 million, respectively, in other income and losses of $116 million, $365 million and $30 million, respectively, in interest expense. Line item totals are in the Consolidated Statement of Income.
(3) 
Amounts are recorded in interest income in the Consolidated Statement of Income.
The table below summarizes the carrying value of hedged assets and liabilities that are designated and qualifying in fair value hedging relationships along with the cumulative amount of fair value hedging adjustments included in the carrying value that have been recorded in the current hedging relationships. These fair value hedging adjustments are open basis adjustments that are not subject to amortization as long as the hedging relationship remains designated.
 
 
 
 
Designated Fair Value Hedged Assets (Liabilities)
 
 
 
 
 
December 31, 2018
(Dollars in millions)
Carrying Value
 
Cumulative Fair Value Adjustments (1)
Long-term debt
$
(138,682
)
 
$
(2,117
)
Available-for-sale debt securities
981

 
(29
)
(1) 
For assets, increase (decrease) to carrying value and for liabilities, (increase) decrease to carrying value.
At December 31, 2018, the cumulative fair value adjustments remaining on long-term debt and AFS debt securities from discontinued hedging relationships were a decrease to the related liability and related asset of $1.6 billion and $29 million, which are being amortized over the remaining contractual life of the de-designated hedged items.
Cash Flow and Net Investment Hedges
The following table summarizes certain information related to cash flow hedges and net investment hedges for 2018, 2017 and 2016.
Of the $1.0 billion after-tax net loss ($1.3 billion pretax) on derivatives in accumulated OCI at December 31, 2018, $253 million after-tax ($332 million pretax) 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. For terminated cash flow hedges, the time period over which the majority of the forecasted transactions are hedged is approximately 4 years, with a maximum length of time for certain forecasted transactions of 17 years.
 
 
 
 
 
 
 
 
 
 
 
 
Gains and Losses on Derivatives Designated as Cash Flow and Net Investment Hedges
 
 
 
 
 
 
 
 
 
 
 
 
 
Gains (Losses) Recognized in
Accumulated OCI on Derivatives
 
Gains (Losses) in Income
Reclassified from Accumulated OCI
(Dollars in millions, amounts pretax)
2018
 
2017
 
2016
 
2018
 
2017
 
2016
Cash flow hedges
 
 
 
 
 
 
 
 
 
 
 
Interest rate risk on variable-rate assets (1)
$
(159
)
 
$
(109
)
 
$
(340
)
 
$
(165
)
 
$
(327
)
 
$
(553
)
Price risk on certain restricted stock awards (2)
4

 
59

 
41

 
27

 
148

 
(32
)
Total
$
(155
)
 
$
(50
)
 
$
(299
)
 
$
(138
)
 
$
(179
)
 
$
(585
)
Net investment hedges
 
 
 
 
 

 
 

 
 
 
 
Foreign exchange risk (3)
$
989

 
$
(1,588
)
 
$
1,636

 
$
411

 
$
1,782

 
$
3


(1) 
Amounts reclassified from accumulated OCI are recorded in interest income in the Consolidated Statement of Income.
(2) 
Amounts reclassified from accumulated OCI are recorded in personnel expense in the Consolidated Statement of Income.
(3) 
Amounts reclassified from accumulated OCI are recorded in other income in the Consolidated Statement of Income. Amounts excluded from effectiveness testing and recognized in other income were gains of $47 million, $120 million and $325 million in 2018, 2017 and 2016, respectively.
Other Risk Management Derivatives
Other risk management derivatives are used by the Corporation to reduce certain risk exposures by economically hedging various assets and liabilities. The gains and losses on these derivatives are recognized in other income. The table below presents gains (losses) on these derivatives for 2018, 2017 and 2016. These gains (losses) are largely offset by the income or expense that is recorded on the hedged item.
 
 
 
 
 
 
Gains and Losses on Other Risk Management Derivatives
 
 
 
 
 
 
(Dollars in millions)
2018
 
2017
 
2016
Interest rate risk on mortgage activities (1)
$
(107
)
 
$
8

 
$
461

Credit risk on loans
9

 
(6
)
 
(107
)
Interest rate and foreign currency risk on ALM activities (2)
1,010

 
(36
)
 
(754
)

(1) 
Primarily related to hedges of interest rate risk on MSRs and IRLCs to originate mortgage loans that will be held for sale. The net gains on IRLCs, which are not included in the table but are considered derivative instruments, were $47 million, $220 million and $533 million for 2018, 2017 and 2016, respectively.
(2) 
Primarily related to hedges of debt securities carried at fair value and hedges of foreign currency-denominated debt.
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. As of December 31, 2018 and 2017, the Corporation had transferred $5.8 billion and $6.0 billion of non-U.S. government-guaranteed MBS to a third-party trust and retained economic exposure to the transferred assets through derivative contracts. In connection with these transfers, the Corporation received gross cash proceeds of $5.8 billion and $6.0 billion at the transfer dates. At December 31, 2018 and 2017, the fair value of the transferred securities was $5.5 billion and $6.1 billion.
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 2018, 2017 and 2016. The difference between total trading account profits in the following table and in the Consolidated Statement of Income represents trading activities in business segments other than Global Markets. This table includes debit valuation adjustment (DVA) and funding valuation adjustment (FVA) gains (losses). Global Markets results in Note 23 – 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
 
