Bank of America 2014 Annual Report Download - page 167

Bank of America 2014 165
The notional amount represents the maximum amount payable
by the Corporation for most credit derivatives. However, the
Corporation does not monitor its exposure to credit derivatives
based solely on the notional amount because this measure does
not take into consideration the probability of occurrence. As such,
the notional amount is not a reliable indicator of the Corporation’s
exposure to these contracts. Instead, a risk framework is used to
define risk tolerances and establish limits to help ensure that
certain credit risk-related losses occur within acceptable,
predefined limits.
The Corporation manages its market risk exposure to credit
derivatives by entering into a variety of offsetting derivative
contracts and security positions. For example, in certain instances,
the Corporation may purchase credit protection with identical
underlying referenced names to offset its exposure. The carrying
value and notional amount of written credit derivatives for which
the Corporation held purchased credit derivatives with identical
underlying referenced names and terms were $5.7 billion and
$880.6 billion at December 31, 2014 and $8.1 billion and $1.0
trillion at December 31, 2013.
Credit-related notes in the table on page 164 include
investments in securities issued by collateralized debt obligation
(CDO), collateralized loan obligation (CLO) and credit-linked note
vehicles. These instruments are primarily classified as trading
securities. The carrying value of these instruments equals the
Corporation’s maximum exposure to loss. The Corporation is not
obligated to make any payments to the entities under the terms
of the securities owned.
Credit-related Contingent Features and Collateral
The Corporation executes the majority of its derivative contracts
in the OTC market with large, international financial institutions,
including broker-dealers and, to a lesser degree, with a variety of
non-financial companies. Substantially all of the derivative
transactions are executed on a daily margin basis. Therefore,
events such as a credit rating downgrade (depending on the
ultimate rating level) or a breach of credit covenants would typically
require an increase in the amount of collateral required of the
counterparty, where applicable, and/or allow the Corporation to
take additional protective measures such as early termination of
all trades. Further, as previously discussed on page 157, the
Corporation enters into legally enforceable master netting
agreements which reduce risk by permitting the closeout and
netting of transactions with the same counterparty upon the
occurrence of certain events.
A majority of the Corporation’s derivative contracts contain
credit risk-related contingent features, primarily in the form of ISDA
master netting agreements and credit support documentation that
enhance the creditworthiness of these instruments compared to
other obligations of the respective counterparty with whom the
Corporation has transacted. These contingent features may be for
the benefit of the Corporation as well as its counterparties with
respect to changes in the Corporation’s creditworthiness and the
mark-to-market exposure under the derivative transactions. At
December 31, 2014 and 2013, the Corporation held cash and
securities collateral of $82.0 billion and $74.4 billion, and posted
cash and securities collateral of $67.9 billion and $56.1 billion in
the normal course of business under derivative agreements.
In connection with certain OTC derivative contracts and other
trading agreements, the Corporation can be required to provide
additional collateral or to terminate transactions with certain
counterparties in the event of a downgrade of the senior debt
ratings of the Corporation or certain subsidiaries. The amount of
additional collateral required depends on the contract and is
usually a fixed incremental amount and/or the market value of the
exposure.
At December 31, 2014, the amount of collateral, calculated
based on the terms of the contracts, that the Corporation and
certain subsidiaries could be required to post to counterparties
but had not yet posted to counterparties was approximately $1.4
billion, including $670 million for Bank of America, N.A. (BANA).
Some counterparties are currently able to unilaterally
terminate certain contracts, or the Corporation or certain
subsidiaries may be required to take other action such as find a
suitable replacement or obtain a guarantee. At December 31,
2014, the current liability recorded for these derivative contracts
was $84 million, against which the Corporation and certain
subsidiaries had posted approximately $54 million of collateral.
The table below presents the amount of additional collateral
that would have been contractually required by derivative contracts
and other trading agreements at December 31, 2014 if the rating
agencies had downgraded their long-term senior debt ratings for
the Corporation or certain subsidiaries by one incremental notch
and by an additional second incremental notch.
Additional Collateral Required to be Posted Upon
Downgrade
December 31, 2014
(Dollars in millions)
One
incremental
notch
Second
incremental
notch
Bank of America Corporation $ 1,402 $ 2,825
Bank of America, N.A. and subsidiaries (1) 1,072 1,886
(1) Included in Bank of America Corporation collateral requirements in this table.
The table below presents the derivative liabilities that would
be subject to unilateral termination by counterparties and the
amounts of collateral that would have been contractually required
at December 31, 2014 if the long-term senior debt ratings for the
Corporation or certain subsidiaries had been lower by one
incremental notch and by an additional second incremental notch.
Derivative Liabilities Subject to Unilateral Termination
Upon Downgrade
December 31, 2014
(Dollars in millions)
One
incremental
notch
Second
incremental
notch
Derivative liability $ 1,785 $ 3,850
Collateral posted 1,520 2,986