Annual report pursuant to Section 13 and 15(d)

Derivatives

v2.4.0.8
Derivatives
 12 Months Ended
Dec. 31, 2013
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, 2013 and 2012. 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.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2013
 
 
 
Gross Derivative Assets
 
Gross Derivative Liabilities
(Dollars in billions)
Contract/
Notional (1)
 
Trading Derivatives and Other Risk Management Derivatives
 
Qualifying
Accounting
Hedges
 
Total
 
Trading Derivatives and Other Risk Management Derivatives
 
Qualifying
Accounting
Hedges
 
Total
Interest rate contracts
 

 
 

 
 

 
 

 
 

 
 

 
 

Swaps
$
33,272.0

 
$
659.9

 
$
7.5

 
$
667.4

 
$
658.4

 
$
0.9

 
$
659.3

Futures and forwards
8,217.6

 
1.6

 
—

 
1.6

 
1.5

 
—

 
1.5

Written options
2,065.4

 
—

 
—

 
—

 
64.4

 
—

 
64.4

Purchased options
2,028.3

 
65.4

 
—

 
65.4

 
—

 
—

 
—

Foreign exchange contracts
 

 
 

 
 

 
 

 
 

 
 

 
 

Swaps
2,284.1

 
43.1

 
1.0

 
44.1

 
42.7

 
1.0

 
43.7

Spot, futures and forwards
2,922.5

 
32.5

 
0.7

 
33.2

 
33.5

 
1.1

 
34.6

Written options
412.4

 
—

 
—

 
—

 
9.2

 
—

 
9.2

Purchased options
392.4

 
8.8

 
—

 
8.8

 
—

 
—

 
—

Equity contracts
 

 
 

 
 

 
 

 
 

 
 

 
 

Swaps
162.0

 
3.6

 
—

 
3.6

 
4.2

 
—

 
4.2

Futures and forwards
71.4

 
1.1

 
—

 
1.1

 
1.4

 
—

 
1.4

Written options
315.6

 
—

 
—

 
—

 
29.6

 
—

 
29.6

Purchased options
266.7

 
30.4

 
—

 
30.4

 
—

 
—

 
—

Commodity contracts
 

 
 

 
 

 
 

 
 

 
 

 
 

Swaps
73.1

 
3.8

 
—

 
3.8

 
5.7

 
—

 
5.7

Futures and forwards
454.4

 
4.7

 
—

 
4.7

 
2.5

 
—

 
2.5

Written options
157.3

 
—

 
—

 
—

 
5.0

 
—

 
5.0

Purchased options
164.0

 
5.2

 
—

 
5.2

 
—

 
—

 
—

Credit derivatives
 

 
 

 
 

 
 

 
 

 
 

 
 

Purchased credit derivatives:
 

 
 

 
 

 
 

 
 

 
 

 
 

Credit default swaps
1,305.1

 
15.7

 
—

 
15.7

 
28.1

 
—

 
28.1

Total return swaps/other
38.1

 
2.0

 
—

 
2.0

 
3.2

 
—

 
3.2

Written credit derivatives:
 

 
 

 
 

 
 

 
 

 
 

 
 

Credit default swaps
1,265.4

 
29.3

 
—

 
29.3

 
13.8

 
—

 
13.8

Total return swaps/other
63.4

 
4.0

 
—

 
4.0

 
0.2

 
—

 
0.2

Gross derivative assets/liabilities
 

 
$
911.1

 
$
9.2

 
$
920.3

 
$
903.4

 
$
3.0

 
$
906.4

Less: Legally enforceable master netting agreements
 

 
 

 
 

 
(825.5
)
 
 

 
 

 
(825.5
)
Less: Cash collateral received/paid
 

 
 

 
 

 
(47.3
)
 
 

 
 

 
(43.5
)
Total derivative assets/liabilities
 

 
 

 
 

 
$
47.5

 
 

 
 

 
$
37.4

(1) 
Represents the total contract/notional amount of derivative assets and liabilities outstanding.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2012
 
 
 
Gross Derivative Assets
 
Gross Derivative Liabilities
(Dollars in billions)
Contract/
Notional (1)
 
Trading Derivatives and Other Risk Management Derivatives
 
Qualifying
Accounting
Hedges
 
Total
 
Trading Derivatives and Other Risk Management Derivatives
 
Qualifying
Accounting
Hedges
 
Total
Interest rate contracts
 

 
 

 
 

 
 

 
 

 
 

