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Annual Report, 2015 Chicago Fed Annual Report Charles Evans President and Chief Executive O cer Federal Reserve Bank of Chicago Welcome to the Federal Reserve Bank of Chicago 2015 annual report. This was an eventful year for the national economy. Economic Growth Real gross domestic product increased by 1.8 percent from the fourth quarter of 2014 to the fourth quarter of 2015. Promoting Full Employment The unemployment rate, at 4.9 percent in January, matched the median long-run projection made by the Federal Open Market Committee (FOMC) in December of 2015. Achieving Our In ation Target One concern is the achievement of our 2 percent in ation target. Actual in ation was only 0.5 percent from the fourth quarter of 2014 to the fourth quarter of 2015. Our Policy Response With labor market improvements and increased con dence in achieving our in ation target, the FOMC made a modest increase in the federal funds rate in December. Moving Forward The December median FOMC forecast is that the federal funds rate will rise gradually over the next three years as economic and nancial conditions warrant. Executive Change 2015 was also a big year for the Bank. We welcomed Ellen Bromagen as our new First Vice President and Chief Operating O cer. New Directors We also have a number of new directors, who participate in the formulation of monetary policy, act as a link between the Federal Reserve System and the public and supervise the administration of the Bank’s operations. In Chicago Susan M. Collins Joan and Sanford Weill Dean of Public Policy, Gerald R. Ford School of Public Policy University of Michigan E. Scott Santi Chairman and Chief Executive O cer Illinois Tool Works Inc. In Detroit Joseph B. Anderson, Jr. Chairman and Chief Executive O cer TAG Holdings LLC Sandra Pierce Chairman and Chief Executive O cer FirstMerit Michigan Rip Rapson President and Chief Executive O cer The Kresge Foundation Thank you for your interest, and we look forward to continued progress in the coming year. To conclude, I leave you with our nancial statements for 2015. Charles Evans Federal Reserve Bank of Chicago March 2016 Financial Statements Auditor Independence The Federal Reserve Board engaged KPMG to audit the 2015 combined and individual nancial statements of the Reserve Banks and Maiden Lane LLC. [1] In 2015, KPMG also conducted audits of internal controls over nancial reporting for each of the Reserve Banks. Fees for KPMG services totaled $6.7 million, of which $0.4 million was for the audit of Maiden Lane LLC. To ensure auditor independence, the Board requires that KPMG be independent in all matters relating to the audits. Speci cally, KPMG may not perform services for the Reserve Banks or others that would place it in a position of auditing its own work, making management decisions on behalf of the Reserve Banks or in any other way impairing its audit independence. In 2015, the Bank did not engage KPMG for any non-audit services. Below is the link to the Federal Reserve Bank of Chicago’s audited nancial statements re ecting balances as of December 31, 2015, and income and expenses for 2015, Management’s Report on Internal Controls over Financial Reporting and the Independent Auditors’ Report. The Federal Reserve Bank of Chicago — Financial Statements as of and for the Years Ended December 31, 2015 and 2014, Management’s Report on Internal Control Over Financial Reporting and Independent Auditors’ Report [1] In addition, KPMG audited the O ce of Employee Bene ts of the Federal Reserve System (OEB), the Retirement Plan for Employees of the Federal Reserve System (System Plan) and the Thrift Plan for Employees of the Federal Reserve System (Thrift Plan). The System Plan and the Thrift Plan provide retirement bene ts to employees of the Board, the Federal Reserve Banks, the OEB and the Consumer Financial Protection Bureau. Photo Credits:Ray Juno/Corbis; Tom Pennington/Getty Images; Reed Saxon/AP Images; Susan Walsh/AP Images; Ryan McVay/Getty Images; Mark Joseph/Mark Joseph Photography. Financial Statements: Federal Reserve Bank of Chicago As of and for the Years Ended December 31, 2015 and 2014 and Independent Auditors’ Report Federal Reserve Bank of Chicago Contents Page Management’s Report on Internal Control over Financial Reporting 1 Independent Auditors’ Report 2-3 Abbreviations 4 Financial Statements: Statements of Condition as of December 31, 2015 and December 31, 2014 5 Statements of Income and Comprehensive Income for the years ended December 31, 2015 and December 31, 2014 6 Statements of Changes in Capital for the years ended December 31, 2015 and December 31, 2014 7 Notes to Financial Statements 8-40 FEDERAL RESERVE BANK OF CHICAGO Management's Report on Internal Control Over Financial Reporting March 8, 2016 To the Board of Directors The management of the Federal Reserve Bank of Chicago (Bank) is responsible for the preparation and fair presentation of the Statements of Condition as of December 31, 2015 and 2014, and the Statements of Income and Comprehensive Income, and Statements of Changes in Capital for the years then ended (the financial statements). The financial statements have been prepared in conformity with the accounting principles, policies, and practices established by the Board of Governors ofthe Federal Reserve System as set forth in the Financial Accounting Manualfor Federal Reserve Banks (FAM), and, as such, include some amounts that are based on management judgments and estimates. To our knowledge, the financial statements are, in all material respects, fairly presented in conformity with the accounting principles, policies and practices documented in the FAM and include all disclosures necessary for such fair presentation. The management of the Bank is responsible for establishing and maintaining effective internal control over financial reporting as it relates to the financial statements. The Bank's internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with the FAM. The Bank's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the Bank's assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with FAM, and that the Bank's receipts and expenditures are being made only in accordance with authorizations of its management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Bank's assets that could have a material effect on its financial statements. Even effective internal control, no matter how well designed, has inherent limitations, including the possibility of human error, and therefore can provide only reasonable assurance with respect to the preparation of reliable financial statements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate. The management of the Bank assessed its internal control over financial reporting based upon the criteria established in the Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, we believe that the Bank maintained effective internal control over financial reporting. Feder 1 Reserve Bank of Chicago . `~ Charles L. Evans President and CEO gen Elle First Vice President and COO 230 SOUTH LA SALLE STREET CHICAGO, ILLINOIS 60604-1413 www.chicagofed.org argaret K. Koenigs Senior Vice President and CFO KPMG LLP 200 E. Randolph Street Chicago, IL 60601 Independent Auditors’ Report To the Board of Governors of the Federal Reserve System and the Board of Directors of the Federal Reserve Bank of Chicago: We have audited the accompanying statement of condition of the Federal Reserve Bank of Chicago (“FRB Chicago”) as of December 31, 2015, and the related statements of income and comprehensive income and changes in capital for the year then ended. We also have audited the FRB Chicago’s internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. The FRB Chicago’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on these financial statements and an opinion on the FRB Chicago’s internal control over financial reporting based on our audit. The accompanying financial statements of the FRB Chicago as of December 31, 2014 and for the year then ended were audited by other auditors whose report thereon dated March 11, 2015, expressed an unmodified opinion on those financial statements and contained an emphasis of matter paragraph that described the FRB Chicago’s basis of accounting discussed in Note 3 to the 2014 financial statements. We conducted our audit of the financial statements in accordance with the auditing standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”) and in accordance with auditing standards generally accepted in the United States of America. We conducted our audit of internal control over financial reporting in accordance with the auditing standards of the PCAOB and in accordance with attestation standards established by the American Institute of Certified Public Accountants. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audit of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. The FRB Chicago’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with the accounting principles established by the Board of Governors of the Federal Reserve System (the “Board”) as described in Note 3 of the financial statements and as set forth in the Financial Accounting Manual for Federal Reserve Banks (“FAM”). The FRB Chicago’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the KPMG LLP is a Delaware limited liability partnership, the U.S. member firm of KPMG International Cooperative (“KPMG International”), a Swiss entity. FRB Chicago; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with the FAM, and that receipts and expenditures of the FRB Chicago are being made only in accordance with authorizations of management and directors of the FRB Chicago; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the FRB Chicago’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. As described in Note 3 to the financial statements, the FRB Chicago has prepared these financial statements in conformity with the accounting principles established by the Board, as set forth in the FAM, which is a basis of accounting other than U.S. generally accepted accounting principles. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the FRB Chicago as of December 31, 2015, and the results of its operations for the year then ended, on the basis of accounting described in Note 3. Also, in our opinion, the FRB Chicago maintained, in all material respects, effective internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Chicago, IL March 8, 2016 Federal Reserve Bank of Chicago Abbreviations ACH ASC ASU BEP Bureau FAM FASB FAST Act FOMC FRBNY GAAP GSE IMF MBS OEB SDR SERP SOMA TBA TDF Automated clearinghouse Accounting Standards Codification Accounting Standards Update Benefit Equalization Retirement Plan Bureau of Consumer Financial Protection Financial Accounting Manual for Federal Reserve Banks Financial Accounting Standards Board Fixing America’s Surface Transportation Act Federal Open Market Committee Federal Reserve Bank of New York Accounting principles generally accepted in the United States of America Government-sponsored enterprise International Monetary Fund Mortgage-backed securities Office of Employee Benefits of the Federal Reserve System Special drawing rights Supplemental Retirement Plan for Select Officers of the Federal Reserve Banks System Open Market Account To be announced Term Deposit Facility 4 Federal Reserve Bank of Chicago Statements of Condition As of December 31, 2015 and December 31, 2014 (in millions) 2015 ASSETS Gold certificates Special drawing rights certificates Coin Loans Note 4 System Open Market Account: Note 5 Treasury securities, net (of which $704 and $455 is lent as of December 31, 2015 and 2014, respectively) Government-sponsored enterprise debt securities, net (of which $5 and $26 is lent as of December 31, 2015 and 2014, respectively) Federal agency and government-sponsored enterprise mortgage-backed securities, net Foreign currency denominated investments, net Central bank liquidity swaps Accrued interest receivable Other assets Bank premises and equipment, net Note 6 Interdistrict settlement account Other assets Total assets LIABILITIES AND CAPITAL Federal Reserve notes outstanding, net System Open Market Account: Securities sold under agreements to repurchase Other liabilities Deposits: Depository institutions Other deposits Interest payable to depository institutions Accrued benefit costs Accrued remittances to the Treasury Interdistrict settlement account Other liabilities Total liabilities $ 2014 734 424 282 9 $ 706 424 279 30 95,884 106,112 1,254 1,634 $ 66,895 526 27 944 1 227 21,637 41 188,885 $ 73,122 577 42 1,047 1 227 41 184,242 $ 93,543 $ 90,946 Note 5 Notes 8 and 9 Capital paid-in Surplus (including accumulated other comprehensive loss of $14 and $35 at December 31, 2015 and 2014, respectively) Total capital Total liabilities and capital $ 26,469 19 20,838 34 60,295 7,226 8 166 75 25 187,826 69,727 13 3 178 24 923 22 182,708 791 767 268 1,059 188,885 767 1,534 184,242 $ The accompanying notes are an integral part of these financial statements. 