Derivative Instruments and Hedging Activities

We enter into derivative instruments, which may include 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 other 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, pay-fixed swaps designated as 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 consumer 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, as well as interest rate floor contracts designated as cash flow hedges of the expected future cash flows in the form of interest receipts on a portion of our dealer floorplan commercial loans.

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 investment 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.

Equity Risk

We enter into equity options to economically hedge our exposure to the equity markets.

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.

We manage our risk to financial counterparties through internal credit analysis, limits, and monitoring. Additionally, derivatives and repurchase agreements are entered into with approved counterparties using industry standard agreements.

We execute certain over-the-counter (OTC) derivatives such as interest rate caps using bilateral agreements with financial counterparties. Bilateral 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. Payments related to the exchange of collateral for OTC derivatives are recognized as collateral.

We also execute certain derivatives such as interest rate swaps with clearinghouses, which requires us to post and receive 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, 2019, or 2018.

We placed cash collateral totaling $19 million and noncash collateral totaling $99 million supporting our derivative positions at March 31, 2019, and $26 million and $105 million at December 31, 2018, respectively, in accounts maintained by counterparties. These amounts include collateral placed at clearinghouses and exclude cash and noncash collateral pledged under repurchase agreements. Refer to Note 12 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 $12 million at March 31, 2019, and we received $30 million and $3 million of cash and noncash collateral, respectively, at December 31, 2018, in accounts maintained by counterparties. These amounts include collateral received from clearinghouses and exclude cash and noncash collateral pledged under repurchase agreements. Refer to Note 12 for details on repurchase agreements. The payables for cash collateral received are included on our Condensed Consolidated Balance Sheet in accrued expenses and other liabilities. 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, 2019						December 31, 2018
	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	$	—	$	—	$	12,085	$	—	$	—	$	24,203
Purchased options	1		—		100		—		—		—
Foreign exchange contracts
Forwards	—		1		134		1		—		136
Total derivatives designated as accounting hedges	1		1		12,319		1		—		24,339
Derivatives not designated as accounting hedges
Interest rate contracts
Futures and forwards	—		—		11		—		—		11
Written options	2		19		6,180		—		37		6,793
Purchased options	19		—		6,081		37		—		6,742
Total interest rate risk	21		19		12,272		37		37		13,546
Foreign exchange contracts
Futures and forwards	—		—		124		3		—		181
Total foreign exchange risk	—		—		124		3		—		181
Equity contracts
Written options	—		1		1		—		—		—
Total equity risk	—		1		1		—		—		—
Total derivatives not designated as accounting hedges	21		20		12,397		40		37		13,727
Total derivatives	$	22	$	21	$	24,716	$	41	$	37	$	38,066

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, 2019		December 31, 2018		March 31, 2019		December 31, 2018		March 31, 2019		December 31, 2018
Assets
Available-for-sale securities (b) (c)	$	1,495	$	1,485	$	10	$	—	$	8	$	(5	)
Finance receivables and loans, net (d)	36,433		40,850		63		24		68		5
Liabilities
Long-term debt	$	12,263	$	13,001	$	66	$	67	$	66	$	67


(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 amount identified as the last of layer in the hedge relationship was $28 million at both March 31, 2019, and December 31, 2018, but the hedge relationship was discontinued during the three months ended March 31, 2019. The carrying amount associated with the last-of-layer relationship was $46 million and $47 million, respectively. There was no basis adjustment associated with the last-of-layer relationships for either period.

(d)

The hedged item represents the carrying value of the hedged portfolio of assets. The amount identified as the last of layer in the open hedge relationship was $9.6 billion as of March 31, 2019, and $21.4 billion as of December 31, 2018. The basis adjustment associated with the open last-of-layer relationship was a $5 million liability as of March 31, 2019, and a $19 million asset as of December 31, 2018, which would be allocated across the entire remaining closed pool upon termination or maturity of the hedge relationship. The amount that is identified as the last of layer in the discontinued hedge relationship was $11.2 billion for the three months ended March 31, 2019. The basis adjustment associated with the discontinued last-of-layer relationship was a $65 million asset for the three months ended March 31, 2019, which was allocated across the entire remaining pool upon termination of the hedge relationship.

