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DERIVATIVES | 9 Months Ended
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Sep. 30, 2018
Derivative Instruments and Hedging Activities Disclosure [Abstract] |
DERIVATIVES | DERIVATIVES In the normal course of business, the Company enters into a variety of derivative transactions in order to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates and foreign currency exchange rates. These transactions include interest rate swap contracts, interest rate options, foreign exchange contracts, residential loan commitment rate locks, interest rate future contracts, swaptions, forward commitments to sell to-be-announced mortgage securities (“TBAs”), forward sale contracts and purchase options. The Company monitors the results of each transaction to ensure that management’s intent is satisfied. The Company does not use derivatives for speculative purposes. The Company’s derivative instruments are recognized on the Consolidated Balance Sheets at fair value. Information regarding the valuation methodology and inputs used to estimate the fair value of the Company’s derivative instruments is described in Note 13 “Fair Value Measurements.” The following table presents derivative instruments included on the Consolidated Balance Sheets in derivative assets and derivative liabilities:
| September 30, 2018 |  | December 31, 2017
(in millions) | Notional Amount(1) | Derivative Assets | Derivative Liabilities |  | Notional Amount(1) | Derivative Assets | Derivative Liabilities
Derivatives designated as hedging instruments: |  |  |  |  |  |  |
Interest rate contracts |  | $10,050 |  |  | $5 |  |  | $— |  |  |  | $13,300 |  |  | $— |  |  | $— |
Derivatives not designated as hedging instruments: |  |  |  |  |  |  |
Interest rate contracts | 111,837 |  | 160 |  | 469 |  |  | 80,180 |  | 538 |  | 379 |
Foreign exchange contracts | 10,346 |  | 116 |  | 105 |  |  | 9,882 |  | 148 |  | 149 |
Other contracts | 5,201 |  | 19 |  | 1 |  |  | 1,039 |  | 7 |  | 5 |
Total derivatives not designated as hedging instruments |  | 295 |  | 575 |  |  |  | 693 |  | 533 |
Gross derivative fair values |  | 300 |  | 575 |  |  |  | 693 |  | 533 |
Less: Gross amounts offset in the Consolidated Balance Sheets (2) |  | (85 | ) | (85 | ) |  |  | (72 | ) | (72 | )
Less: Cash collateral applied (2) |  | (42 | ) | (41 | ) |  |  | (4 | ) | (151 | )
Total net derivative fair values presented in the Consolidated Balance Sheets |  |  | $173 |  |  | $449 |  |  |  |  | $617 |  |  | $310 |
(1) The notional or contractual amount of interest rate derivatives and foreign exchange contracts is the amount upon which interest and other payments under the contract are based. For interest rate contracts, the notional amount is typically not exchanged. Therefore, notional amounts should not be taken as the measure of credit or market risk, as they do not measure the true economic risk of these contracts. (2) Amounts represent the impact of enforceable master netting agreements that allow the Company to net settle positive and negative positions. The Company’s derivative transactions are internally divided into three sub-groups: institutional, customer and residential loan. The Company has certain derivative transactions which are designated as fair value or cash flow hedges, described as follows: Derivatives designated as hedging instruments The Company’s institutional derivatives portfolio qualifies for hedge accounting treatment. This includes interest rate swaps that are designated as highly effective fair value and cash flow hedging relationships. The Company formally documents at inception all hedging relationships, as well as risk management objectives and strategies for undertaking various accounting hedges. Additionally, the Company uses dollar offset or regression analysis at the hedge’s inception, and monthly thereafter, to assess whether the derivatives are expected to be, or have been, highly effective in offsetting changes in the hedged item’s expected cash flows. The Company discontinues hedge accounting treatment when it is determined that a derivative is not expected to be, or has ceased to be, effective as a hedge and then reflects changes in fair value in earnings after termination of the hedge relationship. Fair value hedges The Company has outstanding interest rate swap agreements to manage the interest rate exposure on its medium-term borrowings. The change in value of fair value hedges, to the extent that the hedging relationship is effective, is recorded through other income and offset against the change in the fair value of the hedged item. The following table presents the effect on other income of fair value hedges described above:
| Amounts Recognized in Other Income for the
| Three Months Ended September 30, 2018 |  | Three Months Ended September 30, 2017
(in millions) | Derivative | Hedged Item | Hedge Ineffectiveness |  | Derivative | Hedged Item | Hedge Ineffectiveness
Hedges of interest rate risk on borrowings using interest rate swaps |  | ($6 | ) |  | $7 |  |  | $1 |  |  |  | ($5 | ) |  | $4 |  |  | ($1 | )
| Amounts Recognized in Other Income for the
| Nine Months Ended September 30, 2018 |  | Nine Months Ended September 30, 2017
(in millions) | Derivative | Hedged Item | Hedge Ineffectiveness |  | Derivative | Hedged Item | Hedge Ineffectiveness
Hedges of interest rate risk on borrowings using interest rate swaps |  | ($32 | ) |  | $31 |  |  | ($1 | ) |  |  | $5 |  |  | ($5 | ) |  | $— |