5 Federal Reserve Bank of Chicago Statements of Income and Comprehensive Income For the years ended December 31, 2015 and December 31, 2014 (in millions) 2015 INTEREST INCOME System Open Market Account: Treasury securities, net Government-sponsored enterprise debt securities, net Federal agency and government-sponsored enterprise mortgage-backed securities, net Foreign currency denominated investments, net Total interest income INTEREST EXPENSE System Open Market Account: Securities sold under agreements to repurchase Deposits: Depository institutions Term Deposit Facility Total interest expense Net interest income NON-INTEREST INCOME System Open Market Account: Federal agency and government-sponsored enterprise mortgage-backed securities gains, net Foreign currency translation losses, net Other Income from services Compensation received for service costs provided Reimbursable services to government agencies Other Total non-interest income Note 5 $ Change in prior service costs related to benefit plans Change in actuarial gains (losses) related to benefit plans Total other comprehensive income (loss) Comprehensive (loss) income 2,415 51 $ 2,784 71 1,872 1 4,339 2,273 2 5,130 9 5 191 4 204 4,135 165 9 179 4,951 Note 5 Note 5 OPERATING EXPENSES Salaries and benefits Occupancy Equipment Compensation paid for service costs incurred Other Assessments: Board of Governors operating expenses and currency costs Bureau of Consumer Financial Protection Total operating expenses Net income before providing for remittances to the Treasury Earnings remittances to the Treasury: Interest on Federal Reserve notes Required by the Federal Reserve Act, as amended by the FAST Act Total earnings remittances to the Treasury Net (loss) income after providing for remittances to the Treasury 2014 2 (38) 1 83 24 6 6 84 4 (80) 1 85 24 6 6 46 229 30 10 11 94 217 29 10 11 89 80 13 467 78 15 449 3,752 4,548 3,466 759 4,225 (473) 4,482 4,482 66 Note 11 Note 3n Note 9 Note 9 $ 2 19 21 (452) $ (12) (12) 54 The accompanying notes are an integral part of these financial statements. 6 Federal Reserve Bank of Chicago Statements of Changes in Capital For the years ended December 31, 2015 and December 31, 2014 (in millions, except share data) Capital paid-in Balance at December 31, 2013 (15,191,121 shares) Net change in capital stock issued (157,603 shares) Comprehensive income: Net income Other comprehensive loss Dividends on capital stock Net change in capital Balance at December 31, 2014 (15,348,724 shares) Net change in capital stock issued (470,984 shares) Comprehensive income: Net loss Other comprehensive income Dividends on capital stock Net change in capital Balance at December 31, 2015 (15,819,708 shares) $ 759 Net income retained $ (23) Total capital $ $ 759 - - - 8 66 (46) 20 (12) (12) 66 (12) (46) 8 767 $ 24 $ $ 282 (35) $ - (473) (47) (520) 24 791 802 - - $ $ Total surplus 8 - $ 782 Surplus Accumulated other comprehensive loss 8 66 (12) (46) 16 $ - 21 (14) $ 268 1,534 24 (473) 21 (47) (499) 21 $ 767 1,518 (473) 21 (47) (475) $ 1,059 The accompanying notes are an integral part of these financial statements. 7 Federal Reserve Bank of Chicago Notes to Financial Statements (1) STRUCTURE The Federal Reserve Bank of Chicago (Bank) is part of the Federal Reserve System (System) and is one of the 12 Federal Reserve Banks (Reserve Banks) created by Congress under the Federal Reserve Act of 1913 (Federal Reserve Act), which established the central bank of the United States. The Reserve Banks are chartered by the federal government and possess a unique set of governmental, corporate, and central bank characteristics. The Bank serves the Seventh Federal Reserve District, which includes Iowa, and portions of Michigan, Illinois, Wisconsin, and Indiana. In accordance with the Federal Reserve Act, supervision and control of the Bank is exercised by a board of directors. The Federal Reserve Act specifies the composition of the board of directors for each of the Reserve Banks. Each board is composed of nine members serving three-year terms: three directors, including those designated as chairman and deputy chairman, are appointed by the Board of Governors of the Federal Reserve System (Board of Governors) to represent the public, and six directors are elected by member banks. Banks that are members of the System include all nationally-chartered banks and any state-chartered banks that apply and are approved for membership. Member banks are divided into three classes according to size. Member banks in each class elect one director representing member banks and one representing the public. In any election of directors, each member bank receives one vote, regardless of the number of shares of Reserve Bank stock it holds. In addition to the 12 Reserve Banks, the System also consists, in part, of the Board of Governors and the Federal Open Market Committee (FOMC). The Board of Governors, an independent federal agency, is charged by the Federal Reserve Act with a number of specific duties, including general supervision over the Reserve Banks. The FOMC is composed of members of the Board of Governors, the president of the Federal Reserve Bank of New York (FRBNY), and, on a rotating basis, four other Reserve Bank presidents. (2) OPERATIONS AND SERVICES The Reserve Banks perform a variety of services and operations. These functions include participating in formulating and conducting monetary policy; participating in the payment system, including transfers of funds, automated clearinghouse (ACH) operations, and check collection; distributing coin and currency; performing fiscal agency functions for the U.S. Department of the Treasury (Treasury), certain federal agencies, and other entities; serving as the federal government’s bank; providing short-term loans to depository institutions; providing loans to participants in programs or facilities with broad-based eligibility in unusual and exigent circumstances; serving consumers and communities by providing educational materials and information regarding financial consumer protection rights and laws and information on community development programs and activities; and supervising bank holding companies, state member banks, savings and loan holding companies, U.S. offices of foreign banking organizations, and designated financial market utilities pursuant to authority delegated by the Board of Governors. Certain services are provided to foreign and international monetary authorities, primarily by the FRBNY. The FOMC, in conducting monetary policy, establishes policy regarding domestic open market operations, oversees these operations, and issues authorizations and directives to the FRBNY to execute transactions. The FOMC authorizes and directs the FRBNY to conduct operations in domestic markets, including the direct purchase and sale of Treasury securities, government-sponsored enterprise (GSE) debt securities, and federal agency and GSE mortgage-backed securities (MBS); the purchase of these securities under agreements to resell; and the sale of these securities under agreements to repurchase. The FRBNY holds the resulting securities and agreements in a portfolio known as the System Open Market Account (SOMA). The FRBNY is authorized and directed to lend the Treasury securities and GSE debt securities that are held in the SOMA. 8 Federal Reserve Bank of Chicago Notes to Financial Statements To be prepared to counter disorderly conditions in foreign exchange markets or to meet other needs specified by the FOMC to carry out the System’s central bank responsibilities, the FOMC has authorized and directed the FRBNY to execute spot and forward foreign exchange transactions in 14 foreign currencies, to hold balances in those currencies, and to invest such foreign currency holdings, while maintaining adequate liquidity. The FRBNY holds these securities and obligations in the SOMA. The FOMC has also authorized the FRBNY to maintain reciprocal currency arrangements with the Bank of Canada and the Bank of Mexico in the maximum amounts of $2 billion and $3 billion, respectively, and to warehouse foreign currencies for the Treasury and the Exchange Stabilization Fund in the maximum amount of $5 billion. Because of the global character of bank funding markets, the System has at times coordinated with other central banks to provide liquidity. The FOMC authorized and directed the FRBNY to establish U.S. dollar liquidity and reciprocal foreign currency liquidity swap lines with the Bank of Canada, the Bank of England, the European Central Bank, the Bank of Japan, and the Swiss National Bank. The FRBNY holds amounts outstanding under these swap lines in the SOMA. These swap lines, which were originally established as temporary arrangements, were converted to standing arrangements on October 31, 2013, and will remain in place until further notice. Although the Reserve Banks are separate legal entities, they collaborate on the delivery of certain services to achieve greater efficiency and effectiveness. This collaboration takes the form of centralized operations and product or function offices that have responsibility for the delivery of certain services on behalf of the Reserve Banks. Various operational and management models are used and are supported by service agreements between the Reserve Banks. In some cases, costs incurred by a Reserve Bank for services provided to other Reserve Banks are not shared; in other cases, the Reserve Banks are reimbursed for costs incurred in providing services to other Reserve Banks. Major services provided by the Bank on behalf of the System for which the costs were not reimbursed by the other Reserve Banks include national customer relations and support. (3) SIGNIFICANT ACCOUNTING POLICIES Accounting principles for entities with the unique powers and responsibilities of the nation’s central bank have not been formulated by accounting standard-setting bodies. The Board of Governors has developed specialized accounting principles and practices that it considers to be appropriate for the nature and function of a central bank. These accounting principles and practices are documented in the Financial Accounting Manual for Federal Reserve Banks (FAM), which is issued by the Board of Governors. The Reserve Banks are required to adopt and apply accounting policies and practices that are consistent with the FAM. The financial statements and associated disclosures have been prepared in accordance with the FAM. Limited differences exist between the accounting principles and practices in the FAM and accounting principles generally accepted in the United States of America (GAAP), due to the unique nature of the Bank’s powers and responsibilities as part of the nation’s central bank and given the System’s unique responsibility to conduct monetary policy. The primary differences are the presentation of all SOMA securities holdings at amortized cost, adjusted for credit impairment, if any, the recording of all SOMA securities on a settlement-date basis, and the use of straight-line amortization for Treasury securities, GSE debt securities, and foreign currency denominated investments. Amortized cost, rather than the fair value presentation, more appropriately reflects the financial position associated with the Bank’s securities holdings given the System’s unique responsibility to conduct monetary policy. Although the application of fair value measurements to the securities holdings may result in values substantially greater or less than their carrying values, these unrealized changes in value have no direct effect on the quantity of reserves available to the banking system or on the ability of the Reserve Banks, as the central bank, to meet their financial obligations and responsibilities. Both the domestic and foreign components of the SOMA 9 Federal Reserve Bank of Chicago Notes to Financial Statements portfolio may involve transactions that result in gains or losses when holdings are sold before maturity. Decisions regarding securities and foreign currency transactions, including their purchase and sale, are motivated by monetary policy objectives rather than profit. Accordingly, fair values, earnings, and gains or losses resulting from the sale of such securities and currencies are incidental to open market operations and do not motivate decisions related to policy or open market activities. Accounting for these securities on a settlement-date basis, rather than the trade-date basis required by GAAP, better reflects the timing of the transaction’s effect on the quantity of reserves in the banking system. The cost bases of Treasury securities, GSE debt securities, and foreign government debt instruments are adjusted for amortization of premiums or accretion of discounts on a straight-line basis, rather than using the interest method required by GAAP. In addition, the Bank does not present a Statement of Cash Flows as required by GAAP because the liquidity and cash position of the Bank are not a primary concern given the Reserve Bank’s unique powers and responsibilities as a central bank. Other information regarding the Bank’s activities is provided in, or may be derived from, the Statements of Condition, Income and Comprehensive Income, and Changes in Capital, and the accompanying notes to the financial statements. Other than those described above, there are no significant differences between the policies outlined in the FAM and GAAP. Preparing the financial statements in conformity with the FAM requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates. Significant accounts and accounting policies are explained below. a. Consolidation The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act) established the Bureau of Consumer Financial Protection (Bureau) as an independent bureau within the System that has supervisory authority over some institutions previously supervised by the Reserve Banks in connection with those institutions’ compliance with consumer protection statutes. Section 1017 of the Dodd-Frank Act provides that the financial statements of the Bureau are not to be consolidated with those of the Board