Quarterly report pursuant to Section 13 or 15(d)

Derivatives

v3.20.2
Derivatives
6 Months Ended
Jun. 30, 2020
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 to the Consolidated Financial Statements of the Corporation’s 2019 Annual Report on Form 10-K. The following tables present derivative instruments included on the Consolidated Balance Sheet in derivative assets and liabilities at June 30, 2020 and December 31, 2019. 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.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
June 30, 2020
 
 
 
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
$
18,327.8

 
$
201.4

 
$
22.9

 
$
224.3

 
$
221.7

 
$
0.9

 
$
222.6

Futures and forwards
6,513.7

 
3.1

 

 
3.1

 
2.8

 

 
2.8

Written options
1,691.4

 

 

 

 
52.8

 

 
52.8

Purchased options
1,674.3

 
58.4

 

 
58.4

 

 

 

Foreign exchange contracts
 
 
 
 
 
 


 
 
 
 

 


Swaps
1,497.3

 
37.1

 
0.3

 
37.4

 
41.1

 
0.6

 
41.7

Spot, futures and forwards
4,295.5

 
30.3

 
0.1

 
30.4

 
33.1

 
0.4

 
33.5

Written options
275.7

 

 

 

 
4.3

 

 
4.3

Purchased options
260.0

 
4.4

 

 
4.4

 

 

 

Equity contracts
 
 
 
 
 
 


 
 
 
 

 


Swaps
263.5

 
11.7

 

 
11.7

 
13.0

 

 
13.0

Futures and forwards
113.9

 
0.6

 

 
0.6

 
0.6

 

 
0.6

Written options
608.7

 

 

 

 
41.3

 

 
41.3

Purchased options
551.3

 
43.7

 

 
43.7

 

 

 

Commodity contracts
 

 
 
 
 
 


 
 
 
 

 


Swaps
36.2

 
3.6

 

 
3.6

 
5.0

 

 
5.0

Futures and forwards
54.6

 
1.9

 

 
1.9

 
0.7

 

 
0.7

Written options
29.6

 

 

 

 
3.1

 

 
3.1

Purchased options
32.2

 
2.8

 

 
2.8

 

 

 

Credit derivatives (2)
 

 
 
 
 

 


 
 
 
 

 


Purchased credit derivatives:
 

 
 
 
 

 


 
 
 
 

 


Credit default swaps
379.4

 
5.0

 

 
5.0

 
3.4

 

 
3.4

Total return swaps/options
84.7

 
0.9

 

 
0.9

 
1.6

 

 
1.6

Written credit derivatives:
 
 
 
 
 

 


 
 
 
 

 


Credit default swaps
357.4

 
3.2

 

 
3.2

 
4.1

 

 
4.1

Total return swaps/options
80.8

 
0.6

 

 
0.6

 
0.9

 

 
0.9

Gross derivative assets/liabilities
 
 
$
408.7

 
$
23.3

 
$
432.0

 
$
429.5

 
$
1.9

 
$
431.4

Less: Legally enforceable master netting agreements
 

 


 
 

 
(344.6
)
 
 

 
 

 
(344.6
)
Less: Cash collateral received/paid
 

 
 

 
 

 
(42.2
)
 
 

 
 

 
(44.3
)
Total derivative assets/liabilities
 

 
 

 
 

 
$
45.2

 
 

 
 

 
$
42.5

(1) 
Represents the total contract/notional amount of derivative assets and liabilities outstanding.
(2) 
The net derivative asset (liability) and notional amount of written credit derivatives for which the Corporation held purchased credit derivatives with identical underlying referenced names were $(1.1) billion and $324.6 billion at June 30, 2020.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2019
 
 
 
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
$
15,074.4

 
$
162.0

 
$
9.7

 
$
171.7

 
$
168.5

 
$
0.4

 
$
168.9

Futures and forwards
3,279.8

 
1.0

 

 
1.0

 
1.0

 

 
1.0

Written options
1,767.7

 

 

 

 
32.5

 

 
32.5

Purchased options
1,673.6

 
37.4

 

 
37.4

 

 

 

Foreign exchange contracts
 
 
 

 
 

 
 

 
 

 
 

 
 

Swaps
1,657.7

 
30.3

 
0.7

 
31.0

 
31.7

 
0.9

 
32.6

Spot, futures and forwards
3,792.7

 
35.9

 
0.1

 
36.0

 
38.7

 
0.3

 
39.0

Written options
274.3

 

