Derivatives and Hedging Activities

3 Months Ended

Mar. 31, 2018

Derivative Instruments And Hedging Activities Disclosure [Abstract]

Derivatives and Hedging Activities

9. Derivatives and Hedging Activities

We use derivative financial instruments (derivatives) to manage exposures to various market risks. These instruments derive their value from an underlying variable or multiple variables, including interest rates, foreign exchange rates, and equity index or price, and are carried at fair value on the Consolidated Balance Sheets. These instruments enable end users to increase, reduce or alter exposure to various market risks and, for that reason, are an integral component of our market risk management. We do not transact in derivatives for trading purposes.

In relation to our credit risk, under the terms of the derivative agreements we have with our various counterparties, we are not required to either immediately settle any outstanding liability balances or post collateral upon the occurrence of a specified credit risk-related event. Based on our assessment of the credit risk of our derivative counterparties as of March 31, 2018 and December 31, 2017, no credit risk adjustment to the derivative portfolio was required.

The following table summarizes the total fair value, excluding interest accruals, of derivative assets and liabilities as of March 31, 2018 and December 31, 2017:

		Other Assets Fair Value				Other Liabilities Fair Value
(Millions)		2018		2017		2018		2017
Derivatives designated as hedging instruments:
	Fair value hedges - Interest rate contracts(a)	$	3	$	11	$	95	$	34
	Net investment hedges - Foreign exchange contracts		71		117		167		89
Total derivatives designated as hedging instruments			74		128		262		123
Derivatives not designated as hedging instruments:
	Foreign exchange contracts, including certain embedded derivatives(b)		77		82		117		95
Total derivatives, gross			151		210		379		218
Less: Cash collateral netting(c)(d)			―		(6)		(94)		(45)
	Derivative asset and derivative liability netting(e)		(85)		(80)		(85)		(80)
Total derivatives, net		$	66	$	124	$	200	$	93

• For centrally cleared derivatives, variation margin payments are legally characterized as settlement payments as opposed to collateral. Accordingly, the amounts disclosed for centrally cleared derivatives are based on gross assets and gross liabilities, net of variation margin. We also maintained several bilateral interest rate contracts that are shown gross of any collateral exchanged.
• Includes foreign currency derivatives embedded in certain operating agreements.
• Represents the offsetting of the fair value of bilateral interest rate contracts and certain foreign exchange contracts with the right to reclaim cash collateral or the obligation to return cash collateral.
• We posted $125 million and $146 million as of March 31, 2018 and December 31, 2017, respectively, as initial margin on our centrally cleared interest rate swaps; such amounts are recorded within Other receivables on the Consolidated Balance Sheets and are not netted against the derivative balances.
• Represents the amount of netting of derivative assets and derivative liabilities executed with the same counterparty under an enforceable master netting arrangement.

A majority of our derivative assets and liabilities as of March 31, 2018 and December 31, 2017 are subject to master netting agreements with our derivative counterparties. We have no derivative amounts subject to enforceable master netting arrangements that are not offset on the Consolidated Balance Sheets.

Fair Value Hedges

We are exposed to interest rate risk associated with our fixed-rate long-term debt obligations. At the time of issuance, certain fixed-rate debt obligations are designated in fair value hedging relationships, using interest rate swaps, to economically convert the fixed interest rate to a floating interest rate. We have $23.4 billion and $23.8 billion of fixed-rate debt obligations designated in fair value hedgingrelationships as of March 31, 2018 and December 31, 2017, respectively.

The following table represents the total amounts of income and expense line items associated with the fair value hedges of our fixed-rate long-term debt on the Consolidated Statements of Income for the three months endedMarch 31:

		Gains (losses)
(Millions)	2018		2017
		Interest expense(a)		Other expenses
Hedged items	$	210	$	50
Derivatives designated as hedging instruments		(191)		(75)
Total	$	19	$	(25)

We adopted new accounting guidance providing targeted improvements to the accounting for hedging activities effective January 1, 2018. In compliance with the standard, amounts previously recorded in Other expenses have been prospectively recorded in Total interest expense. Refer to Note 1 for additional information.

The carrying values of the hedged liabilities, recorded within Long-term debt on the Consolidated Balance Sheets, were $22.9 billion and $23.6 billion as of March 31, 2018 and December 31, 2017, respectively, including offsetting amounts of $392 million and $182 million for the respective periods, related to the cumulative amount of fair value hedging adjustments.

We recognized a net reduction in interest expense on long-term debt of $14 million and $44 million for the three months ended March 31, 2018 and 2017, respectively, primarily related to the net settlements (interest accruals) on our interest rate derivatives designated as fair value hedges.

Net Investment Hedges

The losses on net investment hedges, net of taxes, recorded in AOCI as part of the cumulative translation adjustment, were $162 million and $229 million for the three months ended March 31, 2018 and 2017, respectively. Accumulated gains within AOCI of $1 million and nilfor the three months ended March 31, 2018 and 2017, respectively, were reclassifiedinto Other expenses upon investment sales or liquidations.

Derivatives Not Designated as Hedges

The changes in the fair value of derivatives that are not designated as hedges are intended to offset the related foreign exchange gains or losses of the underlying foreign currency exposures. The changes in the fair value of the derivatives and the related underlying foreign currency exposures resulted in net losses of $21 million and $17 million for the three months ended March 31, 2018 and 2017, respectively, and are recognized in Other expenses.

The changes in the fair value of an embedded derivative resulted in a loss of $2 million and a gain of $1 million for the three months ended March 31, 2018 and 2017, respectively,and are recognized in Card Member services expense.