of Governors or the System. The Board of Governors funds the Bureau through assessments on the Reserve Banks as required by the Dodd-Frank Act. The Reserve Banks reviewed the law and evaluated the design of and their relationship to the Bureau and determined that it should not be consolidated in the Bank’s financial statements. b. Gold and Special Drawing Rights Certificates The Secretary of the Treasury is authorized to issue gold certificates to the Reserve Banks. Upon authorization, the Reserve Banks acquire gold certificates by crediting equivalent amounts in dollars to the account established for the Treasury. The gold certificates held by the Reserve Banks are required to be backed by the gold owned by the Treasury. The Treasury may reacquire the gold certificates at any time, and the Reserve Banks must deliver them to the Treasury. At such time, the Treasury’s account is charged, and the Reserve Banks’ gold certificate accounts are reduced. The value of gold for purposes of backing the gold certificates is set by law at $42 2/9 per fine troy ounce. Gold certificates are recorded by the Banks at original cost. The Board of Governors allocates the gold certificates among the Reserve Banks once a year based on each Reserve Bank’s average Federal Reserve notes outstanding during the preceding 12 months. Special drawing rights (SDR) are issued by the International Monetary Fund (IMF) to its members in proportion to each member’s quota in the IMF at the time of issuance. SDRs serve as a supplement to international monetary 10 Federal Reserve Bank of Chicago Notes to Financial Statements reserves and may be transferred from one national monetary authority to another. Under the law providing for U.S. participation in the SDR system, the Secretary of the Treasury is authorized to issue SDR certificates to the Reserve Banks. When SDR certificates are issued to the Reserve Banks, equivalent amounts in U.S. dollars are credited to the account established for the Treasury and the Reserve Banks’ SDR certificate accounts are increased. The Reserve Banks are required to purchase SDR certificates, at the direction of the Treasury, for the purpose of financing SDR acquisitions or for financing exchange-stabilization operations. At the time SDR certificate transactions occur, the Board of Governors allocates the SDR certificates among the Reserve Banks based upon each Reserve Bank’s Federal Reserve notes outstanding at the end of the preceding calendar year. SDR certificates are recorded by the Banks at original cost. c. Coin The amount reported as coin in the Statements of Condition represents the face value of all United States coin held by the Bank. The Bank buys coin at face value from the U.S. Mint in order to fill depository institution orders. d. Loans Loans to depository institutions are reported at their outstanding principal balances and interest income is recognized on an accrual basis. Loans are impaired when current information and events indicate that it is probable that the Bank will not receive the principal and interest that are due in accordance with the contractual terms of the loan agreement. Impaired loans are evaluated to determine whether an allowance for loan loss is required. The Bank has developed procedures for assessing the adequacy of any allowance for loan losses using all available information to identify incurred losses. This assessment includes monitoring information obtained from banking supervisors, borrowers, and other sources to assess the credit condition of the borrowers and, as appropriate, evaluating collateral values. Generally, the Bank would discontinue recognizing interest income on impaired loans until the borrower’s repayment performance demonstrates principal and interest would be received in accordance with the terms of the loan agreement. If the Bank discontinues recording interest on an impaired loan, cash payments are first applied to principal until the loan balance is reduced to zero; subsequent payments are applied as recoveries of amounts previously deemed uncollectible, if any, and then as interest income. e. Securities Purchased Under Agreements to Resell, Securities Sold Under Agreements to Repurchase, and Securities Lending The FRBNY may engage in purchases of securities with primary dealers under agreements to resell (repurchase transactions). These repurchase transactions are typically settled through a tri-party arrangement. In the United States, there are two commercial custodial banks that provide these services. In a tri-party arrangement, a commercial custodial bank manages the collateral clearing, settlement, pricing, and pledging, and provides cash and securities custodial services for and on behalf of the FRBNY and counterparty. The collateral pledged must exceed the principal amount of the transaction by a margin determined by the FRBNY for each class and maturity of acceptable collateral. Collateral designated by the FRBNY as acceptable under repurchase transactions primarily includes Treasury securities (including Treasury Inflation-Protected Securities, Separate Trading of Registered Interest and Principal of Securities Treasury securities, and Treasury Floating Rate Notes); direct obligations of several federal and GSE-related agencies, including Federal National Mortgage Association, Federal Home Loan Mortgage Corporation, and Federal Home Loan Banks; and pass-through federal agency and GSE MBS. The repurchase transactions are accounted for as financing transactions with the associated interest income recognized over the life of the transaction. These transactions are reported at their contractual amounts as “System Open Market Account: Securities purchased under agreements to resell” and the related accrued interest receivable is reported as a component of “System Open Market Account: Accrued interest receivable” in the Statements of Condition. 11 Federal Reserve Bank of Chicago Notes to Financial Statements The FRBNY may engage in sales of securities under agreements to repurchase with primary dealers and with a set of expanded counterparties that includes banks, savings associations, GSEs, and domestic money market funds (Primary dealer and expanded counterparties reverse repurchase agreements). These reverse repurchase transactions are designed to have a margin of zero and are settled through a tri-party arrangement, similar to repurchase transactions. Reverse repurchase transactions may also be executed with foreign official and international account holders as part of a service offering. Reverse repurchase agreements are collateralized by a pledge of an amount of Treasury securities, GSE debt securities, or federal agency and GSE MBS that are held in the SOMA. Reverse repurchase transactions are accounted for as financing transactions, and the associated interest expense is recognized over the life of the transaction. These transactions are reported at their contractual amounts as “System Open Market Account: Securities sold under agreements to repurchase” and the related accrued interest payable is reported as a component of “System Open Market Account: Other liabilities” in the Statements of Condition. Treasury securities and GSE debt securities held in the SOMA may be lent to primary dealers, typically overnight, to facilitate the effective functioning of the domestic securities markets. The amortized cost basis of securities lent continues to be reported as “System Open Market Account: Treasury securities, net” and “System Open Market Account: Government-sponsored enterprise debt securities, net,” as appropriate, in the Statements of Condition. Securities lending transactions are fully collateralized by Treasury securities based on the fair values of the securities lent increased by a margin determined by the FRBNY. The FRBNY charges the primary dealer a fee for borrowing securities, and these fees are reported as a component of “Non-interest income: System Open Market Account: Other” in the Statements of Income and Comprehensive Income. Activity related to securities purchased under agreements to resell, securities sold under agreements to repurchase, and securities lending is allocated to each of the Reserve Banks on a percentage basis derived from an annual settlement of the interdistrict settlement account that occurs in the second quarter of each year. f. Treasury Securities, Government-Sponsored Enterprise Debt Securities, Federal Agency and Government-Sponsored Enterprise Mortgage-Backed Securities, and Foreign Currency Denominated Investments Interest income on Treasury securities, GSE debt securities, and foreign currency denominated investments included in the SOMA is accrued using the straight-line method. Interest income on federal agency and GSE MBS is accrued using the interest method and includes amortization of premiums, accretion of discounts, and gains or losses associated with principal paydowns. Premiums and discounts related to federal agency and GSE MBS are amortized or accreted over the term of the security to stated maturity, and the amortization of premiums and accretion of discounts are accelerated when principal payments are received. Gains and losses resulting from sales of securities are determined by specific issue based on average cost. Treasury securities, GSE debt securities, and federal agency and GSE MBS are reported net of premiums and discounts in the Statements of Condition and interest income on those securities is reported net of the amortization of premiums and accretion of discounts in the Statements of Income and Comprehensive Income. In addition to outright purchases of federal agency and GSE MBS that are held in the SOMA, the FRBNY enters into dollar roll transactions (dollar rolls), which primarily involve an initial transaction to purchase or sell “to be announced” (TBA) MBS for delivery in the current month combined with a simultaneous agreement to sell or purchase TBA MBS on a specified future date. During the years ended December 31, 2015 and 2014, the FRBNY executed dollar rolls to facilitate settlement of outstanding purchases of federal agency and GSE MBS. The FRBNY accounts for dollar rolls as individual purchases and sales, on a settlement-date basis. Accounting for these transactions as purchases and sales, rather than as financing transactions, is appropriate because the purchase or sale 12 Federal Reserve Bank of Chicago Notes to Financial Statements component of the MBS TBA dollar roll is paired off or assigned prior to settlement and, as a result, there is no transfer and return of securities. The FRBNY also conducts small-value exercises from time to time for the purpose of testing operational readiness. Small-value exercises may include sales of federal agency and GSE MBS. Net gains resulting from MBS transactions are reported as a component of “Non-interest income: System Open Market Account: Federal agency and government-sponsored enterprise mortgage-backed securities gains, net” in the Statements of Income and Comprehensive Income. Foreign currency denominated investments, which can include foreign currency deposits, securities purchased under agreements to resell, and government debt instruments, are revalued daily at current foreign currency market exchange rates in order to report these assets in U.S. dollars. Foreign currency translation gains and losses that result from the daily revaluation of foreign currency denominated investments are reported as “Non-interest income: System Open Market Account: Foreign currency translation losses, net” in the Statements of Income and Comprehensive Income. Because the FRBNY enters into commitments to buy Treasury securities, federal agency and GSE MBS, and foreign government debt instruments and records the related securities on a settlement-date basis in accordance with the FAM, the related outstanding commitments are not reflected in the Statements of Condition. Activity related to Treasury securities, GSE debt securities, and federal agency and GSE MBS, including the premiums, discounts, and realized gains and losses, is allocated to each Reserve Bank on a percentage basis derived from an annual settlement of the interdistrict settlement account that occurs in the second quarter of each year. Activity related to foreign currency denominated investments, including the premiums, discounts, and realized and unrealized gains and losses, is allocated in the first quarter of each year to each Reserve Bank based on the ratio of each Reserve Bank’s capital and surplus to the Reserve Banks’ aggregate capital and surplus at the preceding December 31. g. Central Bank Liquidity Swaps Central bank liquidity swaps, which are transacted between the FRBNY and a foreign central bank, can be structured as either U.S. dollar or foreign currency liquidity swap arrangements. Central bank liquidity swaps activity, including the related income and expense, is allocated in the first quarter of each year to each Reserve Bank based on the ratio of each Reserve Bank’s capital and surplus to the Reserve Banks’ aggregate capital and surplus at the preceding December 31. The foreign currency amounts associated with these central bank liquidity swap arrangements are revalued daily at current foreign currency market exchange rates. U.S. dollar liquidity swaps At the initiation of each U.S. dollar liquidity swap transaction, the foreign central bank transfers a specified amount of its currency to a restricted account for the FRBNY in exchange for U.S. dollars at the prevailing market exchange rate. Concurrent with this transaction, the FRBNY and the