Quarterly report pursuant to Section 13 or 15(d)

Derivatives

v3.21.2
Derivatives
9 Months Ended
Sep. 30, 2021
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivatives Derivatives
Derivative Balances
Derivatives are entered into on behalf of customers, for trading or to support risk management activities. Derivatives used in risk management activities include derivatives that may or may not be designated in qualifying hedge accounting relationships. Derivatives that are not designated in qualifying hedge accounting relationships are referred to as other risk management derivatives. For more information on the Corporation’s derivatives and hedging activities, see Note 1 – Summary of Significant Accounting Principles and Note 3 –
Derivatives to the Consolidated Financial Statements of the Corporation’s 2020 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, 2021 and December 31, 2020. Balances are presented on a gross basis, prior to the application of counterparty and cash collateral netting. Total derivative assets and liabilities are adjusted on an aggregate basis to take into consideration the effects of legally enforceable master netting agreements and have been reduced by cash collateral received or paid.
September 30, 2021
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 $ 19,675.2  $ 141.9  $ 9.4  $ 151.3  $ 148.6  $ 2.4  $ 151.0 
Futures and forwards 4,142.2  2.8    2.8  2.7    2.7 
Written options 1,746.8        29.5    29.5 
Purchased options 1,637.3  33.4    33.4       
Foreign exchange contracts  
Swaps 1,433.9  27.6  0.4  28.0  30.7  0.3  31.0 
Spot, futures and forwards 4,628.5  37.1  0.5  37.6  35.1  0.1  35.2 
Written options 338.1        3.9    3.9 
Purchased options 310.6  3.9    3.9       
Equity contracts  
Swaps 431.7  13.6    13.6  16.0    16.0 
Futures and forwards 131.0  0.4    0.4  1.6    1.6 
Written options 738.8        60.3    60.3 
Purchased options 654.4  60.6    60.6       
Commodity contracts    
Swaps 50.2  4.5    4.5  7.7    7.7 
Futures and forwards 91.7  2.3  0.3  2.6  1.1  0.6  1.7 
Written options 41.9        4.0    4.0 
Purchased options 34.0  4.6    4.6       
Credit derivatives (2)
     
Purchased credit derivatives:      
Credit default swaps 375.2  1.8    1.8  5.0    5.0 
Total return swaps/options 52.6  0.3    0.3  1.4    1.4 
Written credit derivatives:    
Credit default swaps 358.3  5.0    5.0  1.5    1.5 
Total return swaps/options 59.3  1.3    1.3  0.5    0.5 
Gross derivative assets/liabilities $ 341.1  $ 10.6  $ 351.7  $ 349.6  $ 3.4  $ 353.0 
Less: Legally enforceable master netting agreements     (279.7)     (279.7)
Less: Cash collateral received/paid       (31.2)     (35.2)
Total derivative assets/liabilities       $ 40.8      $ 38.1 
(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 $3.2 billion and $326.9 billion at September 30, 2021.
