Bank of America Corporation Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

Derivatives

Derivatives

12 Months Ended

Dec. 31, 2017

Derivative Instruments and Hedging Activities Disclosure [Abstract]

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, 2017 and 2016. 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, 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 ⁽²⁾	$	15,416.4	$	175.1	$	2.9	$	178.0		$	172.5	$	1.7	$	174.2
Futures and forwards ⁽²⁾	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 ⁽³⁾
Purchased credit derivatives:
Credit default swaps ⁽²⁾	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 ⁽²⁾	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 ⁽²⁾							(279.2		)					(279.2		)
Less: Cash collateral received/paid ⁽²⁾							(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⁾

Derivative assets and liabilities reflect the effects of contractual amendments by two central clearing counterparties to legally re-characterize daily cash variation margin from collateral, which secures an outstanding exposure, to settlement, which discharges an outstanding exposure. One of these central clearing counterparties amended its governing documents, which became effective in January 2017. In addition, the Corporation elected to transfer its existing positions to the settlement platform for the other central clearing counterparty in September 2017.


⁽³⁾	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.




			December 31, 2016
			Gross Derivative Assets							Gross Derivative Liabilities
(Dollars in billions)	Contract/ Notional ⁽¹⁾		Trading and Other Risk Management Derivatives		Qualifying Accounting Hedges		Total			Trading and Other Risk Management Derivatives		Qualifying Accounting Hedges		Total
Interest rate contracts
Swaps	$	16,977.7	$	385.0	$	5.9	$	390.9		$	386.9	$	2.0	$	388.9
Futures and forwards	5,609.5		2.2		—		2.2			2.1		—		2.1
Written options	1,146.2		—		—		—			52.2		—		52.2
Purchased options	1,178.7		53.3		—		53.3			—		—		—
Foreign exchange contracts
Swaps	1,828.6		54.6		4.2		58.8			58.8		6.2		65.0
Spot, futures and forwards	3,410.7		58.8		1.7		60.5			56.6		0.8		57.4
Written options	356.6		—		—		—			9.4		—		9.4
Purchased options	342.4		8.9		—		8.9			—		—		—
Equity contracts
Swaps	189.7		3.4		—		3.4			4.0		—		4.0
Futures and forwards	68.7		0.9		—		0.9			0.9		—		0.9
Written options	431.5		—		—		—			21.4		—		21.4
Purchased options	385.5		23.9		—		23.9			—		—		—
Commodity contracts
Swaps	48.2		2.5		—		2.5			5.1		—		5.1
Futures and forwards	49.1		3.6		—		3.6			0.5		—		0.5
Written options	29.3		—		—		—			1.9		—		1.9
Purchased options	28.9		2.0		—		2.0			—		—		—
Credit derivatives ⁽²⁾
Purchased credit derivatives:
Credit default swaps	604.0		8.1		—		8.1			10.3		—		10.3
Total return swaps/options	21.2		0.4		—		0.4			1.5		—		1.5
Written credit derivatives:
Credit default swaps	614.4		10.7		—		10.7			7.5		—		7.5
Total return swaps/options	25.4		1.0		—		1.0			0.2		—		0.2
Gross derivative assets/liabilities			$	619.3	$	11.8	$	631.1		$	619.3	$	9.0	$	628.3
Less: Legally enforceable master netting agreements							(545.3		)					(545.3		)
Less: Cash collateral received/paid							(43.3		)					(43.5		)
Total derivative assets/liabilities							$	42.5						$	39.5


⁽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 $2.2 billion and $548.9 billion at December 31, 2016.

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 Balance Sheet at December 31, 2017 and 2016 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 includes 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 and Short-term Borrowings.