 
 

Swaps
$
34,667.4

 
$
1,075.4

 
$
13.8

 
$
1,089.2

 
$
1,062.6

 
$
4.7

 
$
1,067.3

Futures and forwards
11,950.5

 
2.8

 
—

 
2.8

 
2.7

 
—

 
2.7

Written options
2,343.5

 
—

 
—

 
—

 
106.0

 
—

 
106.0

Purchased options
2,162.6

 
105.5

 
—

 
105.5

 
—

 
—

 
—

Foreign exchange contracts
 

 
 

 
 

 
 

 
 

 
 

 
 

Swaps
2,489.0

 
47.4

 
1.4

 
48.8

 
53.2

 
1.8

 
55.0

Spot, futures and forwards
3,023.0

 
31.5

 
0.4

 
31.9

 
30.5

 
0.8

 
31.3

Written options
363.3

 
—

 
—

 
—

 
7.3

 
—

 
7.3

Purchased options
321.8

 
6.5

 
—

 
6.5

 
—

 
—

 
—

Equity contracts
 

 
 

 
 

 
 

 
 

 
 

 
 

Swaps
127.1

 
1.6

 
—

 
1.6

 
2.0

 
—

 
2.0

Futures and forwards
58.4

 
1.0

 
—

 
1.0

 
1.0

 
—

 
1.0

Written options
295.3

 
—

 
—

 
—

 
20.2

 
—

 
20.2

Purchased options
271.0

 
20.4

 
—

 
20.4

 
—

 
—

 
—

Commodity contracts
 

 
 

 
 

 
 

 
 

 
 

 
 

Swaps
60.5

 
2.5

 
0.1

 
2.6

 
4.0

 
—

 
4.0

Futures and forwards
498.9

 
4.8

 
—

 
4.8

 
2.7

 
—

 
2.7

Written options
166.4

 
—

 
—

 
—

 
7.4

 
—

 
7.4

Purchased options
168.2

 
7.1

 
—

 
7.1

 
—

 
—

 
—

Credit derivatives
 

 
 

 
 

 
 

 
 

 
 

 
 

Purchased credit derivatives:
 

 
 

 
 

 
 

 
 

 
 

 
 

Credit default swaps
1,559.5

 
35.6

 
—

 
35.6

 
22.1

 
—

 
22.1

Total return swaps/other
43.5

 
2.5

 
—

 
2.5

 
2.9

 
—

 
2.9

Written credit derivatives:
 

 
 

 
 

 
 

 
 

 
 

 
 

Credit default swaps
1,531.5

 
23.0

 
—

 
23.0

 
32.6

 
—

 
32.6

Total return swaps/other
68.8

 
0.2

 
—

 
0.2

 
0.3

 
—

 
0.3

Gross derivative assets/liabilities
 

 
$
1,367.8

 
$
15.7

 
$
1,383.5

 
$
1,357.5

 
$
7.3

 
$
1,364.8

Less: Legally enforceable master netting agreements
 

 
 

 
 

 
(1,271.9
)
 
 

 
 

 
(1,271.9
)
Less: Cash collateral received/paid
 

 
 

 
 

 
(58.1
)
 
 

 
 

 
(46.9
)
Total derivative assets/liabilities
 

 
 

 
 

 
$
53.5

 
 

 
 

 
$
46.0


(1) 
Represents the total contract/notional amount of derivative assets and liabilities outstanding.
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 below presents derivative instruments included in derivative assets and liabilities on the Consolidated Balance Sheet at December 31, 2013 and 2012 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 and have been reduced by the 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 instrument collateral related to legally enforceable master netting agreements that represents securities collateral received or pledged and customer cash collateral held 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 10 – Federal Funds Sold or Purchased, Securities Financing Agreements and Short-term Borrowings.
 
 
 
 
 
 
 
 
Offsetting of Derivatives
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2013
 
December 31, 2012
(Dollars in billions)
Derivative
Assets
 
Derivative Liabilities
 
Derivative
Assets
 
Derivative Liabilities
Interest rate contracts
 

 
 

 
 

 
 

Over-the-counter
$
381.7

 
$
365.9

 
$
646.7

 
$
623.4

Exchange-traded
0.4

 
0.3

 
—

 
—

Over-the-counter cleared
351.2

 
356.5

 
539.5

 
545.1

Foreign exchange contracts
 
 
 
 
 
 
 
Over-the-counter
82.9

 
83.9

 
84.1

 
88.7

Equity contracts
 
 
 
