PNC Bank 2015 Annual Report Download - page 203

Further detail regarding the gains (losses) on derivatives not designated in hedging relationships is presented in the following table:
Table 116: Gains (Losses) on Derivatives Not Designated As Hedging Instruments under GAAP
Year ended December 31
In millions 2015 2014 2013
Derivatives used for residential mortgage banking activities:
Residential mortgage servicing
Interest rate contracts $103 $ 240 $(223)
Loan sales
Interest rate contracts 83 (3) 286
Gains (losses) included in residential mortgage banking activities (a) $186 $ 237 $ 63
Derivatives used for commercial mortgage banking activities:
Interest rate contracts (b) (c) $ 34 $ 82 $ 12
Credit contracts (c) (1) (2)
Gains (losses) from commercial mortgage banking activities $ 34 $ 81 $ 10
Derivatives used for customer-related activities:
Interest rate contracts $ 71 $ 41 $ 149
Foreign exchange contracts 79 47 80
Equity contracts (3)
Credit contracts (1) (1) (1)
Gains (losses) from customer-related activities (c) $149 $ 87 $ 225
Derivatives used for other risk management activities:
Interest rate contracts $ (19) $ 3
Foreign exchange contracts $281 188 2
Other contracts (d) 1 (134) (168)
Gains (losses) from other risk management activities (c) $282 $ 35 $(163)
Total gains (losses) from derivatives not designated as hedging instruments $651 $ 440 $ 135
(a) Included in Residential mortgage noninterest income.
(b) Included in Corporate services noninterest income.
(c) Included in Other noninterest income.
(d) Includes BlackRock LTIP funding obligation and the swaps entered into in connection with sales of a portion of Visa Class B common shares.
Credit Derivatives – Risk Participation Agreements
We have entered into risk participation agreements to share
some of the credit exposure with other counterparties related
to interest rate derivative contracts or to take on credit
exposure to generate revenue. The notional amount of risk
participation agreements sold was $2.5 billion at
December 31, 2015 and 2.8 billion at December 31, 2014.
Assuming all underlying third party customers referenced in
the swap contracts defaulted at December 31, 2015, the
exposure from these agreements would be $122 million based
on the fair value of the underlying swaps, compared with $124
million at December 31, 2014.
Offsetting, Counterparty Credit Risk, and Contingent
Features
We, generally, utilize a net presentation on the Consolidated
Balance Sheet for those derivative financial instruments
entered into with counterparties under legally enforceable
master netting agreements. The master netting agreements
reduce credit risk by permitting the closeout netting of all
outstanding derivative instruments under the master netting
agreement with the same counterparty upon the occurrence of
an event of default. The master netting agreement also may
require the exchange of cash or marketable securities to
collateralize either party’s net position. In certain cases, minimum
thresholds must be exceeded before any collateral is exchanged.
Collateral is typically exchanged daily based on the net fair value
of the positions with the counterparty as of the preceding day.
Collateral representing initial margin, which is based on potential
future exposure, is also required to be pledged by us in relation to
derivative instruments with central clearing house counterparties.
Any cash collateral exchanged with counterparties under these
master netting agreements is also netted, when appropriate,
against the applicable derivative fair values on the Consolidated
Balance Sheet. However, the fair value of any securities held or
pledged is not included in the net presentation on the balance
sheet. In order for derivative instruments under a master netting
agreement to be eligible for closeout netting under GAAP, we
must conduct sufficient legal review to conclude with a well-
founded basis that the offsetting rights included in the master
netting agreement would be legally enforceable upon an event of
default, including upon an event of bankruptcy, insolvency, or a
similar proceeding of the counterparty. Enforceability is
evidenced by a legal opinion that supports, with sufficient
confidence, the enforceability of the master netting agreement in
such circumstances.
The PNC Financial Services Group, Inc. – Form 10-K 185