Offsetting of Derivatives ⁽¹⁾

	Derivative Assets			Derivative Liabilities			Derivative Assets			Derivative Liabilities
(Dollars in billions)	December 31, 2017						December 31, 2016
Interest rate contracts
Over-the-counter	$	211.7		$	206.0		$	267.3		$	258.2
Over-the-counter cleared ⁽²⁾	1.9			1.8			177.2			182.8
Foreign exchange contracts
Over-the-counter	78.7			80.8			124.3			126.7
Over-the-counter cleared	0.9			0.7			0.3			0.3
Equity contracts
Over-the-counter	18.3			16.2			15.6			13.7
Exchange-traded	9.1			8.5			11.4			10.8
Commodity contracts
Over-the-counter	2.9			4.4			3.7			4.9
Exchange-traded	0.7			0.8			1.1			1.0
Credit derivatives
Over-the-counter	9.1			9.6			15.3			14.7
Over-the-counter cleared ⁽²⁾	6.1			6.0			4.3			4.3
Total gross derivative assets/liabilities, before netting
Over-the-counter	320.7			317.0			426.2			418.2
Exchange-traded	9.8			9.3			12.5			11.8
Over-the-counter cleared ⁽²⁾	8.9			8.5			181.8			187.4
Less: Legally enforceable master netting agreements and cash collateral received/paid
Over-the-counter	(296.9		)	(294.6		)	(398.2		)	(392.6		)
Exchange-traded	(8.6		)	(8.6		)	(8.9		)	(8.9		)
Over-the-counter cleared ⁽²⁾	(8.3		)	(8.5		)	(181.5		)	(187.3		)
Derivative assets/liabilities, after netting	25.6			23.1			31.9			28.6
Other gross derivative assets/liabilities ⁽³⁾	12.2			11.2			10.6			10.9
Total derivative assets/liabilities	37.8			34.3			42.5			39.5
Less: Financial instruments collateral ⁽⁴⁾	(11.2		)	(10.4		)	(13.5		)	(10.5		)
Total net derivative assets/liabilities	$	26.6		$	23.9		$	29.0		$	29.0


⁽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, and exchange-traded derivatives include listed options transacted on an exchange.

⁽²⁾


⁽³⁾	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.

⁽⁴⁾

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 credit default swaps (CDS), total return swaps and swaptions. These derivatives are recorded on the Consolidated Balance Sheet at fair value with changes in fair value recorded in other income.

Derivatives Designated as Accounting Hedges

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

Fair Value Hedges

The following table summarizes information related to fair value hedges for 2017, 2016 and 2015, including hedges of interest rate risk on long-term debt that were acquired as part of a business combination and redesignated at that time. At redesignation, the fair value of the derivatives was positive. As the derivatives mature, the fair value will approach zero. As a result, ineffectiveness will occur and the fair value changes in the derivatives and the long-term debt being hedged may be directionally the same in certain scenarios. Based on a regression analysis, the derivatives continue to be highly effective at offsetting changes in the fair value of the long-term debt attributable to interest rate risk.




Derivatives Designated as Fair Value Hedges

Gains (Losses)	Derivative									Hedged Item									Hedge Ineffectiveness
(Dollars in millions)	2017			2016			2015			2017			2016			2015			2017			2016			2015
Interest rate risk on long-term debt ⁽¹⁾	$	(1,537	)	$	(1,488	)	$	(718	)	$	1,045		$	646		$	(77	)	$	(492	)	$	(842	)	$	(795	)
Interest rate and foreign currency risk on long-term debt ⁽¹⁾	1,811			(941		)	(1,898		)	(1,767		)	944			1,812			44			3			(86		)
Interest rate risk on available-for-sale securities ⁽²⁾	(67		)	227			105			35			(286		)	(127		)	(32		)	(59		)	(22		)
Total	$	207		$	(2,202	)	$	(2,511	)	$	(687	)	$	1,304		$	1,608		$	(480	)	$	(898	)	$	(903	)


⁽¹⁾	Amounts are recorded in interest expense on long-term debt and in other income.


⁽²⁾	Amounts are recorded in interest income on debt securities.

Cash Flow and Net Investment Hedges

The table below summarizes certain information related to cash flow hedges and net investment hedges for 2017, 2016, and 2015. Of the $831 million after-tax net loss ($1.3 billion pre-tax) on derivatives in accumulated OCI at December 31, 2017, $130 million after-tax ($208 million pre-tax) is expected to be reclassified into earnings in the next 12 months. These net losses reclassified into earnings are expected to primarily reduce net interest income related to the respective hedged items. Amounts related to price risk on restricted stock awards reclassified from accumulated OCI are recorded in personnel expense. For terminated cash flow hedges, the time period over which the majority of the forecasted transactions are hedged is approximately seven years, with a maximum length of time for certain forecasted transactions of 19 years.