December 31, 2020
Gross Derivative Assets Gross Derivative Liabilities
(Dollars in billions)
Contract/
Notional (1)
Trading and Other Risk Management Derivatives Qualifying
Accounting
Hedges
Total Trading and Other Risk Management Derivatives Qualifying
Accounting
Hedges
Total
Interest rate contracts              
Swaps $ 13,242.8  $ 199.9  $ 10.9  $ 210.8  $ 209.3  $ 1.3  $ 210.6 
Futures and forwards 3,222.2  3.5  0.1  3.6  3.6  —  3.6 
Written options 1,530.5  —  —  —  40.5  —  40.5 
Purchased options 1,545.8  45.3  —  45.3  —  —  — 
Foreign exchange contracts            
Swaps 1,475.8  37.1  0.3  37.4  39.7  0.6  40.3 
Spot, futures and forwards 3,710.7  53.4  —  53.4  54.5  0.5  55.0 
Written options 289.6  —  —  —  4.8  —  4.8 
Purchased options 279.3  5.0  —  5.0  —  —  — 
Equity contracts              
Swaps 320.2  13.3  —  13.3  14.5  —  14.5 
Futures and forwards 106.2  0.3  —  0.3  1.4  —  1.4 
Written options 599.1  —  —  —  48.8  —  48.8 
Purchased options 541.2  52.6  —  52.6  —  —  — 
Commodity contracts              
Swaps 36.4  1.9  —  1.9  4.4  —  4.4 
Futures and forwards 63.6  2.0  —  2.0  1.0  —  1.0 
Written options 24.6  —  —  —  1.4  —  1.4 
Purchased options 24.7  1.5  —  1.5  —  —  — 
Credit derivatives (2)
             
Purchased credit derivatives:              
Credit default swaps 322.7  2.3  —  2.3  4.4  —  4.4 
Total return swaps/options 63.6  0.2  —  0.2  1.0  —  1.0 
Written credit derivatives:            
Credit default swaps 301.5  4.4  —  4.4  1.9  —  1.9 
Total return swaps/options 68.6  0.6  —  0.6  0.4  —  0.4 
Gross derivative assets/liabilities   $ 423.3  $ 11.3  $ 434.6  $ 431.6  $ 2.4  $ 434.0 
Less: Legally enforceable master netting agreements       (344.9)     (344.9)
Less: Cash collateral received/paid       (42.5)     (43.6)
Total derivative assets/liabilities       $ 47.2      $ 45.5 
(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 $269.8 billion at December 31, 2020.
Offsetting of Derivatives
The Corporation enters into International Swaps and Derivatives Association, Inc. (ISDA) master netting agreements or similar agreements with substantially all of the Corporation’s derivative counterparties. For more information, see Note 3 – Derivatives to the Consolidated Financial Statements of the Corporation’s 2020 Annual Report on Form 10-K.
The following table presents derivative instruments included in derivative assets and liabilities on the Consolidated Balance Sheet at September 30, 2021 and December 31, 2020 by primary risk (e.g., interest rate risk) and the platform, where
applicable, on which these derivatives are transacted. Balances are presented on a gross basis, prior to the application of counterparty and cash collateral netting. Total gross derivative assets and liabilities are adjusted on an aggregate basis to take into consideration the effects of legally enforceable master netting agreements, which include reducing the balance for counterparty netting and cash collateral received or paid.
For more information on offsetting of securities financing agreements, see Note 9 – Federal Funds Sold or Purchased, Securities Financing Agreements, Short-term Borrowings and Restricted Cash.
Offsetting of Derivatives (1)
Derivative
Assets
Derivative
 Liabilities
Derivative
Assets
Derivative
 Liabilities
(Dollars in billions) September 30, 2021 December 31, 2020
Interest rate contracts        
Over-the-counter $ 177.6  $ 171.7  $ 247.7  $ 243.5 
Exchange-traded 0.1    —  — 
Over-the-counter cleared 9.6  9.8  10.2  9.1 
Foreign exchange contracts
Over-the-counter 67.2  68.3  92.2  96.5 
Over-the-counter cleared 0.8  0.8  1.4  1.3 
Equity contracts
Over-the-counter 30.7  32.5  31.3  28.3 
Exchange-traded 42.9  42.1  32.3  31.0 
Commodity contracts
Over-the-counter 8.4  9.5  3.5  5.0 
Exchange-traded 1.9  2.4  0.7  0.7 
Over-the-counter cleared 0.1  0.1  —  — 
Credit derivatives
Over-the-counter 5.8  5.5  5.2  5.6 
Over-the-counter cleared 2.4  2.5  2.2  1.9 
Total gross derivative assets/liabilities, before netting
Over-the-counter 289.7  287.5  379.9  378.9 
Exchange-traded 44.9  44.5  33.0  31.7 
Over-the-counter cleared 12.9  13.2  13.8  12.3 
Less: Legally enforceable master netting agreements and cash collateral received/paid
Over-the-counter (255.5) (259.4) (345.7) (347.2)
Exchange-traded (42.9) (42.9) (29.5) (29.5)
Over-the-counter cleared (12.5) (12.6) (12.2) (11.8)
Derivative assets/liabilities, after netting 36.6  30.3  39.3  34.4 
Other gross derivative assets/liabilities (2)
4.2  7.8  7.9  11.1 
Total derivative assets/liabilities 40.8  38.1  47.2  45.5 
Less: Financial instruments collateral (3)
(13.1) (11.4) (16.1) (16.6)
Total net derivative assets/liabilities $ 27.7  $ 26.7  $ 31.1  $ 28.9 
(1)Over-the-counter derivatives include bilateral transactions between the Corporation and a particular counterparty. Over-the-counter cleared derivatives include bilateral transactions between the Corporation and a counterparty where the transaction is cleared through a clearinghouse. Exchange-traded derivatives include listed options transacted on an exchange.