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)	2019			2018
Gain (loss) recognized in earnings
Interest rate contracts
Gain on mortgage and automotive loans, net	$	1		$	—
Other income, net of losses	(5		)	2
Total interest rate contracts	(4		)	2
Foreign exchange contracts
Other income, net of losses	(1		)	—
Total foreign exchange contracts	(1		)	—
(Loss) gain recognized in earnings	$	(5	)	$	2

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.



	Interest and fees on finance receivables and loans						Interest and dividends on investment securities and other earning assets						Interest on deposits				Interest on long-term debt
Three months ended March 31, ($ in millions)	2019			2018			2019			2018			2019		2018		2019		2018
Gain (loss) on fair value hedging relationships
Interest rate contracts
Hedged fixed-rate unsecured debt	$	—		$	—		$	—		$	—		$	—	$	—	$	—	$	36
Derivatives designated as hedging instruments on fixed-rate unsecured debt	—			—			—			—			—		—		—		(35		)
Hedged fixed-rate FHLB advances	—			—			—			—			—		—		—		33
Derivatives designated as hedging instruments on fixed-rate FHLB advances	—			—			—			—			—		—		—		(33		)
Hedged available-for-sale securities	—			—			10			(3		)	—		—		—		—
Derivatives designated as hedging instruments on available-for-sale securities	—			—			(10		)	3			—		—		—		—
Hedged fixed-rate consumer automotive loans	43			(45		)	—			—			—		—		—		—
Derivatives designated as hedging instruments on fixed-rate consumer automotive loans	(43		)	45			—			—			—		—		—		—
Total gain on fair value hedging relationships	—			—			—			—			—		—		—		1
Gain on cash flow hedging relationships
Interest rate contracts
Hedged deposit liabilities
Reclassified from accumulated other comprehensive income into income	—			—			—			—			1		—		—		—
Hedged variable-rate borrowings
Reclassified from accumulated other comprehensive income into income	—			—			—			—			—		—		4		—
Total gain on cash flow hedging relationships	$	—		$	—		$	—		$	—		$	1	$	—	$	4	$	—
Total amounts presented in the Condensed Consolidated Statement of Comprehensive Income	$	1,807		$	1,543		$	240		$	176		$	592	$	351	$	419	$	411

During the next twelve months, we estimate $7 million will be reclassified into pretax earnings from derivatives designated as cash flow hedges.

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)	2019			2018			2019		2018			2019			2018
Gain (loss) on fair value hedging relationships
Interest rate contracts
Amortization of deferred unsecured debt basis adjustments	$	—		$	—		$	—	$	—		$	6		$	15
Interest for qualifying accounting hedges of unsecured debt	—			—			—		—			—			3
Amortization of deferred secured debt basis adjustments (FHLB advances)	—			—			—		—			(6		)	(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		)	(4		)	—		—			—			—
Interest for qualifying accounting hedges of consumer automotive loans held-for-investment	6			(7		)	—		—			—			—
Total gain (loss) on fair value hedging relationships	2			(11		)	—		(1		)	—			19
Gain on cash flow hedging relationships
Interest rate contracts
Interest for qualifying accounting hedges of variable-rate borrowings	—			—			—		—			—			1
Total gain on cash flow hedging relationships	$	—		$	—		$	—	$	—		$	—		$	1

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



	Three months ended March 31,
($ in millions)	2019			2018
Interest rate contracts
(Loss) gain recognized in other comprehensive loss	$	(10	)	$	18

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



	Three months ended March 31,
($ in millions)	2019			2018
Foreign exchange contracts (a) (b)
(Loss) gain recognized in other comprehensive loss	$	(2	)	$	4


(a)	There were no amounts excluded from effectiveness testing for the three months ended March 31, 2019, or 2018.


(b)	Gains and losses reclassified from accumulated other comprehensive loss are reported as other income, net of losses, in the Condensed Consolidated Statement of Comprehensive Income. There were no amounts reclassified for the three months ended March 31, 2019, or 2018.