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 pre-tax)	2017			2016			2015			2017			2016			2015
Cash flow hedges
Interest rate risk on variable-rate portfolios	$	(109	)	$	(340	)	$	95		$	(327	)	$	(553	)	$	(974	)
Price risk on certain restricted stock awards ⁽¹⁾	59			41			(40		)	148			(32		)	91
Total ⁽²⁾	$	(50	)	$	(299	)	$	55		$	(179	)	$	(585	)	$	(883	)
Net investment hedges
Foreign exchange risk ⁽³⁾	$	(1,588	)	$	1,636		$	3,010		$	1,782		$	3		$	153


⁽¹⁾	Gains (losses) recognized in accumulated OCI are primarily related to the change in the Corporation’s stock price for the period.


⁽²⁾	In 2017, 2016 and 2015, amounts representing hedge ineffectiveness were not significant.

⁽³⁾

In 2017, substantially all of the gains in income reclassified from accumulated OCI were comprised of the gain recognized on derivatives used to hedge the currency risk of the Corporation’s net investment in its non-U.S. consumer credit card business, which was sold in 2017. For more information, see Note 14 – Accumulated Other Comprehensive Income (Loss). In 2017, 2016 and 2015, amounts excluded from effectiveness testing in total were $120 million, $325 million and $298 million.

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 2017, 2016 and 2015. These gains (losses) are largely offset by the income or expense that is recorded on the hedged item.




Other Risk Management Derivatives

Gains (Losses)
(Dollars in millions)	2017			2016			2015
Interest rate risk on mortgage banking income ⁽¹⁾	$	8		$	461		$	254
Credit risk on loans ⁽²⁾	(6		)	(107		)	(22		)
Interest rate and foreign currency risk on ALM activities ⁽³⁾	(36		)	(754		)	(222		)
Price risk on certain restricted stock awards ⁽⁴⁾	301			9			(267		)

⁽¹⁾

Net gains (losses) on these derivatives are recorded in mortgage banking income as they are used to mitigate the interest rate risk related to MSRs, IRLCs and mortgage LHFS, all of which are measured at fair value with changes in fair value recorded in mortgage banking income. The fair value of IRLCs is derived from the fair value of related mortgage loans which is based on observable market data and includes the expected net future cash flows related to servicing of the loans. The net gains on IRLCs related to the origination of mortgage loans that are held-for-sale, which are not included in the table but are considered derivative instruments, were $220 million, $533 million and $714 million for 2017, 2016 and 2015, respectively.


⁽²⁾	Primarily related to derivatives that are economic hedges of credit risk on loans. Net gains (losses) on these derivatives are recorded in other income.


⁽³⁾	Primarily related to hedges of debt securities carried at fair value and hedges of foreign currency-denominated debt. Gains (losses) on these derivatives and the related hedged items are recorded in other income.


⁽⁴⁾	Gains (losses) on these derivatives are recorded in personnel expense.

Transfers of Financial Assets with Risk Retained through Derivatives

The Corporation enters into certain transactions involving the transfer of financial assets that are accounted for as sales where substantially all of the economic exposure to the transferred financial assets is retained through derivatives (e.g., interest rate and/or credit), but the Corporation does not retain control over the assets transferred. Through December 31, 2017 and 2016, the Corporation transferred $6.0 billion and $6.6 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 $6.0 billion and $6.6 billion at the transfer dates. At December 31, 2017 and 2016, the fair value of the transferred securities was $6.1 billion and $6.3 billion. Derivative assets of $46 million and $43 million and liabilities of $3 million and $10 million were recorded at December 31, 2017 and 2016, and are included in credit derivatives in the derivative instruments table on page 113.

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 2017, 2016 and 2015. 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 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 following table is not presented on an FTE basis.