(2)Consists of derivatives entered into under master netting agreements where the enforceability of these agreements is uncertain under bankruptcy laws in some countries or industries.
(3)Amounts are limited to the derivative asset/liability balance and, accordingly, do not include excess collateral received/pledged. Financial instruments collateral includes securities collateral received or pledged and cash securities held and posted at third-party custodians that are not offset on the Consolidated Balance Sheet but shown as a reduction to derive net derivative assets and liabilities.
Derivatives Designated as Accounting Hedges
The Corporation uses various types of interest rate and foreign exchange derivative contracts to protect against changes in the fair value of its assets and liabilities due to fluctuations in interest rates and exchange rates (fair value hedges). The Corporation also uses these types of contracts to protect against changes in the cash flows of its assets and liabilities, and other forecasted transactions (cash flow hedges). The Corporation hedges its net investment in consolidated non-U.S.
operations determined to have functional currencies other than the U.S. dollar using forward exchange contracts and cross-currency basis swaps, and by issuing foreign currency-denominated debt (net investment hedges).
Fair Value Hedges
The table below summarizes information related to fair value hedges for the three and nine months ended September 30, 2021 and 2020.
Gains and Losses on Derivatives Designated as Fair Value Hedges
Three Months Ended September 30, 2021 Three Months Ended September 30, 2020
(Dollars in millions) Derivative Hedged Item Derivative Hedged Item
Interest rate risk on long-term debt (1)
$ (1,658) $ 1,660  $ (1,523) $ 1,473 
Interest rate and foreign currency risk on long-term debt (2)
(49) 46  79  (87)
Interest rate risk on available-for-sale securities (3)
867  (859) 139  (139)
Total $ (840) $ 847  $ (1,305) $ 1,247 
` Nine Months Ended September 30, 2021 Nine Months Ended September 30, 2020
Derivative Hedged Item Derivative Hedged Item
Interest rate risk on long-term debt (1)
$ (6,237) $ 6,208  $ 9,286  $ (9,403)
Interest rate and foreign currency risk on long-term debt (2)
(72) 67  644  (638)
Interest rate risk on available-for-sale securities (3)
4,245  (4,184) (572) 559 
Total $ (2,064) $ 2,091  $ 9,358  $ (9,482)
(1)Amounts are recorded in interest expense in the Consolidated Statement of Income.
(2)For the three and nine months ended September 30, 2021, the derivative amount includes gains (losses) of $(11) million and $(62) million in interest expense, $(33) million and $(2) million in market making and similar activities, and $(5) million and $(8) million in accumulated other comprehensive income (OCI). For the same periods in 2020, the derivative amount includes gains (losses) of $(13) million and $718 million in interest expense, $95 million and $(83) million in market making and similar activities, and $(3) million and $9 million in accumulated OCI. Line item totals are in the Consolidated Statement of Income and on the Consolidated Balance Sheet.
(3)Amounts are recorded in interest income in the Consolidated Statement of Income.
The table below summarizes the carrying value of hedged assets and liabilities that are designated and qualifying in fair value hedging relationships along with the cumulative amount of fair value hedging adjustments included in the carrying value that have been recorded in the current hedging relationships. These fair value hedging adjustments are open basis adjustments that are not subject to amortization as long as the hedging relationship remains designated.
