| Derivatives and Hedging Activities. | Note 17. Derivatives and Hedging Activities.
The FHLBNY, consistent with the Finance Agency’s regulations, may enter into interest-rate swaps, swaptions, and interest-rate cap and floor agreements to manage its interest rate exposure inherent in otherwise unhedged assets and funding positions. We are not a derivatives dealer and do not trade derivatives for short-term profit.
The contractual or notional amount of derivatives reflects the involvement of the FHLBNY in the various classes of financial instruments, and serve as a basis for calculating periodic interest payments or cash flows. Notional amount of a derivative does not measure the credit risk exposure, and the maximum credit exposure is substantially less than the notional amount. The maximum credit risk is the estimated cost of replacing interest-rate swaps, forward agreements, mandatory delivery contracts for mortgage loans and purchased caps and floors (derivatives) in a gain position if the counterparty defaults and the related collateral, if any, is of insufficient value to the FHLBNY.
Derivatives are instruments that derive their value from underlying asset prices, indices, reference rates and other inputs, or a combination of these factors. The FHLBNY executes derivatives with swap dealers and financial institution swap counterparties as negotiated contracts, which are usually referred to as over-the-counter (OTC) derivatives.
The majority of OTC derivative contracts at September 30, 2019 and December 31, 2018 were “Cleared derivatives”, which are contracts transacted bilaterally with executing swap counterparties, then cleared and settled through derivative clearing organizations (DCOs) as mandated under the Dodd-Frank Act. When transacting a derivative for clearing, the FHLBNY utilizes a designated clearing agent, the Futures Commission Merchant (FCM) that acts on behalf of the FHLBNY to clear and settle the interest rate exchange transaction through the DCO. Once the transaction is accepted for clearing by the FCM, acting in the capacity of an intermediary between the FHLBNY and the DCO, the original transaction between the FHLBNY and the executing swap counterparty is extinguished, and is replaced by an identical transaction between the FHLBNY and the DCO. The DCO becomes the counterparty to the FHLBNY. However, the FCM remains as the principal operational contact and interacts with the DCO through the life cycle events of the derivative transaction on behalf of the FHLBNY.
The FHLBNY also transacts derivative contracts that are executed and settled bilaterally with counterparties, rather than settling the transaction as a cleared derivative with a DCO. Such derivative have to be transacted bilaterally and are not clearable as the structures have not yet been mandated for clearing under the Dodd-Frank Act, typically because the transactions are complex and their ongoing pricing and settlement mechanisms have not yet been operationalized by the DCOs.
The following table presents the FHLBNY’s derivative activities based on notional amounts (in thousands):
Derivative Notionals
Hedging Instruments Under ASC 815
September 30, 2019
December 31, 2018
Interest rate contracts
Interest rate swaps
$
$
Interest rate caps
Mortgage delivery commitments
Total interest rate contracts notionals
$
$
Credit Risk Due to Non-performance by Counterparties
Derivative transactions are customarily documented by the FHLBNY under industry standard master netting agreements, which provide that following an event of default, the non-defaulting party may promptly terminate all transactions between the parties and determine the net amount due to be paid to, or by the defaulting party. Obligations under master netting agreements are customarily secured by collateral posted under an industry standard credit support annex to the master netting agreements. The netting and collateral rights incorporated in the master netting agreements are considered to be legally enforceable if a supportive legal opinion has been obtained from counsel of recognized standing. Based on the analysis of the rules, and legal analysis obtained, the FHLBNY has made a determination that it has the right of setoff that is enforceable under applicable law.