 
 
 
 
Over-the-counter
20.3

 
17.6

 
15.2

 
13.3

Exchange-traded
8.4

 
9.8

 
4.8

 
4.7

Commodity contracts
 
 
 
 
 
 
 
Over-the-counter
6.3

 
7.4

 
6.9

 
7.9

Exchange-traded
3.3

 
2.9

 
3.4

 
3.2

Credit derivatives
 
 
 
 
 
 
 
Over-the-counter
44.0

 
38.9

 
56.0

 
53.9

Over-the-counter cleared
5.8

 
5.9

 
3.8

 
3.4

Total gross derivative assets/liabilities, before netting
 
 
 
 
 
 
 
Over-the-counter
535.2

 
513.7

 
808.9

 
787.2

Exchange-traded
12.1

 
13.0

 
8.2

 
7.9

Over-the-counter cleared
357.0

 
362.4

 
543.3

 
548.5

Less: Legally enforceable master netting agreements and cash collateral received/paid
 
 
 
 
 
 
 
Over-the-counter
(505.0
)
 
(495.4
)
 
(780.8
)
 
(764.4
)
Exchange-traded
(11.2
)
 
(11.2
)
 
(5.9
)
 
(5.9
)
Over-the-counter cleared
(356.6
)
 
(362.4
)
 
(543.3
)
 
(548.5
)
Derivative assets/liabilities, after netting
31.5

 
20.1

 
30.4

 
24.8

Other gross derivative assets/liabilities
16.0

 
17.3

 
23.1

 
21.2

Total derivative assets/liabilities
47.5

 
37.4

 
53.5

 
46.0

Less: Financial instruments collateral (1)
(10.1
)
 
(4.6
)
 
(11.5
)
 
(14.6
)
Total net derivative assets/liabilities
$
37.4

 
$
32.8

 
$
42.0

 
$
31.4

(1) 
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 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. 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 that are 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 MSRs. For more information on MSRs, see Note 23 – 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. Cash flow and 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 (loss).
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 certain information related to fair value hedges for 2013, 2012 and 2011, including hedges of interest rate risk on long-term debt that were acquired as part of a business combination and redesignated. 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)
2013
(Dollars in millions)
Derivative
 
Hedged
Item
 
Hedge
Ineffectiveness
Interest rate risk on long-term debt (1)
$
(4,704
)
 
$
3,925

 
$
(779
)
Interest rate and foreign currency risk on long-term debt (1)
(1,291
)
 
1,085

 
(206
)
Interest rate risk on available-for-sale securities (2)
839

 
(840
)
 
(1
)
Price risk on commodity inventory (3)
(13
)
 
11

 
(2
)
Total
$
(5,169
)
 
$
4,181

 
$
(988
)
 
 
 
 
 
 
 
2012
Interest rate risk on long-term debt (1)
$
(195
)
 
$
(770
)
 
$
(965
)
Interest rate and foreign currency risk on long-term debt (1)
(1,482
)
 
1,225

 
(257
)
Interest rate risk on available-for-sale securities (2)
(4
)
 
91

 
87

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

 
—

Total
$
(1,687
)
 
$
552

 
$
(1,135
)
 
 
 
 
 
 
 
2011
Interest rate risk on long-term debt (1)
$
4,384

 
$
(4,969
)
 
$
(585
)
Interest rate and foreign currency risk on long-term debt (1)
780

 
(1,057
)
 
(277
)
Interest rate risk on available-for-sale securities (2)
(11,386
)
 
10,490

 
(896
)
Price risk on commodity inventory (3)
16

 
(16
)
 
—

Total
$
(6,206
)
 
$
4,448

 
$
(1,758
)
(1) 
Amounts are recorded in interest expense on long-term debt and in other income (loss).
(2) 
Amounts are recorded in interest income on debt securities. Hedged AFS securities positions were sold during 2013 and the related hedges were terminated.
(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 2013, 2012 and 2011. During the next 12 months, net losses in accumulated other comprehensive income (OCI) of $784 million ($494 million after-tax) on derivative instruments that qualify as cash flow hedges are expected to be reclassified into earnings. These net losses reclassified into earnings are expected to primarily reduce net interest income related to the respective hedged items. Amounts related to commodity price risk reclassified from accumulated OCI are recorded in trading account profits with the underlying hedged item. Amounts related to price risk on restricted stock awards reclassified from accumulated OCI are recorded in personnel expense.
Amounts related to foreign exchange risk recognized in accumulated OCI on derivatives exclude pre-tax losses of $7 million and pre-tax gains of $82 million related to long-term debt designated as a net investment hedge for 2012 and 2011. There were no such hedges for 2013.
 