Designated Fair Value Hedged Assets and Liabilities
September 30, 2021 December 31, 2020
(Dollars in millions) Carrying Value
Cumulative
Fair Value
 Adjustments (1)
Carrying Value
Cumulative
Fair Value
 Adjustments (1)
Long-term debt (2)
$ 177,111  $ 4,933  $ 150,556  $ 8,910 
Available-for-sale debt securities (2, 3, 4)
178,130  (2,120) 116,252  114 
Trading account assets (5)
590    427  15 
(1)Increase (decrease) to carrying value.
(2)At September 30, 2021 and December 31, 2020, the cumulative fair value adjustments remaining on long-term debt and available-for-sale debt securities from discontinued hedging relationships resulted in an increase in the related liability of $1.2 billion and $3.7 billion and a decrease in the related asset of $240 million and $69 million, which are being amortized over the remaining contractual life of the de-designated hedged items.
(3)These amounts include the amortized cost of the prepayable financial assets used to designate hedging relationships in which the hedged item is the last layer expected to be remaining at the end of the hedging relationship (i.e. last-of-layer hedging relationship). At September 30, 2021 and December 31, 2020, the amortized cost of the closed portfolios used in these hedging relationships was $23.7 billion and $34.6 billion, of which $6.9 billion and $7.0 billion was designated in the last-of-layer hedging relationship. At September 30, 2021, the cumulative adjustment associated with these hedging relationships was a decrease of $103 million. At December 31, 2020, the cumulative adjustment was insignificant.
(4)Carrying value represents amortized cost.
(5)Represents hedging activities related to certain commodities inventory.
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, 2021 and 2020. Of the $704 million after-tax net loss ($938 million pretax) on derivatives in accumulated OCI at September 30, 2021, gains of $858 million after-tax ($1.1 billion pretax) related to both open and terminated cash flow hedges are expected to be reclassified
into earnings in the next 12 months. These net gains reclassified into earnings are expected to primarily increase net interest income related to the respective hedged items. For terminated cash flow hedges, the time period over which the majority of the forecasted transactions are hedged is approximately 3 years, with a maximum length of time for certain forecasted transactions of 15 years.
Gains and Losses on Derivatives Designated as Cash Flow and Net Investment Hedges
Gains (Losses)
 Recognized in
Accumulated OCI
on Derivatives
Gains (Losses)
in Income
Reclassified from
 Accumulated OCI
Gains (Losses)
 Recognized in
Accumulated OCI
on Derivatives
Gains (Losses)
in Income
Reclassified from
 Accumulated OCI
(Dollars in millions, amounts pretax) Three Months Ended September 30, 2021 Nine Months Ended September 30, 2021
Cash flow hedges
Interest rate risk on variable-rate assets (1)
$ (539) $ 38  $ (1,115) $ 111 
Price risk on forecasted MBS purchases (1)
29  5  (272) 20 
Price risk on certain compensation plans (2)
(2) 14  57  40 
Total $ (512) $ 57  $ (1,330) $ 171 
Net investment hedges    
Foreign exchange risk (3)
$ 642  $   $ 1,145  $  
Three Months Ended September 30, 2020 Nine Months Ended September 30, 2020
Cash flow hedges
Interest rate risk on variable-rate assets (1)
$ (101) $ $ 810  $ (44)
Price risk on forecasted MBS purchases (1)
184  184 
Price risk on certain compensation plans (2)
32  23 
Total $ 115  $ 13  $ 1,017  $ (36)
Net investment hedges
Foreign exchange risk (3)
$ (703) $ —  $ 265  $
(1)Amounts reclassified from accumulated OCI are recorded in interest income in the Consolidated Statement of Income.
(2)Amounts reclassified from accumulated OCI are recorded in compensation and benefits expense in the Consolidated Statement of Income.
(3)Amounts reclassified from accumulated OCI are recorded in other income in the Consolidated Statement of Income. For the three and nine months ended September 30, 2021, amounts excluded from effectiveness testing and recognized in market making and similar activities were losses of $36 million and $86 million. For the same periods in 2020 amounts excluded from effectiveness testing and recognized in other income were gains of $10 million and $115 million.
