This excerpt taken from the BBT 10-Q filed May 8, 2009.
Fair Value Hedges
At March 31, 2009, BB&T had designated notional values of $4.8 billion of derivatives as fair value hedges which reflected a net unrealized gain of $412 million, with instruments in a gain position reflecting a fair value of $535 million recorded in other assets and instruments in a loss position reflecting a fair value of $123 million recorded in other liabilities. For a qualifying fair value hedge, changes in the value of the derivatives that have been highly effective as hedges are recognized in current period earnings along with the corresponding changes in the fair value of the designated hedged item attributable to the risk being hedged. The impact on earnings
resulting from fair value hedge ineffectiveness was $5 million during the first three months of 2009.
BB&T also held $58.3 billion in notional value of derivatives not designated as hedges at March 31, 2009. These instruments were in a net gain position with a net estimated fair value of $94 million. Changes in the fair value of these derivatives are reflected in current period earnings.
Derivatives not designated as a hedge include the notional amount of $14.8 billion that have been entered into as a risk management instrument for mortgage banking operations at March 31, 2009. For mortgage loans originated for sale, BB&T is exposed to changes in market rates and conditions subsequent to the interest rate lock and funding date. BB&Ts risk management strategy related to its interest rate lock commitment derivatives and loans held for sale includes using mortgage-based derivatives such as forward commitments and options in order to mitigate market risk.
Derivatives not designated as a hedge include the notional amount of $11.7 billion that have been entered into as a risk management instrument for mortgage servicing rights at March 31, 2009. The $74 million gain related to these derivatives is offset by a negative $46 million quarterly valuation adjustment for residential mortgage servicing rights at March 31, 2009.
BB&T also held derivatives not designated as hedges with notional amounts totaling $31.8 billion at March 31, 2009 as risk management instruments primarily to facilitate transactions on behalf of its clients, as well as activities related to balance sheet management.
At March 31, 2009, BB&T had designated notional values of $73 million of derivatives as net investment hedges used to hedge the variability in a foreign currency exchange rate.
Credit risk related to derivatives arises when amounts receivable from a counterparty exceed those payable. Because the notional amount of the instruments only serves as a basis for calculating amounts receivable or payable, the risk of loss with any counterparty is limited to a small fraction of the notional amount. BB&T controls the risk of loss by subjecting counterparties to credit reviews and approvals similar to those used in making loans and other extensions of credit. In addition, certain counterparties are required to provide cash collateral to BB&T when their unsecured loss positions exceed certain negotiated limits. These bilateral limits are typically based on current credit ratings and vary with ratings changes. As of March 31, 2009 and December 31, 2008, respectively, BB&T had received cash collateral of approximately $120 million and $165 million. In addition, BB&T had posted collateral of $126 million and $180 million at March 31, 2009 and December 31, 2008, respectively. In the event that BB&T's credit ratings had been downgraded below investment grade, the amount of collateral posted would have increased by $309 million and $225 million as of March 31, 2009 and December 31, 2008, respectively. As of March 31, 2009, BB&T had approximately $34 million of unsecured positions with derivative dealers. All of the derivative contracts to which BB&T is a party settle monthly, quarterly or semiannually. In the case of contracts with derivative dealers, BB&T only transacts with dealers that are national market makers whose credit ratings are strong. Further, BB&T has netting agreements with the dealers with which it does business. Because of these factors, BB&Ts credit risk exposure related to derivatives contracts at March 31, 2009 and December 31, 2008 was not material.