 
 
 
 
 
Derivatives Designated as Cash Flow and Net Investment Hedges
 
 
 
 
 
 
 
 
 
 
 
 
2013
(Dollars in millions, amounts pre-tax)
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
$
(321
)
 
$
(1,102
)
 
$
—

Price risk on restricted stock awards
477

 
329

 
—

Total
$
156

 
$
(773
)
 
$
—

Net investment hedges
 

 
 

 
 

Foreign exchange risk
$
1,024

 
$
(355
)
 
$
(134
)
 
 
 
 
 
 
 
2012
Cash flow hedges
 

 
 

 
 

Interest rate risk on variable-rate portfolios
$
10

 
$
(957
)
 
$
—

Price risk on restricted stock awards
420

 
(78
)
 
—

Total
$
430

 
$
(1,035
)
 
$
—

Net investment hedges
 

 
 

 
 

Foreign exchange risk
$
(771
)
 
$
(26
)
 
$
(269
)
 
 
 
 
 
 
 
2011
Cash flow hedges
 

 
 

 
 

Interest rate risk on variable-rate portfolios
$
(2,079
)
 
$
(1,392
)
 
$
(8
)
Commodity price risk on forecasted purchases and sales
(3
)
 
6

 
(3
)
Price risk on restricted stock awards
(408
)
 
(231
)
 
—

Total
$
(2,490
)
 
$
(1,617
)
 
$
(11
)
Net investment hedges
 

 
 

 
 

Foreign exchange risk
$
(1,055
)
 
$
384

 
$
(572
)
(1) 
Amounts related to derivatives designated as cash flow hedges represent hedge ineffectiveness and amounts related to net investment hedges represent amounts excluded from effectiveness testing.
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 2013, 2012 and 2011. These gains (losses) are largely offset by the income or expense that is recorded on the hedged item.
 
 
 
 
 
 
Other Risk Management Derivatives
 
 
 
 
 
 
 
 
 
 
 
Gains (Losses)
 
 
 
 
 
 
 
 
 
 
 
(Dollars in millions)
2013
 
2012
 
2011
Price risk on mortgage banking production income (1, 2)
$
968

 
$
3,022

 
$
2,852

Market-related risk on mortgage banking servicing income (1)
(1,108
)
 
2,000

 
3,612

Credit risk on loans (3)
(47
)
 
(95
)
 
30

Interest rate and foreign currency risk on ALM activities (4)
2,501

 
424

 
(48
)
Price risk on restricted stock awards (5)
865

 
1,008

 
(610
)
Other
(19
)
 
58

 
281

Total
$
3,160

 
$
6,417

 
$
6,117

(1) 
Net gains on these derivatives are recorded in mortgage banking income.
(2) 
Includes net gains on interest rate lock commitments related to the origination of mortgage loans that are held-for-sale, which are considered derivative instruments, of $927 million, $3.0 billion and $3.8 billion for 2013, 2012 and 2011, respectively.
(3) 
Net gains (losses) on these derivatives are recorded in other income (loss).
(4) 
The balance is primarily related to hedges of debt securities carried at fair value and hedges of foreign currency-denominated debt. Results from these items are recorded in other income (loss). The offsetting mark-to-market, while not included in the table above, is also recorded in other income (loss).
(5) 
Gains (losses) on these derivatives are recorded in personnel expense.
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. However, the majority of income related to derivative instruments is recorded in trading account profits.
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, all 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 (loss).
Gains (losses) on certain instruments, primarily loans, that the Global Markets business segment shares with Global Banking are not considered trading instruments and are excluded from sales and trading revenue in their entirety.

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 2013, 2012 and 2011. 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 adjustment (DVA) gains (losses), net of hedges. Global Markets results in Note 24 – Business Segment Information are presented on a fully taxable-equivalent (FTE) basis. The table below is not presented on a FTE basis.
 
