Quarterly report pursuant to Section 13 or 15(d)

Derivatives

v2.4.0.8
Derivatives
 9 Months Ended
Sep. 30, 2013
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivatives
NOTE 3 – 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 2012 Annual Report on Form 10-K. The following tables present derivative instruments included on the Consolidated Balance Sheet in derivative assets and liabilities at September 30, 2013 and December 31, 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.

 
September 30, 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
$
33,859.6

 
$
725.2

 
$
8.7

 
$
733.9

 
$
720.9

 
$
0.7

 
$
721.6

Futures and forwards
9,086.9

 
3.4

 
—

 
3.4

 
4.0

 
—

 
4.0

Written options
2,162.6

 
—

 
—

 
—

 
70.8

 
—

 
70.8

Purchased options
2,111.1

 
72.1

 
—

 
72.1

 
—

 
—

 
—

Foreign exchange contracts
 
 
 
 
 
 
 
 
 
 
 
 
 
Swaps
2,312.4

 
45.3

 
0.9

 
46.2

 
46.4

 
1.5

 
47.9

Spot, futures and forwards
2,901.3

 
24.8

 
0.5

 
25.3

 
26.6

 
1.4

 
28.0

Written options
485.5

 
—

 
—

 
—

 
7.9

 
—

 
7.9

Purchased options
448.7

 
7.6

 
—

 
7.6

 
—

 
—

 
—

Equity contracts
 
 
 
 
 
 
 
 
 
 
 
 
 
Swaps
152.3

 
3.4

 
—

 
3.4

 
3.0

 
—

 
3.0

Futures and forwards
76.3

 
1.3

 
—

 
1.3

 
1.4

 
—

 
1.4

Written options
363.6

 
—

 
—

 
—

 
28.1

 
—

 
28.1

Purchased options
320.6

 
27.2

 
—

 
27.2

 
—

 
—

 
—

Commodity contracts
 
 
 
 
 
 
 
 
 
 
 
 
 
Swaps
73.1

 
3.8

 
—

 
3.8

 
4.5

 
—

 
4.5

Futures and forwards
592.3

 
4.6

 
—

 
4.6

 
2.7

 
—

 
2.7

Written options
209.7

 
—

 
—

 
—

 
6.8

 
—

 
6.8

Purchased options
223.4

 
7.1

 
—

 
7.1

 
—

 
—

 
—

Credit derivatives
 
 
 
 
 
 
 
 
 
 
 
 
 
Purchased credit derivatives:
 
 
 
 
 
 
 
 
 
 
 
 
 
Credit default swaps
1,441.7

 
23.4

 
—

 
23.4

 
23.6

 
—

 
23.6

Total return swaps/other
47.4

 
2.2

 
—

 
2.2

 
3.2

 
—

 
3.2

Written credit derivatives:
 
 
 
 
 
 
 
 
 
 
 
 
 
Credit default swaps
1,417.9

 
24.7

 
—

 
24.7

 
20.9

 
—

 
20.9

Total return swaps/other
77.5

 
3.6

 
—

 
3.6

 
0.2

 
—

 
0.2

Gross derivative assets/liabilities
 
 
$
979.7

 
$
10.1

 
$
989.8

 
$
971.0

 
$
3.6

 
$
974.6

Less: Legally enforceable master netting agreements
 
 
 
(889.3
)
 
 
 
 
 
(889.3
)
Less: Cash collateral received/paid
 
 
 
 
 
 
(47.3
)
 
 
 
 
 
(40.7
)
Total derivative assets/liabilities
 
 
 
 
 
$
53.2

 
 
 
 
 
$
44.6

(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 table below presents derivative instruments included in derivative assets and liabilities on the Consolidated Balance Sheet at September 30, 2013 and December 31, 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
 
 
 
 
 
 
 
 
September 30, 2013
 
December 31, 2012
(Dollars in billions)
Derivative
Assets
 
Derivative
Liabilities
 
Derivative
Assets
 
Derivative
Liabilities
Interest rate contracts
 
 
 
 
 
 
 
Over-the-counter
$
439.8

 
$
416.3

 
$
646.7

 
$
623.4

Exchange traded
0.2

 
0.2

 
—

 
—

Over-the-counter cleared
368.0

 
375.8

 
539.5

 
545.1

Foreign exchange contracts
 
 
 
 
 
 
 
Over-the-counter
76.1

 
79.6

 
84.1

 
88.7

Equity contracts
 

 
 
 
 

 
 
Over-the-counter
20.0

 
17.5

 
15.2

 
13.3

Exchange-traded
7.2

 
8.5

 
4.8

 
4.7

Commodity contracts
 
 
 
 
 
 
 