Credit risk on bilateral OTC — bilateral or uncleared derivative contracts — For derivatives that are not eligible for clearing with a DCO under the Dodd-Frank Act, the FHLBNY is subject to credit risk as a result of non-performance by swap counterparties to the derivative agreements. The FHLBNY enters into master netting arrangements and bilateral security agreements with all active derivative counterparties that provide for delivery of collateral at specified levels to limit the net unsecured credit exposure to these counterparties. The FHLBNY makes judgments on each counterparty’s creditworthiness, and makes estimates of the collateral values in analyzing counterparty non-performance credit risk. Bilateral agreements consider the credit risks and the agreement specifies thresholds to post or receive collateral with changes in credit ratings. When the FHLBNY has more than one derivative transaction outstanding with the counterparty, and a legally enforceable master netting agreement exists with the counterparty, the net exposure (less collateral held) represents the appropriate measure of credit risk. The FHLBNY conducts all its bilaterally executed derivative transactions under ISDA master netting agreements.
Credit risk on OTC cleared derivative transactions — The FHLBNY’s derivative transactions that are eligible for clearing are subject to mandatory clearing rules under the Commodity Futures Trading Commission (CFTC) as provided under the Dodd-Frank Act. If a derivative transaction is listed as eligible for clearing, the FHLBNY must abide by the CFTC rules to clear the transaction through a DCO. The FHLBNY’s cleared derivatives are also initially executed bilaterally with a swap dealer (the executing swap counterparty) in the OTC market. The clearing process requires all parties to the derivative transaction to novate the contracts to a DCO, which then becomes the counterparty to all parties, including the FHLBNY, to the transaction.
Information pertaining to FHLBNY’s derivative activities, based on notional amounts, is presented in the table below. Derivative notional amounts are reference amounts from which contractual payments are derived and do not represent a complete and accurate measure of FHLBNY’s exposure to derivative transactions. Rather, FHLBNY’s derivative exposure arises primarily from market fluctuations (i.e., market risk), counterparty failure (i.e., credit risk) and/or periods of high volatility or financial stress (i.e., liquidity risk), as well as any market valuation adjustments that may be required on the transactions.
Offsetting of Derivative Assets and Derivative Liabilities — Net Presentation
The table below presents the gross and net derivatives receivables by contract type and amount for those derivatives contracts for which netting is permissible under U.S. GAAP as Derivative instruments — Nettable. Derivatives receivables have been netted with respect to those receivables as to which the netting requirements have been met, including obtaining a legal analysis with respect to the enforceability of the netting. The table also presents security collateral, which are not permitted to be offset, but which would be eligible for offsetting to the extent an event of default occurred and a legal opinion supporting enforceability of the netting and collateral rights has been obtained (in thousands):
September 30, 2019
December 31, 2018
Derivative
Derivative
Derivative
Derivative
Derivative instruments - Nettable
Gross recognized amount
Uncleared derivatives
$
$
$
$
Cleared derivatives
Total gross recognized amount
Gross amounts of netting adjustments and cash collateral
Uncleared derivatives
)
)
)
)
Cleared derivatives
)
)
)
)
Total gross amounts of netting adjustments and cash collateral
)
)
)
)
Net amounts after offsetting adjustments and cash collateral
$
$
$
$
Uncleared derivatives
$
$
$
$
Cleared derivatives
—
Total net amounts after offsetting adjustments and cash collateral
$
$
$
$
Derivative instruments - Not Nettable
Uncleared derivatives (a)
$
$
$
$
—
Total derivative assets and total derivative liabilities
Uncleared derivatives
Cleared derivatives
—
Total derivative assets and total derivative liabilities presented in the Statements of Condition (b)
$
$
$
$
Non-cash collateral received or pledged (c)
Can be sold or repledged
Security pledged as initial margin to Derivative Clearing Organization (d)
$
$
—
$
$
—
Cannot be sold or repledged
Uncleared derivatives securities received
)
—
)
—
Total net amount of non-cash collateral received or repledged
$
$
—
$
$
—
Total net exposure cash and non-cash (e)
$
$
$
$
Net unsecured amount - Represented by:
Uncleared derivatives
$
$
$
$
Cleared derivatives
—
Total net exposure cash and non-cash (e)
$
$
$
$
(a) Not nettable derivative instruments are without legal right of offset, and were synthetic derivatives representing forward mortgage delivery commitments of 45 business days or less. Amounts were not material, and it was operationally not practical to separate receivables from payables; net presentation was adopted. No cash collateral was involved with the mortgage delivery commitments.
