SunTrust 2009 Annual Report Download - page 148

SUNTRUST BANKS, INC.
Notes to Consolidated Financial Statements (Continued)
Credit Derivatives
As part of its trading businesses, the Company enters into contracts that are, in form or substance, written guarantees:
specifically, CDS, swap participations, and TRS. The Company accounts for these contracts as derivative instruments
and, accordingly, records these contracts at fair value, with changes in fair value recorded in trading account profits and
commissions.
The Company writes CDS, which are agreements under which the Company receives premium payments from its
counterparty for protection against an event of default of a reference asset. In the event of default under the CDS, the
Company would either net cash settle or make a cash payment to its counterparty and take delivery of the defaulted
reference asset, from which the Company may recover all, a portion, or none of the credit loss, depending on the
performance of the reference asset. Events of default, as defined in the CDS agreements, are generally triggered upon
the failure to pay and similar events related to the issuer(s) of the reference asset. As of December 31, 2009, all written
CDS contracts reference single name corporate credits or corporate credit indices. When the Company has written CDS,
it has generally entered into offsetting CDS for the underlying reference asset, under which the Company paid a
premium to its counterparty for protection against an event of default on the reference asset. The counterparties to these
purchased CDS are of high creditworthiness and have ISDA agreements in place that subject the CDS to master netting
provisions, thereby mitigating the risk of non-payment to the Company. As such, at December 31, 2009, the Company
does not have any significant risk of making a non-recoverable payment on any written CDS. During 2009 and 2008,
the only instances of default on written CDS were driven by credit indices with constituent credit default. In all cases
where the Company made resulting cash payments to settle, the Company collected like amounts from the
counterparties to the offsetting purchased CDS. At December 31, 2009, the written CDS had remaining terms of
approximately three months to five years. The maximum guarantees outstanding at December 31, 2009 and
December 31, 2008, as measured by the gross notional amounts of written CDS, were $129.5 million and $190.8
million, respectively. At December 31, 2009 and December 31, 2008, the gross notional amounts of purchased CDS
contracts, which represent benefits to, rather than obligations of, the Company, were $184.5 million and $245.2 million,
respectively. The fair values of the written CDS were $1.8 million and $34.7 million at December 31, 2009 and
December 31, 2008, respectively, and the fair values of the purchased CDS were $4.3 million and $45.8 million at
December 31, 2009, and December 31, 2008, respectively.
The Company writes swap participations, which are credit derivatives whereby the Company has guaranteed payment to
a dealer counterparty in the event that the counterparty experiences a loss on a derivative instrument, such as an interest
rate swap, due to a failure to pay by the counterparty’s customer (the “obligor”) on that derivative instrument. The
Company monitors its payment risk on its swap participations by monitoring the creditworthiness of the obligors, which
is based on the normal credit review process the Company would have performed had it entered into the derivative
instruments directly with the obligors. The obligors are all corporations or partnerships. However, the Company
continues to monitor the creditworthiness of its obligors and the likelihood of payment could change at any time due to
unforeseen circumstances. To date, no material losses have been incurred related to the Company’s written swap
participations. At December 31, 2009, the remaining terms on these swap participations generally ranged from one
month to nine years, with a weighted average on the maximum estimated exposure of 3.2 years. The Company’s
maximum estimated exposure to written swap participations, as measured by projecting a maximum value of the
guaranteed derivative instruments based on interest rate curve simulations and assuming 100% default by all obligors on
the maximum values, was approximately $83.3 million and $125.7 million at December 31, 2009 and December 31,
2008, respectively. The fair values of the written swap participations were de minimis at December 31, 2009 and
December 31, 2008. As part of its trading activities, the Company may enter into purchased swap participations, but
such activity is not matched, as discussed herein related to CDS or TRS.
The Company has also entered into TRS contracts on loans. The Company’s TRS business consists of matched trades,
such that when the Company pays depreciation on one TRS, it receives the same depreciation on the matched TRS. As
such, the Company does not have any long or short exposure, other than credit risk of its counterparty, which is
managed through collateralization. The Company typically receives initial cash collateral from the counterparty upon
entering into the TRS and is entitled to additional collateral as the fair value of the underlying reference assets
deteriorate. At December 31, 2008, there was $602.1 million of outstanding and offsetting TRS notional balances. The
fair values of the TRS derivative assets and liabilities were $171.0 million and $166.6 million at December 31, 2008,
respectively, and related collateral held at December 31, 2008 was $296.8 million. As of December 31, 2008, the
Company had decided to temporarily suspend its TRS business and the Company has unwound its positions as of
December 31, 2009. The Company did not incur any losses on these unwinds.
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