US Bank 2015 Annual Report Download - page 130

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Cash Flow Hedges These derivatives are interest rate swaps
the Company uses to hedge the forecasted cash flows from
its underlying variable-rate loans and debt. Changes in the fair
value of derivatives designated as cash flow hedges are
recorded in other comprehensive income (loss) until the cash
flows of the hedged items are realized. If a derivative
designated as a cash flow hedge is terminated or ceases to
be highly effective, the gain or loss in other comprehensive
income (loss) is amortized to earnings over the period the
forecasted hedged transactions impact earnings. If a hedged
forecasted transaction is no longer probable, hedge
accounting is ceased and any gain or loss included in other
comprehensive income (loss) is reported in earnings
immediately, unless the forecasted transaction is at least
reasonably possible of occurring, whereby the amounts
remain within other comprehensive income (loss). At
December 31, 2015, the Company had $67 million (net-of-
tax) of realized and unrealized losses on derivatives classified
as cash flow hedges recorded in other comprehensive
income (loss), compared with $172 million (net-of-tax) of
realized and unrealized losses at December 31, 2014. The
estimated amount to be reclassified from other
comprehensive income (loss) into earnings during the next 12
months is a loss of $68 million (net-of-tax). This amount
includes gains and losses related to hedges that were
terminated early for which the forecasted transactions are still
probable. All cash flow hedges were highly effective for the
year ended December 31, 2015, and the change in fair value
attributed to hedge ineffectiveness was not material.
Net Investment Hedges The Company uses forward
commitments to sell specified amounts of certain foreign
currencies, and occasionally non-derivative debt instruments,
to hedge the volatility of its investment in foreign businesses
driven by fluctuations in foreign currency exchange rates. The
ineffectiveness on all net investment hedges was not material
for the year ended December 31, 2015. There were no non-
derivative debt instruments designated as net investment
hedges at December 31, 2015 or 2014.
Other Derivative Positions The Company enters into free-
standing derivatives to mitigate interest rate risk and for other
risk management purposes. These derivatives include forward
commitments to sell to-be-announced securities (“TBAs”) and
other commitments to sell residential mortgage loans, which
are used to economically hedge the interest rate risk related
to residential MLHFS and unfunded mortgage loan
commitments. The Company also enters into interest rate
swaps, forward commitments to buy TBAs, U.S. Treasury
and Eurodollar futures and options on U.S. Treasury futures
to economically hedge the change in the fair value of the
Company’s MSRs. The Company also enters into foreign
currency forwards to economically hedge remeasurement
gains and losses the Company recognizes on foreign
currency denominated assets and liabilities. In addition, the
Company acts as a seller and buyer of interest rate derivatives
and foreign exchange contracts for its customers. The
Company mitigates the market and liquidity risk associated
with these customer derivatives by entering into similar
offsetting positions with broker-dealers, or on a portfolio basis
by entering into other derivative or non-derivative financial
instruments that partially or fully offset the exposure from
these customer-related positions. The Company’s customer
derivatives and related hedges are monitored and reviewed by
the Company’s Market Risk Committee, which establishes
policies for market risk management, including exposure limits
for each portfolio. The Company also has derivative contracts
that are created through its operations, including
commitments to originate MLHFS and swap agreements
related to the sale of a portion of its Class B common shares
of Visa Inc. Refer to Note 22 for further information on these
swap agreements.
For additional information on the Company’s purpose for
entering into derivative transactions and its overall risk
management strategies, refer to “Management Discussion
and Analysis — Use of Derivatives to Manage Interest Rate
and Other Risks” which is incorporated by reference into
these Notes to Consolidated Financial Statements.
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