Quarterly report pursuant to Section 13 or 15(d)

Derivatives

v2.4.0.8
Derivatives
 3 Months Ended
Mar. 31, 2014
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivatives
NOTE 2 – 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 2013 Annual Report on Form 10-K. The following tables present derivative instruments included on the Consolidated Balance Sheet in derivative assets and liabilities at March 31, 2014 and December 31, 2013. 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.

 
March 31, 2014
 
 
 
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
$
31,892.5

 
$
583.1

 
$
7.9

 
$
591.0

 
$
577.9

 
$
0.7

 
$
578.6

Futures and forwards
7,900.8

 
1.3

 
—

 
1.3

 
1.2

 
—

 
1.2

Written options
1,925.8

 
—

 
—

 
—

 
67.9

 
—

 
67.9

Purchased options
1,901.3

 
67.3

 
—

 
67.3

 
—

 
—

 
—

Foreign exchange contracts
 
 
 
 
 
 
 
 
 
 
 
 


Swaps
2,258.3

 
35.1

 
0.7

 
35.8

 
34.2

 
0.7

 
34.9

Spot, futures and forwards
3,504.4

 
23.5

 
0.4

 
23.9

 
24.9

 
0.9

 
25.8

Written options
506.1

 
—

 
—

 
—

 
8.0

 
—

 
8.0

Purchased options
482.4

 
7.6

 
—

 
7.6

 
—

 
—

 
—

Equity contracts
 
 
 
 
 
 
 
 
 
 
 
 


Swaps
187.8

 
3.5

 
—

 
3.5

 
3.9

 
—

 
3.9

Futures and forwards
75.9

 
1.1

 
—

 
1.1

 
1.5

 
—

 
1.5

Written options
320.9

 
—

 
—

 
—

 
29.6

 
—

 
29.6

Purchased options
285.6

 
28.7

 
—

 
28.7

 
—

 
—

 
—

Commodity contracts
 
 
 
 
 
 
 
 
 
 
 
 


Swaps
71.8

 
3.8

 
—

 
3.8

 
5.7

 
—

 
5.7

Futures and forwards
541.4

 
5.8

 
—

 
5.8

 
3.6

 
—

 
3.6

Written options
156.5

 
—

 
—

 
—

 
4.9

 
—

 
4.9

Purchased options
158.4

 
5.1

 
—

 
5.1

 
—

 
—

 
—

Credit derivatives
 
 
 
 
 
 
 
 
 
 
 
 


Purchased credit derivatives:
 
 
 
 
 
 
 
 
 
 
 
 


Credit default swaps
1,304.8

 
13.7

 
—

 
13.7

 
28.1

 
—

 
28.1

Total return swaps/other
60.0

 
0.4

 
—

 
0.4

 
3.8

 
—

 
3.8

Written credit derivatives:
 
 
 
 
 
 
 
 
 
 
 
 
 
Credit default swaps
1,272.0

 
29.3

 
—

 
29.3

 
11.9

 
—

 
11.9

Total return swaps/other
76.5

 
6.0

 
—

 
6.0

 
0.1

 
—

 
0.1

Gross derivative assets/liabilities
 
 
$
815.3

 
$
9.0

 
$
824.3

 
$
807.2

 
$
2.3

 
$
809.5

Less: Legally enforceable master netting agreements
 
 
 
(736.2
)
 
 
 
 
 
(736.2
)
Less: Cash collateral received/paid
 
 
 
 
 
 
(42.8
)
 
 
 
 
 
(36.4
)
Total derivative assets/liabilities
 
 
 
 
 
$
45.3

 
 
 
 
 
$
36.9

(1) 
Represents the total contract/notional amount of derivative assets and liabilities outstanding.
 
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.

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 presents derivative instruments included in derivative assets and liabilities on the Consolidated Balance Sheet at March 31, 2014 and December 31, 2013 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 which includes reducing the balance for counterparty netting and 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 9 – Federal Funds Sold or Purchased, Securities Financing Agreements and Short-term Borrowings.

Offsetting of Derivatives
 
 
 
 
 
 
 
 
March 31, 2014
 
December 31, 2013
(Dollars in billions)
Derivative
Assets
 
Derivative
Liabilities
 
Derivative
Assets
 
Derivative
Liabilities
Interest rate contracts
 
 
 
 
 
 
 
Over-the-counter
$
369.0

 
$
353.0

 
$
381.7

 
$
365.9

Exchange-traded
0.4

 
0.3

 
0.4

 
0.3

Over-the-counter cleared
289.1

 
292.4

 
351.2

 
356.5

Foreign exchange contracts
 
 
 
 
 
 
 
Over-the-counter
64.5

 
65.7

 
82.9

 
83.9

Equity contracts
 

 
 
 
 

 
 
Over-the-counter
19.7

 
17.4

 
20.3

 
17.6

Exchange-traded
7.7

 
9.9

 
8.4

 
9.8

Commodity contracts
 
 
 
