Derivatives and Hedging Activities

6 Months Ended

Jun. 30, 2020

Derivative Instruments and Hedging Activities Disclosure [Abstract]

We use derivative financial instruments 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 an 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, certain of our bilateral derivative agreements include provisions that allow our counterparties to terminate the agreement in the event of a downgrade of our debt credit rating below investment grade and settle the outstanding net liability position. As of June 30, 2020, these derivatives were not in a significant net liability position. Based on our assessment of the credit risk of our derivative counterparties and our own credit risk as of June 30, 2020 and December 31, 2019, no credit risk adjustment to the derivative portfolio was required.

A majority of our derivative assets and liabilities as of June 30, 2020 and December 31, 2019 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.

The following table summarizes the total fair value, excluding interest accruals, of derivative assets and liabilities as of June 30, 2020 and December 31, 2019:


	Other Assets Fair Value						Other Liabilities Fair Value
(Millions)	2020		2019		2020		2019
Derivatives designated as hedging instruments:
Fair value hedges - Interest rate contracts ^(a)	$	624	$	185	$	—	$	—
Net investment hedges - Foreign exchange contracts	249		24		151		186
Total derivatives designated as hedging instruments	873		209		151		186
Derivatives not designated as hedging instruments:
Foreign exchange contracts	197		134		271		254
Total derivatives, gross	1,070		343		422		440
Derivative asset and derivative liability netting ^(b)	(237)		(90)		(237)		(90)
Cash collateral netting ^(c)(d)	(628)		(185)		(2)		(9)
Total derivatives, net	$	205	$	68	$	183	$	341

(a)For our centrally cleared derivatives, variation margin payments are legally characterized as settlement payments as opposed to collateral.

(b)Represents the amount of netting of derivative assets and derivative liabilities executed with the same counterparty under an enforceable master netting arrangement.

(c)Represents the offsetting of the fair value of bilateral interest rate contracts and certain foreign exchange contracts with the right to cash collateral held from the counterparty or cash collateral posted with the counterparty.

(d)We posted $61 million and $47 million as of June 30, 2020 and December 31, 2019, respectively, as initial margin on our centrally cleared interest rate swaps; such amounts are recorded within Other assets on the Consolidated Balance Sheets and are not netted against the derivative balances.

Fair Value Hedges

We are exposed to interest rate risk associated with our fixed-rate debt obligations. At the time of issuance, certain fixed-rate long-term 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 $18.8 billion and $22.6 billion of fixed-rate debt obligations designated in fair value hedging relationships as of June 30, 2020 and December 31, 2019, respectively.

The following table presents the gains and losses recognized in Interest expense on the Consolidated Statements of Income associated with the fair value hedges of our fixed-rate long-term debt for the three and six months ended June 30:


	Gains (losses)
	Three Months Ended June 30,						Six Months Ended June 30,
(Millions)	2020		2019		2020		2019
Fixed-rate long-term debt	$	4	$	(280)	$	(593)	$	(440)
Derivatives designated as hedging instruments	(10)		286		601		444
Total	$	(6)	$	6	$	8	$	4

The carrying values of the hedged liabilities, recorded within Long-term debt on the Consolidated Balance Sheets, were $19.6 billion and $22.7 billion as of June 30, 2020 and December 31, 2019, respectively, including the cumulative amount of fair value hedging adjustments of $810 million and $217 million for the respective periods.

We recognized a net decrease of $81 million and a net increase of $36 million in Interest expense on Long-term debt for the three months ended June 30, 2020 and 2019, respectively, and a net decrease of $102 million and a net increase of $74 million for the six months ended June 30, 2020, and 2019, respectively, primarily related to the net settlements (interest accruals) on our interest rate derivatives designated as fair value hedges.

Net Investment Hedges

We had notional amounts of approximately $9.9 billion and $9.8 billion of foreign currency derivatives designated as net investment hedges as of June 30, 2020 and December 31, 2019, respectively. The gain or loss on net investment hedges, net of taxes, recorded in AOCI as part of the cumulative translation adjustment, was a loss of $339 million and a gain of $87 million for the three months ended June 30, 2020 and 2019, respectively, and a gain of $393 million and a loss of $75 million for the six months ended June 30, 2020, and 2019, respectively. Net investment hedge reclassifications out of AOCI into the Consolidated Statements of Income associated with the sale or liquidation of a business, net of taxes, were a gain of $1 million and nil for the three months ended June 30, 2020 and 2019, respectively, and a gain of $1 million and nil for the six months ended June 30, 2020 and 2019, respectively.

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 a net loss of $2 million and a net gain of $23 million for the three months ended June 30, 2020 and 2019, respectively, and net gains of $18 million and $27 million for the six months ended June 30, 2020 and 2019, respectively, that are recognized in Other, net expenses in the Consolidated Statements of Income.