Other Risk Management Derivatives
Other risk management derivatives are used by the Corporation to reduce certain risk exposures by economically hedging various assets and liabilities. The table below presents gains (losses) on these derivatives for the three and nine months ended September 30, 2021 and 2020. These gains (losses) are largely offset by the income or expense recorded on the hedged item.
Gains and Losses on Other Risk Management Derivatives
Three Months Ended September 30 Nine Months Ended September 30
(Dollars in millions) 2021 2020 2021 2020
Interest rate risk on mortgage activities (1, 2)
$ 10  $ 73  $ (49) $ 601 
Credit risk on loans (2)
(9) (28) (40) (6)
Interest rate and foreign currency risk on asset and liability management activities (3)
552  (2,571) 1,495  (2,060)
Price risk on certain compensation plans (4)
(23) 263  575  109 
(1)Includes hedges of interest rate risk on mortgage servicing rights (MSRs) and interest rate lock commitments (IRLCs) to originate mortgage loans that will be held for sale.
(2)Gains (losses) on these derivatives are recorded in other income.
(3)Gains (losses) on these derivatives are recorded in market making and similar activities.
(4)Gains (losses) on these derivatives are recorded in compensation and benefits expense.
Transfers of Financial Assets with Risk Retained through Derivatives
The Corporation enters into certain transactions involving the transfer of financial assets that are accounted for as sales where substantially all of the economic exposure to the transferred financial assets is retained through derivatives (e.g., interest rate and/or credit), but the Corporation does not retain control over the assets transferred. At September 30, 2021 and December 31, 2020, the Corporation had transferred $4.9 billion and $5.2 billion of non-U.S. government-guaranteed mortgage-backed securities (MBS) to a third-party trust and retained economic exposure to the transferred assets through derivative contracts. In connection with these transfers, the Corporation received gross cash proceeds of $4.9 billion and $5.2 billion at the transfer dates. At September 30, 2021 and December 31, 2020, the fair value of the transferred securities was $5.1 billion and $5.5 billion.
Sales and Trading Revenue
The Corporation enters into trading derivatives to facilitate client transactions and to manage risk exposures arising from trading
account assets and liabilities. It is the Corporation’s policy to include these derivative instruments in its trading activities, which include derivatives and non-derivative cash instruments. The resulting risk from these derivatives is managed on a portfolio basis as part of the Corporation’s Global Markets business segment. For more information on sales and trading revenue, see Note 3 – Derivatives to the Consolidated Financial Statements of the Corporation’s 2020 Annual Report on Form 10-K.
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, 2021 and 2020. This table includes debit valuation adjustment (DVA) and funding valuation adjustment (FVA) gains (losses). Global Markets results in Note 17 – Business Segment Information are presented on a fully taxable-equivalent (FTE) basis. The table below is not presented on an FTE basis.
Sales and Trading Revenue
Market making and similar activities Net Interest
Income
Other (1)
Total Market making and similar activities Net Interest
Income
Other (1)
Total
(Dollars in millions) Three Months Ended September 30, 2021 Nine Months Ended September 30, 2021
Interest rate risk $ 180  $ 442  $ 43  $ 665  $ 590  $ 1,350  $ 141  $ 2,081 
Foreign exchange risk 345  (22) 2  325  1,082  (62) 7  1,027 
Equity risk 1,196  (28) 433  1,601  3,657  7  1,389  5,053 
Credit risk 248  458  158  864  1,491  1,263  446  3,200 
Other risk (2)
45  (30) 45  60  627  (58) 91  660 
Total sales and trading revenue
$ 2,014  $ 820  $ 681  $ 3,515  $ 7,447  $ 2,500  $ 2,074  $ 12,021 
Three Months Ended September 30, 2020 Nine Months Ended September 30, 2020
Interest rate risk $ 85  $ 545  $ 57  $ 687  $ 2,249  $ 1,754  $ 175  $ 4,178 
Foreign exchange risk 338  (10) 332  1,153  (8) (2) 1,143 
Equity risk 816  (7) 391  1,200  2,805  (99) 1,361  4,067 
Credit risk 413  401  73  887  570  1,336  253  2,159 
Other risk (2)
73  (7) 14  80  280  21  24  325 
Total sales and trading revenue
$ 1,725  $ 922  $ 539  $ 3,186  $ 7,057  $ 3,004  $ 1,811  $ 11,872 
(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 $460 million and $1.5 billion for the three and nine months ended September 30, 2021 compared to $430 million and $1.5 billion for the same periods in 2020.