Over-the-counter
7.0

 
7.7

 
6.9

 
7.9

Exchange-traded
3.0

 
2.7

 
3.4

 
3.2

Credit derivatives
 

 
 

 
 

 
 

Over-the-counter
48.2

 
42.9

 
56.0

 
53.9

Over-the-counter cleared
4.4

 
4.5

 
3.8

 
3.4

Total gross derivative assets/liabilities, before netting


 


 
 
 
 
Over-the-counter
591.1

 
564.0

 
808.9

 
787.2

Exchange-traded
10.4

 
11.4

 
8.2

 
7.9

Over-the-counter cleared
372.4

 
380.3

 
543.3

 
548.5

Less: Legally enforceable master netting and cash collateral received/paid
 
 
 
 
 
 
 
Over-the-counter
(556.6
)
 
(541.8
)
 
(780.8
)
 
(764.4
)
Exchange-traded
(7.9
)
 
(7.9
)
 
(5.9
)
 
(5.9
)
Over-the-counter cleared
(372.1
)
 
(380.3
)
 
(543.3
)
 
(548.5
)
Derivative assets/liabilities, after netting
37.3

 
25.7

 
30.4

 
24.8

Other gross derivative assets/liabilities
15.9

 
18.9

 
23.1

 
21.2

Total derivative assets/liabilities
53.2

 
44.6

 
53.5

 
46.0

Less: Financial instruments collateral (1)
(11.4
)
 
(7.5
)
 
(11.5
)
 
(14.6
)
Total net derivative assets/liabilities
$
41.8

 
$
37.1

 
$
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 mortgage servicing rights (MSRs). For more information on MSRs, see Note 19 – 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 the three and nine months ended September 30, 2013 and 2012, 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)
Three Months Ended September 30
 
Nine Months Ended September 30
 
2013
 
2013
(Dollars in millions)
Derivative
 
Hedged
Item
 
Hedge
Ineffectiveness
 
Derivative
 
Hedged
Item
 
Hedge
Ineffectiveness
Interest rate risk on long-term debt (1)
$
(313
)
 
$
81

 
$
(232
)
 
$
(3,696
)
 
$
3,114

 
$
(582
)
Interest rate and foreign currency risk on long-term debt (1)
991

 
(1,059
)
 
(68
)
 
(1,129
)
 
945

 
(184
)
Interest rate risk on available-for-sale securities (2)
—

 
—

 
—

 
836

 
(837
)
 
(1
)
Price risk on commodity inventory (3)
1

 
1

 
2

 
1

 
—

 
1

Total
$
679

 
$
(977
)
 
$
(298
)
 
$
(3,988
)
 
$
3,222

 
$
(766
)
 
 
 
 
 
 
 
 
 
 
 
 
 
2012
 
2012
Interest rate risk on long-term debt (1)
$
109

 
$
(385
)
 
$
(276
)
 
$
518

 
$
(1,265
)
 
$
(747
)
Interest rate and foreign currency risk on long-term debt (1)
(716
)
 
647

 
(69
)
 
(1,455
)
 
1,259

 
(196
)
Interest rate risk on available-for-sale securities (2)
349

 
(309
)
 
40

 
(593
)
 
659

 
66

Price risk on commodity inventory (3)
(24
)
 
24

 
—

 
(10
)
 
10

 
—

Total
$
(282
)
 
$
(23
)
 
$
(305
)
 
$
(1,540
)
 
$
663

 
$
(877
)
(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 the six months ended June 30, 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 the three and nine months ended September 30, 2013 and 2012. During the next 12 months, net losses in accumulated other comprehensive income (OCI) of $889 million ($560 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 related to long-term debt designated as a net investment hedge for the nine months ended September 30, 2012; there were no losses related to these hedges for the three months ended September 30, 2012. There were no such hedges for the three and nine months ended September 30, 2013.

Derivatives Designated as Cash Flow and Net Investment Hedges
 
 
 
 
 
 
 
Three Months Ended September 30
 
Nine Months Ended September 30
 
2013
 
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)
 
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
$
(15
)
 
$
(271
)
 
$
1

 
$
(305
)
 
$
(801
)
 
$
(1
)
Price risk on restricted stock awards
137

 
108

 
—

 
302

 
217

 
—

Total
$
122

 
$
(163
)
 
$
1

 
$
(3
)
 
$
(584
)
 
$
(1
)
Net investment hedges
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange risk
$
(1,472
)
 
$
2

 
$
(31
)
 
$
1,008

 
$
(89
)
 
$
(103
)
 
 
 
 
 
 
 
 
 
 
 
 
 
2012
 
2012
Cash flow hedges
 
 
 
 
 
 
 
 
 
 
 