 

 

 
3.8

 

 
3.8

Purchased options
261.6

 
4.0

 

 
4.0

 

 

 

Equity contracts
 

 
 

 
 

 
 

 
 

 
 

 
 

Swaps
315.0

 
6.5

 

 
6.5

 
8.1

 

 
8.1

Futures and forwards
125.1

 
0.3

 

 
0.3

 
1.1

 

 
1.1

Written options
731.1

 

 

 

 
34.6

 

 
34.6

Purchased options
668.6

 
42.4

 

 
42.4

 

 

 

Commodity contracts
 

 
 

 
 

 
 

 
 

 
 

 
 

Swaps
42.0

 
2.1

 

 
2.1

 
4.4

 

 
4.4

Futures and forwards
61.3

 
1.7

 

 
1.7

 
0.4

 

 
0.4

Written options
33.2

 

 

 

 
1.4

 

 
1.4

Purchased options
37.9

 
1.4

 

 
1.4

 

 

 

Credit derivatives (2)
 

 
 

 
 

 
 

 
 

 
 

 
 

Purchased credit derivatives:
 

 
 

 
 

 
 

 
 

 
 

 
 

Credit default swaps
321.6

 
2.7

 

 
2.7

 
5.6

 

 
5.6

Total return swaps/options
86.6

 
0.4

 

 
0.4

 
1.3

 

 
1.3

Written credit derivatives:
 

 
 

 
 

 
 

 
 
 
 

 
 

Credit default swaps
300.2

 
5.4

 

 
5.4

 
2.0

 

 
2.0

Total return swaps/options
86.2

 
0.8

 

 
0.8

 
0.4

 

 
0.4

Gross derivative assets/liabilities
 

 
$
334.3

 
$
10.5

 
$
344.8

 
$
335.5

 
$
1.6

 
$
337.1

Less: Legally enforceable master netting agreements
 

 
 

 
 

 
(270.4
)
 
 

 
 

 
(270.4
)
Less: Cash collateral received/paid
 

 
 

 
 

 
(33.9
)
 
 

 
 

 
(28.5
)
Total derivative assets/liabilities
 

 
 

 
 

 
$
40.5

 
 

 
 

 
$
38.2

(1) 
Represents the total contract/notional amount of derivative assets and liabilities outstanding.
(2) 
The net derivative asset (liability) and notional amount of written credit derivatives for which the Corporation held purchased credit derivatives with identical underlying referenced names were $2.8 billion and $309.7 billion at December 31, 2019.
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. For more information, see Note 3 – Derivatives to the Consolidated Financial Statements of the Corporation’s 2019 Annual Report on Form 10-K.
The following table presents derivative instruments included in derivative assets and liabilities on the Consolidated Balance Sheet at June 30, 2020 and December 31, 2019 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 9 – 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)
June 30, 2020
 
December 31, 2019
Interest rate contracts
 

 
 

 
 

 
 

Over-the-counter
$
275.1

 
$
268.4

 
$
203.1

 
$
196.6

Exchange-traded
0.1

 
0.1

 
0.1

 
0.1

Over-the-counter cleared
9.4

 
8.6

 
6.0

 
5.3

Foreign exchange contracts
 
 
 
 
 
 
 
Over-the-counter
70.1

 
77.5

 
69.2

 
73.1

Over-the-counter cleared
1.0

 
0.8

 
0.5

 
0.5

Equity contracts
 
 
 
 
 
 
 
Over-the-counter
23.2

 
20.8

 
21.3

 
17.8

Exchange-traded
31.4

 
30.5

 
26.4

 
22.8

Commodity contracts
 
 
 
 
 
 
 
Over-the-counter
5.6

 
6.5

 
2.8

 
4.2

Exchange-traded
1.3

 
1.2

 
0.8

 
0.8

Over-the-counter cleared
0.1

 
0.1

 

 
0.1

Credit derivatives
 
 
 
 
 
 
 
Over-the-counter
7.6

 
8.0

 
6.4

 
6.6

Over-the-counter cleared
1.9

 
1.7

 
2.5

 
2.2

Total gross derivative assets/liabilities, before netting
 
 
 
 
 
 
 
Over-the-counter
381.6

 
381.2

 
302.8

 
298.3

Exchange-traded
32.8

 
31.8

 
27.3

 
23.7

Over-the-counter cleared
12.4

 
11.2

 
9.0

 
8.1

Less: Legally enforceable master netting agreements and cash collateral received/paid
 