foreign central bank agree to a second transaction that obligates the foreign central bank to return the U.S. dollars and the FRBNY to return the foreign currency on a specified future date at the same exchange rate as the initial transaction. The Bank’s allocated portion of the foreign currency amounts that the FRBNY acquires are reported as “System Open Market Account: Central bank liquidity swaps” in the Statements of Condition. Because the swap transaction will be unwound at the same U.S. dollar amount and exchange rate that were used in the initial transaction, the recorded value of the foreign currency amounts is not affected by changes in the market exchange rate. 13 Federal Reserve Bank of Chicago Notes to Financial Statements The foreign central bank compensates the FRBNY based on the amount outstanding and the rate under the swap agreement. The Bank’s allocated portion of the amount of compensation received during the term of the swap transaction is reported as “Interest income: System Open Market Account: Central bank liquidity swaps” in the Statements of Income and Comprehensive Income. Foreign currency liquidity swaps Foreign currency liquidity swap transactions involve the transfer by the FRBNY, at the prevailing market exchange rate, of a specified amount of U.S. dollars to an account for the foreign central bank in exchange for its currency. The foreign currency amounts that the FRBNY receives are recorded as a liability. h. Bank Premises, Equipment, and Software Bank premises and equipment are stated at cost less accumulated depreciation. Depreciation is calculated on a straight-line basis over the estimated useful lives of the assets, which range from 3 to 50 years. Major alterations, renovations, and improvements are capitalized at cost as additions to the asset accounts and are depreciated over the remaining useful life of the asset or, if appropriate, over the unique useful life of the alteration, renovation, or improvement. Maintenance, repairs, and minor replacements are charged to operating expense in the year incurred. Reserve Banks may transfer assets to other Reserve Banks or may lease property of other Reserve Banks. Costs incurred to acquire software are capitalized based on the purchase price. Costs incurred during the application development stage to develop internal-use software are capitalized based on the cost of direct services and materials associated with designing, coding, installing, and testing the software. Capitalized software costs are amortized on a straight-line basis over the estimated useful lives of the software applications, which generally range from three to five years. Maintenance costs and minor replacements related to software are charged to operating expense in the year incurred. Capitalized assets, including software, buildings, leasehold improvements, furniture, and equipment, are impaired and an adjustment is recorded when events or changes in circumstances indicate that the carrying amount of assets or asset groups is not recoverable and significantly exceeds the assets’ fair value. i. Interdistrict Settlement Account Each Reserve Bank aggregates the payments due to or from other Reserve Banks. These payments result from transactions between the Reserve Banks and transactions that involve depository institution accounts held by other Reserve Banks, such as Fedwire funds and securities transfers and check and ACH transactions. The cumulative net amount due to or from the other Reserve Banks is reflected in the “Interdistrict settlement account” in the Statements of Condition. An annual settlement of the interdistrict settlement account occurs in the second quarter of each year. As a result of the annual settlement, the balance in each Bank’s interdistrict settlement account is adjusted by an amount equal to the average balance in the account during the previous twelve-month period ended March 31. An equal and offsetting adjustment is made to each Bank’s allocated portion of SOMA assets and liabilities. j. Federal Reserve Notes Federal Reserve notes are the circulating currency of the United States. These notes, which are identified as issued to a specific Reserve Bank, must be fully collateralized. All of the Bank’s assets are eligible to be pledged as collateral. The collateral value is equal to the book value of the collateral tendered with the exception of securities, for which the collateral value is equal to the par value of the securities tendered. The par value of securities sold under agreements to repurchase is deducted from the eligible collateral value. 14 Federal Reserve Bank of Chicago Notes to Financial Statements The Board of Governors may, at any time, call upon a Reserve Bank for additional security to adequately collateralize outstanding Federal Reserve notes. To satisfy the obligation to provide sufficient collateral for outstanding Federal Reserve notes, the Reserve Banks have entered into an agreement that provides for certain assets of the Reserve Banks to be jointly pledged as collateral for the Federal Reserve notes issued to all Reserve Banks. In the event that this collateral is insufficient, the Federal Reserve Act provides that Federal Reserve notes become a first and paramount lien on all the assets of the Reserve Banks. Finally, Federal Reserve notes are obligations of the United States government. “Federal Reserve notes outstanding, net” in the Statements of Condition represents the Bank’s Federal Reserve notes outstanding, reduced by the Bank’s currency holdings of $9,479 million and $10,427 million at December 31, 2015 and 2014, respectively. At December 31, 2015 and 2014, all Federal Reserve notes outstanding, reduced by the Reserve Bank’s currency holdings, were fully collateralized. At December 31, 2015, all gold certificates, all special drawing rights certificates, and $1,363 billion of domestic securities held in the SOMA were pledged as collateral. At December 31, 2015, no investments denominated in foreign currencies were pledged as collateral. k. Deposits Depository Institutions Depository institutions’ deposits represent the reserve and service-related balances in the accounts that depository institutions hold at the Bank. Required reserve balances are those that a depository institution must hold to satisfy its reserve requirement. Reserve requirements are the amount of funds that a depository institution must hold in reserve against specified deposit liabilities. Excess reserves are those held by the depository institutions in excess of their required reserve balances. The interest rates paid on required reserve balances and excess balances are determined by the Board of Governors, based on an FOMC-established target range for the federal funds rate. Interest expense on depository institutions’ deposits is accrued daily at the appropriate rate. Interest payable is reported as a component of “Interest payable to depository institutions” in the Statements of Condition. The Term Deposit Facility (TDF) consists of deposits with specific maturities held by eligible institutions at the Reserve Banks. The Reserve Banks pay interest on these deposits at interest rates determined by auction. Interest expense on depository institutions’ deposits is accrued daily at the appropriate rate. Interest payable is reported as a component of “Interest payable to depository institutions” in the Statements of Condition. There were no deposits held by the Bank under the TDF at December 31, 2015 and 2014. Other Other deposits include the Bank’s allocated portion of foreign central bank and foreign government deposits held at the FRBNY. Other deposits also include cash collateral and deposits of designated financial market utilities held by the Bank. l. Capital Paid-in The Federal Reserve Act requires that each member bank subscribe to the capital stock of the Reserve Bank in an amount equal to 6 percent of the capital and surplus of the member bank. These shares are nonvoting, with a par value of $100, and may not be transferred or hypothecated. As a member bank’s capital and surplus changes, its holdings of Reserve Bank stock must be adjusted. Currently, only one-half of the subscription is paid in, and the remainder is subject to call. A member bank is liable for Reserve Bank liabilities up to twice the par value of stock subscribed by it. 15 Federal Reserve Bank of Chicago Notes to Financial Statements By law, each Reserve Bank is required to pay each member bank an annual dividend of 6 percent on the paid-in capital stock. This cumulative dividend is paid semiannually. The Fixing America’s Surface Transportation Act (FAST Act), which was enacted on December 4, 2015, amended section 7 of the Federal Reserve Act related to Reserve Bank surplus and the payment of dividends to member banks. The FAST Act changed the dividend rate for member banks with more than $10 billion of consolidated assets, effective January 1, 2016, to the smaller of 6 percent or the rate equal to the high yield of the 10-year Treasury note auctioned at the last auction held prior to the payment of the dividend. The FAST Act did not change the 6 percent dividend rate for member banks with $10 billion or less of total consolidated assets. The provisions of the FAST Act related to dividend payments did not affect the amounts reported by the Bank for the year ended December 31, 2015, but are expected to reduce the amount of dividend payments made to member banks in future years. m. Surplus Before the enactment of the FAST Act, the Board of Governors required the Reserve Banks to maintain a surplus equal to the amount of capital paid-in. On a daily basis, surplus was adjusted to equate the balance to capital paid-in. Effective December 4, 2015, the FAST Act limits aggregate Reserve Bank surplus to $10 billion. Reserve Bank surplus is allocated among the Reserve Banks based on the ratio of each Bank’s capital paid-in to total Reserve Bank capital paid-in as of December 31 of each year. Accumulated other comprehensive income is reported as a component of “Surplus” in the Statements of Condition and the Statements of Changes in Capital. Additional information regarding the classifications of accumulated other comprehensive income is provided in Notes 9 and 10. n. Earnings Remittances to the Treasury Before the enactment of the FAST Act, the Board of Governors required the Reserve Banks to transfer excess earnings to the Treasury as interest on Federal Reserve notes after providing for the costs of operations, payment of dividends, and reservation of an amount necessary to equate surplus with capital paid-in. The Federal Reserve Act, as amended by the FAST Act effective December 4, 2015, now requires that any amounts of the surplus funds of the Reserve Banks that exceed, or would exceed, the aggregate limitation of $10 billion shall be transferred to the Board of Governors for transfer to the Treasury. The Bank remits excess earnings to the Treasury after providing for the cost of operations, payment of dividends, and reservation of an amount necessary to maintain surplus at the Bank’s allocated portion of the $10 billion aggregate surplus limitation. Remittances to the Treasury are made on a weekly basis. The amount of the remittances to the Treasury that were required under the Board of Governor’s policy is reported as “Earnings remittances to the Treasury: Interest on Federal Reserve notes” in the Statements of Income and Comprehensive Income. The amount of the remittances to the Treasury that are required by the FAST Act is reported as “Earnings remittances to the Treasury: Required by the Federal Reserve Act, as amended by the FAST Act” in the Statements of Income and Comprehensive Income. The amount due to the Treasury is reported as “Accrued remittances to the Treasury” in the Statements of Condition. See Note 11 for additional information on earnings remittances to the Treasury. Under the previous Board of Governor’s policy, if earnings during the year were not sufficient to provide for the costs of operations, payment of dividends, and equating surplus and capital paid-in, remittances to the Treasury were suspended, and under the FAST Act, if earnings during the year are not sufficient to provide for the costs of operations, payment of dividends, and maintaining surplus at an amount equal to the Bank’s allocated portion of the $10 billion aggregate surplus limitation, remittances to the Treasury are suspended. A deferred asset is recorded that 16 Federal Reserve Bank of Chicago Notes to Financial Statements represents the amount of net earnings a Reserve Bank will need to realize before remittances to the Treasury resume. This deferred asset is periodically reviewed for impairment. o. Income and Costs Related to Treasury Services When directed by the Secretary of the Treasury, the Bank is required by the Federal Reserve Act to serve as fiscal agent and depositary of the United States Government. By statute, the Treasury has appropriations to pay for these services. During the years ended December 31, 2015 and 2014, the Bank was reimbursed for all services provided to the Treasury as its fiscal agent. p. Income from Services, Compensation Received for Service Costs Provided, and Compensation Paid for Service Costs Incurred The Bank has overall responsibility for managing the Reserve Banks’ provision of electronic access services to depository institutions and, as a result, reports total System revenue for these services as “Income from services” in its Statements of Income and Comprehensive Income. The Bank compensates the applicable Reserve Banks for the