Derivative Instruments and Hedging Activities

We enter into derivative instruments, such as interest rate, foreign-currency, and equity swaps, futures, forwards, and options in connection with our risk management activities. 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.

Interest Rate Risk

We monitor our mix of fixed- and variable-rate assets and liabilities and 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 these trades 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 can include receive-fixed swaps designated as fair value hedges of specific fixed-rate unsecured debt obligations, receive-fixed swaps designated as fair value hedges of specific fixed-rate FHLB advances, fair value hedges of securities within our available-for-sale portfolio, and pay-fixed swaps designated as fair value hedges of closed portfolios of fixed-rate held-for-investment retail automotive loan assets in which the hedged item is the last layer expected to be remaining at the end of the hedging relationship. Other derivatives qualifying for hedge accounting consist of pay-fixed swaps designated as cash flow hedges of the expected future cash flows in the form of interest payments on certain variable-rate borrowings and deposit liabilities.

We may also execute economic hedges, which consist of interest rate swaps, interest rate caps, forwards, futures, options, and swaptions to mitigate interest rate risk.

We also enter into interest rate lock commitments and forward-sale commitments that are executed as part of our mortgage business that meet the accounting definition of a derivative.

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. 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 loss. We also periodically enter into foreign-currency forwards to economically hedge any foreign-denominated debt, centralized lending, and foreign-denominated third-party loans. These foreign currency forwards that are used as economic hedges 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.

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 generally require both parties to post collateral in the event the fair values of the derivative financial instruments meet posting thresholds established under the agreements. 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. These payments are characterized as collateral for over-the-counter (OTC) derivatives.

We execute certain derivatives such as interest rate swaps with clearinghouses, which requires us to post collateral. For these clearinghouse derivatives, these payments are recognized as settlements rather than 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. No such specified credit risk related events occurred during the three months ended March 31, 2018, or 2017.

We placed cash collateral totaling $28 million and securities collateral totaling $100 million at March 31, 2018, and $20 million and $97 million at December 31, 2017, respectively, in accounts maintained by counterparties. This amount primarily relates to collateral posted to support our derivative positions. This amount also excludes cash and securities pledged as collateral under repurchase agreements. Refer to Note 13 for details on the repurchase agreements. The receivables for cash collateral placed are included on our Condensed Consolidated Balance Sheet in other assets.

We received cash collateral from counterparties totaling $30 million and $17 million at March 31, 2018, and December 31, 2017, respectively, primarily to support these derivative positions. This amount also excludes cash and securities pledged as collateral under repurchase agreements. The payables for cash collateral received are included on our Condensed Consolidated Balance Sheet in accrued expenses and other liabilities. In certain circumstances, we receive or post securities as collateral with counterparties. We do not record collateral received on our Condensed Consolidated Balance Sheet unless certain conditions are met. We received noncash collateral of $2 million at both March 31, 2018, and December 31, 2017. Included in these amounts is noncash collateral where we have been granted the right to sell or pledge the underlying assets. We have not sold or pledged any of the noncash collateral received under these agreements.

Balance Sheet Presentation

The following table summarizes the amounts of derivative instruments reported on our Condensed Consolidated Balance Sheet. The 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.

Derivative contracts in a receivable and payable position exclude open trade equity on derivatives cleared through central clearing counterparties. Any associated collateral exchanged with our central clearing counterparties are treated as settlements of the derivative exposure, rather than collateral. Such payments are recognized as settlements of the derivatives contracts in a receivable and payable position on our Condensed Consolidated Balance Sheet.

Notional amounts are reference amounts from which contractual obligations are derived and are not recorded on the balance sheet. In our view, derivative notional is not an accurate measure of our derivative exposure when viewed in isolation from other factors, such as market rate fluctuations and counterparty credit risk.



	March 31, 2018						December 31, 2017
	Derivative contracts in a				Notional amount		Derivative contracts in a				Notional amount
($ in millions)	receivable position		payable position				receivable position		payable position
Derivatives designated as accounting hedges
Interest rate contracts
Swaps	$	—	$	—	$	20,250	$	—	$	—	$	6,915
Foreign exchange contracts
Forwards	—		—		145		—		1		136
Total derivatives designated as accounting hedges	—		—		20,395		—		1		7,051
Derivatives not designated as accounting hedges
Interest rate contracts
Futures and forwards	—		—		5		—		—		23
Written options	1		55		6,139		1		39		8,327
Purchased options	55		—		6,081		38		—		8,237
Total interest rate risk	56		55		12,225		39		39		16,587
Foreign exchange contracts
Futures and forwards	—		—		297		—		1		124
Total foreign exchange risk	—		—		297		—		1		124
Equity contracts
Written options	—		1		—		—		—		—
Total equity risk	—		1		—		—		—		—
Total derivatives not designated as accounting hedges	56		56		12,522		39		40		16,711
Total derivatives	$	56	$	56	$	32,917	$	39	$	41	$	23,762

The following table presents amounts recorded on our Condensed Consolidated Balance Sheet related to cumulative basis adjustments for fair value hedges.



($ in millions)	Carrying amount of the hedged items				Cumulative amount of fair value hedging adjustment included in the carrying amount of the hedged items
	Carrying amount of the hedged items				Total					Discontinued (a)
	March 31, 2018		December 31, 2017		March 31, 2018			December 31, 2017		March 31, 2018		December 31, 2017
Assets
Available-for-sale securities (b)	$	985	$	173	$	—		$	2	$	2	$	2
Finance receivables and loans, net (c)	22,121		2,305		(31		)	18		14		19
Liabilities
Long-term debt	$	14,958	$	14,640	$	127		$	208	$	163	$	235


(a)	Represents the fair value hedging adjustment on qualifying hedges for which the hedging relationship was discontinued. This represents a subset of the amounts reported in the total hedging adjustment.