 
 
 
 
 
 
Over-the-counter
(346.0
)
 
(348.6
)
 
(274.7
)
 
(269.3
)
Exchange-traded
(29.1
)
 
(29.1
)
 
(21.5
)
 
(21.5
)
Over-the-counter cleared
(11.7
)
 
(11.2
)
 
(8.1
)
 
(8.1
)
Derivative assets/liabilities, after netting
40.0

 
35.3

 
34.8

 
31.2

Other gross derivative assets/liabilities (2)
5.2

 
7.2

 
5.7

 
7.0

Total derivative assets/liabilities
45.2

 
42.5

 
40.5

 
38.2

Less: Financial instruments collateral (3)
(14.2
)
 
(15.4
)
 
(14.6
)
 
(16.1
)
Total net derivative assets/liabilities
$
31.0

 
$
27.1

 
$
25.9

 
$
22.1

(1) 
Over-the-counter derivatives include bilateral transactions between the Corporation and a particular counterparty. Over-the-counter-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 asset and liability management (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. For more information on ALM and risk management derivatives, see Note 3 – Derivatives to the Consolidated Financial Statements of the Corporation’s 2019 Annual Report on Form 10-K.
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 following table summarizes information related to fair value hedges for the three and six months ended June 30, 2020 and 2019.
 
 
 
 
 
 
 
 
Gains and Losses on Derivatives Designated as Fair Value Hedges
 
 
 
 
 
 
 
 
 
Three Months Ended June 30, 2020
 
Three Months Ended June 30, 2019
(Dollars in millions)
Derivative
 
Hedged Item
 
Derivative
 
Hedged Item
Interest rate risk on long-term debt (1)
$
475

 
$
(600
)
 
$
4,132

 
$
(4,121
)
Interest rate and foreign currency risk on long-term debt (2)
60

 
(60
)
 
41

 
(32
)
Interest rate risk on available-for-sale securities (3)
(361
)
 
356

 
(55
)
 
55

Total
$
174

 
$
(304
)
 
$
4,118


$
(4,098
)
 
 
 
 
 
 
 
 
 
Six Months Ended June 30, 2020
 
Six Months Ended June 30, 2019
 
Derivative
 
Hedged Item
 
Derivative
 
Hedged Item
Interest rate risk on long-term debt (1)
$
10,809

 
$
(10,876
)
 
$
6,045

 
$
(6,050
)
Interest rate and foreign currency risk on long-term debt (2)
565

 
(551
)
 
98

 
(80
)
Interest rate risk on available-for-sale securities (3)
(711
)
 
698

 
(100
)
 
98

Total
$
10,663

 
$
(10,729
)
 
$
6,043


$
(6,032
)

(1) 
Amounts are recorded in interest expense in the Consolidated Statement of Income.
(2) 
For the three and six months ended June 30, 2020, the derivative amount includes gains (losses) of $(3) million and $731 million in interest expense, $63 million and $(178) million in market making and similar activities, and $0 and $12 million in accumulated OCI. For the same periods in 2019, the derivative amount includes gains (losses) of $(3) million and $167 million in interest expense, $30 million and $(89) million in market making and similar activities, and $14 million and $20 million in accumulated OCI. Line item totals are in the Consolidated Statement of Income and on the Consolidated Balance Sheet.
(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)
 
 
 
 
 
 
 
 
 
June 30, 2020
 
December 31, 2019
(Dollars in millions)
Carrying Value
 
Cumulative
Fair Value Adjustments (1)
 
Carrying Value
 
Cumulative
Fair Value Adjustments (1)
Long-term debt (2)
$
(192,130
)
 
$
(19,856
)
 
$
(162,389
)
 