(b) Amounts represented Derivative assets and liabilities that were recorded in the Statements of Conditions. Derivative cash balances were not netted with non-cash collateral received or pledged, since legal ownership of the non-cash collateral remains with the pledging counterparty (see footnote (c) below).
(c) Non-cash collateral received or pledged — For certain uncleared derivatives, counterparties have pledged U.S. Treasury securities to the FHLBNY as collateral. Amounts also included non-cash mortgage collateral on derivative positions with member counterparties where we acted as an intermediary. For certain cleared derivatives, we have pledged marketable securities to satisfy initial margin or collateral requirements.
(d) Amounts represented securities pledged to Derivative Clearing Organization to fulfill our initial margin obligations on cleared derivatives. Securities pledged may be sold or repledged if the FHLBNY defaults on our obligations under rules established by the CFTC.
(e) Amounts represented net exposure after applying non-cash collateral pledged to and by the FHLBNY. Since legal ownership and control over the securities are not transferred, the net exposure represented in the table above is for information only and is not reported as such in the Statements of Condition.
Fair Value of Derivative Instruments
The following tables represent outstanding notional balances and estimated fair values of the derivatives outstanding at September 30, 2019 and December 31, 2018 (in thousands):
September 30, 2019
Notional Amount
Derivative
Derivative
Fair value of derivative instruments (a)
Derivatives designated as hedging instruments under ASC 815 Interest rate swaps
$
$
$
Total derivatives in hedging relationships under ASC 815
Derivatives not designated as hedging instruments
Interest rate swaps
Interest rate caps
—
Mortgage delivery commitments
Other (b)
Total derivatives not designated as hedging instruments
Total derivatives before netting and collateral adjustments
$
Netting adjustments
)
)
Cash Collateral and related accrued interest
)
)
Total netting adjustments and cash collateral
)
)
Total derivative assets and total derivative liabilities
$
$
Security collateral pledged as initial margin to Derivative Clearing Organization (c)
$
Security collateral received from counterparty (c)
)
Net security
Net exposure
$
December 31, 2018
Notional Amount
Derivative
Derivative
Fair value of derivative instruments (a)
Derivatives designated as hedging instruments under ASC 815 Interest rate swaps
$
$
$
Total derivatives in hedging relationships under ASC 815
Derivatives not designated as hedging instruments
Interest rate swaps
Interest rate caps
—
Mortgage delivery commitments
—
Other (b)
Total derivatives not designated as hedging instruments
Total derivatives before netting and collateral adjustments
$
Netting adjustments
)
)
Cash Collateral and related accrued interest
)
)
Total netting adjustments and cash collateral
)
)
Total derivative assets and total derivative liabilities
$
$
Security collateral pledged as initial margin to Derivative Clearing Organization (c)
$
Security collateral received from counterparty (c)
)
Net security
Net exposure
$
(a) All derivative assets and liabilities with swap dealers and counterparties are executed under collateral agreements; derivative instruments executed bilaterally are subject to legal right of offset under master netting agreements.
(b) The Other category comprised of interest rate swaps intermediated for member, and notional amounts represent purchases by the FHLBNY from dealers and an offsetting purchase from us by the member.
(c) Non-cash security collateral is not permitted to be offset on the balance sheet, but would be eligible for offsetting in an event of default. Amounts represent U.S. Treasury securities pledged to and received from counterparties as collateral at September 30, 2019 and December 31, 2018.
Accounting for Derivative Hedging
The FHLBNY accounts for its hedging activities in accordance with ASC 815, Derivatives and Hedging . As a general rule, hedge accounting is permitted where the FHLBNY is exposed to a particular risk, typically interest-rate risk that causes changes in the fair value of an asset or liability or variability in the expected future cash flows of an existing asset, liability or a forecasted transaction that may affect earnings. Derivative contracts hedging the risks associated with the changes in fair value are referred to as Fair value hedges, while contracts hedging the risks affecting the expected future cash flows are called Cash flow hedges.