Cash flow hedges The Company has outstanding interest rate swap agreements designed to hedge a portion of the Company’s floating rate assets and financing liabilities (including its borrowed funds). All of these swaps have been deemed as highly effective cash flow hedges. The effective portion of the hedging gains and losses associated with these hedges are recorded in OCI; the ineffective portion of the hedging gains and losses is recorded in earnings (other income). Hedging gains and losses on derivative contracts reclassified from OCI to current period earnings are included in the line item in the accompanying Consolidated Statements of Operations in which the hedged item is recorded and in the same period that the hedged item affects earnings. During the next 12 months, there are $17 million in pre-tax net losses on derivative instruments included in OCI expected to be reclassified to net interest income in the Consolidated Statements of Operations. Hedging gains and losses associated with the Company’s cash flow hedges are immediately reclassified from OCI to current period earnings (other income) if it becomes probable that the hedged forecasted transactions will not occur during the originally specified time period. The following table presents the effect of cash flow hedges on net income and stockholders' equity:
| Amounts Recognized for the
| Three Months Ended September 30, |  | Nine Months Ended September 30,
(in millions) | 2018 |  |  | 2017 |  |  | 2018 |  |  | 2017 |
Effective portion of (loss) gain recognized in OCI (1) |  | ($35 | ) |  |  | ($2 | ) |  |  | ($122 | ) |  |  | $35 |
Amount of net (loss) gain reclassified from OCI to interest income (2) | (17 | ) |  | 3 |  |  | (36 | ) |  | 23 |
Amount of net gain (loss) reclassified from OCI to interest expense (2) | 3 |  |  | 1 |  |  | 11 |  |  | (2 | )
(1) The cumulative effective gains and losses on the Company’s cash flow hedging activities are included on the accumulated other comprehensive loss line item on the Consolidated Balance Sheets. (2) This amount includes both (i) the amortization of effective gains and losses associated with the Company’s terminated cash flow hedges and (ii) the current reporting period’s interest settlements realized on the Company’s active cash flow hedges. Both (i) and (ii) were previously included on the accumulated other comprehensive loss line item on the Consolidated Balance Sheets and were subsequently recorded as adjustments to the interest income or expense of the underlying hedged item. Derivatives not designated as hedging instruments Economic hedges The Company’s customer derivatives are recorded on the Consolidated Balance Sheets at fair value. These include interest rate and foreign exchange derivative contracts that are designed to meet the hedging and financing needs of the Company’s customers. The mark-to-market gains and losses associated with the customer derivatives are mitigated by mark-to-market gains and losses on interest rate and foreign exchange derivative contracts transacted. The Company also purchases interest rate floors primarily to hedge the exposure related to customer deposit products that have embedded minimum interest rate guarantees. The Company utilizes interest rate floors in non-qualifying hedging relationships. The Company’s residential loan derivatives (including residential loan commitments and forward sales contracts) are recorded on the Consolidated Balance Sheets at fair value. The Company also uses derivatives to hedge the risk of changes in the fair value of its residential MSR portfolio measured at fair value. Certain residential MSRs are accounted for at fair value with changes in the fair value influenced primarily by changes in interest rates. Derivatives used to hedge the fair value of residential MSRs include TBAs, interest rate swaptions, interest rate futures and interest rate swaps. The following table presents the effect of economic hedges on noninterest income:
|  | Amounts Recognized in Noninterest Income for the
| Affected Line Item in the Consolidated Statements of Operations | Three Months Ended September 30, |  | Nine Months Ended September 30,
(in millions) | 2018 |  |  | 2017 |  |  | 2018 |  |  | 2017 |
Economic Hedge Type |  |  |  |  |  |  |  |
Customer interest rate contracts | Foreign exchange and interest rate products |  | ($84 | ) |  |  | $12 |  |  |  | ($363 | ) |  |  | $92 |
Customer foreign exchange contracts | Foreign exchange and interest rate products | 30 |  |  | 61 |  |  | (27 | ) |  | 157 |
Derivatives transactions to hedge interest rate risk | Foreign exchange and interest rate products | 97 |  |  | (2 | ) |  | 403 |  |  | (58 | )
Derivatives transactions to hedge foreign exchange risk | Foreign exchange and interest rate products | 24 |  |  | (55 | ) |  | 99 |  |  | (140 | )
Residential loan commitments | Mortgage banking fees | 6 |  |  | — |  |  | 6 |  |  | 3 |
Forward sale contracts | Mortgage banking fees | (13 | ) |  | (1 | ) |  | (15 | ) |  | (7 | )
Interest rate derivative contracts used to hedge residential MSRs | Mortgage banking fees | (3 | ) |  | — |  |  | (3 | ) |  | — |
Total |  |  | $57 |  |  |  | $15 |  |  |  | $100 |  |  |  | $47 |

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- Definition The entire disclosure for derivative instruments and hedging activities including, but not limited to, risk management strategies, non-hedging derivative instruments, assets, liabilities, revenue and expenses, and methodologies and assumptions used in determining the amounts. + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -URI http://asc.fasb.org/topic&trid=2229140 + Details
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