Bank of America 2014 Annual Report Download - page 215

Bank of America 2014 213
however, the potential for the Corporation to be required to make
these payments is remote.
Prime Brokerage and Securities Clearing Services
In connection with its prime brokerage and clearing businesses,
the Corporation performs securities clearance and settlement
services on behalf of its clients with other brokerage firms and
clearinghouses. Under these arrangements, the Corporation
stands ready to meet the obligations of its clients with respect to
securities transactions. The Corporation’s obligations in this
respect are secured by the assets in the clients’ accounts and the
accounts of their customers as well as by any proceeds received
from the transactions cleared and settled by the firm on behalf of
clients or their customers. The Corporation’s maximum potential
exposure under these arrangements is difficult to estimate;
however, the potential for the Corporation to incur material losses
pursuant to these arrangements is remote.
Other Derivative Contracts
The Corporation funds selected assets, including securities issued
by CDOs and CLOs, through derivative contracts, typically total
return swaps, with third parties and VIEs that are not consolidated
by the Corporation. The total notional amount of these derivative
contracts was $527 million and $1.8 billion with commercial banks
and $1.2 billion and $1.3 billion with VIEs at December 31, 2014
and 2013. The underlying securities are senior securities and
substantially all of the Corporation’s exposures are insured.
Accordingly, the Corporation’s exposure to loss consists principally
of counterparty risk to the insurers. In certain circumstances,
generally as a result of ratings downgrades, the Corporation may
be required to purchase the underlying assets, which would not
result in additional gain or loss to the Corporation as such exposure
is already reflected in the fair value of the derivative contracts.
Other Guarantees
The Corporation has entered into additional guarantee agreements
and commitments, including sold risk participation swaps, liquidity
facilities, lease-end obligation agreements, partial credit
guarantees on certain leases, real estate joint venture guarantees,
divested business commitments and sold put options that require
gross settlement. The maximum potential future payment under
these agreements was approximately $6.2 billion and $6.9 billion
at December 31, 2014 and 2013. The estimated maturity dates
of these obligations extend up to 2033. The Corporation has made
no material payments under these guarantees.
In the normal course of business, the Corporation periodically
guarantees the obligations of its affiliates in a variety of
transactions including ISDA-related transactions and non-ISDA
related transactions such as commodities trading, repurchase
agreements, prime brokerage agreements and other transactions.
Payment Protection Insurance Claims Matter
In the U.K., the Corporation previously sold payment protection
insurance (PPI) through its international card services business
to credit card customers and consumer loan customers. PPI covers
a consumer’s loan or debt repayment if certain events occur such
as loss of job or illness. In response to an elevated level of
customer complaints across the industry, heightened media
coverage and pressure from consumer advocacy groups, the U.K.
Financial Services Authority, which has subsequently been
replaced by the Prudential Regulation Authority (PRA) and the
Financial Conduct Authority (FCA), investigated and raised
concerns about the way some companies have handled complaints
related to the sale of these insurance policies. In connection with
this matter, the Corporation established a reserve for PPI. The
reserve was $378 million and $381 million at December 31, 2014
and 2013. The Corporation recorded expense of $621 million and
$258 million in 2014 and 2013. The increase in the provision was
due primarily to the volume of new complaints not decreasing as
expected. It is reasonably possible that the Corporation will incur
additional expense related to PPI claims; however, the amount of
such additional expense cannot be reasonably estimated.
Litigation and Regulatory Matters
In the ordinary course of business, the Corporation and its
subsidiaries are routinely defendants in or parties to many pending
and threatened legal actions and proceedings, including actions
brought on behalf of various classes of claimants. These actions
and proceedings are generally based on alleged violations of
consumer protection, securities, environmental, banking,
employment, contract and other laws. In some of these actions
and proceedings, claims for substantial monetary damages are
asserted against the Corporation and its subsidiaries.
In the ordinary course of business, the Corporation and its
subsidiaries are also subject to regulatory and governmental
examinations, information gathering requests, inquiries,
investigations, and threatened legal actions and proceedings. For
example, certain subsidiaries of the Corporation are registered
broker-dealers or investment advisors and are subject to regulation
by the SEC, the Financial Industry Regulatory Authority, the
European Commission, the PRA, the FCA and other international,
federal and state securities regulators. In connection with formal
and informal inquiries, the Corporation and its subsidiaries receive
numerous requests, subpoenas and orders for documents,
testimony and information in connection with various aspects of
the Corporation’s regulated activities.
In view of the inherent difficulty of predicting the outcome of
such litigation, regulatory and governmental matters, particularly
where the claimants seek very large or indeterminate damages or
where the matters present novel legal theories or involve a large
number of parties, the Corporation generally cannot predict what
the eventual outcome of the pending matters will be, what the
timing of the ultimate resolution of these matters will be, or what
the eventual loss, fines or penalties related to each pending matter
may be.
In accordance with applicable accounting guidance, the
Corporation establishes an accrued liability for litigation,
regulatory and governmental matters when those matters present
loss contingencies that are both probable and estimable. In such
cases, there may be an exposure to loss in excess of any amounts
accrued. As a litigation, regulatory or governmental matter
develops, the Corporation, in conjunction with any outside counsel
handling the matter, evaluates on an ongoing basis whether such
matter presents a loss contingency that is probable and estimable.
When a loss contingency is not both probable and estimable, the
Corporation does not establish an accrued liability. If, at the time
of evaluation, the loss contingency related to a litigation, regulatory
or governmental matter is not both probable and estimable, the
matter will continue to be monitored for further developments that
would make such loss contingency both probable and estimable.
Once the loss contingency related to a litigation, regulatory or
governmental matter is deemed to be both probable and