US Bank 2015 Annual Report Download - page 134

Derivatives are subject to credit risk associated with
counterparties to the derivative contracts. The Company
measures that credit risk using a credit valuation adjustment
and includes it within the fair value of the derivative. The
Company manages counterparty credit risk through
diversification of its derivative positions among various
counterparties, by entering into master netting arrangements
and, where possible, by requiring collateral arrangements. A
master netting arrangement allows two counterparties, who
have multiple derivative contracts with each other, the ability
to net settle amounts under all contracts, including any
related collateral, through a single payment and in a single
currency. Collateral arrangements require the counterparty to
deliver collateral (typically cash or U.S. Treasury and agency
securities) equal to the Company’s net derivative receivable,
subject to minimum transfer and credit rating requirements.
The Company’s collateral arrangements are predominately
bilateral and, therefore, contain provisions that require
collateralization of the Company’s net liability derivative
positions. Required collateral coverage is based on certain net
liability thresholds and contingent upon the Company’s credit
rating from two of the nationally recognized statistical rating
organizations. If the Company’s credit rating were to fall
below credit ratings thresholds established in the collateral
arrangements, the counterparties to the derivatives could
request immediate additional collateral coverage up to and
including full collateral coverage for derivatives in a net liability
position. The aggregate fair value of all derivatives under
collateral arrangements that were in a net liability position at
December 31, 2015, was $956 million. At December 31,
2015, the Company had $823 million of cash posted as
collateral against this net liability position.
NOTE 21 NETTING ARRANGEMENTS FOR CERTAIN FINANCIAL INSTRUMENTS AND SECURITIES FINANCING
ACTIVITIES
The majority of the Company’s derivative portfolio consists of
bilateral over-the-counter trades. However, current
regulations require that certain interest rate swaps and
forwards and credit contracts need to be centrally cleared
through clearinghouses. In addition, a portion of the
Company’s derivative positions are exchange-traded. These
are predominately U.S. Treasury futures or options on U.S.
Treasury futures. Of the Company’s $202.4 billion total
notional amount of derivative positions at December 31,
2015, $69.8 billion related to those centrally cleared through
clearinghouses and $8.3 billion related to those that were
exchange-traded. Irrespective of how derivatives are traded,
the Company’s derivative contracts include offsetting rights
(referred to as netting arrangements), and depending on
expected volume, credit risk, and counterparty preference,
collateral maintenance may be required. For all derivatives
under collateral support arrangements, fair value is
determined daily and, depending on the collateral
maintenance requirements, the Company and a counterparty
may receive or deliver collateral, based upon the net fair value
of all derivative positions between the Company and the
counterparty. Collateral is typically cash, but securities may be
allowed under collateral arrangements with certain
counterparties. Receivables and payables related to cash
collateral are included in other assets and other liabilities on
the Consolidated Balance Sheet, along with the related
derivative asset and liability fair values. Any securities pledged
to counterparties as collateral remain on the Consolidated
Balance Sheet. Securities received from counterparties as
collateral are not recognized on the Consolidated Balance
Sheet, unless the counterparty defaults. In general, securities
used as collateral can be sold, repledged or otherwise used
by the party in possession. No restrictions exist on the use of
cash collateral by either party. Refer to Note 20 for further
discussion of the Company’s derivatives, including collateral
arrangements.
As part of the Company’s treasury and broker-dealer
operations, the Company executes transactions that are
treated as securities sold under agreements to repurchase or
securities purchased under agreements to resell, both of
which are accounted for as collateralized financings.
Securities sold under agreements to repurchase include
repurchase agreements and securities loaned transactions.
Securities purchased under agreements to resell include
reverse repurchase agreements and securities borrowed
transactions. For securities sold under agreements to
repurchase, the Company records a liability for the cash
received, which is included in short-term borrowings on the
Consolidated Balance Sheet. For securities purchased under
agreements to resell, the Company records a receivable for
the cash paid, which is included in other assets on the
Consolidated Balance Sheet.
Securities transferred to counterparties under repurchase
agreements and securities loaned transactions continue to be
recognized on the Consolidated Balance Sheet, are
measured at fair value, and are included in investment
securities or other assets. Securities received from
counterparties under reverse repurchase agreements and
securities borrowed transactions are not recognized on the
Consolidated Balance Sheet unless the counterparty defaults.
The securities transferred under repurchase and reverse
repurchase transactions typically are U.S. Treasury and
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