Derivative Financial Instruments and Hedging Activities

9 Months Ended

Sep. 30, 2023

Derivative Instruments and Hedging Activities Disclosure [Abstract]

DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES

DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES

In the normal course of business, our operations are exposed to global market risks, including the effect of changes in interest rates and foreign currency exchange rates. To manage these risks, we enter into highly effective derivative contracts. We have elected to apply hedge accounting to certain derivatives. Derivatives that are designated in hedging relationships are evaluated for effectiveness using regression analysis at the time they are designated and throughout the hedge period. Some derivatives do not qualify for hedge accounting; for others, we elect not to apply hedge accounting.

Income Effect of Derivative Financial Instruments

The gains/(losses), by hedge designation, reported in income for the periods ended September 30 were as follows (in millions):

	Third Quarter				First Nine Months
	2022		2023		2022		2023
Fair value hedges
Interest rate contracts
Net interest settlements and accruals on hedging instruments	$	(39)	$	(137)	$	62	$	(407)
Fair value changes on hedging instruments	(600)		(219)		(1,922)		(285)
Fair value changes on hedged debt	615		210		1,991		223
Cross-currency interest rate swap contracts
Net interest settlements and accruals on hedging instruments	(8)		(23)		(17)		(56)
Fair value changes on hedging instruments	(66)		(46)		(164)		(48)
Fair value changes on hedged debt	67		44		173		47
Derivatives not designated as hedging instruments
Interest rate contracts	130		28		342		125
Foreign currency exchange contracts (a)	112		59		137		30
Cross-currency interest rate swap contracts	(494)		(137)		(1,164)		(112)
Total	$	(283)	$	(221)	$	(562)	$	(483)

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(a)Reflects forward contracts between us and an affiliated company.

NOTE 7. DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES (Continued)

Balance Sheet Effect of Derivative Financial Instruments

Derivative assets and liabilities are reported on the balance sheets at fair value and are presented on a gross basis. The notional amounts of the derivative instruments do not necessarily represent amounts exchanged by the parties and are not a direct measure of our financial exposure. We also enter into master agreements with counterparties that may allow for netting of exposures in the event of default or breach of the counterparty agreement. Collateral represents cash received or paid under reciprocal arrangements that we have entered into with our derivative counterparties, which we do not use to offset our derivative assets and liabilities.

The fair value of our derivative instruments and the associated notional amounts were as follows (in millions):

	December 31, 2022						September 30, 2023
	Notional		Fair Value of Assets		Fair Value of Liabilities		Notional		Fair Value of Assets		Fair Value of Liabilities
Fair value hedges
Interest rate contracts	$	16,883	$	—	$	1,653	$	16,821	$	—	$	1,439
Cross-currency interest rate swap contracts	885		—		161		2,078		—		202
Derivatives not designated as hedging instruments
Interest rate contracts	63,210		931		483		59,155		830		720
Foreign currency exchange contracts (a)	4,219		41		76		11,009		158		106
Cross-currency interest rate swap contracts	6,635		15		653		6,396		55		515
Total derivative financial instruments, gross (b) (c)	$	91,832	$	987	$	3,026	$	95,459	$	1,043	$	2,982

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(a)Includes forward contracts between us and an affiliated company, including offsetting forward contracts with our consolidated entities, totaling $5.6 billion in notional amounts and $95 million in both assets and liabilities at September 30, 2023.

(b)At December 31, 2022 and September 30, 2023, we held collateral of $210 million and $128 million, respectively, and we posted collateral of $193 million and $162 million, respectively.

(c)At December 31, 2022 and September 30, 2023, the fair value of assets and liabilities available for counterparty netting was $166 million and $329 million, respectively. All derivatives are categorized within Level 2 of the fair value hierarchy.