In 2017, the FASB issued ASU 2017-12, Targeted Improvements to Accounting for Hedging Activities (Topic 815) , with the primary objective of simplifying and improving the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements. We adopted the guidance effective January 1, 2019, and adoption primarily impacted the FHLBNY’s accounting for derivatives designated as cash flow hedges and fair value hedges.
We adopted the reporting and disclosure requirements under the ASU prospectively. The new guidance requires that we report the entire hedging effects of the hedging instruments in the same income statement line item as the hedged item in the Statements of income. Prior period comparative financial information was not reclassified to conform to current presentation. Certain post-adoption quantitative tabular disclosures required under ASU 2017-12 have been expanded to include the comparative period. We believe that the use of post-adoption tabular disclosures to include comparative information is not akin to the adoption of the ASU on a retrospective basis, since it only affects the manner in which previously recorded amounts are disclosed.
The FASB issued ASU 2018-16, Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes (Topic 815 ), which adds the OIS rate based on SOFR as an approved U.S. benchmark rate to facilitate the LIBOR to SOFR transition. The other interest rates in the United States that are eligible benchmarks under Topic 815 are interest rates on direct Treasury obligations of the U.S. government (UST), the London Interbank Offered Rate (LIBOR) swap rate, the Overnight Index Swap (OIS) Rate based on the Fed Funds Effective Rate, and the Securities Industry and Financial Markets Association (SIFMA) Municipal Swap Rate. The FHLBNY’s primary benchmark is LIBOR, and the Fed funds indexed rate is an alternative benchmark. The FHLBNY implemented the SOFR rate as another benchmark rate for interest rate hedging in the third quarter of 2019.
Typically, we execute derivatives under three hedging strategies — by designating them as a fair value or cash flow hedge of an underlying financial instrument or a forecasted transaction that qualifies for hedge accounting treatment; by acting as an intermediary; or by designating the derivative as an asset-liability management hedge (i.e. an “economic hedge”). Derivative contracts hedging the risks associated with changes in fair value are referred to as fair value hedges, while contracts hedging the variability of expected future cash flows are cash flow hedges. To qualify as an accounting hedge under the hedge accounting rules (versus an economic hedge in which hedge accounting is not applied), a hedging relationship must be highly effective in offsetting the risk designated as being hedged. The hedging relationship must be formally documented at inception, detailing the particular risk management objective and strategy for the hedge. The effectiveness of these hedging relationships is evaluated at hedge inception and on an ongoing basis both on a retrospective and prospective basis when we deem the hedge as not eligible for the short-cut method, which assumes the hedged item and the hedging derivative are perfectly hedged as defined under ASC 815 and amended by ASU 2017-12.
Fair Value Hedges.
Hedging of Benchmark interest Rate Risk — The FHLBNY’s fair value hedges are primarily hedges of fixed-rate Consolidated obligation bonds and fixed-rate advances, and beginning in 2019 we have executed fair value hedges of available-for-sale securities. For qualifying fair value hedges of interest rate risk, the changes in the fair value of the derivative and the changes in the fair value of the hedged item attributable to the hedged risk, either total cash flows or benchmark only cash flows, are presented within Interest income or Interest expense based on whether the hedged item is an asset or a liability. Prior to the adoption of ASU 2017-12, changes to the fair value of the derivative and the qualifying hedged item were presented in Other income (loss) , a line item below the Net interest income line in the Statements of income.
The two principal fair value hedging activities are summarized below:
·
Consolidated Obligations — The FHLBNY may manage the risk arising from changing market prices and volatility of a Consolidated obligation debt by matching the cash inflows on the derivative with the cash outflow on the Consolidated obligation debt and may include early termination features or options. In general, whenever we issue a longer-term fixed-rate debt, or a fixed-rate debt with call or put or other embedded options, we will simultaneously execute a derivative transaction, generally an interest rate swap, with terms that offset the terms of the fixed-rate debt, or terms of the debt with embedded put or call options or other options. When a fixed-rate debt is hedged, the combination of the fixed-rate debt and the derivative transaction effectively creates a variable rate liability, indexed to a benchmark interest rate.