 
 
 
 
 
 
 
 
Trading Account Profits
 
Net Interest
Income
 
Other (1)
 
Total
(Dollars in millions)
2018
Interest rate risk
$
1,180

 
$
1,292

 
$
220

 
$
2,692

Foreign exchange risk
1,503

 
(7
)
 
6

 
1,502

Equity risk
3,994

 
(781
)
 
1,619

 
4,832

Credit risk
1,063

 
1,853

 
552

 
3,468

Other risk
189

 
64

 
66

 
319

Total sales and trading revenue
$
7,929

 
$
2,421

 
$
2,463

 
$
12,813

 
2017
Interest rate risk
$
712

 
$
1,560

 
$
249

 
$
2,521

Foreign exchange risk
1,417

 
(1
)
 
7

 
1,423

Equity risk
2,689

 
(517
)
 
1,903

 
4,075

Credit risk
1,685

 
1,937

 
576

 
4,198

Other risk
203

 
45

 
76

 
324

Total sales and trading revenue
$
6,706

 
$
3,024

 
$
2,811

 
$
12,541

 
2016
Interest rate risk
$
1,189

 
$
2,002

 
$
145

 
$
3,336

Foreign exchange risk
1,360

 
(10
)
 
5

 
1,355

Equity risk
1,917

 
28

 
2,074

 
4,019

Credit risk
1,674

 
1,956

 
424

 
4,054

Other risk
407

 
(7
)
 
39

 
439

Total sales and trading revenue
$
6,547

 
$
3,969

 
$
2,687

 
$
13,203

(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 $1.7 billion, $2.0 billion and $2.1 billion for 2018, 2017 and 2016, respectively.
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 predefined 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 derivatives 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 where the Corporation is the seller of credit protection and their expiration at December 31, 2018 and 2017 are summarized in the following table.
 
 
 
 
 
 
 
 
 
 
Credit Derivative Instruments
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Less than
One Year
 
One to
Three Years
 
Three to
Five Years
 
Over Five
Years
 
Total
 
December 31, 2018
(Dollars in millions)
Carrying Value
Credit default swaps:
 

 
 

 
 

 
 

 
 

Investment grade
$
2

 
$
44

 
$
436

 
$
488

 
$
970

Non-investment grade
132

 
636

 
914

 
1,691

 
3,373

Total
134

 
680

 
1,350

 
2,179

 
4,343

Total return swaps/options:
 

 
 

 
 

 
 

 
 

Investment grade
105

 

 

 

 
105

Non-investment grade
472

 
21

 

 

 
493

Total
577

 
21

 

 

 
598

Total credit derivatives
$
711

 
$
701

 
$
1,350

 
$
2,179

 
$
4,941

Credit-related notes:
 

 
 

 
 

 
 

 
 

Investment grade
$

 
$

 
$
4

 
$
532

 
$
536

Non-investment grade
1

 
1

 
1

 
1,500

 
1,503

Total credit-related notes
$
1

 
$
1

 
$
5

 
$
2,032

 
$
2,039

 
Maximum Payout/Notional
Credit default swaps:
 

 
 

 
 

 
 

 
 

Investment grade
$
53,758

 
$
95,699

 
$
95,274

 
$
20,054

 
$
264,785

Non-investment grade
24,297

 
33,881

 
34,530

 
14,426

 
107,134

Total
78,055

 
129,580

 
129,804

 
34,480

 
371,919

Total return swaps/options:
 

 
 

 
 

 
 

 
 

Investment grade
60,042

 
822

 
59

 
72

 
60,995

Non-investment grade
24,524

 
1,649

 
39

 
70

 
26,282

Total
84,566

 
2,471

 
98

 
142

 
87,277

Total credit derivatives
$
162,621

 
$
132,051

 
$
129,902

 
$
34,622

 
$
459,196

 
 
 
 
 
 
 
 
 
 
 
December 31, 2017
 
Carrying Value
Credit default swaps:
 
 
 
 
 
 
 
 
 
Investment grade
$
4

 
$
3

 
$
61

 
$
245

 
$
313

Non-investment grade
203

 
453

 
484

 
2,133

 
3,273

Total
207

 
456

 
545

 
2,378

 
3,586

Total return swaps/options:
 

 
 

 
 

 
 

 
 

Investment grade
30

 

 

 

 
30

Non-investment grade
150

 

 

 
3

 
153

Total
180

 

 

 
3

 
183

Total credit derivatives
$
387

 
$
456

 
$
545

 
$
2,381

 
$
3,769

Credit-related notes:
 

 
 

 
 

 
 

 
 

Investment grade
$

 
$

 
$
7

 
$
689

 
$
696

Non-investment grade
12

 
4

 
34

 
1,548

 
1,598

Total credit-related notes
$
12

 
$
4

 
$
41

 
$
2,237

 
$
2,294

 
Maximum Payout/Notional
Credit default swaps:
 
