KeyBank 2013 Annual Report Download - page 177

/credit risk is the risk of loss arising from an obligor’s inability or failure to meet contractual payment or
performance terms; and
/foreign exchange risk is the risk that an exchange rate will adversely affect the fair value of a financial
instrument.
Derivative assets and liabilities are recorded at fair value on the balance sheet, after taking into account the
effects of bilateral collateral and master netting agreements. These agreements allow us to settle all derivative
contracts held with a single counterparty on a net basis, and to offset net derivative positions with related cash
collateral, where applicable. As a result, we could have derivative contracts with negative fair values included in
derivative assets on the balance sheet and contracts with positive fair values included in derivative liabilities.
At December 31, 2013, after taking into account the effects of bilateral collateral and master netting agreements,
we had $91 million of derivative assets and a positive $7 million of derivative liabilities that relate to contracts
entered into for hedging purposes. Our hedging derivative liabilities are in an asset position largely because we
have contracts with positive fair values as a result of master netting agreements. As of the same date, after taking
into account the effects of bilateral collateral and master netting agreements and a reserve for potential future
losses, we had derivative assets of $316 million and derivative liabilities of $421 million that were not designated
as hedging instruments.
The Dodd-Frank Act, which is currently being implemented, may limit the types of derivative activities that
KeyBank and other insured depository institutions may conduct. As a result, we may not continue to use all of
the types of derivatives noted above in the future. For further information, please see the section entitled
“Supervision and Regulation” in Item 1 of this report.
Additional information regarding our accounting policies for derivatives is provided in Note 1 (“Summary of
Significant Accounting Policies”) under the heading “Derivatives.”
Derivatives Designated in Hedge Relationships
Net interest income and the EVE change in response to changes in the mix of assets, liabilities, and off-balance
sheet instruments; associated interest rates tied to each instrument; differences in the repricing and maturity
characteristics of interest-earning assets and interest-bearing liabilities; and changes in interest rates. We utilize
derivatives that have been designated as part of a hedge relationship in accordance with the applicable accounting
guidance to minimize the exposure and volatility of net interest income and EVE to interest rate fluctuations. The
primary derivative instruments used to manage interest rate risk are interest rate swaps, which convert the
contractual interest rate index of agreed-upon amounts of assets and liabilities (i.e., notional amounts) to another
interest rate index.
We designate certain “receive fixed/pay variable” interest rate swaps as fair value hedges. These contracts
convert certain fixed-rate long-term debt into variable-rate obligations, thereby modifying our exposure to
changes in interest rates. As a result, we receive fixed-rate interest payments in exchange for making variable-
rate payments over the lives of the contracts without exchanging the notional amounts.
Similarly, we designate certain “receive fixed/pay variable” interest rate swaps as cash flow hedges. These
contracts effectively convert certain floating-rate loans into fixed-rate loans to reduce the potential adverse effect
of interest rate decreases on future interest income. Again, we receive fixed-rate interest payments in exchange
for making variable-rate payments over the lives of the contracts without exchanging the notional amounts.
We also designate certain “pay fixed/receive variable” interest rate swaps as cash flow hedges. These swaps
convert certain floating-rate debt into fixed-rate debt. We also use these swaps to manage the interest rate risk
associated with anticipated sales of certain commercial real estate loans. The swaps protect against the possible
short-term decline in the value of the loans that could result from changes in interest rates between the time they
are originated and the time they are sold.
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