·
Advances — We offer a wide array of advances structures to meet members’ funding needs. These advances may have maturities up to 30 years with fixed or adjustable rates and may include early termination features or options. We may use derivatives to adjust the repricing and/or options characteristics of advances to more closely match the characteristics of its funding liabilities. In general, whenever a member executes a longer term fixed-rate advance, or a fixed-rate advance with call or put or other embedded options, we will simultaneously execute a derivative transaction, generally an interest rate swap, with terms that offset the terms of the fixed-rate advance, or terms of the advance with embedded put or call options or other options. When a fixed-rate advance is hedged, the combination of the fixed-rate advance and the derivative transaction effectively creates a variable rate asset, indexed to a benchmark interest rate.
In the nine months ended September 30, 2019, the FHLBNY executed interest rate hedges employing strategies under the new guidance for “partial-term hedges” and “benchmark rate component hedging”. The two strategies are among several hedging strategies permitted under the recently adopted ASU 2017-12.
·
The partial-term hedging strategy makes it possible to hedge selected fixed-rate payments in a fair value hedge of interest rate risk. While US GAAP has long permitted entities to designate one or more contractual cash flows in a financial instrument, the hedge strategy could result in hedge ineffectiveness. This is because the fair value of the hedging instrument and the hedged item would react differently to changes in interest rates because the principal repayment of the debt occurs on a different date than the swap’s maturity. ASU 2017-12 addresses this issue by allowing entities to calculate the change in the fair value of the hedged item in a partial-term hedge of a fixed-rate financial instrument using an assumed term that begins when the first hedged cash flow begins to accrue and ends when the last hedged cash flow is due and payable. Similar to other fair value hedges, where the hedged item is an asset, the fair value of the hedged item attributable to interest rate risk is recorded in P&L and presented in Interest income from investments along with the change in the fair value of the hedging instrument. The new strategy was utilized by the FHLBNY for hedging certain AFS designated mortgage-backed securities.
·
Benchmark rate component hedging is permitted under the ASU, which addressed the issue that measuring changes in the fair value of the hedged item using the total coupon cash flows misrepresents the true effectiveness of these hedging relationships. Additionally, these hedging relationships are not meant to manage credit risk, and that using the total contractual cash flows to determine the change in the fair value of the hedged item attributable to the change in the benchmark interest rate creates an earnings mismatch that reflects the portion of the financial instrument that the entity does not intend to hedge. The new guidance addresses these issues by allowing entities to use either (1) the full contractual coupon cash flows or (2) the benchmark rate component of the contractual coupon cash flows to calculate the change in the fair value of the hedged item attributable to changes in the benchmark interest rate in a fair value hedge of interest rate risk. We have used the concept selectively in 2019.
Fair value hedge gains and losses
Gains and Losses on Fair value hedges under ASC 815 are summarized below (in thousands):
Gains (Losses) on Fair Value Hedges
Three months ended September 30,
2019
2018
Recorded in Interest
Recorded in Other
Gains (losses) on derivatives in designated and qualifying fair value hedges:
Interest rate hedges
$
)
$
Gains (losses) on hedged item in designated and qualifying fair value hedges:
Interest rate hedges
$
$
)
Gains (Losses) on Fair Value Hedges
Nine months ended September 30,
2019
2018
Recorded in Interest
Recorded in Other
Gains (losses) on derivatives in designated and qualifying fair value hedges:
Interest rate hedges
$
)
$
Gains (losses) on hedged item in designated and qualifying fair value hedges:
Interest rate hedges
$
$
)
Gains (losses) represent changes in fair values of derivatives and hedged items due to changes in the designated benchmark interest rates. Beginning in 2019, gains and losses on ASC 815 hedges are recorded in the same line in the Statements of income as the hedged assets and hedged liabilities. Prior to the adoption of ASU 2017-12 on January 1, 2019, gains and losses on derivatives and hedged items were recorded in Other income (loss).
