Wells Fargo 2013 Annual Report Download - page 214

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Note 16: Derivatives (continued)
Free-standing derivatives also include embedded derivatives
that are required to be accounted for separately from their host
contract. We periodically issue hybrid long-term notes and CDs
where the performance of the hybrid instrument notes is linked
to an equity, commodity or currency index, or basket of such
indices. These notes contain explicit terms that affect some or all
of the cash flows or the value of the note in a manner similar to a
derivative instrument and therefore are considered to contain an
“embedded” derivative instrument. The indices on which the
performance of the hybrid instrument is calculated are not
clearly and closely related to the host debt instrument. The
“embedded” derivative is separated from the host contract and
accounted for as a free-standing derivative. Additionally, we may
invest in hybrid instruments that contain embedded derivatives,
such as credit derivatives, that are not clearly and closely related
to the host contract. In such instances, we either elect fair value
option for the hybrid instrument or separate the embedded
derivative from the host contract and account for the host
contract and derivative separately.
The following table shows the net gains recognized in the
income statement related to derivatives not designated as
hedging instruments.
- -
Year ended December 31,
(in millions) 2013 2012 2011
Net gains (losses) recognized on free-standing derivatives (economic hedges):
Interest rate contracts
Recognized in noninterest income:
Mortgage banking (1) 1,412 (1,882) 246
Other (2) 119 2 (157)
Equity contracts (3) (317) 4 (5)
Foreign exchange contracts (2) 24 (53) 70
Credit contracts (2) (6) (15) (18)
Subtotal 1,232 (1,944) 136
Net gains (losses) recognized on customer accommodation, trading and other free-standing derivatives:
Interest rate contracts
Recognized in noninterest income:
Mortgage banking (4) (561) 7,222 3,594
Other (5) 743 589 298
Commodity contracts (5) 324 (14) 124
Equity contracts (5) (622) (234) 769
Foreign exchange contracts (5) 746 501 698
Credit contracts (5) (53) (54) (200)
Other (5) (5)
Subtotal 577 8,010 5,278
Net gains recognized related to derivatives not designated as hedging instruments 1,809 6,066 5,414
(1) Predominantly mortgage banking noninterest income including gains (losses) on the derivatives used as economic hedges of MSRs measured at fair value, interest rate lock
commitments and mortgages held for sale.
(2) Predominantly included in other noninterest income.
(3) Predominantly included in net gains (losses) from equity investments.
(4) Predominantly mortgage banking noninterest income including gains (losses) on interest rate lock commitments.
(5) Predominantly included in net gains from trading activities in noninterest income.
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