Derivative Instruments and Hedging Activities

We enter into interest rate, foreign-currency, and equity swaps, futures, forwards, options, and swaptions in connection with our market risk management activities. Derivative instruments are used to manage interest rate risk relating to specific groups of assets and liabilities, including automotive loan assets and debt. We use foreign exchange contracts to mitigate foreign-currency risk associated with foreign-currency-denominated debt, foreign exchange transactions, and our net investment in foreign subsidiaries. In addition, we also enter into equity option contracts to manage our exposure to the equity markets. Our primary objective for utilizing derivative financial instruments is to manage interest rate risk associated with our fixed and variable rate assets and liabilities, foreign exchange risks related to our foreign-currency denominated assets and liabilities, and market risks related to our investment portfolio and certain of our executive share-based compensation plans.

Interest Rate Risk

We monitor our mix of fixed- and variable-rate assets and liabilities. When it is cost-effective to do so, we may enter into interest rate swaps, forwards, futures, options, and swaptions to achieve our desired mix of fixed- and variable-rate assets and liabilities. We execute interest rate swaps, forwards, futures, options, and swaptions to modify our exposure to interest rate risk by converting certain fixed-rate instruments to a variable-rate and certain variable-rate instruments to a fixed-rate. We use a mix of both derivatives that qualify for hedge accounting treatment and economic hedges.

Derivatives qualifying for hedge accounting consist of receive-fixed swaps designated as fair value hedges of specific fixed-rate debt obligations, pay-fixed swaps designated as fair value hedges of specific portfolios of fixed-rate held-for-investment retail automotive loan assets, and pay-fixed swaps designated as cash flow hedges of the expected future cash flows in the form of interest payments on certain outstanding variable-rate borrowings associated with our secured debt.

We also execute economic hedges, which consist of interest rate swaps and interest rate caps held to mitigate interest rate risk associated with our debt portfolio. We also use interest rate swaps to economically hedge our net fixed-versus-variable interest rate exposure. We enter into economic hedges in the form of short-dated, exchange-traded Eurodollar futures to hedge the interest rate exposure of our fixed-rate automotive loans, as well as forwards, options, and swaptions to economically hedge our net fixed-versus-variable interest rate exposure.

In the past, we used a multitude of derivative instruments to manage interest rate risk related to MSRs, mortgage loan commitments, and mortgage loans held-for-sale. They included, but were not limited to, interest rate swaps, forward sales of mortgage backed securities, interest rate futures contracts, options on U.S. Treasuries, swaptions, interest rate floors, and interest rate caps. Since we no longer have exposures to these activities, we no longer utilize these hedge strategies as of December 31, 2014.

Foreign Exchange Risk

We enter into derivative financial instrument contracts to mitigate the risk associated with variability in cash flows related to our various foreign-currency exposures.

We enter into foreign-currency forwards with external counterparties as net investment hedges of foreign exchange exposure on our investments in foreign subsidiaries. However, we have reduced our foreign exchange exposure to net investments in foreign operations through the sales and disposals of discontinued international businesses. Refer to Note 2 for further details on these sales.

Our remaining foreign subsidiaries in wind-down maintain both assets and liabilities in local currencies. These local currencies are generally the subsidiaries' functional currencies for accounting purposes. Foreign-currency-exchange-rate gains and losses arise when the assets or liabilities of our subsidiaries are denominated in currencies that differ from its functional currency. In addition, our equity is impacted by the cumulative translation adjustments resulting from the translation of foreign subsidiary results; this impact is reflected in our accumulated other comprehensive income (loss).

We utilize a cross-currency swap to economically hedge foreign exchange exposure on foreign-currency-denominated debt by converting the funding currency to our functional currency. This swap was entered into concurrent with the debt issuance with the terms of the derivative matching the terms of the underlying debt.

We also enter into foreign currency forwards to economically hedge our foreign denominated debt, our centralized lending program, and foreign-denominated third party loans. The hedge of foreign denominated debt was entered into concurrent with the debt issuance with the terms of the derivative matching the terms of the underlying debt. The centralized lending program manages liquidity for our subsidiary businesses, but as of December 31, 2014, this activity is immaterial. Foreign-currency-denominated loan agreements are executed with our foreign subsidiaries in their local currencies. We evaluate our foreign-currency exposure resulting from intercompany lending and manage our currency risk exposure by entering into foreign-currency derivatives with external counterparties. Our remaining foreign-currency derivatives, such as hedges of foreign-denominated third party loans, are recorded at fair value with changes recorded as income offsetting the gains and losses on the associated foreign-currency transactions.

Market Risk

We enter into equity options to economically hedge our exposure to the equity markets. We purchase options to assume a long position on certain equities and write options to assume a short position.