 
 
 
 
 
 
 
Sales and Trading Revenue
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2013
(Dollars in millions)
Trading Account Profits
 
Net Interest Income
 
Other (1)
 
Total
Interest rate risk
$
1,120

 
$
1,104

 
$
83

 
$
2,307

Foreign exchange risk
1,170

 
4

 
(26
)
 
1,148

Equity risk
1,994

 
112

 
2,094

 
4,200

Credit risk
2,075

 
2,711

 
88

 
4,874

Other risk
375

 
(203
)
 
202

 
374

Total sales and trading revenue
$
6,734

 
$
3,728

 
$
2,441

 
$
12,903

 
 
 
 
 
 
 
 
 
2012
Interest rate risk
$
583

 
$
1,040

 
$
(6
)
 
$
1,617

Foreign exchange risk
909

 
5

 
6

 
920

Equity risk
1,180

 
(57
)
 
1,891

 
3,014

Credit risk
2,522

 
2,321

 
961

 
5,804

Other risk
512

 
(219
)
 
(42
)
 
251

Total sales and trading revenue
$
5,706

 
$
3,090

 
$
2,810

 
$
11,606

 
 
 
 
 
 
 
 
 
2011
Interest rate risk
$
2,148

 
$
923

 
$
(63
)
 
$
3,008

Foreign exchange risk
1,090

 
8

 
(10
)
 
1,088

Equity risk
1,482

 
129

 
2,347

 
3,958

Credit risk
1,067

 
2,605

 
552

 
4,224

Other risk
630

 
(184
)
 
(72
)
 
374

Total sales and trading revenue
$
6,417

 
$
3,481

 
$
2,754

 
$
12,652

(1) 
Represents amounts in investment and brokerage services and other income (loss) that are recorded in Global Markets and included in the definition of sales and trading revenue. Includes investment and brokerage services revenue of $2.0 billion, $1.8 billion and $2.2 billion for 2013, 2012 and 2011, 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 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 at December 31, 2013 and 2012 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
 
 
 
 
December 31, 2013
 
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
$
2

 
$
220

 
$
974

 
$
1,134

 
$
2,330

Non-investment grade
424

 
1,924

 
2,469

 
6,667

 
11,484

Total
426

 
2,144

 
3,443

 
7,801

 
13,814

Total return swaps/other:
 

 
 

 
 

 
 

 
 

Investment grade
22

 
—

 
—

 
—

 
22

Non-investment grade
29

 
38

 
2

 
86

 
155

Total
51

 
38

 
2

 
86

 
177

Total credit derivatives
$
477

 
$
2,182

 
$
3,445

 
$
7,887

 
$
13,991

Credit-related notes: (1)
 

 
 

 
 

 
 

 
 

Investment grade
$
—

 
$
278

 
$
595

 
$
4,457

 
$
5,330

Non-investment grade
145

 
107

 
756

 
946

 
1,954

Total credit-related notes
$
145

 
$
385

 
$
1,351

 
$
5,403

 
$
7,284

 
Maximum Payout/Notional
Credit default swaps:
 

 
 

 
 

 
 

 
 

Investment grade
$
170,764

 
$
379,273

 
$
411,426

 
$
36,039

 
$
997,502

Non-investment grade
53,316

 
90,986

 
95,319

 
28,257

 
267,878

Total
224,080

 
470,259

 
506,745

 
64,296

 
1,265,380

Total return swaps/other:
 

 
 

 
 

 
 

 
 

Investment grade
21,771

 
—

 
—

 
—

 
21,771

Non-investment grade
27,784

 
8,150

 
4,103

 
1,599

 
41,636

Total
49,555

 
8,150

 
4,103

 
1,599

 
63,407

Total credit derivatives
$
273,635

 
$
478,409

 
$
510,848

 
$
65,895

 
$
1,328,787

 
December 31, 2012
 
Carrying Value
Credit default swaps:
 

 
 

 
 

 
 

 
 

Investment grade
$
52

 
$
757

 
$
5,595

 
$
2,903

 
$
9,307

Non-investment grade
923

 
4,403

 
7,030

 
10,959

 
23,315

Total
975

 
5,160

 
12,625

 
13,862

 
32,622

Total return swaps/other:
 

 
 

 
 

 
 

 
 

Investment grade
39

 
—

 
—

 
—

 
39

Non-investment grade
57

 
104

 
39

 
37

 
237

Total
96

 
104

 
39

 
37

 
276

Total credit derivatives
$
1,071

 
$
5,264

 
$
12,664

 
$
13,899

 
$
32,898

Credit-related notes: (1)
 

 
 

 
 

 
 

 
 

