Huntington National Bank 2014 Annual Report Download - page 184

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Derivatives used in trading activities
Various derivative financial instruments are offered to enable customers to meet their financing and investing objectives and for
their risk management purposes. Derivative financial instruments used in trading activities consisted of commodity, interest rate, and
foreign exchange contracts. The derivative contracts grant the option holder the right to buy or sell an underlying financial instrument
for a predetermined price before the contract expires. Huntington may enter into offsetting third-party contracts with approved,
reputable counterparties with substantially matching terms and currencies in order to economically hedge significant exposure related
to derivatives used in trading activities.
Commodity derivatives help the customer hedge risk and reduce exposure to price changes in commodities. Activity related to
commodity derivatives is concentrated in large corporate, middle market, and energy sectors. Commodities markets trade and include
oil, refined products, natural gas, coal, as well as industrial and precious metals. The energy sector focuses on oil, gas, and coal.
Based on policy limits and the relatively small notional amounts of commodity activity, we do not anticipate any meaningful price risk
for our commodity derivatives. Interest rate options grant the option holder the right to buy or sell an underlying financial instrument
for a predetermined price before the contract expires. Interest rate futures are commitments to either purchase or sell a financial
instrument at a future date for a specified price or yield and may be settled in cash or through delivery of the underlying financial
instrument. Interest rate caps and floors are option-based contracts that entitle the buyer to receive cash payments based on the
difference between a designated reference rate and a strike price, applied to a notional amount. Written options, primarily caps, expose
Huntington to market risk but not credit risk. Purchased options contain both credit and market risk. The interest rate risk of these
customer derivatives is mitigated by entering into similar derivatives having offsetting terms with other counterparties. The credit risk
to these customers is evaluated and included in the calculation of fair value. Foreign currency derivatives help the customer hedge risk
and reduce exposure to fluctuations in exchange rates. Transactions are primarily in liquid currencies with Canadian dollars and Euros
comprising a majority of all transactions.
The net fair values of these derivative financial instruments used in trading activities, for which the gross amounts are included in
accrued income and other assets or accrued expenses and other liabilities at December 31, 2014 and 2013, were $74.4 million and
$80.5 million, respectively. The total notional values of derivative financial instruments used by Huntington on behalf of customers,
including offsetting derivatives, were $14.4 billion and $14.3 billion at December 31, 2014 and 2013, respectively. Huntington’s
credit risks from derivatives used for trading purposes were $219.3 million and $160.4 million at the same dates, respectively.
Financial assets and liabilities that are offset in the Consolidated Balance Sheets
Huntington records derivatives at fair value as further described in Note 17. Huntington records these derivatives net of any
master netting arrangement in the Consolidated Balance Sheets. Collateral agreements are regularly entered into as part of the
underlying derivative agreements with Huntington’s counterparties to mitigate counterparty credit risk.
All derivatives are carried on the Consolidated Balance Sheets at fair value. Derivative balances are presented on a net basis
taking into consideration the effects of legally enforceable master netting agreements. Cash collateral exchanged with counterparties
is also netted against the applicable derivative fair values. Huntington enters into derivative transactions with two primary groups:
broker-dealers and banks, and Huntington’s customers. Different methods are utilized for managing counterparty credit exposure and
credit risk for each of these groups.
Huntington enters into transactions with broker-dealers and banks for various risk management purposes. These types of
transactions generally are high dollar volume. Huntington enters into bilateral collateral and master netting agreements with these
counterparties, and routinely exchange cash and high quality securities collateral with these counterparties. Huntington enters into
transactions with customers to meet their financing, investing, payment and risk management needs. These types of transactions
generally are low dollar volume. Huntington generally enters into master netting agreements with customer counterparties, however
collateral is generally not exchanged with customer counterparties.
At December 31, 2014 and December 31, 2013, aggregate credit risk associated with these derivatives, net of collateral that has
been pledged by the counterparty, was $19.5 million and $15.2 million, respectively. The credit risk associated with interest rate
swaps is calculated after considering master netting agreements with broker-dealers and banks.
At December 31, 2014, Huntington pledged $130.9 million of investment securities and cash collateral to counterparties, while
other counterparties pledged $130.0 million of investment securities and cash collateral to Huntington to satisfy collateral netting
agreements. In the event of credit downgrades, Huntington would not be required to provide additional collateral.