costs incurred to provide these services and reports the resulting compensation paid as “Operating expenses: Compensation paid for service costs incurred” in its Statements of Income and Comprehensive Income. The Federal Reserve Bank of Atlanta has overall responsibility for managing the Reserve Banks’ provision of check and ACH services to depository institutions, the FRBNY has overall responsibility for managing the Reserve Banks’ provision of Fedwire funds and securities services. The Reserve Bank that has overall responsibility for managing these services recognizes the related total System revenue in its Statements of Income and Comprehensive Income. The Bank is compensated for costs incurred to provide these services by the Reserve Banks responsible for managing these services and reports this compensation as “Non-interest income: Compensation received for service costs provided” in its Statements of Income and Comprehensive Income. q. Assessments The Board of Governors assesses the Reserve Banks to fund its operations and the operations of the Bureau. These assessments are allocated to each Reserve Bank based on each Reserve Bank’s capital and surplus balances. The Board of Governors also assesses each Reserve Bank for expenses related to producing, issuing, and retiring Federal Reserve notes based on each Reserve Bank’s share of the number of notes comprising the System’s net liability for Federal Reserve notes on December 31 of the prior year. The Dodd-Frank Act requires that, after the transfer of its responsibilities to the Bureau on July 21, 2011, the Board of Governors fund the Bureau in an amount not to exceed a fixed percentage of the total operating expenses of the System as reported in the Board of Governor’s 2009 annual report, which totaled $4.98 billion. After 2013, the amount will be adjusted annually in accordance with the provisions of the Dodd-Frank Act. The percentage of total operating expenses of the System for the years ended December 31, 2015 and 2014 was 12.42 percent ($618.7 million) and 12.22 percent ($608.4 million), respectively. The Bank’s assessment for Bureau funding is reported as “Assessments: Bureau of Consumer Financial Protection” in the Statements of Income and Comprehensive Income. r. Taxes The Reserve Banks are exempt from federal, state, and local taxes, except for taxes on real property. The Bank’s real property taxes were $4 million for each of the years ended December 31, 2015 and 2014, and are reported as a component of “Operating expenses: Occupancy” in the Statements of Income and Comprehensive Income. 17 Federal Reserve Bank of Chicago Notes to Financial Statements s. Restructuring Charges The Reserve Banks recognize restructuring charges for exit or disposal costs incurred as part of the closure of business activities in a particular location, the relocation of business activities from one location to another, or a fundamental reorganization that affects the nature of operations. Restructuring charges may include costs associated with employee separations, contract terminations, and asset impairments. Expenses are recognized in the period in which the Bank commits to a formalized restructuring plan or executes the specific actions contemplated in the plan and all criteria for financial statement recognition have been met. The Bank had no restructuring activities in 2015 and 2014. t. Recently Issued Accounting Standards In April 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. This update changes the requirements for reporting discontinued operations, which may include a component of an entity or a group of components of an entity, or a business or nonprofit activity. This update is effective for the Bank for the year ended December 31, 2015, and did not have a material effect on the Bank’s financial statements. In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). This update was issued to create common revenue recognition guidance for U.S. GAAP and International Financial Reporting Standards. The guidance is applicable to all contracts for the transfer of goods or services regardless of industry or type of transaction. This update requires recognition of revenue in a manner that reflects the consideration that the entity expects to receive in return for the transfer of goods or services to customers. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which delayed the required effective date of this accounting by one year. This revenue recognition accounting guidance is effective for the Bank for the year ending December 31, 2019, although the Bank may elect to adopt guidance earlier. The Bank is continuing to evaluate the effect of this new guidance on the Bank’s financial statements. In June 2014, the FASB issued ASU 2014-11, Transfer and Servicing (Topic 860): Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures. This update requires certain changes in the accounting for repurchase-to-maturity transactions and repurchase financing transactions. Additionally, this update provides guidance for the disclosures for certain transfers of financial assets accounted for as sales, where the transferor retains substantially all of the exposure to economic return on the transferred financial asset; and repurchase agreements, securities lending transactions, and repurchase-to-maturity transactions that are accounted for as secured borrowings. This update is effective for the Bank for the year ended December 31, 2015. The update did not have any effect on the Bank’s accounting for these transactions. The relevant required disclosures have been included in the Note 3e and Note 5 to the Bank’s financial statements. In April 2015, the FASB issued ASU 2015-05, Intangibles - Goodwill and Other - Internal Use Software (Subtopic 350-40). The amendments in this update provide guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. Consequently, all software licenses within the scope of subtopic 350-40 will be accounted for consistent with other licenses of intangible assets. This update is effective for the Bank for the year ending December 31, 2016, and is not expected to have a material effect on the Bank’s financial statements. 18 Federal Reserve Bank of Chicago Notes to Financial Statements In July 2015, the FASB issued ASU 2015-12, Plan Accounting: Defined Benefit Pension Plans (Topic 960), Defined Contribution Pension Plans (Topic 962), Health and Welfare Benefit Plans (Topic 965): (Part I) Fully Benefit-Responsive Investment Contracts, (Part II) Plan Investment Disclosures, (Part III) Measurement Date Practical Expedient (consensuses of the FASB Emerging Issues Task Force). Previously, plans were required to disclose (1) individual investments representing 5 percent or more of net assets available for benefits and (2) net appreciation or depreciation for investments by general type. The amendments in Part II of this update (1) eliminate the required disclosure related to individual investments and (2) removes the requirement to disaggregate net appreciation or depreciation for investments by general type. This update is effective for the Bank for the year ending December 31, 2016, and is not expected to have a material effect on the Bank’s financial statements. In January 2016, the FASB issued ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The amendments in this update eliminate the requirement to disclose methods and significant assumptions used to estimate the fair value for financial instruments measured at amortized cost on the balance sheet. This update is effective for the Bank for the year ending December 31, 2019. The Bank is continuing to evaluate the effect of this new guidance on the Bank’s financial statements. In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). This update revises the model to assess how a lease should be classified and provides guidance for lessees, requiring lessees to present right-of-use assets and lease liabilities on the balance sheet. The update is effective for the Bank for the year ended December 31, 2020, although earlier adoption is permitted. The Bank is continuing to evaluate the effect of this new guidance on its financial statements. (4) LOANS Loans to Depository Institutions The Bank offers primary, secondary, and seasonal loans to eligible borrowers (depository institutions that maintain reservable transaction accounts or nonpersonal time deposits and have established discount window borrowing privileges). Each program has its own interest rate and interest is accrued using the applicable interest rate established at least every 14 days by the Bank’s board of directors, subject to review and determination by the Board of Governors. Primary and secondary loans are extended on a short-term basis, typically overnight, whereas seasonal loans may be extended for a period of up to nine months. Primary, secondary, and seasonal loans are collateralized to the satisfaction of the Bank to reduce credit risk. Assets eligible to collateralize these loans include consumer, business, and real estate loans; Treasury securities; GSE debt securities; foreign sovereign debt; municipal, corporate, and state and local government obligations; asset-backed securities; corporate bonds; commercial paper; and bank-issued assets, such as certificates of deposit, bank notes, and deposit notes. Collateral is assigned a lending value that is deemed appropriate by the Bank, which is typically fair value reduced by a margin. Loans to depository institutions are monitored daily to ensure that borrowers continue to meet eligibility requirements for these programs. If a borrower no longer qualifies for these programs, the Bank will generally request full repayment of the outstanding loan or, for primary or seasonal loans, may convert the loan to a secondary credit loan. Collateral levels are reviewed daily against outstanding obligations, and borrowers that no longer have sufficient collateral to support outstanding loans are required to provide additional collateral or to make partial or full repayment. Loans to depository institutions were $9 million and $30 million as of December 31, 2015 and 2014, respectively, with a remaining maturity within 15 days. 19 Federal Reserve Bank of Chicago Notes to Financial Statements At December 31, 2015 and 2014, the Bank did not have any loans that were impaired, restructured, past due, or on non-accrual status, and no allowance for loan losses was required. There were no impaired loans during the years ended December 31, 2015 and 2014. Interest income attributable to loans to depository institutions was immaterial during the years ended December 31, 2015 and 2014. (5) SYSTEM OPEN MARKET ACCOUNT a. Domestic Securities Holdings The FRBNY conducts domestic open market operations and, on behalf of the Reserve Banks, holds the resulting securities in the SOMA. During the year ended December 31, 2014, the FRBNY continued the purchase of Treasury securities and federal agency and GSE MBS under the large-scale asset purchase programs as directed by the FOMC, although at a reduced pace than previous years. In October 2014, the FOMC concluded its asset purchase program while maintaining its existing policy of reinvesting principal payments from its holdings of GSE debt securities and federal agency and GSE MBS and of rolling over maturing Treasury securities at auction. During the year ended December 31, 2015, the FRBNY continued the reinvestments. The Bank’s allocated share of activity related to domestic open market operations was 3.715 percent and 4.087 percent at December 31, 2015 and 2014, respectively. 20 Federal Reserve Bank of Chicago Notes to Financial Statements The Bank’s allocated share of Treasury securities, GSE debt securities, and federal agency and GSE MBS, net, excluding accrued interest, held in the SOMA at December 31 was as follows (in millions): 2015 Unamortized premiums Par Treasury securities Notes Bonds Total Treasury securities $ $ $ 60,739 30,719 91,458 GSE debt securities $ Federal agency and GSE MBS $ Unaccreted discounts $ $ 778 4,236 5,014 1,224 $ 30 $ 64,926 $ 1,996 $ $ Total amortized cost (241) (347) (588) $ $ 61,276 34,608 95,884 - $ 1,254 (27) $ 66,895 2014 Unamortized premiums Par Treasury securities Notes Bonds Total Treasury securities $ $ $ 66,822 33,777 100,599 GSE debt securities $ Federal agency and GSE MBS $ Unaccreted discounts $ $ 1,131 5,093 6,224 1,581 $ 53 $ 70,987 $ 2,175 $ $ Total amortized cost (315) (396) (711) $ $ 67,638 38,474 106,112 - $ 1,634 (40) $ 73,122 The FRBNY enters into transactions for the purchase of securities under agreements to resell and transactions to sell securities under agreements to repurchase as part of its monetary policy activities. Prior to December 17, 2015, these operations were for the purpose of further assessing the appropriate structure of such operations in supporting the implementation of monetary policy during normalization. From December 17, 2015 these operations have been undertaken as necessary to maintain the federal funds rate in a target range. In addition, transactions to sell securities under agreements to repurchase are entered into as part of a service offering to foreign official and international account holders. 