SunTrust 2012 Annual Report Download - page 172

Notes to Consolidated Financial Statements (Continued)
156
of all positions with that counterparty if an asset, adjusted for held collateral. As of December 31, 2012, net derivative asset
positions were $1.8 billion, representing the $2.6 billion of derivative gains adjusted for collateral of $0.8 billion that the
Company held in relation to these gain positions. As of December 31, 2011, net derivative asset positions were $2.4 billion,
representing $3.6 billion of derivative gains, adjusted for collateral of $1.2 billion that the Company held in relation to these
gain positions.
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 associated with its derivatives designated as trading instruments
using a VAR methodology.
Derivative instruments are 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 recognize.
Generally, the expected loss of each counterparty is estimated using the Company’s internal risk rating system. The risk rating
system utilizes counterparty-specific PD and LGD 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. Additionally, counterparty exposure is
evaluated by offsetting positions that are subject to master netting arrangements, as well as considering the amount of marketable
collateral securing the position. All counterparties and defined exposure limits are explicitly approved. Counterparties are
regularly reviewed and appropriate business action is taken to adjust the exposure to certain counterparties, as necessary. This
approach is also used by the Company to estimate its own credit risk on derivative liability positions. The Company adjusted
the net fair value of its derivative contracts for estimates of net counterparty credit risk by approximately $29 million and $36
million as of December 31, 2012 and 2011, respectively.
The majority of the Company’s derivatives contain contingencies that relate to the creditworthiness of the Bank. These
contingencies, which are contained in industry standard master netting agreements, may be considered events of default.
Should the Bank be in default under any of these provisions, the Bank’s counterparties would be permitted under such master
netting agreements to close-out net at amounts that would approximate the then-fair values of the derivatives and the offsetting
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. Additionally, certain of the Company’s derivative
liability positions, totaling $1.3 billion in fair value at December 31, 2012 and $1.2 billion at December 31, 2011, 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, 2012, the Bank carried senior long-term debt ratings of A3/BBB+ from three
of the major ratings agencies. At the current rating level, ATEs have been triggered for approximately $9 million in fair value
liabilities as of December 31, 2012. For illustrative purposes, if the Bank were downgraded to Baa3/BBB-, ATEs would be
triggered in derivative liability contracts that had a total fair value of $3 million at December 31, 2012; ATEs do not exist at
lower ratings levels. At December 31, 2012, $1.3 billion in fair value of derivative liabilities were subject to CSAs, against
which the Bank has posted $1.3 billion in collateral, primarily in the form of cash. If requested by the counterparty pursuant
to the terms of the CSA, the Bank would be required to post estimated additional collateral against these contracts at
December 31, 2012, of $5 million if the Bank were downgraded to Baa3/BBB-, and any further downgrades to Ba1/BB+ or
below would require the posting of an additional $3 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.
Notional and Fair Value of Derivative Positions
The following tables present the Company’s derivative positions as of December 31, 2012 and 2011. The notional amounts
in the tables are presented on a gross basis and have been classified within Asset Derivatives or Liability Derivatives based
on the estimated fair value of the individual contract at December 31, 2012 and 2011. Gross positive and gross negative fair
value amounts associated with respective notional amounts are presented without consideration of any netting agreements,
including collateral arrangements. For contracts constituting a combination of options that contain a written option and a
purchased option (such as a collar), the notional amount of each option is presented separately, with the purchased notional
amount generally being presented as an Asset Derivative and the written notional amount being presented as a Liability
Derivative. For contracts that contain a combination of options, the fair value is generally presented as a single value with the