Investment grade
$
4

 
$
12

 
$
441

 
$
3,849

 
$
4,306

Non-investment grade
116

 
161

 
314

 
1,425

 
2,016

Total credit-related notes
$
120

 
$
173

 
$
755

 
$
5,274

 
$
6,322

 
Maximum Payout/Notional
Credit default swaps:
 

 
 

 
 

 
 

 
 

Investment grade
$
260,177

 
$
349,125

 
$
500,038

 
$
90,453

 
$
1,199,793

Non-investment grade
79,861

 
99,043

 
110,248

 
42,559

 
331,711

Total
340,038

 
448,168

 
610,286

 
133,012

 
1,531,504

Total return swaps/other:
 

 
 

 
 

 
 

 
 

Investment grade
43,536

 
15

 
—

 
—

 
43,551

Non-investment grade
5,566

 
11,028

 
7,631

 
1,035

 
25,260

Total
49,102

 
11,043

 
7,631

 
1,035

 
68,811

Total credit derivatives
$
389,140

 
$
459,211

 
$
617,917

 
$
134,047

 
$
1,600,315

(1) 
For credit-related notes, maximum payout/notional is the same as carrying value.
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 $8.1 billion and $1.0 trillion at December 31, 2013 and $20.7 billion and $1.1 trillion at December 31, 2012.
Credit-related notes in the table on page 176 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. Substantially all 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 169, 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 December 31, 2013 and 2012, the Corporation held cash and securities collateral of $74.4 billion and $85.6 billion, and posted cash and securities collateral of $56.1 billion and $74.1 billion in the normal course of business under derivative agreements.
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, 2013, 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 $1.3 billion, including $700 million 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 December 31, 2013, the current liability recorded for these derivative contracts was $385 million, against which the Corporation and certain subsidiaries had posted approximately $350 million of collateral.
The table below presents the amount of additional collateral contractually required by derivative contracts and other trading agreements at December 31, 2013 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
 
 
 
 
December 31, 2013
(Dollars in millions)
One
incremental notch
Second
incremental notch
Bank of America Corporation
$
1,302

$
4,101

Bank of America, N.A. and subsidiaries (1)
881

3,039


(1) 
Included in Bank of America Corporation collateral requirements in this table.
The table below presents the derivative liability that would be subject to unilateral termination by counterparties and the amounts of collateral that would have been posted at December 31, 2013 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.
 
 
 
Derivative Liability Subject to Unilateral Termination Upon Downgrade
 
 
 
 
December 31, 2013
(Dollars in millions)
One
incremental notch
Second
incremental notch
Derivative liability
$
927

$
1,878

Collateral posted
733

1,467



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 may enter into risk management activities to offset market driven exposures. The Corporation often hedges the counterparty spread risk in CVA with CDS and often hedges the other market risks in both CVA and DVA primarily with currency and interest rate swaps. Since the components of the valuation adjustments on derivatives move independently and the Corporation may not hedge all of the market driven exposures, the effect of a hedge may increase the gross valuation adjustments on derivatives or may result in a gross positive valuation adjustment on derivatives becoming a negative adjustment (or the reverse).
In 2013, the Corporation refined its methodology for calculating CVA and DVA on a prospective basis, to adjust the way it values mutual termination clauses in derivatives contracts and to more fully incorporate the potential for the counterparties to default prior to a change in their credit ratings. This change in estimate increased CVA by $361 million and DVA by $433 million resulting in a net positive earnings impact of $72 million at the time of the change and is included in the results for 2013. The net CVA and DVA excluding the impact of these refinements was a gain of $265 million and a loss of $508 million for 2013.
The table below presents CVA and DVA gains (losses), which are recorded in trading account profits on a gross and net of hedge basis.
 
 
 
 
 
 
 
 
 
Valuation Adjustments on Derivatives
 
 
 
 
 
 
 
 
 
 
2013
 
2012
 
2011
(Dollars in millions)
Gross
Net
 
Gross
Net
 
Gross
Net
Derivative assets (CVA) (1)
$
738

$
(96
)
 
$
1,022

$
291

 
$
(1,863
)
$
(606
)
Derivative liabilities (DVA) (2)
(39
)
(75
)
 
(2,212
)
(2,477
)
 
1,385

1,000

(1) 
At December 31, 2013, 2012 and 2011, the cumulative CVA reduced the derivative assets balance by $1.6 billion, $2.4 billion and $2.8 billion, respectively.
(2) 
At December 31, 2013, 2012 and 2011, the cumulative DVA reduced the derivative liabilities balance by $803 million, $807 million and $2.4 billion, respectively.