Cumulative Basis Adjustment
Upon electing to apply ASC 815 fair value hedge accounting, the carrying value of the hedged item is adjusted to reflect the cumulative impact of changes in the hedged risk. The hedge basis adjustment, whether arising from an active or de-designated hedge relationship, remains with the hedged item until the hedged item is derecognized from the balance sheet.
The tables below present the carrying amount of FHLBNY’s assets and liabilities under active ASC 815 qualifying fair value hedges at September 30, 2019 and December 31, 2018, as well as the hedged item’s cumulative hedge basis adjustments, which were included in the carrying value of assets and liabilities in active hedges. The tables also present unamortized cumulative basis adjustments from discontinued hedges where the previously hedged item remains on the FHLBNY’s Statements of condition (in thousands):
September 30, 2019
Cumulative Fair Value Hedging
Carrying Amount of (a)
Active Hedging
Discontinued
Assets:
Hedged advances
$
$
$
—
Hedged AFS debt securities (a)
—
De-designated advances (b)
—
—
$
$
$
Liabilities:
Hedged consolidated obligation bonds
$
$
)
$
—
De-designated consolidated obligation bonds (b)
—
—
)
$
$
)
$
)
December 31, 2018
Cumulative Fair Value Hedging
Carrying Amount of (a)
Active Hedging
Discontinued
Assets:
Hedged advances
$
$
)
$
—
De-designated advances (b)
—
—
$
$
)
$
Liabilities:
Hedged consolidated obligation bonds
$
$
)
$
—
De-designated consolidated obligation bonds (b)
—
—
)
$
$
)
$
)
(a) Carrying amounts represent amortized cost adjusted for cumulative fair value hedging basis. For hedged AFS securities, consistent with fair value hedge accounting, changes in the fair values due to changes in the benchmark rate of the assumed hedged item in a partial-term hedge, are recorded as an adjustment to amortized cost and an offset to interest income from available-for-sale securities.
(b) The carrying amounts of de-designated hedged items were not included in the carrying amounts of hedged assets/liabilities as de-designated advances and debt are no longer hedged. Par amounts of de-designated advances were not material; par amounts of de-designated CO bonds were approximately $1.2 billion. Cumulative fair value hedging adjustments for active and discontinued hedging relationships will remain until the items are derecognized from the balance sheet.
Cash Flow Hedges
FHLBNY hedges the variability of forecasted cash flows associated primarily with forecasted transactions. Variable cash flows from forecasted liabilities are synthetically converted to fixed-rate cash flows by entering into receive-variable, pay-fixed interest rate swaps and receive-variable, pay-fixed forward-starting interest rate swaps. Prior to the adoption of ASU 2017-12, ASC 815 required the risk being hedged as the risk of overall variability in the hedged cash flows due to changes in the benchmark rate. With the adoption of ASU 2017-12, the FHLBNY may hedge the variability from changes in a contractually specified rate and recognize the entire change in fair value of the cash flow hedging instruments in Accumulated other comprehensive income (loss) AOCI. Prior to the adoption of ASU 2017-12, to the extent that these derivatives were not fully effective, changes in their fair values in excess of changes in the value of the hedged transactions were immediately included in Other income (loss). With the adoption of ASU 2017-12, such amounts are no longer required to be immediately recognized in earnings, but instead the full change in the value of the hedging instrument is required to be recorded in AOCI, and then recognized in earnings in the same period that the cash flows impact earnings.
Accordingly, for hedges of forecasted debt issuance, changes in fair value of interest rate swap will remain in AOCI and will be included in the earnings of future periods when the forecasted hedged cash flows impact earnings. However, if it becomes probable that some or all of the hedged forecasted transactions will not occur, any amounts that remain in AOCI related to these transactions must be immediately reflected in Other income (loss).