Interest rate risk on variable-rate portfolios
$
21

 
$
(260
)
 
$
—

 
$
(32
)
 
$
(636
)
 
$
—

Commodity price risk on forecasted purchases and sales
—

 
3

 
—

 
—

 
—

 
—

Price risk on restricted stock awards
65

 
(28
)
 
—

 
155

 
(90
)
 
—

Total
$
86

 
$
(285
)
 
$
—

 
$
123

 
$
(726
)
 
$
—

Net investment hedges
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange risk
$
(1,149
)
 
$
11

 
$
(13
)
 
$
(1,021
)
 
$
(26
)
 
$
(180
)
(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 the three and nine months ended September 30, 2013 and 2012. These gains (losses) are largely offset by the income or expense that is recorded on the hedged item.

Other Risk Management Derivatives
 
 
 
 
Gains (Losses)
Three Months Ended September 30
 
Nine Months Ended September 30
(Dollars in millions)
2013
 
2012
 
2013
 
2012
Price risk on mortgage banking production income (1, 2)
$
(203
)
 
$
850

 
$
687

 
$
2,240

Market-related risk on mortgage banking servicing income (1)
44

 
822

 
(937
)
 
1,970

Credit risk on loans (3)
(16
)
 
(32
)
 
(23
)
 
(70
)
Interest rate and foreign currency risk on ALM activities (4)
1,195

 
(309
)
 
1,703

 
(987
)
Price risk on restricted stock awards (5)
192

 
142

 
432

 
392

Other
(4
)
 
16

 
(15
)
 
105

Total
$
1,208

 
$
1,489

 
$
1,847

 
$
3,650

(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 $228 million and $767 million for the three and nine months ended September 30, 2013 compared to $1.0 billion and $2.4 billion for the same periods in 2012.
(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 the three and nine months ended September 30, 2013 and 2012. 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 20 – 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
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended September 30
 
Nine Months Ended September 30
 
2013
 
2013
(Dollars in millions)
Trading
Account
Profits
 
Net Interest Income
 
Other (1)
 
Total
 
Trading
Account
Profits
 
Net Interest Income
 
Other (1)
 
Total
Interest rate risk
$
188

 
$
237

 
$
31

 
$
456

 
$
1,207

 
$
800

 
$
66

 
$
2,073

Foreign exchange risk
215

 
2

 
(6
)
 
211

 
890

 
3

 
(21
)
 
872

Equity risk
392

 
48

 
505

 
945

 
1,663

 
42

 
1,598

 
3,303

Credit risk
349

 
622

 
79

 
1,050

 
1,805

 
2,010

 
(167
)
 
3,648

Other risk
57

 
(56
)
 
5

 
6

 
374

 
(141
)
 
35

 
268

Total sales and trading revenue
$
1,201

 
$
853

 
$
614

 
$
2,668

 
$
5,939

 
$
2,714

 
$
1,511

 
$
10,164

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2012
 
2012
Interest rate risk
$
68

 
$
267

 
$
(4
)
 
$
331

 
$
522

 
$
752

 
$
(21
)
 
$
1,253

Foreign exchange risk
193

 
1

 
13

 
207

 
659

 
5

 
12

 
676

Equity risk
195

 
15

 
457

 
667

 
988

 
(90
)
 
1,442

 
2,340

Credit risk
663

 
552

 
130

 
1,345

 
2,387

 
1,632

 
862

 
4,881

Other risk
118

 
(45
)
 
(12
)
 
61

 
425

 
(168
)
 
30

 
287

Total sales and trading revenue
$
1,237

 
$
790

 
$
584

 
$
2,611

 
$
4,981

 
$
2,131

 
$
2,325

 
$
9,437

(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 $480 million and $1.6 billion for the three and nine months ended September 30, 2013 and $428 million and $1.4 billion for the same periods in 2012.

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 September 30, 2013 and December 31, 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.

Credit Derivative Instruments
 
 
 
September 30, 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
$
11

 
$
629

 
$
2,874

 
$
2,039

 
$
5,553

Non-investment grade
679

 
2,705

 
4,158

 
7,810

 
15,352

Total
690

 
3,334

 
7,032

 
9,849

 
20,905

Total return swaps/other:
 
 
 
 
 
 
 
 
 
Investment grade
26

 
—

 
—

 
—

 
26

Non-investment grade
98

 
65

 
35

 
12

 
210

Total
124

 
65

 
35

 
12

 
236

Total credit derivatives
$
814

 
$
3,399

 
$
7,067

 
$
9,861

 
$
21,141

Credit-related notes: (1)
 
 
 
 
 
 
 
 
 