 
 
 
 
 
 
 
 
Investment grade
$
61,388

 
$
115,480

 
$
107,081

 
$
21,579

 
$
305,528

Non-investment grade
39,312

 
49,843

 
39,098

 
14,420

 
142,673

Total
100,700

 
165,323

 
146,179

 
35,999

 
448,201

Total return swaps/options:
 

 
 

 
 

 
 

 
 

Investment grade
37,394

 
2,581

 

 
143

 
40,118

Non-investment grade
13,751

 
514

 
143

 
697

 
15,105

Total
51,145

 
3,095

 
143

 
840

 
55,223

Total credit derivatives
$
151,845

 
$
168,418

 
$
146,322

 
$
36,839

 
$
503,424


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 so that certain credit risk-related losses occur within acceptable, predefined limits.
Credit-related notes in the table above include investments in securities issued by 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 102, the Corporation enters into legally enforceable master netting agreements which reduce risk by permitting 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 December 31, 2018 and 2017, the Corporation held cash and securities collateral of $81.6 billion and $77.2 billion, and posted cash and securities collateral of $56.5 billion and $59.2 billion in the normal course of business under derivative agreements, excluding 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 December 31, 2018, 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 $1.8 billion, including $1.0 billion for Bank of America, National Association (Bank of America, N.A. or 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 December 31, 2018 and 2017, the liability recorded for these derivative contracts was not significant.
The table below presents the amount of additional collateral that would have been contractually required by derivative contracts and other trading agreements at December 31, 2018 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 at December 31, 2018
 
 
 
 
(Dollars in millions)
One
incremental notch
 
Second
incremental notch
Bank of America Corporation
$
619

 
$
347

Bank of America, N.A. and subsidiaries (1)
209

 
268

(1) 
Included in Bank of America Corporation collateral requirements in this table.
The following table 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 December 31, 2018 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 at December 31, 2018
 
 
 
 
(Dollars in millions)
One
incremental notch
 
Second
incremental notch
Derivative liabilities
$
13

 
$
581

Collateral posted
1

 
305


Valuation Adjustments on Derivatives
The Corporation records credit risk valuation adjustments on derivatives in order to properly reflect the credit quality of the counterparties and its own credit quality. The Corporation calculates valuation adjustments on derivatives based on a modeled expected exposure that incorporates current market risk factors. The exposure also takes into consideration credit mitigants such as enforceable master netting agreements and collateral. CDS spread data is used to estimate the default probabilities and severities that are applied to the exposures. Where no observable credit default data is available for counterparties, the Corporation uses proxies and other market data to estimate default probabilities and severity.
Valuation adjustments on derivatives are affected by changes in market spreads, non-credit related market factors such as interest rate and currency changes that affect the expected exposure, and other factors like changes in collateral arrangements and partial payments. Credit spreads and non-credit factors can move independently. For example, for an interest rate swap, changes in interest rates may increase the expected exposure, which would increase the counterparty credit valuation adjustment (CVA). Independently, counterparty credit spreads may tighten, which would result in an offsetting decrease to CVA.
The Corporation enters into risk management activities to offset market driven exposures. The Corporation often hedges the counterparty spread risk in CVA with CDS. The Corporation hedges other market risks in both CVA and DVA primarily with currency and interest rate swaps. In certain instances, the net-of-hedge amounts in the table below move in the same direction as the gross amount or may move in the opposite direction. This movement is a consequence of the complex interaction of the risks being hedged, resulting in limitations in the ability to perfectly hedge all of the market exposures at all times.
The table below presents CVA, DVA and FVA gains (losses) on derivatives, which are recorded in trading account profits, on a gross and net of hedge basis for 2018, 2017 and 2016. CVA gains reduce the cumulative CVA thereby increasing the derivative assets balance. DVA gains increase the cumulative DVA thereby decreasing the derivative liabilities balance. CVA and DVA losses have the opposite impact. FVA gains related to derivative assets reduce the cumulative FVA thereby increasing the derivative assets balance. FVA gains related to derivative liabilities increase the cumulative FVA thereby decreasing the derivative liabilities balance. FVA losses have the opposite impact.
 
 
 
 
 
 
 
 
 
 
Valuation Adjustments on Derivatives (1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gains (Losses)
Gross
Net
 
Gross
Net
 
Gross
 
Net
(Dollars in millions)
2018
 
2017
 
2016
Derivative assets (CVA)
$
77

$
187

 
$
330

$
98

 
$
374

 
$
214

Derivative assets/liabilities (FVA)
(15
)
14

 
160

178

 
186

 
102

Derivative liabilities (DVA)
(19
)
(55
)
 
(324
)
(281
)
 
24

 
(141
)
(1) 
At December 31, 2018, 2017 and 2016, cumulative CVA reduced the derivative assets balance by $600 million, $677 million and $1.0 billion, cumulative FVA reduced the net derivatives balance by $151 million, $136 million and $296 million, and cumulative DVA reduced the derivative liabilities balance by $432 million, $450 million and $774 million, respectively.