(b)	The carrying amount of hedged available-for-sale securities is presented above using amortized cost. Refer to Note 6 for a reconciliation of the amortized cost and fair value of available-for-sale securities.

(c)

The hedged item represents the carrying value of the hedged portfolio of assets. The amount that is identified as the last of layer in the hedge relationship is $9.7 billion as of March 31, 2018. The basis adjustment associated with the last-of-layer relationship is $45 million liability as of March 31, 2018, which would be allocated across the entire remaining closed pool upon termination or maturity of the hedge relationship. A last-of-layer hedge strategy did not exist at December 31, 2017.

Statement of Comprehensive Income Presentation

The following table summarizes the location and amounts of gains and losses on derivative instruments not designated as accounting hedges reported in our Condensed Consolidated Statement of Comprehensive Income.



	Three months ended March 31,
($ in millions)	2018		2017
Gain (loss) recognized in earnings
Interest rate contracts
Other income, net of losses	$	2	$	(2	)
Total interest rate contracts	2		(2		)
Foreign exchange contracts (a)
Other income, net of losses	—		(1		)
Total foreign exchange contracts	—		(1		)
Gain (loss) recognized in earnings	$	2	$	(3	)


(a)	Amounts exclude gains and losses related to the revaluation of the related foreign-denominated debt or receivables. Gains of $0 million and $1 million were recognized for the three months ended March 31, 2018, and 2017, respectively.

The following table summarizes the location and amounts of gains and losses on derivative instruments designated as fair value hedges reported in our Condensed Consolidated Statement of Comprehensive Income. We had no gains or losses on derivative instruments designated as cash flow hedges for the periods shown.



	Interest and fees on finance receivables and loans						Interest and dividends on investment securities and other earning assets					Interest on long-term debt
Three months ended March 31, ($ in millions)	2018			2017			2018			2017		2018			2017
Gain (loss) on fair value hedging relationships
Interest rate contracts
Hedged fixed-rate unsecured debt	$	—		$	—		$	—		$	—	$	36		$	(2	)
Derivatives designated as hedging instruments on fixed-rate unsecured debt	—			—			—			—		(35		)	3
Hedged fixed-rate FHLB advances	—			—			—			—		33			(1		)
Derivatives designated as hedging instruments on fixed-rate FHLB advances	—			—			—			—		(33		)	1
Hedged available-for-sale securities	—			—			(3		)	—		—			—
Derivatives designated as hedging instruments on available-for-sale securities	—			—			3			—		—			—
Hedged fixed-rate retail automotive loans	(45		)	(4		)	—			—		—			—
Derivatives designated as hedging instruments on fixed-rate retail automotive loans	45			2			—			—		—			—
Total (loss) gain on fair value hedging relationships	$	—		$	(2	)	$	—		$	—	$	1		$	1
Total amounts presented in the Condensed Consolidated Statement of Comprehensive Income	$	1,543		$	1,368		$	176		$	134	$	411		$	424

The following table summarizes the location and amounts of gains and losses related to interest and amortization on derivative instruments designated as fair value and cash flow hedges reported in our Condensed Consolidated Statement of Comprehensive Income.



	Interest and fees on finance receivables and loans						Interest and dividends on investment securities and other earning assets					Interest on long-term debt
Three months ended March 31, ($ in millions)	2018			2017			2018			2017		2018			2017
Gain (loss) on fair value hedging relationships
Interest rate contracts
Amortization of deferred unsecured debt basis adjustments	$	—		$	—		$	—		$	—	$	15		$	20
Interest for qualifying accounting hedges of unsecured debt	—			—			—			—		3			5
Amortization of deferred secured debt basis adjustments (FHLB advances)	—			—			—			—		(1		)	(1		)
Interest for qualifying accounting hedges of secured debt (FHLB advances)	—			—			—			—		2			—
Interest for qualifying accounting hedges of available-for-sale securities	—			—			(1		)	—		—			—
Amortization of deferred loan basis adjustments	(4		)	(5		)	—			—		—			—
Interest for qualifying accounting hedges of retail automotive loans held-for-investment	(7		)	(1		)	—			—		—			—
Total (loss) gain on fair value hedging relationships	(11		)	(6		)	(1		)	—		19			24
Gain on cash flow hedging relationships
Interest rate contracts (a)
Interest for qualifying accounting hedges of variable-rate borrowings	—			—			—			—		1			—
Total gain on cash flow hedging relationships	$	—		$	—		$	—		$	—	$	1		$	—
Total amounts presented in the Condensed Consolidated Statement of Comprehensive Income	$	1,543		$	1,368		$	176		$	134	$	411		$	424


(a)	During the next twelve months, we estimate $13 million will be reclassified into pretax earnings from derivatives designated as cash flow hedges.

The following table summarizes the effect of cash flow hedges on accumulated other comprehensive loss.



	Three months ended March 31,
($ in millions)	2018		2017
Cash flow hedges
Interest rate contracts
Gain recognized in other comprehensive loss	$	18	$	—

The following table summarizes the effect of net investment hedges on accumulated other comprehensive loss and the Condensed Consolidated Statement of Comprehensive Income.



	Gain (loss) recognized in other comprehensive (loss) income on derivatives
Three months ended March 31, ($ in millions)	2018		2017
Foreign exchange contracts (a) (b)	$	4	$	(2	)


(a)	There were no amounts excluded from effectiveness testing for the three months ended March 31, 2018, or 2017, respectively.


(b)	Gains and losses reclassified from accumulated other comprehensive loss are reported as other income, net of losses, on the Condensed Consolidated Statement of Comprehensive Income. There were no amounts reclassified for the three months ended March 31, 2018, or 2017, respectively.