During the year ended December 31, 2014, we also entered into prepaid equity forward contracts to economically hedge the price risk associated with certain of our executive share-based compensation plans described in Note 24. The prepaid equity forward contracts are hybrid instruments containing an embedded forward contract, which is considered a derivative instrument. The embedded derivative instrument is bifurcated from the host contract and is recorded at fair value with changes in fair value recorded in compensation and benefits expense. The balance of the prepaid component of these equity forward contracts is $74 million as of December 31, 2014, and was recorded within other assets on the Consolidated Balance Sheet.

Counterparty Credit Risk

Derivative financial instruments contain an element of credit risk if counterparties are unable to meet the terms of the agreements. Credit risk associated with derivative financial instruments is measured as the net replacement cost should the counterparties that owe us under the contract completely fail to perform under the terms of those contracts, assuming no recoveries of underlying collateral as measured by the market value of the derivative financial instrument.

To mitigate the risk of counterparty default, we maintain collateral agreements with certain counterparties. The agreements require both parties to maintain collateral in the event the fair values of the derivative financial instruments meet established thresholds. In the event that either party defaults on the obligation, the secured party may seize the collateral. Generally, our collateral arrangements are bilateral such that we and the counterparty post collateral for the value of our total obligation to each other. Contractual terms provide for standard and customary exchange of collateral based on changes in the market value of the outstanding derivatives. The securing party posts additional collateral when their obligation rises or removes collateral when it falls. We also have unilateral collateral agreements whereby we are the only entity required to post collateral.

Certain derivative instruments contain provisions that require us to either post additional collateral or immediately settle any outstanding liability balances upon the occurrence of a specified credit risk-related event. If a credit risk-related event had been triggered, the amount of additional collateral required to be posted by us would have been insignificant.

We placed cash and securities collateral totaling $236 million and $328 million at December 31, 2014 and 2013, respectively, in accounts maintained by counterparties, $18 million of which relates to non-derivative collateral at December 31, 2014 and December 31, 2013. We received cash collateral from counterparties totaling $71 million and $159 million at December 31, 2014 and 2013, respectively. The receivables for collateral placed and the payables for collateral received are included on our Consolidated Balance Sheet in other assets and accrued expenses and other liabilities, respectively. In certain circumstances, we receive or post securities as collateral with counterparties. We do not record such collateral received on our Consolidated Balance Sheet unless certain conditions are met. At December 31, 2014 and 2013, we received noncash collateral of $15 million and $18 million, respectively.

Balance Sheet Presentation

The following table summarizes the fair value amounts of derivative instruments reported on our Consolidated Balance Sheet. The fair value amounts are presented on a gross basis, are segregated by derivatives that are designated and qualifying as hedging instruments or those that are not, and are further segregated by type of contract within those two categories. The notional amount is not recorded on the balance sheet and is not, when viewed in isolation, a meaningful measure of the risk profile of the instruments.



	2014						2013
	Derivative contracts in a				Notional amount		Derivative contracts in a				Notional amount
December 31, ($ in millions)	receivable position (a)		payable position (b)				receivable position (a)		payable position (b)
Derivatives qualifying for hedge accounting
Interest rate contracts
Swaps (c)	$	118	$	7	$	18,554	$	204	$	169	$	21,606
Foreign exchange contracts
Forwards	—		—		210		3		—		326
Total derivatives qualifying for hedge accounting	118		7		18,764		207		169		21,932
Economic hedges
Interest rate contracts
Swaps	40		65		11,979		36		44		13,613
Futures and forwards	4		2		18,886		11		3		29,836
Written options	—		94		14,823		—		94		11,132
Purchased options	94		—		15,159		95		—		22,962
Total interest rate risk	138		161		60,847		142		141		77,543
Foreign exchange contracts
Swaps	—		74		1,210		12		1		1,379
Futures and forwards	5		4		304		1		1		330
Written options	—		—		—		—		—		17
Purchased options	—		—		—		—		—		17
Total foreign exchange risk	5		78		1,514		13		2		1,743
Equity contracts
Forwards	—		3		74		—		—		—
Written options	—		3		1		—		5		3
Purchased options	2		—		—		—		—		—
Total equity risk	2		6		75		—		5		3
Total economic hedges	145		245		62,436		155		148		79,289
Total derivatives	$	263	$	252	$	81,200	$	362	$	317	$	101,221


(a)	Derivative contracts in a receivable position are classified as other assets on the Consolidated Balance Sheet, and includes accrued interest of $50 million and $120 million at December 31, 2014 and 2013, respectively.


(b)	Derivative contracts in a liability position are classified as accrued expenses and other liabilities on the Consolidated Balance sheet, and includes accrued interest of $17 million and $12 million at December 31, 2014 and 2013, respectively.

