Bank of America 2009 Annual Report Download - page 149

Credit Risk Management of Derivatives and Credit-
related Contingent Features
The Corporation executes the majority of its derivative contracts in the
over-the-counter 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
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 Corpo-
ration to take additional protective measures such as early termination of
all trades. Further, as discussed above, the Corporation enters into
legally enforceable master netting agreements which reduce risk by per-
mitting the closeout and netting of transactions with the same counter-
party upon the occurrence of certain events.
Substantially all of the Corporation’s derivative contracts contain
credit risk-related contingent features, primarily in the form of Interna-
tional Swaps and Derivatives Association, Inc. (ISDA) master agreements
that enhance the creditworthiness of these instruments as compared to
other obligations of the respective counterparty with whom the Corpo-
ration has transacted (e.g., other debt or equity). These contingent fea-
tures may be for the benefit of the Corporation, as well as its
counterparties with respect to changes in the Corporation’s creditworthi-
ness. At December 31, 2009, the Corporation received cash and secu-
rities collateral of $74.6 billion and posted cash and securities collateral
of $69.1 billion in the normal course of business under derivative
agreements.
In connection with certain over-the-counter derivatives contracts and
other trading agreements, the Corporation could be required to provide
additional collateral or to terminate transactions with certain counter-
parties in the event of a downgrade of the senior debt ratings of Bank of
America Corporation and its subsidiaries. The amount of additional collat-
eral required depends on the contract and is usually a fixed incremental
amount and/or the market value of the exposure. At December 31, 2009,
the amount of additional collateral and termination payments that would
be required for such derivatives and trading agreements was approx-
imately $2.1 billion if the long-term credit rating of Bank of America
Corporation and its subsidiaries was incrementally downgraded by one
level by all ratings agencies. A second incremental one level downgrade
by the ratings agencies would require approximately $1.2 billion in addi-
tional collateral.
The Corporation records counterparty credit risk valuation adjustments
on derivative assets in order to properly reflect the credit quality of the
counterparty. These adjustments are necessary as the market quotes on
derivatives do not fully reflect the credit risk of the counterparties to the
derivative assets. The Corporation considers collateral and legally
enforceable master netting agreements that mitigate its credit exposure
to each counterparty in determining the counterparty credit risk valuation
adjustment. All or a portion of these counterparty credit risk valuation
adjustments can be reversed or otherwise adjusted in future periods due
to changes in the value of the derivative contract, collateral and creditwor-
thiness of the counterparty. During 2009, credit valuation gains of $1.8
billion for counterparty credit risk related to derivative assets and during
2008, losses of $3.2 billion were recognized in trading account profits
(losses). At December 31, 2009 and 2008, the cumulative counterparty
credit risk valuation adjustment that was included in the derivative asset
balance was $7.6 billion and $4.0 billion.
In addition, the fair value of the Corporation’s or its subsidiaries’
derivative liabilities is adjusted to reflect the impact of the Corporation’s
credit quality. During 2009, credit valuation losses of $801 million and
during 2008, gains of $364 million were recognized in trading account
profits (losses) for changes in the Corporation’s or its subsidiaries’ credit
risk. At December 31, 2009 and 2008, the Corporation’s cumulative
credit risk valuation adjustment that was included in the derivative
liabilities balance was $608 million and $573 million.
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