The two principal cash flow hedging activities for the FHLBNY are summarized below:
·
Cash flow hedges of “Anticipated Consolidated Bond Issuance” — The FHLBNY enters into interest-rate swaps to hedge the anticipated issuance of debt, and to “lock in” the interest to be paid for the cost of funding. The swaps are terminated upon issuance of the debt instrument, and gains or losses upon termination are recorded in AOCI. Gains and losses are reclassified to earnings in the periods in which earnings are affected by the variability of the cash flows of the debt that was issued.
·
Cash flow hedges of “Rolling Issuance of Discount Notes” — The FHLBNY executes long-term pay-fixed, receive-variable interest rate swaps as hedges of the variable quarterly interest payments on the discount note borrowing program. In this program, we issue a series of discount notes with 91-day terms over periods typically up to 10-15 years. We will continue issuing new 91-day discount notes over the terms of the swaps as each outstanding discount note matures. The interest rate swaps require a settlement every 91 days, and the variable-rate, which is based on the 3-month LIBOR, is reset immediately following each payment. The swaps are expected to eliminate the risk of variability of cash flows for each forecasted discount note issuance every 91 days. The fair values of the interest rate swaps are recorded in AOCI.
Cash flow hedge gains and losses
The following tables present derivative instruments used in cash flow hedge accounting relationships and the gains and losses recorded on such derivatives (in thousands):
Derivative Gains (Losses) Recorded in Income and Other Comprehensive Income/Loss
Three months ended September 30,
2019
2018
Amounts (b)
Amounts (d)
Total
Amounts (b)
Amounts (c)
Amounts (d)
Total
Interest rate contracts (a)
$
)
$
)
$
)
$
$
)
$
$
Derivative Gains (Losses) Recorded in Income and Other Comprehensive Income/Loss
Nine months ended September 30,
2019
2018
Amounts (b)
Amounts (d)
Total
Amounts (b)
Amounts (c)
Amounts (d)
Total
Interest rate contracts (a)
$
)
$
)
$
)
$
$
$
$
(a) Primarily consists of benchmark interest rate swaps indexed to LIBOR. For periods after January 1, 2019, the FHLBNY includes the gain and loss on the hedging derivatives in the same line in the Statements of income as the change in cash flows on the hedged item.
(b) Amounts represent amortization of gains (losses) related to closed cash flow hedges that were reclassified during the period to interest expense as a yield adjustment. Losses reclassified represent losses in AOCI that were amortized as an expense to debt interest expense. If debt is held to maturity, losses in AOCI will be relieved through amortization. It is expected that over the next 12 months, $1.0 million of the unrecognized losses in AOCI will be recognized as yield adjustments to debt interest expense.
(c) Amount represents the ineffectiveness recorded in the prior year periods through Other income (loss). Subsequent to the adoption of ASU 2017-12, hedge ineffectiveness (as defined under ASC 815) is reclassified only if the original transaction would not occur by the end of the specified time period or within a two-month period thereafter. There were no amounts that were reclassified into earnings due to discontinuation of cash flow hedges. Reclassification would occur if it became probable that the original forecasted transactions would not occur by the end of the originally specified time period or within a two-month period thereafter.
(d) Amounts represent changes in the fair values of open interest rate swap contracts in cash flow hedges of CO debt, primarily those hedging the rolling issuance of CO discount notes.
Economic Hedges
FHLBNY often uses economic hedges when hedge accounting would be too complex or operationally burdensome. End-user derivatives that are economic hedges are carried at fair value, with changes in value included in Other income (loss), a line item, which is below Net interest income. For hedges that either do not meet the ASC 815 hedging criteria or for which management decides not to apply ASC 815 hedge accounting, the derivative is recorded at fair value on the balance sheet with the associated changes in fair value recorded in earnings, while the “hedged” instrument continues to be carried at amortized cost. Therefore, current earnings are affected by the interest rate shifts and other factors that cause a change in the swap’s value, but for which no offsetting change in value is recorded on the hedged instrument. Economic hedges are |