21 Federal Reserve Bank of Chicago Notes to Financial Statements There were no material transactions related to securities purchased under agreements to resell during the years ended December 31, 2015 and 2014. Financial information related to securities sold under agreements to repurchase for the years ended December 31 was as follows (in millions): Allocated to the Bank 2015 Total SOMA 2014 2015 2014 Primary dealers and expanded counterparties: Contract amount outstanding, end of year $ Average daily amount outstanding, during the year 17,633 $ 16,214 $ 474,592 $ 396,705 4,826 5,630 125,656 130,281 Maximum balance outstanding, during the year 17,633 16,214 474,592 396,705 Securities pledged (par value), end of year 16,272 14,928 437,961 365,235 Securities pledged (fair value), end of year 17,664 16,289 475,422 398,540 Foreign official and international accounts: Contract amount outstanding, end of year $ Average daily amount outstanding, during the year 8,836 $ 6,005 4,624 $ 4,564 237,809 $ 157,929 113,132 102,968 Maximum balance outstanding, during the year 8,836 6,385 237,809 122,232 Securities pledged (par value), end of year 8,558 4,429 230,333 108,355 Securities pledged (fair value), end of year 8,836 4,624 237,825 113,132 Total contract amount outstanding, end of year $ 26,469 $ 3 $ 20,838 $ 3 $ 712,401 $ 509,837 84 $ 68 Supplemental information - interest expense: Primary dealers and expanded counterparties Foreign official and international accounts Total interest expense - securities sold under agreements to repurchase $ 2 6 $ 9 $ 5 164 $ 248 44 $ 112 Securities pledged as collateral, at December 31, 2015 and 2014, consisted solely of Treasury securities. The contract amount outstanding as of December 31, 2015 of securities sold under agreements to repurchase that were transacted with primary dealers and expanded counterparties had a term of one business day and matured on January 4, 2016. The contract amount outstanding as of December 31, 2015 of securities sold under agreements to repurchase that were transacted with foreign official and international accounts had a term of one business day and matured on January 4, 2016. 22 Federal Reserve Bank of Chicago Notes to Financial Statements The remaining maturity distribution of Treasury securities, GSE debt securities, federal agency and GSE MBS bought outright, and securities sold under agreements to repurchase that were allocated to the Bank at December 31, 2015 and 2014 was as follows (in millions): Within 15 days December 31, 2015: Treasury securities (par value) GSE debt securities (par value) Federal agency and GSE $ MBS (par value)1 Securities sold under agreements to repurchase (contract amount) December 31, 2014: Treasury securities (par value) GSE debt securities (par value) Federal agency and GSE MBS (par value)1 Securities sold under agreements to repurchase (contract amount) 1 $ - 16 days to 90 days $ 1,435 91 days to 1 year Over 1 year to 5 years $ $ 6,595 - 137 486 - - - 26,469 - - - $ 45 29 $ 144 161 - - - 20,838 - - 41,552 Over 5 years to 10 years $ 18,177 $ - 514 335 17 - - $ Over 10 years 45,487 $ 28,063 - 1,250 264 1 - - $ 23,699 Total $ 91,458 87 1,224 64,574 64,926 - 26,469 26,905 $ 100,599 96 1,581 70,722 70,987 - 20,838 The par amount shown for federal agency and GSE MBS is the remaining principal balance of the securities. Federal agency and GSE MBS are reported at stated maturity in the table above. The estimated weighted average life of these securities, which differs from the stated maturity primarily because it factors in scheduled payments and prepayment assumptions, was approximately 6.5 and 5.7 years as of December 31, 2015 and 2014, respectively. The amortized cost and par value of Treasury securities and GSE debt securities that were loaned from the SOMA under securities lending agreements, at December 31 were as follows (in millions): Treasury securities (amortized cost) Treasury securities (par value) GSE debt securities (amortized cost) GSE debt securities (par value) Allocated to the Bank 2015 2014 $ 704 $ 455 671 413 5 26 5 25 $ Total SOMA 2015 2014 18,960 $ 11,144 18,055 10,105 146 633 137 616 Securities pledged as collateral by the counterparties in the securities lending arrangements at December 31, 2015 and 2014, consisted solely of Treasury securities. The securities lending agreements outstanding as of December 31, 2015 had a term of one business day and matured on January 4, 2016. The FRBNY enters into commitments to buy and sell Treasury securities and records the related securities on a settlement-date basis. As of December 31, 2015, there were no outstanding commitments. 23 Federal Reserve Bank of Chicago Notes to Financial Statements The FRBNY enters into commitments to buy and sell federal agency and GSE MBS and records the related securities on a settlement-date basis. As of December 31, 2015, the total purchase price of the federal agency and GSE MBS under outstanding purchase commitments was $22,187 million, none of which was related to dollar rolls. The total purchase price of outstanding purchase commitments allocated to the Bank was $824 million, none of which was related to dollar rolls. MBS commitments, which had contractual settlement dates extending through January 2016, are principally for the purchase of TBA MBS for which the number and identity of the pools that will be delivered to fulfill the commitment are unknown at the time of the trade. As of December 31, 2015, there were no outstanding sales commitments for federal agency and GSE MBS. These commitments are subject to varying degrees of off-balance-sheet market risk and counterparty credit risk that result from their future settlement. The FRBNY requires the posting of cash collateral for MBS commitments as part of its risk management practices used to mitigate the counterparty credit risk. Other assets consists primarily of cash and short-term investments related to the federal agency and GSE MBS portfolio. Other liabilities, which are primarily related to federal agency and GSE MBS purchases and sales, includes the FRBNY’s obligation to return cash margin posted by counterparties as collateral under commitments to purchase and sell federal agency and GSE MBS. In addition, other liabilities includes obligations that arise from the failure of a seller to deliver MBS to the FRBNY on the settlement date. Although the FRBNY has ownership of and records its investments in the MBS as of the contractual settlement date, it is not obligated to make payment until the securities are delivered, and the amount included in other liabilities represents the FRBNY’s obligation to pay for the securities when delivered. The amount of other assets and other liabilities allocated to the Bank and held in the SOMA at December 31 was as follows (in millions): Total SOMA 2015 2014 Allocated to the Bank 2015 2014 Other assets: MBS portfolio related cash and short term investments Other Total other assets Other liabilities: Cash margin Obligations from MBS transaction fails Other Total other liabilities $ 1 $ 1 $ - $ 1 $ 1 $ $ 18 1 19 $ 33 1 34 $ $ $ $ 13 1 14 $ 486 16 6 508 $ $ $ 28 1 29 793 30 7 830 Accrued interest receivable on domestic securities holdings was $25,354 million and $25,561 million as of December 31, 2015 and 2014, respectively, of which $942 million and $1,045 million, respectively, was allocated to the Bank. These amounts are reported as a component of “System Open Market Account: Accrued interest receivable” in the Statements of Condition. 24 Federal Reserve Bank of Chicago Notes to Financial Statements Information about transactions related to Treasury securities, GSE debt securities, and federal agency and GSE MBS during the years ended December 31, 2015 and 2014, is summarized as follows (in millions): Allocated to the Bank Notes 3,195 $ $ (888) (27) (646) 1,634 21,096 (2) (8,820) (312) (21,724) $ 73,122 $ (223) (19) (138) 1,254 13,612 (19) 1 (12,731) (447) (6,643) $ 66,895 7,747 (23) (246) 21 (20,651) $ 67,638 3,994 (449) 57 (11,833) $ 38,474 11,741 (23) (695) 78 (32,484) $ 106,112 Purchases 1 Sales 1 Realized gains, net 2 Principal payments and maturities Amortization of premiums and accretion of discounts, net Inflation adjustment on inflation-indexed securities Annual reallocation adjustment 3 Balance at December 31, 2015 102 (111) (210) 1 (6,144) 61,276 28 (20) (392) 1 (3,483) 34,608 130 (131) (602) 2 (9,627) 95,884 Year-ended December 31, 2015 Supplemental information - par value of transactions: Purchases 4 Sales 1 $ Purchases 1 Sales 1 Realized gains, net 2 Principal payments and maturities Amortization of premiums and accretion of discounts, net Inflation adjustment on inflation-indexed securities Annual reallocation adjustment 3 Balance at December 31, 2014 $ 46,705 $ 127,495 $ Year-ended December 31, 2014 Supplemental information - par value of transactions: Purchases 4 Sales $ GSE debt securities Balance at December 31, 2013 $ 80,790 Bonds Total Treasury securities $ Federal agency and GSE MBS 82,884 $ 7,861 - $ 3,926 - $ 11,787 - $ - $ 20,391 (2) $ 102 - $ 29 - $ 131 - $ - $ 13,135 (18) Purchases and sales may include payments and receipts related to principal, premiums, discounts, and inflation compensation adjustments to the basis of inflation-indexed securities. The amount reported as sales includes the realized gains and losses on such transactions. Purchases and sales exclude MBS TBA transactions that are settled on a net basis. 2 Realized gains, net offset the amount of realized gains and losses included in the reported sales amount. 3 Reflects the annual adjustment to the Bank's allocated portion of the related SOMA securities that results from the annual settlement of the interdistrict settlement account, as discussed in Note 3i. 4 Includes inflation compensation. 25 Federal Reserve Bank of Chicago Notes to Financial Statements Total SOMA Federal agency and GSE MBS $ 1,533,860 Notes Bonds Balance at December 31, 2013 $ 1,495,115 $ 864,319 $ 2,359,434 $ Purchases 1 Sales 1 Realized gains, net 2 Principal payments and maturities Amortization of premiums and accretion of discounts, net Inflation adjustment on inflation-indexed securities Balance at December 31, 2014 165,306 (475) (5,545) 500 $ 1,654,901 85,826 (10,132) 1,327 $ 941,340 251,132 (475) (15,677) 1,827 $ 2,596,241 (18,544) (588) $ 39,990 466,384 (29) (203,933) (7,199) $ 1,789,083 Purchases 1 Sales 1 Realized gains, net 2 Principal payments and maturities Amortization of premiums and accretion of discounts, net Inflation adjustment on inflation-indexed securities Balance at December 31, 2015 2,736 (2,977) (5,485) 53 $ 1,649,228 761 (543) (10,253) 143 $ 931,448 3,497 (3,520) (15,738) 196 $ 2,580,676 $ (5,733) (509) 33,748 356,976 (464) 16 (333,441) (11,721) $ 1,800,449 $ 167,497 - $ 83,739 - $ 251,236 - $ - $ 450,633 (29) $ 2,747 - $ 766 - $ 3,513 - $ - $ 344,505 (435) Year-ended December 31, 2014 Supplemental information - par value of transactions: Purchases 3 Sales Year-ended December 31, 2015 Supplemental information - par value of transactions: Purchases 3 Sales 1 GSE debt securities Total Treasury securities 59,122 Purchases and sales may include payments and receipts related to principal, premiums, discounts, and inflation compensation adjustments to the basis of inflation-indexed securities. The amount reported as sales includes the realized gains and losses on such transactions. Purchases and sales exclude MBS TBA transactions that are settled on a net basis. 2 Realized gains, net offset the amount of realized gains and losses included in the reported sales amount. 3 Includes inflation compensation. b. Foreign Currency Denominated Investments The FRBNY conducts foreign currency operations and, on behalf of the Reserve Banks, holds the resulting foreign currency denominated investments in the SOMA. The FRBNY holds foreign currency deposits with foreign central banks and the Bank for International Settlements and invests in foreign government debt instruments of Germany, France, and Japan. These foreign government debt instruments are backed by the full faith and credit of the issuing foreign governments. In addition, the FRBNY may enter into transactions to purchase Euro-denominated government debt securities under agreements to resell for which the accepted collateral is the debt instruments issued by the governments of Belgium, France, Germany, Italy, the Netherlands, and Spain, which are backed by the full faith and credit of those issuing governments. At December 31, 2015 and 2014, there were no securities purchased under agreements to resell outstanding and, consequently, no related foreign securities held as collateral. The Bank’s allocated share of activity related to foreign currency operations was 2.686 percent and 2.761 percent at December 31, 2015 and 2014, respectively. 