$
(8,685
)
Available-for-sale debt securities (2, 3, 4)
53,063

 
746

 
1,654

 
64


(1) 
For assets, increase (decrease) to carrying value and for liabilities, (increase) decrease to carrying value.
(2) 
At June 30, 2020 and December 31, 2019, the cumulative fair value adjustments remaining on long-term debt and AFS debt securities from discontinued hedging relationships resulted in a decrease in the related liability of $780 million and $1.3 billion and an increase in the related asset of $27 million and $8 million, which are being amortized over the remaining contractual life of the de-designated hedged items.
(3) 
These amounts include the amortized cost basis of the prepayable financial assets used to designate hedging relationships in which the hedged item is the last layer expected to be remaining at the end of the hedging relationship. At June 30, 2020, the amortized cost of the closed portfolios used in these hedging relationships was $45.2 billion, of which $8.4 billion was designated in the hedging relationship. The cumulative basis adjustments associated with these hedging relationships were $135 million.
(4) 
Carrying value represents amortized cost.
Cash Flow and Net Investment Hedges
The following table summarizes certain information related to cash flow hedges and net investment hedges for the three and six months ended June 30, 2020 and 2019. Of the $332 million after-tax net gain ($441 million pretax) on derivatives in accumulated OCI at June 30, 2020, gains of $189 million after-tax ($250 million pretax) related to open cash flow hedges are expected to be
reclassified into earnings in the next 12 months. These net gains reclassified into earnings are expected to primarily increase 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 3 years, with a maximum length of time for certain forecasted transactions of 16 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
 
Gains (Losses) Recognized in
Accumulated OCI
on Derivatives
 
Gains (Losses)
in Income
Reclassified from Accumulated OCI
(Dollars in millions, amounts pretax)
Three Months Ended June 30, 2020
 
Six Months Ended June 30, 2020
Cash flow hedges
 
 
 
 
 
 
 
Interest rate risk on variable-rate assets (1)
$
320

 
$
(23
)
 
$
911

 
$
(49
)
Price risk on certain compensation plans (2)
73

 

 
(9
)
 

Total
$
393

 
$
(23
)
 
$
902

 
$
(49
)
Net investment hedges
 

 
 

 
 
 
 
Foreign exchange risk (3)
$
(400
)
 
$
1

 
$
968

 
$
1

 
 
 
 
 
 
 
 
 
Three Months Ended June 30, 2019
 
Six Months Ended June 30, 2019
Cash flow hedges
 
 
 
 
 
 
 
Interest rate risk on variable-rate assets (1)
$
364

 
$
(28
)
 
$
618

 
$
(51
)
Net investment hedges
 
 
 
 
 
 
 
Foreign exchange risk (3)
$
(202
)
 
$

 
$
(196
)
 
$
1

(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 compensation and benefits expense in the Consolidated Statement of Income.
(3) 
Amounts reclassified from accumulated OCI are recorded in other income in the Consolidated Statement of Income. For the three and six months ended June 30, 2020, amounts excluded from effectiveness testing and recognized in market making and similar activities were gains of $75 million and $105 million. For the same periods in 2019, amounts excluded from effectiveness testing and recognized in market making and similar activities were gains of $24 million and $77 million.
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 following table presents gains (losses) on these derivatives for the three and six months ended June 30, 2020 and 2019. These gains (losses) are largely offset by the income or expense recorded on the hedged item.
 
 
 
 
 
 
 
 
Gains and Losses on Other Risk Management Derivatives
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended June 30
 
Six Months Ended June 30
(Dollars in millions)
2020
 
2019
 
2020
 
2019
Interest rate risk on mortgage activities (1, 2)
$
62

 
$
147

 
$
441

 
$
251

Credit risk on loans (2)
(66
)
 
(14
)
 
22

 
(40
)
Interest rate and foreign currency risk on ALM activities (3)
(1,017
)
 
(355
)
 
511

 
874

Price risk on certain compensation plans (4)
603

 
125

 
(154
)
 
636

(1) 
Primarily related to hedges of interest rate risk on mortgage servicing rights and interest rate lock commitments to originate mortgage loans that will be held for sale. The net gains on interest rate lock commitments which are not included in the table but are considered derivative instruments, were $39 million and $87 million for the three and six months ended June 30, 2020 compared to $24 million and $36 million for the same periods in 2019.
(2) 
Gains (losses) on these derivatives are recorded in other income.
(3) 
Gains (losses) on these derivatives are recorded in market making and similar activities.
(4) 
Gains (losses) on these derivatives are recorded in compensation and benefits 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. At both June 30, 2020 and December 31, 2019, the Corporation had transferred $5.2 billion of non-U.S. government-guaranteed mortgage-backed securities (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 $5.2 billion at both transfer dates. At June 30, 2020 and December 31, 2019, the fair value of the transferred securities was $5.1 billion and $5.3 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. For more information on sales and trading revenue, see Note 3 – Derivatives to the Consolidated Financial Statements of the Corporation’s 2019 Annual Report on Form 10-K.
The following table, 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 six months ended June 30, 2020 and 2019. This table includes debit valuation adjustment (DVA) and funding valuation adjustment (FVA) gains (losses). Global Markets results in Note 17 – 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
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Market making and similar activities
 
