SunTrust 2009 Annual Report Download - page 145

SUNTRUST BANKS, INC.
Notes to Consolidated Financial Statements (Continued)
to risk of its counterparties were $3.5 billion, representing the net of $4.6 billion in derivative gains by counterparty, netted
by counterparty where formal netting arrangements exist, adjusted for collateral of $1.1 billion that the Company holds in
relation to these gain positions.
Derivative instruments are primarily transacted in the institutional dealer market and priced with observable market
assumptions at a mid-market valuation point, with appropriate valuation adjustments for liquidity and credit risk. For
purposes of valuation adjustments to its derivative positions, the Company has evaluated liquidity premiums that may be
demanded by market participants, as well as the credit risk of its counterparties and its own credit. The Company has
considered factors such as the likelihood of default by itself and its counterparties, its net exposures, and remaining
maturities in determining the appropriate fair value adjustments to record. Generally, the expected loss of each counterparty
is estimated using the Company’s proprietary internal risk rating system. The risk rating system utilizes counterparty-specific
probabilities of default and loss given default estimates to derive the expected loss. For counterparties that are rated by
national rating agencies, those ratings are also considered in estimating the credit risk. In addition, counterparty exposure is
evaluated by netting positions that are subject to master netting arrangements, as well as considering the amount of
marketable collateral securing the position. Specifically approved counterparties and exposure limits are defined. The
approved counterparties are regularly reviewed and appropriate business action is taken to adjust the exposure to certain
counterparties, as necessary. This approach used to estimate exposures to counterparties is also used by the Company to
estimate its own credit risk on derivative liability positions. To date, no material losses due to a counterparty’s inability to
pay any net uncollateralized position has been incurred. The Company adjusted the net fair value of its derivative contracts
for estimates of net counterparty credit risk by approximately $24.9 million and $23.1 million as of December 31, 2009 and
December 31, 2008, respectively.
The majority of the Company’s derivatives contain contingencies that relate to the creditworthiness of the Bank. These are
contained in industry standard master trading agreements as events of default. Should the Bank be in default under any of
these provisions, the Bank’s counterparties would be permitted under such master agreements to close-out net at amounts
that would approximate the then-fair values of the derivatives and the netting of the amounts would produce a single sum due
by one party to the other. The counterparties would have the right to apply any collateral posted by the Bank against any net
amount owed by the Bank. In addition, of the Company’s total derivative liability positions, approximately $1.3 billion in
fair value, contain provisions conditioned on downgrades of the Bank’s credit rating. These provisions, if triggered, would
either give rise to an ATE that permits the counterparties to close-out net and apply collateral or, where a CSA is present,
require the Bank to post additional collateral. Collateral posting requirements generally result from differences in the fair
value of the net derivative liability compared to specified collateral thresholds at different ratings levels of the Bank, both of
which are negotiated provisions within each CSA. At December 31, 2009, the Bank carried senior long-term debt ratings of
A-/A2 from two of the major ratings agencies. For illustrative purposes, if the Bank were downgraded to BBB-/Baa3, ATEs
would be triggered in derivative liability contracts that had a fair value of approximately $25.5 million at December 31,
2009, against which the Bank had posted collateral of approximately $10.4 million; ATEs do not exist at lower ratings levels.
At December 31, 2009, approximately $1.3 billion in fair value of derivative liabilities are subject to CSAs, against which the
Bank has posted approximately $1.1 billion in collateral. If requested by the counterparty per the terms of the CSA, the Bank
would be required to post estimated additional collateral against these contracts of approximately $658.9 million if the Bank
were downgraded to BBB-/Baa3, and any further downgrades to BB+/Ba1 or below would require the posting of an
additional $20.0 million. Such collateral posting amounts may be more or less than the Bank’s estimates based on the
specified terms of each CSA as to the timing of a collateral calculation and whether the Bank and its counterparties differ on
their estimates of the fair values of the derivatives or collateral.
Derivatives also expose the Company to market risk. Market risk is the adverse effect that a change in market factors, such as
interest rates, currency rates, equity prices, or implied volatility, has on the value of a derivative. The Company manages the
market risk associated with its derivatives by establishing and monitoring limits on the types and degree of risk that may be
undertaken. The Company continually measures this risk by using a VAR methodology.
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