 
 
 
 
Over-the-counter
7.4

 
8.6

 
6.3

 
7.4

Exchange-traded
3.4

 
3.0

 
3.3

 
2.9

Over-the-counter cleared
0.1

 
0.1

 
—

 
—

Credit derivatives
 

 
 

 
 

 
 

Over-the-counter
42.1

 
37.4

 
44.0

 
38.9

Over-the-counter cleared
6.4

 
6.1

 
5.8

 
5.9

Total gross derivative assets/liabilities, before netting


 


 
 
 
 
Over-the-counter
502.7

 
482.1

 
535.2

 
513.7

Exchange-traded
11.5

 
13.2

 
12.1

 
13.0

Over-the-counter cleared
295.6

 
298.6

 
357.0

 
362.4

Less: Legally enforceable master netting and cash collateral received/paid
 
 
 
 
 
 
 
Over-the-counter
(473.7
)
 
(463.6
)
 
(505.0
)
 
(495.4
)
Exchange-traded
(10.4
)
 
(10.4
)
 
(11.2
)
 
(11.2
)
Over-the-counter cleared
(294.9
)
 
(298.6
)
 
(356.6
)
 
(362.4
)
Derivative assets/liabilities, after netting
30.8

 
21.3

 
31.5

 
20.1

Other gross derivative assets/liabilities
14.5

 
15.6

 
16.0

 
17.3

Total derivative assets/liabilities
45.3

 
36.9

 
47.5

 
37.4

Less: Financial instruments collateral (1)
(9.1
)
 
(4.4
)
 
(10.1
)
 
(4.6
)
Total net derivative assets/liabilities
$
36.2

 
$
32.5

 
$
37.4

 
$
32.8

(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 17 – 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 months ended March 31, 2014 and 2013.

Derivatives Designated as Fair Value Hedges
Gains (Losses)
Three Months Ended March 31
 
2014
(Dollars in millions)
Derivative
 
Hedged
Item
 
Hedge
Ineffectiveness
Interest rate risk on long-term debt (1)
$
366

 
$
(560
)
 
$
(194
)
Interest rate and foreign currency risk on long-term debt (1)
118

 
(144
)
 
(26
)
Interest rate risk on available-for-sale securities (2)
2

 
(3
)
 
(1
)
Price risk on commodity inventory (3)
2

 
5

 
7

Total
$
488

 
$
(702
)
 
$
(214
)
 
 
 
 
 
 
 
2013
Interest rate risk on long-term debt (1)
$
(953
)
 
$
771

 
$
(182
)
Interest rate and foreign currency risk on long-term debt (1)
(1,538
)
 
1,456

 
(82
)
Interest rate risk on available-for-sale securities (2)
850

 
(846
)
 
4

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

 
—

Total
$
(1,644
)
 
$
1,384

 
$
(260
)
(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.
(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 months ended March 31, 2014 and 2013. During the next 12 months, net losses in accumulated other comprehensive income (OCI) of $781 million ($488 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 price risk on restricted stock awards reclassified from accumulated OCI are recorded in personnel expense.

Derivatives Designated as Cash Flow and Net Investment Hedges
 
Three Months Ended March 31
 
2014
(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
$
17

 
$
(281
)
 
$
—

Price risk on restricted stock awards
156

 
150

 
—

Total
$
173

 
$
(131
)
 
$
—

Net investment hedges
 
 
 
 
 
Foreign exchange risk
$
(181
)
 
$
(2
)
 
$
(58
)
 
 
 
 
 
 
 
2013
Cash flow hedges
 
 
 
 
 
Interest rate risk on variable-rate portfolios
$
(14
)
 
$
(275
)
 
$
(1
)
Price risk on restricted stock awards
55

 
40

 
—

Total
$
41

 
$
(235
)
 
$
(1
)
Net investment hedges
 
 
 
 
 
Foreign exchange risk
$
1,676

 
$
(94
)
 
$
(35
)
(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 months ended March 31, 2014 and 2013. 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 March 31
(Dollars in millions)
2014
 
2013
Price risk on mortgage banking production income (1, 2)
$
140

 
$
422

Market-related risk on mortgage banking servicing income (1)
241

 
(136
)
Credit risk on loans (3)
(6
)
 
3

Interest rate and foreign currency risk on ALM activities (4)
(598
)
 
(605
)
Price risk on restricted stock awards (5)
364

 
116

Other
(3
)
 
(4
)
Total
$
138

 
$
(204
)
(1) 
Net gains (losses) 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 $173 million and $407 million for the three months ended March 31, 2014 and 2013.
(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, 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 (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 months ended March 31, 2014 and 2013. 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. Global Markets results in Note 18 – 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 March 31
 
2014
(Dollars in millions)
Trading
Account
Profits
 
Net Interest Income
 
Other (1)
 