Net Interest
Income
 
Other (1)
 
Total
 
Market making and similar activities
 
Net Interest
Income
 
Other (1)
 
Total
(Dollars in millions)
Three Months Ended June 30, 2020
 
Six Months Ended June 30, 2020
Interest rate risk
$
635

 
$
658

 
$
49

 
$
1,342

 
$
2,188

 
$
1,275

 
$
121

 
$
3,584

Foreign exchange risk
367

 
(3
)
 
(11
)
 
353

 
804

 
2

 
(6
)
 
800

Equity risk
741

 
31

 
451

 
1,223

 
2,003

 
(91
)
 
968

 
2,880

Credit risk
537

 
426

 
142

 
1,105

 
156

 
869

 
177

 
1,202

Other risk
80

 
8

 
2

 
90

 
181

 
28

 
11

 
220

Total sales and trading revenue
$
2,360


$
1,120


$
633


$
4,113

 
$
5,332

 
$
2,083

 
$
1,271

 
$
8,686

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended June 30, 2019
 
Six Months Ended June 30, 2019
Interest rate risk
$
321

 
$
389

 
$
62

 
$
772

 
$
634

 
$
796

 
$
145

 
$
1,575

Foreign exchange risk
322

 
14

 
9

 
345

 
637

 
34

 
15

 
686

Equity risk
1,010

 
(264
)
 
399

 
1,145

 
1,979

 
(439
)
 
794

 
2,334

Credit risk
290

 
465

 
129

 
884

 
767

 
898

 
265

 
1,930

Other risk
17

 
30

 
18

 
65

 
24

 
47

 
30

 
101

Total sales and trading revenue
$
1,960

 
$
634

 
$
617

 
$
3,211

 
$
4,041

 
$
1,336


$
1,249

 
$
6,626

(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 $470 million and $1.0 billion for the three and six months ended June 30, 2020 compared to $423 million and $857 million for the same periods in 2019.
Credit Derivatives
The Corporation enters into credit derivatives primarily to facilitate client transactions and to manage credit risk exposures. 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. For more information on credit derivatives, see Note 3 – Derivatives to the Consolidated Financial Statements of the Corporation’s 2019 Annual Report on Form 10-K.
Credit derivative instruments where the Corporation is the seller of credit protection and their expiration at June 30, 2020 and December 31, 2019 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
 
June 30, 2020
(Dollars in millions)
Carrying Value
Credit default swaps:
 

 
 

 
 

 
 

 
 

Investment grade
$
1

 
$
33

 
$
171

 
$
325

 
$
530

Non-investment grade
101

 
705

 
1,127

 
1,649

 
3,582

Total
102

 
738

 
1,298

 
1,974

 
4,112

Total return swaps/options:
 

 
 

 
 

 
 

 
 

Investment grade
76

 

 

 

 
76

Non-investment grade
803

 
5

 

 

 
808

Total
879

 
5

 

 

 
884

Total credit derivatives
$
981

 
$
743

 
$
1,298

 
$
1,974

 
$
4,996

Credit-related notes:
 

 
 

 
 

 
 

 
 

Investment grade
$

 
$

 
$

 
$
569

 
$
569

Non-investment grade
6

 
2

 
2

 
978

 
988

Total credit-related notes
$
6

 
$
2

 
$
2

 
$
1,547

 
$
1,557

 
Maximum Payout/Notional
Credit default swaps:
 

 
 

 
 

 
 

 
 

Investment grade
$
50,713

 
$
80,302

 
$
106,343

 
$
17,662

 
$
255,020

Non-investment grade
20,066

 
30,178

 
41,237

 
10,938

 
102,419

Total
70,779

 
110,480

 
147,580

 
28,600

 
357,439

Total return swaps/options:
 

 
 

 
 

 
 

 
 

Investment grade
35,492

 

 
132

 

 
35,624

Non-investment grade
44,487

 
687

 

 
5

 
45,179

Total
79,979

 
687

 
132

 
5

 
80,803

Total credit derivatives
$
150,758

 
$
111,167

 
$
147,712

 
$
28,605

 
$
438,242

 
 
 
 