26 Federal Reserve Bank of Chicago Notes to Financial Statements Information about foreign currency denominated investments valued at amortized cost and at foreign currency market exchange rates at December 31 was as follows (in millions): Allocated to Bank 2015 2014 Euro: Foreign currency deposits German government debt instruments French government debt instruments $ Japanese yen: Foreign currency deposits Japanese government debt instruments Total $ 167 61 89 69 140 526 Total SOMA 2015 2014 191 69 102 $ 71 144 577 $ 6,218 2,261 3,325 $ 2,568 5,195 19,567 $ $ 6,936 2,494 3,687 2,576 5,207 20,900 $ Accrued interest receivable on foreign currency denominated investments was $64 million and $83 million as of December 31, 2015 and 2014, respectively, of which $2 million for each year was allocated to the Bank. These amounts are reported as a component of “System Open Market Account: Accrued interest receivable” in the Statements of Condition. The remaining maturity distribution of foreign currency denominated investments that were allocated to the Bank at December 31, 2015 and 2014, was as follows (in millions): Within 15 days December 31, 2015: Euro Japanese yen Total December 31, 2014: Euro Japanese yen Total $ $ $ $ 16 days to 90 days 57 74 131 $ 100 76 176 $ $ $ 91 days to 1 year Over 1 year to 5 years Over 5 years to 10 years 119 9 128 $ 28 43 71 $ 103 83 186 $ 78 11 89 $ 45 43 88 $ 139 85 224 $ $ $ $ $ $ $ Total 10 10 $ - $ $ $ 317 209 526 362 215 577 There were no foreign exchange contracts related to foreign currency operations outstanding as of December 31, 2015. The FRBNY enters into commitments to buy foreign government debt instruments and records the related securities on a settlement-date basis. During 2015, there were purchases and maturities of foreign government debt instruments of $3,288 million and $3,155 million, respectively, of which $89 million and $85 million, respectively, were allocated to the Bank. There were no sales of foreign government debt instruments in 2015. In connection with its foreign currency activities, the FRBNY may enter into transactions that are subject to varying degrees of off-balance-sheet market risk and counterparty credit risk that result from their future settlement. The FRBNY controls these risks by obtaining credit approvals, establishing transaction limits, receiving collateral in some cases, and performing monitoring procedures. 27 Federal Reserve Bank of Chicago Notes to Financial Statements Foreign currency working balances held and foreign exchange contracts executed by the Bank to facilitate international payments and currency transactions made on behalf of foreign central banks and U.S. official institution customers were not material as of December 31, 2015 and 2014. c. Central Bank Liquidity Swaps U.S. Dollar Liquidity Swaps The Bank’s allocated share of U.S. dollar liquidity swaps was 2.686 percent and 2.761 percent at December 31, 2015 and 2014, respectively. The total foreign currency held under U.S. dollar liquidity swaps in the SOMA at December 31, 2015 and 2014, was $997 million and $1,528 million, respectively, of which $27 million and $42 million, respectively, was allocated to the Bank. The remaining maturity distribution of U.S. dollar liquidity swaps that were allocated to the Bank at December 31 was as follows (in millions): Euro Japanese yen Total 2015 2014 Within 15 days $ 25 2 $ 27 Within 15 days $ 42 $ 42 Foreign Currency Liquidity Swaps At December 31, 2015 and 2014, there was no balance outstanding related to foreign currency liquidity swaps. d. Fair Value of SOMA Assets and Liabilities The fair value amounts below are presented solely for informational purposes and are not intended to comply with the fair value disclosures required by FASB Accounting Standards Codification (ASC) Topic 820 (ASC 820), Fair Value Measurement. Although the fair value of SOMA security holdings can be substantially greater than or less than the recorded value at any point in time, these unrealized gains or losses have no effect on the ability of the Reserve Banks, as the central bank, to meet their financial obligations and responsibilities. Because SOMA securities are recorded at amortized cost, cumulative unrealized gains (losses) are not recognized in the Statements of Condition and the changes in cumulative unrealized gains (losses) are not recognized in the Statements of Income and Comprehensive Income. The fair value of the Treasury securities, GSE debt securities, federal agency and GSE MBS, and foreign government debt instruments held in the SOMA is subject to market risk, arising from movements in market variables such as interest rates and credit risk. The fair value of federal agency and GSE MBS is also affected by the expected rate of prepayments of mortgage loans underlying the securities. The fair value of foreign government debt instruments is also affected by currency risk. Based on evaluations performed as of December 31, 2015 and 2014, there are no credit impairments of SOMA securities holdings. 28 Federal Reserve Bank of Chicago Notes to Financial Statements The following table presents the amortized cost, fair value, and cumulative unrealized gains on the Treasury securities, GSE debt securities, and federal agency and GSE MBS held in the SOMA at December 31 (in millions): Allocated to the Bank 2014 2015 Amortized cost Treasury securities: Notes $ Bonds Total Treasury securities GSE debt securities Federal agency and GSE MBS Total domestic SOMA portfolio securities holdings $ Memorandum - Commitments for: Purchases of Treasury securities Purchases of Federal agency and GSE MBS Sales of Federal agency and GSE MBS $ Fair value 61,276 34,608 95,884 1,254 66,895 164,033 $ 824 - $ $ 62,025 37,397 99,422 1,307 67,259 167,988 824 - Cumulative unrealized gains Amortized cost $ $ $ $ 749 2,789 3,538 53 364 3,955 - $ $ Fair value 67,638 38,474 106,112 1,634 73,122 180,868 $ 1,173 - $ $ Cumulative unrealized gains 68,802 43,034 111,836 1,737 74,408 187,981 $ $ 1,164 4,560 5,724 103 1,286 7,113 1,177 - $ 4 - Total SOMA 2015 Amortized cost Treasury securities: Notes $ 1,649,228 Bonds 931,448 Total Treasury securities 2,580,676 GSE debt securities 33,748 Federal agency and GSE MBS 1,800,449 Total domestic SOMA portfolio securities holdings $ 4,414,873 Memorandum - Commitments for: Purchases of Treasury securities Purchases of Federal agency and GSE MBS Sales of Federal agency and GSE MBS $ 22,187 - Fair value 2014 Cumulative unrealized gains $ 1,669,395 1,006,514 2,675,909 35,165 1,810,256 $ 4,521,330 $ $ $ 22,170 - $ 20,167 75,066 95,233 1,417 9,807 106,457 (17) - Cumulative unrealized gains Amortized cost Fair value $ 1,654,901 941,340 2,596,241 39,990 1,789,083 $ 4,425,314 $ 1,683,377 1,052,916 2,736,293 42,499 1,820,544 $ 4,599,336 $ $ $ $ 28,692 - 28,803 - $ 28,476 111,576 140,052 2,509 31,461 174,022 111 - The fair value of Treasury securities and GSE debt securities was determined using pricing services that provide market consensus prices based on indicative quotes from various market participants. The fair value of federal agency and GSE MBS was determined using a pricing service that utilizes a model-based approach that considers observable inputs for similar securities. The cost bases of securities purchased under agreements to resell, securities sold under agreements to repurchase, central bank liquidity swaps and other investments held in the SOMA domestic portfolio approximate fair value. Due to the short-term nature of these agreements and the defined amount that will be received upon settlement, the cost basis is estimated to approximate fair value. At December 31, 2015 and 2014, the fair value of foreign currency denominated investments was $19,630 million and $20,996 million, respectively, of which $527 million and $580 million, respectively, was allocated to the Bank. The fair value of foreign government debt instruments was determined using pricing services that provide market consensus prices based on indicative quotes from various market participants. The fair value of foreign currency deposits and securities purchased under agreements to resell was determined by reference to market interest rates. 29 Federal Reserve Bank of Chicago Notes to Financial Statements The following table provides additional information on the amortized cost and fair values of the federal agency and GSE MBS portfolio at December 31 (in millions): 2015 Distribution of MBS holdings by coupon rate Allocated to the Bank: 2.0% 2.5% 3.0% 3.5% 4.0% 4.5% 5.0% 5.5% 6.0% 6.5% Total Total SOMA: 2.0% 2.5% 3.0% 3.5% 4.0% 4.5% 5.0% 5.5% 6.0% 6.5% Total Amortized cost $ $ $ $ 416 4,330 20,600 21,527 13,418 4,307 1,818 414 57 8 66,895 11,198 116,527 554,430 579,403 361,149 115,914 48,931 11,138 1,542 217 1,800,449 2014 Fair value $ $ $ $ 408 4,273 20,185 21,622 13,694 4,609 1,952 445 62 9 67,259 10,993 115,018 543,270 581,940 368,576 124,043 52,523 11,989 1,666 238 1,810,256 Amortized cost $ $ $ $ 523 4,684 20,979 19,672 17,495 6,370 2,679 622 86 12 73,122 12,788 114,609 513,289 481,305 428,047 155,867 65,544 15,232 2,110 292 1,789,083 Fair value $ $ $ $ 516 4,638 20,692 20,002 18,033 6,860 2,890 671 93 13 74,408 12,618 113,468 506,280 489,390 441,204 167,844 70,719 16,414 2,287 320 1,820,544 30 Federal Reserve Bank of Chicago Notes to Financial Statements The following tables present the realized gains and the change in the cumulative unrealized gains (losses) related to SOMA domestic securities holdings during the years ended December 31, 2015 and 2014 (in millions): Allocated to Bank 2015 2014 Change in cumulative unrealized gains (losses)2, 3 Realized gains 1 Treasury securities $ GSE debt securities - $ $ (41) 2 $ - $ (2,282) $ 7,164 - (754) 2 (losses)2, 3 Realized gains 1 (1,487) - Federal agency and GSE MBS Total Change in cumulative unrealized gains (26) 4 $ 3,180 4 $ 10,318 Total SOMA 2015 2014 Change in cumulative unrealized gains (losses)2 Realized gains 1 Treasury securities $ GSE debt securities 1 $ - Federal agency and GSE MBS Total - 43 (44,819) $ (67,565) - $ 158,150 - (21,654) $ (losses)2 Realized gains 1 (1,092) 43 $ Change in cumulative unrealized gains (605) 81 $ 81 69,749 $ 227,294 Realized gains are reported in “Non-interest income: System Open Market Account: Federal agency and government-sponsored enterprise mortgage-backed securities gains, net” in the Statements of Income and Comprehensive Income. 2 Because SOMA securities are recorded at amortized cost, the change in the cumulative unrealized gains (losses) is not reported in the Statements of Income and Comprehensive Income. 3 The amount reported as change in cumulative unrealized gains (losses) allocated to the Bank is affected by the annual adjustment to the Bank's allocated portion of the related SOMA securities, as discussed in Note 3f. The amount of change in cumulative unrealized gains (losses) position, net, related to foreign currency denominated investments was a loss of $33 million and a gain of $18 million for the years ended December 31, 2015 and 2014, respectively, of which $1 million for each year were allocated to the Bank. 31 Federal Reserve Bank of Chicago Notes to Financial Statements ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 establishes a three-level fair value hierarchy that distinguishes between assumptions developed using market data obtained from independent sources (observable inputs) and the Bank’s assumptions developed using the best information available in the circumstances (unobservable inputs). The three levels established by ASC 820 are described as follows: • Level 1 – Valuation is based on quoted prices for identical instruments traded in active markets. • Level 2 – Valuation is based on quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market. • Level 3 – Valuation is based on model-based techniques that use significant inputs and assumptions not observable in the market. These unobservable inputs and assumptions reflect the Bank’s estimates of inputs and assumptions that market participants would use in pricing the assets and liabilities. Valuation techniques include the use of option pricing models, discounted cash flow models, and similar techniques. Treasury securities, GSE debt securities, federal agency and GSE MBS, and foreign government debt instruments are classified as Level 2 within the ASC 820 hierarchy because the fair values are based on indicative quotes and other observable inputs obtained from independent pricing services. The fair value hierarchy level of SOMA financial assets is not necessarily an indication of the risk associated with those assets. (6) BANK PREMISES, EQUIPMENT, AND SOFTWARE Bank premises and equipment at December 31 were as follows (in millions): 2015 2014 Bank premises and equipment: Land and land improvements $ Buildings Building machinery and equipment 18 $ 18 296 292 45 41 Construction in progress 20 13 Furniture and equipment 60 59 439 423 (212) (196) 227 227 Subtotal Accumulated depreciation Bank premises and equipment, net Depreciation expense, for the years ended December 31 $ 19 $ 19 32 Federal Reserve Bank of Chicago Notes to Financial Statements The Bank leases space to outside tenants with remaining lease terms ranging from one to eight years. Rental income from such leases was $5 million for each of the years ended December 31, 2015 and 2014, and is reported as a component of “Non-interest income: Other” in the Statements of Income and Comprehensive Income. Future minimum lease payments that the Bank will receive under non-cancelable lease agreements in existence at December 31, 2015, are as follows (in millions): 2016 $ 6 2017 5 2018 3 2019 3 2020 2 Thereafter Total 3 $ 22 The Bank had capitalized software assets, net of amortization, of $11 million and $9 million at December 31, 2015 and 2014, respectively. Amortization expense was $3 million and $2 million for the years ended December 31, 2015 and 2014, respectively. Capitalized software assets are reported as a component of “Other assets” in the Statements of Condition and the related amortization is reported as a component of “Operating expenses: Other” in the Statements of Income and Comprehensive Income. (7) COMMITMENTS AND CONTINGENCIES In conducting its operations, the Bank enters into contractual commitments, normally with fixed expiration dates or termination provisions, at specific rates and for specific purposes. At December 31, 2015, the Bank was obligated under non-cancelable leases for premises and equipment with remaining terms ranging from two to approximately five years. These leases provide for increased lease payments based upon increases in real estate taxes, operating costs, or selected price indexes. Rental expense under operating leases for certain operating facilities, warehouses, and data processing and office equipment (including taxes, insurance, and maintenance when included in rent), net of sublease rentals, was $2 million for each of the years ended December 31, 2015 and 2014. Certain of the Bank’s leases have options to renew. 