PNC Bank 2014 Annual Report Download - page 140

Derivative Instruments And Hedging Activities
We use a variety of financial derivatives as part of our overall
asset and liability risk management process to help manage
exposure to interest rate, market and credit risk inherent in our
business activities. Interest rate and total return swaps,
swaptions, interest rate caps and floors, options, forwards, and
futures contracts are the primary instruments we use for
interest rate risk management.
Financial derivatives involve, to varying degrees, interest rate,
market and credit risk. We manage these risks as part of our
asset and liability management process and through credit
policies and procedures.
We recognize all derivative instruments at fair value as either
Other assets or Other liabilities on the Consolidated Balance
Sheet and the related cash flows in the Operating Activities
section of the Consolidated Statement Of Cash Flows.
Adjustments for counterparty credit risk are included in the
determination of fair value. The accounting for changes in the
fair value of a derivative instrument depends on whether it has
been designated and qualifies as part of a cash flow or net
investment hedging relationship. For all other derivatives,
changes in fair value are recognized in earnings.
We utilize a net presentation for derivative instruments on the
Consolidated Balance Sheet taking into consideration the
effects of legally enforceable master netting agreements. Cash
collateral exchanged with counterparties is also netted against
the applicable derivative exposures by offsetting obligations to
return, or rights to reclaim, cash collateral against the fair
values of the net derivatives being collateralized.
For those derivative instruments that are designated and
qualify as accounting hedges, we designate the hedging
instrument, based on the exposure being hedged, as a fair
value hedge, a cash flow hedge or a hedge of the net
investment in a foreign operation.
We formally document the relationship between the hedging
instruments and hedged items, as well as the risk management
objective and strategy, before undertaking an accounting
hedge. To qualify for hedge accounting, the derivatives and
related hedged items must be designated as a hedge at
inception of the hedge relationship. For accounting hedge
relationships, we formally assess, both at the inception of the
hedge and on an ongoing basis, if the derivatives are highly
effective in offsetting designated changes in the fair value or
cash flows of the hedged item. If it is determined that the
derivative instrument is not highly effective, hedge accounting
is discontinued.
For derivatives that are designated as fair value hedges (i.e.,
hedging the exposure to changes in the fair value of an asset
or a liability attributable to a particular risk, such as changes
in LIBOR), changes in the fair value of the hedging
instrument are recognized in earnings and offset by also
recognizing in earnings the changes in the fair value of the
hedged item attributable to the hedged risk. To the extent the
change in fair value of the derivative does not offset the
change in fair value of the hedged item, the difference or
ineffectiveness is reflected in the Consolidated Income
Statement in the same financial statement category as the
hedged item.
For derivatives designated as cash flow hedges (i.e., hedging
the exposure to variability in expected future cash flows), the
effective portions of the gain or loss on derivatives are
reported as a component of Accumulated other comprehensive
income (loss) and subsequently reclassified to income in the
same period or periods during which the hedged transaction
affects earnings. The change in fair value attributable to the
ineffective portion of the hedging instrument is recognized
immediately in Noninterest income.
For derivatives designated as a hedge of net investment in a
foreign operation, the effective portions of the gain or loss on
the derivatives are reported as a component of Accumulated
other comprehensive income (loss). The change in fair value
attributable to the ineffective portion of the hedging
instrument is recognized immediately in Noninterest income.
We discontinue hedge accounting when it is determined that
the derivative no longer qualifies as an effective hedge; the
derivative expires or is sold, terminated or exercised; or the
derivative is de-designated as a fair value or cash flow hedge
or, for a cash flow hedge, it is no longer probable that the
forecasted transaction will occur by the end of the originally
specified time period. If we determine that the derivative no
longer qualifies as a fair value or cash flow hedge and hedge
accounting is discontinued, the derivative will continue to be
recorded on the balance sheet at its fair value with changes in
fair value included in current earnings. For a discontinued fair
value hedge, the previously hedged item is no longer adjusted
for changes in fair value.
When hedge accounting is discontinued because it is no longer
probable that a forecasted transaction will occur, the
derivative will continue to be recorded on the balance sheet at
its fair value with changes in fair value included in current
earnings, and the gains and losses in Accumulated other
comprehensive income (loss) will be recognized immediately
into earnings. When we discontinue hedge accounting because
the hedging instrument is sold, terminated or no longer
designated, the amount reported in Accumulated other
comprehensive income (loss) up to the date of sale,
termination or de-designation continues to be reported in
Other comprehensive income or loss until the forecasted
transaction affects earnings. We did not terminate any cash
flow hedges in 2014, 2013 or 2012 due to a determination that
a forecasted transaction was no longer probable of occurring.
122 The PNC Financial Services Group, Inc. – Form 10-K