(c)

Includes fair value hedges consisting of receive-fixed swaps on fixed-rate debt obligations with $97 million and $196 million in a receivable position, $1 million and $163 million in a payable position, and of a $4.7 billion and $8.5 billion notional amount at December 31, 2014 and December 31, 2013, respectively. Of the hedge notional amount at December 31, 2014, $2.7 billion is associated with debt maturing in five or more years. Other fair value hedges include pay-fixed swaps on portfolios of held-for-investment automotive loan assets with $21 million and $9 million in a receivable position, $6 million and $5 million in a payable position, and of a $13.9 billion and $12.6 billion notional amount at December 31, 2014 and December 31, 2013, respectively. Also includes cash flow hedges consisting of pay-fixed swaps on floating rate debt obligations with $1 million in a payable position, and of a $495 million notional amount at December 31, 2013.

Statement of Income and Comprehensive Income Presentation

The following table summarizes the location and amounts of gains and losses on derivative instruments reported in our Consolidated Statement of Income.



Year ended December 31, ($ in millions)	2014			2013			2012
Derivatives qualifying for hedge accounting
Gain (loss) recognized in earnings on derivatives
Interest rate contracts
Interest and fees on finance receivables and loans (a)	$	15		$	7		$	—
Interest on long-term debt (b)	199			(389		)	164
Gain (loss) recognized in earnings on hedged items (c)
Interest rate contracts
Interest and fees on finance receivables and loans	34			2			—
Interest on long-term debt	(185		)	402			(193		)
Total derivatives qualifying for hedge accounting	63			22			(29		)
Economic derivatives
(Loss) gain recognized in earnings on derivatives
Interest rate contracts
Servicing asset valuation and hedge activities, net	—			(112		)	556
Loss on mortgage and automotive loans, net	—			(37		)	(5		)
Other income, net of losses (d)	(37		)	14			(18		)
Total interest rate contracts	(37		)	(135		)	533
Foreign exchange contracts (e)
Interest on long-term debt	(172		)	94			(39		)
Other income, net of losses	12			24			(48		)
Total foreign exchange contracts	(160		)	118			(87		)
Equity contracts
Compensation and benefits expense	(5		)	—			—
Total equity contracts	(5		)	—			—
(Loss) gain recognized in earnings on derivatives	$	(139	)	$	5		$	417


(a)	Amounts exclude losses related to interest for qualifying accounting hedges of portfolios of retail automotive loans held-for-investment of $61 million and $9 million for the years ended December 31, 2014 and 2013, respectively. These losses are primarily offset by the fixed coupon receipts on the consumer automotive loans held-for-investment.


(b)	Amounts exclude gains related to interest for qualifying accounting hedges of debt, which are primarily offset by the fixed coupon payment on the long-term debt. The gains were $112 million, $131 million, and $119 million for the years ended December 31, 2014, 2013, and 2012, respectively.


(c)	Amounts exclude gains related to amortization of deferred basis adjustments on the de-designated hedged item of $155 million, $247 million, and $226 million for the years ended December 31, 2014, 2013, and 2012, respectively.


(d)	Amounts in 2012 include other income from derivatives held for trading purposes entered into by our broker-dealer.


(e)	Amounts exclude gains and losses related to the revaluation of the related foreign-denominated debt or receivable. Gains of $165 million, losses of $117 million, and gains of $87 million, were recognized for the years ended December 31, 2014, 2013, and 2012, respectively.

The following table summarizes derivative instruments used in cash flow and net investment hedge accounting relationships.



Year ended December 31, ($ in millions)	2014			2013			2012
Cash flow hedges
Interest rate contracts
(Loss) gain reclassified from accumulated other comprehensive income to interest on long-term debt (a)	$	(2	)	$	(7	)	$	1
Loss recorded directly to interest on long-term debt	—			—			(7		)
Total interest on long-term debt	$	(2	)	$	(7	)	$	(6	)
Gain (loss) recognized in other comprehensive income	$	2		$	6		$	(7	)
Net investment hedges
Foreign exchange contracts
Loss reclassified from accumulated other comprehensive income to income (loss) from discontinued operations, net	$	—		$	(250	)	$	(1	)
Total loss from discontinued operations, net	$	—		$	(250	)	$	(1	)
Gain (loss) recognized in other comprehensive income (b)	$	13		$	309		$	(270	)


(a)	The amount represents losses reclassified from other comprehensive income (OCI) into earnings as a result of the discontinuance of hedge accounting because it is probable that the forecasted transaction will not occur.


(b)	The amounts represent the effective portion of net investment hedges. There are offsetting amounts recognized in accumulated other comprehensive income related to the revaluation of the related net investment in foreign operations. There were losses of $41 million and $582 million, and gains of $285 million for the years ended December 31, 2014, 2013, and 2012, respectively.