33 Federal Reserve Bank of Chicago Notes to Financial Statements Future minimum lease payments under non-cancelable operating leases, net of sublease rentals, with remaining terms of one year or more, at December 31, 2015, are as follows (in thousands): Operating leases 2016 $ 2017 400 245 2018 233 2019 457 2020 321 Thereafter Future minimum lease payments $ 1,656 At December 31, 2015, there were no material unrecorded unconditional purchase commitments or obligations in excess of one year. Under the Insurance Agreement of the Reserve Banks, each of the Reserve Banks has agreed to bear, on a per-incident basis, a share of certain losses in excess of 1 percent of the capital paid-in of the claiming Reserve Bank, up to 50 percent of the total capital paid-in of all Reserve Banks. Losses are borne in the ratio of a Reserve Bank’s capital paid-in to the total capital paid-in of all Reserve Banks at the beginning of the calendar year in which the loss is shared. No claims were outstanding under the agreement at December 31, 2015 and 2014. The Bank is involved in certain legal actions and claims arising in the ordinary course of business. Although it is difficult to predict the ultimate outcome of these actions, in management’s opinion, based on discussions with counsel, the legal actions and claims will be resolved without material adverse effect on the financial position or results of operations of the Bank. (8) RETIREMENT AND THRIFT PLANS Retirement Plans The Bank currently offers three defined benefit retirement plans to its employees, based on length of service and level of compensation. Substantially all of the employees of the Reserve Banks, Board of Governors, and Office of Employee Benefits of the Federal Reserve System (OEB) participate in the Retirement Plan for Employees of the Federal Reserve System (System Plan). 1 Under the Dodd-Frank Act, newly hired Bureau employees are eligible to participate in the System Plan and, during the years ended December 31, 2015 and 2014, certain costs associated with the System Plan were reimbursed by the Bureau. In addition, employees at certain compensation levels participate in the Benefit Equalization Retirement Plan (BEP) and certain Reserve Bank officers participate in the Supplemental Retirement Plan for Select Officers of the Federal Reserve Banks (SERP). The FRBNY, on behalf of the System, recognizes the net asset or net liability and costs associated with the System Plan in its consolidated financial statements. The Bank reports the net cost related to the BEP and SERP as a 1 The OEB was established by the System to administer selected System benefit plans. 34 Federal Reserve Bank of Chicago Notes to Financial Statements component of “Operating expenses: Salaries and benefits” in its Statements of Income and Comprehensive Income and reports the net liability as a component of “Accrued benefit costs” in its Statements of Condition. The Bank’s projected benefit obligation, funded status, and net pension expenses for the BEP and the SERP at December 31, 2015 and 2014, and for the years then ended, were not material. Thrift Plan Employees of the Bank participate in the defined contribution Thrift Plan for Employees of the Federal Reserve System (Thrift Plan). The Bank matches 100 percent of the first 6 percent of employee contributions from the date of hire and provides an automatic employer contribution of 1 percent of eligible pay. The Bank’s Thrift Plan contributions totaled $10 million and $9 million for the years ended December 31, 2015 and 2014, respectively, and are reported as a component of “Operating expenses: Salaries and benefits” in the Statements of Income and Comprehensive Income. (9) POSTRETIREMENT BENEFITS OTHER THAN RETIREMENT PLANS AND POSTEMPLOYMENT BENEFITS Postretirement Benefits Other Than Retirement Plans In addition to the Bank’s retirement plans, employees who have met certain age and length-of-service requirements are eligible for both medical and life insurance benefits during retirement. The Bank and plan participants fund benefits payable under the medical and life insurance plans as due and the plans have no assets. Following is a reconciliation of the beginning and ending balances of the benefit obligation (in millions): 2015 Accumulated postretirement benefit obligation at January 1 $ 2014 156.3 $ 138.3 Service cost benefits earned during the period 5.2 4.3 Interest cost on accumulated benefit obligation 6.3 6.6 (16.5) 13.2 2.3 2.4 (9.3) (9.1) 0.6 0.6 Net actuarial (gain) loss Contributions by plan participants Benefits paid Medicare Part D subsidies Plan amendments Accumulated postretirement benefit obligation at December 31 (2.2) $ 142.7 $ 156.3 At December 31, 2015 and 2014, the weighted-average discount rate assumptions used in developing the postretirement benefit obligation were 4.31 percent and 3.96 percent, respectively. Discount rates reflect yields available on high-quality corporate bonds that would generate the cash flows necessary to pay the plan’s benefits when due. The System Plan discount rate assumption setting convention uses an unrounded rate. 35 Federal Reserve Bank of Chicago Notes to Financial Statements Following is a reconciliation of the beginning and ending balance of the plan assets, and the unfunded postretirement benefit obligation and accrued postretirement benefit costs (in millions): 2015 Fair value of plan assets at January 1 $ 2014 - Contributions by the employer $ - 6.4 Contributions by plan participants Benefits paid Medicare Part D subsidies 6.1 2.3 2.4 (9.3) (9.1) 0.6 Fair value of plan assets at December 31 Unfunded obligation and accrued postretirement benefit cost 0.6 $ - $ - $ 142.7 $ 156.3 2.1 $ Amounts included in accumulated other comprehensive loss are shown below: Prior service cost $ Net actuarial loss - (16.5) Total accumulated other comprehensive loss $ (14.4) (35.3) $ (35.3) Accrued postretirement benefit costs are reported as a component of “Accrued benefit costs” in the Statements of Condition. For measurement purposes, the assumed health-care cost trend rates at December 31 are provided in the table below. The current health-care cost trend rate for next year is expected to decline ratably each year until achieving the ultimate trend rate in 2022: 2015 Health-care cost trend rate assumed for next year 2014 7.00% 6.60% 4.75% 4.75% 2022 2019 Rate to which the cost trend rate is assumed to decline (the ultimate trend rate) Year that the rate reaches the ultimate trend rate Assumed health-care cost trend rates have a significant effect on the amounts reported for health-care plans. A one percentage point change in assumed health-care cost trend rates would have the following effects for the year ended December 31, 2015 (in millions): One percentage point increase One percentage point decrease Effect on aggregate of service and interest cost components of net periodic postretirement benefit costs Effect on accumulated postretirement benefit obligation $ 2.1 19.9 $ (1.7) (16.4) 36 Federal Reserve Bank of Chicago Notes to Financial Statements The following is a summary of the components of net periodic postretirement benefit expense for the years ended December 31 (in millions): 2015 Service cost-benefits earned during the period $ Interest cost on accumulated benefit obligation Amortization of prior service cost Amortization of net actuarial loss 2014 5.2 $ 6.6 (0.1) (0.4) 2.4 Net periodic postretirement benefit expense $ 4.3 6.3 13.8 1.1 $ 11.6 Estimated amounts that will be amortized from accumulated other comprehensive loss into net periodic postretirement benefit expense in 2016 are shown below: Prior service cost $ Net actuarial loss Total (0.4) 0.2 $ (0.2) Net postretirement benefit costs are actuarially determined using a January 1 measurement date. At January 1, 2015 and 2014, the weighted-average discount rate assumptions used to determine net periodic postretirement benefit costs were 3.96 percent and 4.79 percent, respectively. Net periodic postretirement benefit expense is reported as a component of “Operating expenses: Salaries and benefits” in the Statements of Income and Comprehensive Income. The Medicare Prescription Drug, Improvement and Modernization Act of 2003 established a prescription drug benefit under Medicare (Medicare Part D) and a federal subsidy to sponsors of retiree health-care benefit plans that provide benefits that are at least actuarially equivalent to Medicare Part D. The benefits provided under the Bank’s plan to certain participants are at least actuarially equivalent to the Medicare Part D prescription drug benefit. The estimated effects of the subsidy are reflected in actuarial loss in the accumulated postretirement benefit obligation and net periodic postretirement benefit expense. Federal Medicare Part D subsidy receipts were $444 thousand and $598 thousand in the years ended December 31, 2015 and 2014, respectively. Expected receipts in 2016, related to benefits paid in the years ended December 31, 2015 and 2014, are $206 thousand and $139 thousand, respectively. 37 Federal Reserve Bank of Chicago Notes to Financial Statements Following is a summary of expected postretirement benefit payments (in millions): Without subsidy 2016 $ 7.3 With subsidy $ 6.7 2017 7.5 6.9 2018 7.7 7.0 2019 8.1 7.3 2020 8.4 7.6 47.1 42.3 2021 - 2025 Total $ 86.1 $ 77.8 Postemployment Benefits The Bank offers benefits to former qualifying or inactive employees. Postemployment benefit costs are actuarially determined using a December 31 measurement date and include the cost of medical, dental, and vision insurance; survivor income; disability benefits; and self-insured workers’ compensation expenses. The accrued postemployment benefit costs recognized by the Bank at December 31, 2015 and 2014, were $9 million and $10 million, respectively. This cost is included as a component of “Accrued benefit costs” in the Statements of Condition. Net periodic postemployment benefit expense included in 2015 and 2014 operating expenses were $283 thousand and $2 million, respectively, and are recorded as a component of “Operating expenses: Salaries and benefits” in the Statements of Income and Comprehensive Income. 38 Federal Reserve Bank of Chicago Notes to Financial Statements (10) ACCUMULATED OTHER COMPREHENSIVE INCOME AND OTHER COMPREHENSIVE INCOME Following is a reconciliation of beginning and ending balances of accumulated other comprehensive loss as of December 31 (in millions): 2015 Balance at January 1 2014 Amount related to postretirement benefits other than retirement plans Amount related to postretirement benefits other than retirement plans $ $ (35.3) (22.7) Change in funded status of benefit plans: Prior service costs arising during the year (0.1) Change in prior service costs related to benefit plans (0.4) 2.4 Change in actuarial gain (losses) related to benefit plans Change in funded status of benefit plans - other comprehensive income (loss) (13.3) 1 1.1 (12.6) 20.9 (14.4) 1 (12.2) 18.8 $ 1 (0.4) 16.4 Amortization of net actuarial loss 1 1 2.1 Net actuarial gain (loss) arising during the year Balance at December 31 - 2.2 Amortization of prior service cost $ (35.3) Reclassification is reported as a component of “Operating Expenses: Salaries and benefits” in the Statements of Income and Comprehensive Income. Additional detail regarding the classification of accumulated other comprehensive loss is included in Note 9. (11) DISTRIBUTION OF COMPREHENSIVE INCOME The following table presents the distribution of the Bank’s comprehensive income for the years ended December 31 (in millions): 2015 Dividends on capital stock Transfer (from) to surplus Earnings remittances to the Treasury Interest on Federal Reserve notes Required by the Federal Reserve Act, as amended by the FAST Act Total distribution $ 47 (499) 2014 $ 3,466 $ 759 3,773 46 8 4,482 $ 4,536 Before the enactment of the FAST Act, the amount reported as transfer (from) to surplus represented the amount necessary to equate surplus with capital paid-in, in accordance with the Board of Governor’s policy. Subsequent to 39 Federal Reserve Bank of Chicago Notes to Financial Statements the enactment of the FAST Act, the amount reported as transfer (from) to surplus represents the amount necessary to maintain surplus at an amount equal to the Bank’s allocated portion of the aggregate surplus limitation. On December 28, 2015, the Reserve Banks reduced the aggregate surplus to the $10 billion limit in the FAST Act by remitting $19.3 billion to the Treasury. The Bank’s share of this remittance was $523 million, which is reported as a component of “Earnings remittances to the Treasury: Required by the Federal Reserve Act, as amended by the FAST Act” in the Bank’s Statements of Income and Comprehensive Income, and in the table above. (12) SUBSEQUENT EVENTS The FAST Act includes provisions that, effective on January 1, 2016, will change the rate of dividends paid to member banks by the Bank. See Note 3l for additional information on these FAST Act provisions. There were no other subsequent events that require adjustments to or disclosures in the financial statements as of December 31, 2015. Subsequent events were evaluated through March 8, 2016, which is the date that the financial statements were available to be issued. 40
@FedFRASER