Total
Interest rate risk
$
353

 
$
280

 
$
113

 
$
746

Foreign exchange risk
237

 
2

 
(5
)
 
234

Equity risk
601

 
(18
)
 
601

 
1,184

Credit risk
1,039

 
700

 
155

 
1,894

Other risk
137

 
(90
)
 
73

 
120

Total sales and trading revenue
$
2,367

 
$
874

 
$
937

 
$
4,178

 
 
 
 
 
 
 
 
 
2013
Interest rate risk
$
677

 
$
293

 
$
(42
)
 
$
928

Foreign exchange risk
370

 
—

 
(8
)
 
362

Equity risk
608

 
15

 
530

 
1,153

Credit risk
1,040

 
716

 
(374
)
 
1,382

Other risk
195

 
(48
)
 
(11
)
 
136

Total sales and trading revenue
$
2,890

 
$
976

 
$
95

 
$
3,961

(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 $561 million and $528 million for the three months ended March 31, 2014 and 2013.

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 March 31, 2014 and December 31, 2013 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
 
 
 
March 31, 2014
 
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
$
3

 
$
219

 
$
756

 
$
880

 
$
1,858

Non-investment grade
518

 
1,833

 
2,019

 
5,704

 
10,074

Total
521

 
2,052

 
2,775

 
6,584

 
11,932

Total return swaps/other:
 
 
 
 
 
 
 
 
 
Investment grade
25

 
—

 
—

 
—

 
25

Non-investment grade
24

 
70

 
2

 
7

 
103

Total
49

 
70

 
2

 
7

 
128

Total credit derivatives
$
570

 
$
2,122

 
$
2,777

 
$
6,591

 
$
12,060

Credit-related notes: (1)
 
 
 
 
 
 
 
 
 
Investment grade
$
2

 
$
279

 
$
601

 
$
4,024

 
$
4,906

Non-investment grade
124

 
109

 
348

 
1,036

 
1,617

Total credit-related notes
$
126

 
$
388

 
$
949

 
$
5,060

 
$
6,523

 
Maximum Payout/Notional
Credit default swaps:
 
 
 
 
 
 
 
 
 
Investment grade
$
161,359

 
$
377,903

 
$
409,371

 
$
57,499

 
$
1,006,132

Non-investment grade
47,811

 
90,484

 
95,078

 
32,498

 
265,871

Total
209,170

 
468,387

 
504,449

 
89,997

 
1,272,003

Total return swaps/other:
 
 
 
 
 
 
 
 
 
Investment grade
36,553

 
—

 
—

 
—

 
36,553

Non-investment grade
25,557

 
9,964

 
3,269

 
1,135

 
39,925

Total
62,110

 
9,964

 
3,269

 
1,135

 
76,478

Total credit derivatives
$
271,280

 
$
478,351

 
$
507,718

 
$
91,132

 
$
1,348,481

 
 
 
 
 
 
 
 
 
 
 
December 31, 2013
 
Carrying Value
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

(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 $6.3 billion and $994.3 billion at March 31, 2014, and $8.1 billion and $1.0 trillion at December 31, 2013.

Credit-related notes in the table on page 149 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 140, 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 March 31, 2014 and December 31, 2013, the Corporation held cash and securities collateral of $69.6 billion and $74.4 billion, and posted cash and securities collateral of $48.0 billion and $56.1 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 March 31, 2014, 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 $1.5 billion, including $620 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 March 31, 2014, the current liability recorded for these derivative contracts was $143 million, against which the Corporation and certain subsidiaries had posted approximately $83 million of collateral.

The table below presents the amount of additional collateral contractually required by derivative contracts and other trading agreements at March 31, 2014 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
 
March 31, 2014
(Dollars in millions)
One incremental notch
 
Second incremental notch
Bank of America Corporation
$
1,166

 
$
3,712

Bank of America, N.A. and subsidiaries (1)
816

 
2,588

(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 March 31, 2014 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
 
March 31, 2014
(Dollars in millions)
One incremental notch
 
Second incremental notch
Derivative liability
$
1,177

 
$
2,052

Collateral posted
925

 
1,674



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. The Corporation hedges other market risks in both CVA and debit valuation adjustment (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).

The table below presents CVA and DVA gains (losses) on derivatives, which are recorded in trading account profits on a gross and net of hedge basis, for the three months ended March 31, 2014 and 2013.

Valuation Adjustments on Derivatives
 
Three Months Ended March 31
 
2014
 
2013
(Dollars in millions)
Gross
Net
 
Gross
Net
Derivative assets (CVA) (1)
$
52

$
40

 
$
(131
)
$
(295
)
Derivative liabilities (DVA) (2)
(82
)
(85
)
 
375

379

(1) 
At both March 31, 2014 and December 31, 2013, the cumulative CVA reduced the derivative assets balance by $1.6 billion.
(2) 
At March 31, 2014 and December 31, 2013, the cumulative DVA reduced the derivative liabilities balance by $714 million and $803 million.