(2)Includes commodity risk.
Credit Derivatives
The Corporation enters into credit derivatives primarily to facilitate client transactions and to manage credit risk exposures. Credit derivatives are classified as investment and non-investment grade based on the credit quality of the underlying referenced obligation. The Corporation considers ratings of BBB- or higher as investment grade. Non-investment grade includes non-rated credit derivative instruments. The Corporation discloses internal categorizations of investment
grade and non-investment grade consistent with how risk is managed for these instruments. For more information on credit derivatives, see Note 3 – Derivatives to the Consolidated Financial Statements of the Corporation’s 2020 Annual Report on Form 10-K.
Credit derivative instruments where the Corporation is the seller of credit protection and their expiration at September 30, 2021 and December 31, 2020 are summarized in the table below.
Credit Derivative Instruments
Less than
One Year
One to
Three Years
Three to
Five Years
Over Five
Years
Total
September 30, 2021
(Dollars in millions) Carrying Value
Credit default swaps:          
Investment grade $   $ 1  $ 40  $ 73  $ 114 
Non-investment grade 8  119  426  859  1,412 
Total 8  120  466  932  1,526 
Total return swaps/options:          
Investment grade 18        18 
Non-investment grade 88  353  5    446 
Total 106  353  5    464 
Total credit derivatives $ 114  $ 473  $ 471  $ 932  $ 1,990 
Credit-related notes:          
Investment grade $   $   $ 42  $ 274  $ 316 
Non-investment grade 5    14  1,328  1,347 
Total credit-related notes $ 5  $   $ 56  $ 1,602  $ 1,663 
  Maximum Payout/Notional
Credit default swaps:          
Investment grade $ 33,007  $ 74,896  $ 110,525  $ 37,271  $ 255,699 
Non-investment grade 11,254  30,197  45,994  15,197  102,642 
Total 44,261  105,093  156,519  52,468  358,341 
Total return swaps/options:          
Investment grade 26,711  64  78    26,853 
Non-investment grade 18,900  13,015  536  16  32,467 
Total 45,611  13,079  614  16  59,320 
Total credit derivatives $ 89,872  $ 118,172  $ 157,133  $ 52,484  $ 417,661 
December 31, 2020
Carrying Value
Credit default swaps:
Investment grade $ —  $ $ 35  $ 94  $ 130 
Non-investment grade 26  233  364  1,163  1,786 
Total 26  234  399  1,257  1,916 
Total return swaps/options:          
Investment grade 21  —  —  25 
Non-investment grade 345  —  —  —  345 
Total 366  —  —  370 
Total credit derivatives $ 392  $ 238  $ 399  $ 1,257  $ 2,286 
Credit-related notes:          
Investment grade $ —  $ —  $ —  $ 572  $ 572 
Non-investment grade 64  10  947  1,023 
Total credit-related notes $ 64  $ $ 10  $ 1,519  $ 1,595 
  Maximum Payout/Notional
Credit default swaps:
Investment grade $ 33,474  $ 75,731  $ 87,218  $ 16,822  $ 213,245 
Non-investment grade 13,664  28,770  35,978  9,852  88,264 
Total 47,138  104,501  123,196  26,674  301,509 
Total return swaps/options:          
Investment grade 30,961  1,061  77  —  32,099 
Non-investment grade 36,128  364  27  36,524 
Total 67,089  1,425  104  68,623 
Total credit derivatives $ 114,227  $ 105,926  $ 123,300  $ 26,679  $ 370,132 
The notional amount represents the maximum amount payable by the Corporation for most credit derivatives. However, the Corporation does not monitor its exposure to credit derivatives based solely on the notional amount because this measure does not take into consideration the probability of occurrence. As such, the notional amount is not a reliable indicator of the Corporation’s exposure to these contracts. Instead, a risk framework is used to define risk tolerances and establish limits so that certain credit risk-related losses occur within acceptable, predefined limits.