 
 
 
 
 
 
 
December 31, 2019
 
Carrying Value
Credit default swaps:
 
 
 
 
 
 
 
 
 
Investment grade
$

 
$
5

 
$
60

 
$
164

 
$
229

Non-investment grade
70

 
292

 
561

 
808

 
1,731

Total
70

 
297

 
621

 
972

 
1,960

Total return swaps/options:
 

 
 

 
 

 
 

 
 

Investment grade
35

 

 

 

 
35

Non-investment grade
344

 

 

 

 
344

Total
379

 

 

 

 
379

Total credit derivatives
$
449

 
$
297

 
$
621

 
$
972

 
$
2,339

Credit-related notes:
 

 
 

 
 

 
 

 
 

Investment grade
$

 
$
3

 
$
1

 
$
639

 
$
643

Non-investment grade
6

 
2

 
1

 
1,125

 
1,134

Total credit-related notes
$
6

 
$
5

 
$
2

 
$
1,764

 
$
1,777

 
Maximum Payout/Notional
Credit default swaps:
 
 
 
 
 
 
 
 
 
Investment grade
$
55,827

 
$
67,838

 
$
71,320

 
$
17,708

 
$
212,693

Non-investment grade
19,049

 
26,521

 
29,618

 
12,337

 
87,525

Total
74,876

 
94,359

 
100,938

 
30,045

 
300,218

Total return swaps/options:
 

 
 

 
 

 
 

 
 

Investment grade
56,488

 

 
62

 
76

 
56,626

Non-investment grade
28,707

 
657

 
104

 
60

 
29,528

Total
85,195

 
657

 
166

 
136

 
86,154

Total credit derivatives
$
160,071

 
$
95,016

 
$
101,104

 
$
30,181

 
$
386,372


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 collateralized debt obligation (CDO), collateralized loan obligation 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
Certain 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 June 30, 2020 and December 31, 2019, the Corporation held cash and securities collateral of $89.0 billion and $84.3 billion and posted cash and securities collateral of $85.3 billion and $69.1 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 over-the-counter 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. For more information on credit-related contingent features and collateral, see Note 3 – Derivatives to the Consolidated Financial Statements of the Corporation’s 2019 Annual Report on Form 10-K.
At June 30, 2020, 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 $2.2 billion, including $1.3 billion for Bank of America, National Association.
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 June 30, 2020 and December 31, 2019, the liability recorded for these derivative contracts was not significant.
The following table presents the amount of additional collateral that would have been contractually required by derivative contracts and other trading agreements at June 30, 2020 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 June 30, 2020
 
 
 
 
(Dollars in millions)
One
incremental notch
 
Second
incremental notch
Bank of America Corporation
$
337

 
$
707

Bank of America, N.A. and subsidiaries (1)
111

 
512

(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 June 30, 2020 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 June 30, 2020
 
 
 
 
(Dollars in millions)
One
incremental notch
 
Second
incremental notch
Derivative liabilities
$
36

 
$
1,189

Collateral posted
1

 
920


Valuation Adjustments on Derivatives
The table below presents credit valuation adjustment (CVA), DVA and FVA gains (losses) on derivatives (excluding the effect of any related hedge activities), which are recorded in market making and similar activities, for the three and six months ended June 30, 2020 and 2019. For more information on the valuation adjustments on derivatives, see Note 3 – Derivatives to the Consolidated Financial Statements of the Corporation’s 2019 Annual Report on Form 10-K.
 
 
 
 
Valuation Adjustments Gains (Losses) on Derivatives (1)
 
 
 
 
 
Three Months Ended June 30
(Dollars in millions)
2020
 
2019
Derivative assets (CVA)
$
276

 
$
(64
)
Derivative assets/liabilities (FVA)
69

 
26

Derivative liabilities (DVA)
(256
)
 
8

 
 
 
 
 
Six Months Ended June 30
(Dollars in millions)
2020
 
2019
Derivative assets (CVA)
$
(508
)
 
$
2

Derivative assets/liabilities (FVA)
(87
)
 
33

Derivative liabilities (DVA)
158

 
(73
)
(1) 
At June 30, 2020 and December 31, 2019, cumulative CVA reduced the derivative assets balance by $1.0 billion and $528 million, cumulative FVA reduced the net derivatives balance by $240 million and $153 million, and cumulative DVA reduced the derivative liabilities balance by $443 million and $285 million, respectively.