Sales and Trading Revenue

	Trading Account Profits		Net Interest Income			Other ⁽¹⁾			Total
(Dollars in millions)	2017
Interest rate risk	$	1,145	$	980		$	417		$	2,542
Foreign exchange risk	1,417		(1		)	(162		)	1,254
Equity risk	2,689		(525		)	1,904			4,068
Credit risk	1,251		2,537			577			4,365
Other risk	204		33			75			312
Total sales and trading revenue	$	6,706	$	3,024		$	2,811		$	12,541

	2016
Interest rate risk	$	1,613	$	1,410		$	304		$	3,327
Foreign exchange risk	1,360		(10		)	(154		)	1,196
Equity risk	1,917		20			2,074			4,011
Credit risk	1,250		2,569			424			4,243
Other risk	407		(20		)	40			427
Total sales and trading revenue	$	6,547	$	3,969		$	2,688		$	13,204

	2015
Interest rate risk	$	1,290	$	1,333		$	(259	)	$	2,364
Foreign exchange risk	1,322		(10		)	(117		)	1,195
Equity risk	2,115		56			2,152			4,323
Credit risk	920		2,333			445			3,698
Other risk	459		(81		)	62			440
Total sales and trading revenue	$	6,106	$	3,631		$	2,283		$	12,020


⁽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 $2.0 billion, $2.1 billion, and $2.2 billion for 2017, 2016, and 2015, 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 at December 31, 2017 and 2016 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, 2017
(Dollars in millions)	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

	December 31, 2016
	Carrying Value
Credit default swaps:
Investment grade	$	10	$	64	$	535	$	783	$	1,392
Non-investment grade	771		1,053		908		3,339		6,071
Total	781		1,117		1,443		4,122		7,463
Total return swaps/options:
Investment grade	16		—		—		—		16
Non-investment grade	127		10		2		1		140
Total	143		10		2		1		156
Total credit derivatives	$	924	$	1,127	$	1,445	$	4,123	$	7,619
Credit-related notes:
Investment grade	$	—	$	12	$	542	$	1,423	$	1,977
Non-investment grade	70		22		60		1,318		1,470
Total credit-related notes	$	70	$	34	$	602	$	2,741	$	3,447
	Maximum Payout/Notional
Credit default swaps:
Investment grade	$	121,083	$	143,200	$	116,540	$	21,905	$	402,728
Non-investment grade	84,755		67,160		41,001		18,711		211,627
Total	205,838		210,360		157,541		40,616		614,355
Total return swaps/options:
Investment grade	12,792		—		—		—		12,792
Non-investment grade	6,638		5,127		589		208		12,562
Total	19,430		5,127		589		208		25,354
Total credit derivatives	$	225,268	$	215,487	$	158,130	$	40,824	$	639,709

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.

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 114, 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, 2017 and 2016, the Corporation held cash and securities collateral of $77.2 billion and $85.5 billion, and posted cash and securities collateral of $59.2 billion and $71.1 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 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, 2017, 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 $3.2 billion, including $2.1 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, 2017 and 2016, 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 December 31, 2017 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, 2017

(Dollars in millions)	One incremental notch		Second incremental notch
Bank of America Corporation	$	779	$	487
Bank of America, N.A. and subsidiaries ⁽¹⁾	391		230


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

The table below presents the derivative liabilities that would be subject to unilateral termination by counterparties and the amounts of collateral that would have been contractually required at December 31, 2017 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, 2017

(Dollars in millions)	One incremental notch		Second incremental notch
Derivative liabilities	$	428	$	1,163
Collateral posted	339		800

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 2017, 2016 and 2015. 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)	2017						2016					2015
Derivative assets (CVA)	$	330		$	98		$	374	$	214		$	255		$	227
Derivative assets/liabilities (FVA)	160			178			186		102			16			16
Derivative liabilities (DVA)	(324		)	(281		)	24		(141		)	(18		)	(153		)


⁽¹⁾	At December 31, 2017, 2016 and 2015, cumulative CVA reduced the derivative assets balance by $677 million, $1.0 billion and $1.4 billion, cumulative FVA reduced the net derivatives balance by $136 million, $296 million and $481 million, and cumulative DVA reduced the derivative liabilities balance by $450 million, $774 million and $750 million, respectively.