Investment grade
$
1

 
$
270

 
$
291

 
$
4,705

 
$
5,267

Non-investment grade
159

 
154

 
702

 
980

 
1,995

Total credit-related notes
$
160

 
$
424

 
$
993

 
$
5,685

 
$
7,262

 
Maximum Payout/Notional
Credit default swaps:
 
 
 
 
 
 
 
 
 
Investment grade
$
211,697

 
$
361,303

 
$
482,919

 
$
56,592

 
$
1,112,511

Non-investment grade
62,546

 
96,021

 
110,575

 
36,243

 
305,385

Total
274,243

 
457,324

 
593,494

 
92,835

 
1,417,896

Total return swaps/other:
 
 
 
 
 
 
 
 
 
Investment grade
30,937

 
—

 
—

 
—

 
30,937

Non-investment grade
33,036

 
6,265

 
5,744

 
1,545

 
46,590

Total
63,973

 
6,265

 
5,744

 
1,545

 
77,527

Total credit derivatives
$
338,216

 
$
463,589

 
$
599,238

 
$
94,380

 
$
1,495,423

 
 
 
 
 
 
 
 
 
 
 
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 $14.2 billion and $1.1 trillion at September 30, 2013, and $20.7 billion and $1.1 trillion at December 31, 2012.

Credit-related notes in the table on page 164 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. The Corporation discloses internal categorizations of investment grade and non-investment grade consistent with how risk is managed for these instruments.

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 156, the Corporation enters into legally enforceable master netting agreements which reduce risk by permitting the closeout and netting of transactions with the same counterparty upon the occurrence of certain events.

A majority of the Corporation's derivative contracts contain credit risk-related contingent features, primarily in the form of ISDA master netting agreements and credit support documentation that enhance the creditworthiness of these instruments compared to other obligations of the respective counterparty with whom the Corporation has transacted. These contingent features may be for the benefit of the Corporation as well as its counterparties with respect to changes in the Corporation's creditworthiness and the mark-to-market exposure under the derivative transactions. At September 30, 2013 and December 31, 2012, the Corporation held cash and securities collateral of $75.6 billion and $85.6 billion, and posted cash and securities collateral of $58.7 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 September 30, 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 $1.8 billion, including $800 million for BANA.

Some counterparties are currently able to unilaterally terminate certain contracts, or the Corporation or certain subsidiaries may be required to take other action such as find a suitable replacement or obtain a guarantee. At September 30, 2013, the current liability recorded for these derivative contracts was $281 million, against which the Corporation and certain subsidiaries had posted approximately $198 million of collateral.

At September 30, 2013, if the rating agencies had downgraded their long-term senior debt ratings for the Corporation or certain subsidiaries by one incremental notch, the amount of additional collateral contractually required by derivative contracts and other trading agreements would have been approximately $3.4 billion, including $3.0 billion for BANA. If the rating agencies had downgraded their long-term senior debt ratings for these entities by an additional second incremental notch, approximately $4.4 billion in additional incremental collateral, including $300 million for BANA, would have been required.

Also, if the rating agencies had downgraded their long-term senior debt ratings for the Corporation or certain subsidiaries by one incremental notch, the derivative liability that would be subject to unilateral termination by counterparties as of September 30, 2013 was $2.3 billion, against which $1.9 billion of collateral has been posted. If the rating agencies had downgraded their long-term senior debt ratings for the Corporation and certain subsidiaries by a second incremental notch, the derivative liability that would be subject to unilateral termination by counterparties as of September 30, 2013 was an incremental $1.2 billion, against which $800 million of collateral has been posted.

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 early 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 the nine months ended September 30, 2013. The net CVA and DVA excluding the impact of these refinements was a gain of $230 million and a loss of $307 million for the nine months ended September 30, 2013.

The table below presents CVA and DVA gains (losses) for the Corporation on a gross and net of hedge basis, which are recorded in trading account profits.

Valuation Adjustments on Derivatives
 
 
 
 
 
 
 
Three Months Ended September 30
 
Nine Months Ended September 30
 
2013
 
2012
 
2013
 
2012
(Dollars in millions)
Gross
Net
 
Gross
Net
 
Gross
Net
 
Gross
Net
Derivative assets (CVA) (1)
$
335

$
102

 
$
525

$
75

 
$
347

$
(131
)
 
$
725

$
237

Derivative liabilities (DVA) (2)
(293
)
(292
)
 
(606
)
(583
)
 
159

126

 
(1,899
)
(2,200
)
(1) 
At September 30, 2013 and December 31, 2012, the cumulative CVA reduced the derivative assets balance by $2.0 billion and $2.4 billion.
(2) 
At September 30, 2013 and December 31, 2012, the cumulative DVA reduced the derivative liabilities balance by $1.0 billion and $807 million.