KeyBank 2015 Annual Report Download - page 187

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.
Interest rate swaps were also used to hedge the floating-rate debt that funded fixed-rate leases entered into by our
equipment finance line of business. These swaps were designated as cash flow hedges to mitigate the interest rate
mismatch between the fixed-rate lease cash flows and the floating-rate payments on the debt. These hedge
relationships were terminated during the quarter ended March 31, 2014.
We use foreign currency forward transactions to hedge the foreign currency exposure of our net investment in
various foreign equipment finance entities. These entities are denominated in a non-U.S. currency. These swaps
are designated as net investment hedges to mitigate the exposure of measuring the net investment at the spot
foreign exchange rate.
Derivatives Not Designated in Hedge Relationships
On occasion, we enter into interest rate swap contracts to manage economic risks but do not designate the
instruments in hedge relationships. Excluding contracts addressing customer exposures, the amount of
derivatives hedging risks on an economic basis at December 31, 2015, was not significant.
Like other financial services institutions, we originate loans and extend credit, both of which expose us to credit
risk. We actively manage our overall loan portfolio and the associated credit risk in a manner consistent with
asset quality objectives and concentration risk tolerances to mitigate portfolio credit risk. Purchasing credit
default swaps enables us to transfer to a third party a portion of the credit risk associated with a particular
extension of credit, including situations where there is a forecasted sale of loans. Beginning in the first quarter of
2014, we began purchasing credit default swaps to reduce the credit risk associated with the debt securities held
in our trading portfolio. We may also sell credit derivatives to offset our purchased credit default swap position
prior to maturity. Although we use credit default swaps for risk management purposes, they are not treated as
hedging instruments.
172