Credit-related notes in the table above include investments in securities issued by collateralized debt obligation (CDO), collateralized loan obligation (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
Certain of the Corporation’s derivative contracts contain credit risk-related contingent features, primarily in the form of ISDA master netting agreements and credit support documentation that enhance the creditworthiness of these instruments compared to other obligations of the respective counterparty with whom the Corporation has transacted. These contingent features may be for the benefit of the Corporation as well as its counterparties with respect to changes in the Corporation’s creditworthiness and the mark-to-market exposure under the derivative transactions. At September 30, 2021 and December 31, 2020, the Corporation held cash and securities collateral of $87.2 billion and $96.5 billion and posted cash and securities collateral of $73.7 billion and $88.6 billion in the normal course of business under derivative agreements, excluding cross-product margining agreements where clients are permitted to margin on a net basis for both derivative and secured financing arrangements.
In connection with certain over-the-counter derivative contracts and other trading agreements, the Corporation can be required to provide additional collateral or to terminate transactions with certain counterparties in the event of a downgrade of the senior debt ratings of the Corporation or certain subsidiaries. The amount of additional collateral required depends on the contract and is usually a fixed incremental amount and/or the market value of the exposure. For more information on credit-related contingent features and collateral, see Note 3 – Derivatives to the Consolidated Financial Statements of the Corporation’s 2020 Annual Report on Form 10-K.
At September 30, 2021, the amount of collateral, calculated based on the terms of the contracts, that the Corporation and certain subsidiaries could be required to post to counterparties but had not yet posted to counterparties was $2.4 billion, including $1.1 billion for Bank of America, National Association.
Some counterparties are currently able to unilaterally terminate certain contracts, or the Corporation or certain
subsidiaries may be required to take other action such as find a suitable replacement or obtain a guarantee. At September 30, 2021 and December 31, 2020, the liability recorded for these derivative contracts was not significant.
The table below presents the amount of additional collateral that would have been contractually required by derivative contracts and other trading agreements at September 30, 2021 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. The table also presents derivative liabilities that would be subject to unilateral termination by counterparties upon downgrade of the Corporation's or certain subsidiaries' long-term senior debt ratings.
Additional Collateral Required to be Posted and Derivative Liabilities Subject to Unilateral Termination Upon Downgrade
at September 30, 2021
(Dollars in millions) One
incremental
 notch
Second
incremental
 notch
Additional collateral required to be posted upon downgrade
Bank of America Corporation $ 342  $ 802 
Bank of America, N.A. and subsidiaries (1)
69  610 
Derivative liabilities subject to unilateral termination upon downgrade
Derivative liabilities $ 22  $ 764 
Collateral posted 559 
(1)Included in Bank of America Corporation collateral requirements in this table.
Valuation Adjustments on Derivatives
The table below presents credit valuation adjustment (CVA), DVA and FVA gains (losses) on derivatives (excluding the effect of any related hedge activities), which are recorded in market making and similar activities, for the three and nine months ended September 30, 2021 and 2020. For more information on the valuation adjustments on derivatives, see Note 3 – Derivatives to the Consolidated Financial Statements of the Corporation’s 2020 Annual Report on Form 10-K.
Valuation Adjustments Gains (Losses) on Derivatives (1)
Three Months Ended September 30
(Dollars in millions) 2021 2020
Derivative assets (CVA) $ 54  $ 174 
Derivative assets/liabilities (FVA)
19  27 
Derivative liabilities (DVA) (5) (105)
Nine Months Ended September 30
(Dollars in millions) 2021 2020
Derivative assets (CVA) $ 212  $ (334)
Derivative assets/liabilities (FVA)
34  (60)
Derivative liabilities (DVA) (13) 53 
(1)At September 30, 2021 and December 31, 2020, cumulative CVA reduced the derivative assets balance by $434 million and $646 million, cumulative FVA reduced the net derivatives balance by $143 million and $177 million, and cumulative DVA reduced the derivative liabilities balance by $296 million and $309 million.