Derivatives and Hedging Activities

6 Months Ended

Jun. 30, 2015

Derivative Instruments And Hedging Activities Disclosure [Abstract]

Derivatives and Hedging Activities

9. Derivatives and Hedging Activities

The Company uses 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 rate, 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 the Company’s market risk management. The Company does not engage in derivatives for trading purposes.

In relation to the Company’s credit risk, under the terms of the derivative agreements it has with its various counterparties, the Company is 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 the assessment of credit risk of the Company’s derivative counterparties as of June 30, 2015 and December 31, 2014, the Company does not have derivative positions that warrant credit valuation adjustments.

The following table summarizes the total fair value, excluding interest accruals, of derivative assets and liabilities as of June 30, 2015 and December 31, 2014:

		Other Assets				Other Liabilities
		Fair Value				Fair Value
(Millions)		2015		2014		2015		2014
Derivatives designated as hedging instruments:
Interest rate contracts
	Fair value hedges	$	288	$	314	$	5	$	4
Foreign exchange contracts
	Net investment hedges		139		492		164		46
Total derivatives designated as hedging instruments			427		806		169		50
Derivatives not designated as hedging instruments:
	Foreign exchange contracts, including certain embedded derivatives(a)		178		185		135		114
Total derivatives, gross			605		991		304		164
Less: Cash collateral netting(b)			(205)		(158)		―		(4)
Derivative asset and derivative liability netting(c)			(149)		(122)		(149)		(122)
Total derivatives, net(d)		$	251	$	711	$	155	$	38

• Includes foreign currency derivatives embedded in certain operating agreements.
• Represents the offsetting of derivative instruments and the right to reclaim cash collateral (a receivable) or the obligation to return cash collateral (a payable) arising from derivative instrument(s) executed with the same counterparty under an enforceable master netting arrangement. From time to time, the Company also receives non-cash collateral from counterparties in the form of security interests in U.S. Treasury securities, which reduces the Company’s risk exposure, but does not reduce the net exposure on the Company’s Consolidated Balance Sheets. The Company had such non-cash collateral as of December 31, 2014 with a fair value of $91 million, none of which was sold or repledged. The Company did not have any such non-cash collateral as of June 30, 2015. Additionally, the Company posted $126 million and $114 million as of June 30, 2015 and December 31, 2014, respectively, as initial margin on its centrally cleared interest rate swaps; such amounts are recorded within Other receivables on the Company’s 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.
• The Company has no individually significant derivative counterparties and therefore, no significant risk exposure to any single derivative counterparty. The total net derivative assets and derivative liabilities are presented within Other assets and Other liabilities on the Company’s Consolidated Balance Sheets.

A majority of the Company’s derivative assets and liabilities as of June 30, 2015 and December 31, 2014are subject to master netting agreements with its derivative counterparties. In addition, the Company has no derivative amounts subject to enforceable master netting arrangements that are not offset on the Company’s Consolidated Balance Sheets.

Fair Value Hedges

Interest Rate Contracts

The Company is exposed to interest rate risk associated with its fixed-rate long-term debt. The Company uses interest rate swaps to economically convert certain fixed-rate debt obligations to floating-rate obligations at the time of issuance. As of June 30, 2015and December 31, 2014, the Company hedged $18.1 billion and $17.6 billion, respectively, of its fixed-rate debt to floating-rate debt using interest rate swaps.

Total Return Contract

The Company hedged its exposure to changes in the fair value of its equity investment in Industrial and Commercial Bank of China (ICBC) in local currency. The Company used a total return contract (TRC) to transfer its exposure to its derivative counterparty. On July 18, 2014, the Company sold its remaining shares in ICBC and terminated the TRC.

The following table summarizes the impact on the Consolidated Statements of Income associated with the Company’s fair value hedges for the three and six months endedJune 30:

Three Months Ended June 30: (Millions)
	Gains (losses) recognized in income
	Derivative contract					Hedged item					Net hedge
		Amount					Amount				ineffectiveness
Derivative relationship	Income Statement Line Item	2015		2014		Income Statement Line Item	2015		2014		2015		2014
Interest rate contracts	Other expenses	$	(89)	$	(10)	Other expenses	$	85	$	14	$	(4)	$	4
Total return contract	Other non-interest revenues		―		(1)	Other non-interest revenues		―		1		―		―

Six Months Ended June 30: (Millions)
	Gains (losses) recognized in income
	Derivative contract					Hedged item					Net hedge
		Amount					Amount				ineffectiveness
Derivative relationship	Income Statement Line Item	2015		2014		Income Statement Line Item	2015		2014		2015		2014
Interest rate contracts	Other expenses	$	(26)	$	(60)	Other expenses	$	29	$	64	$	3	$	4
Total return contract	Other non-interest revenues		―		11	Other non-interest revenues		―		(11)		―		―

The Company also recognized a net reduction in interest expense on long-term debt of $71million and $74million for the three months ended June 30, 2015 and 2014, respectively, and $140 million and $143 million for the six months endedJune 30, 2015 and 2014, respectively, primarily related to the net settlements (interest accruals) on the Company’s interest rate derivatives designated as fair value hedges.

Net Investment Hedges

The effective portion of the gain or (loss) on net investment hedges, net of taxes, recorded in Accumulated Other Comprehensive Loss as part of the cumulative translation adjustment was $(34) million and $(116)million for the three months ended June 30, 2015 and 2014, respectively, and $161 million and $(133) million for the six months ended June 30, 2015 and 2014, respectively, with any ineffective portion recognized in Other expenses during the period of change. During the three months ended June 30, 2015 and 2014, the Company reclassified nil and $(7) million, respectively, and nil and $9 million for the six months ended June 30, 2015 and 2014, respectively, from Accumulated Other Comprehensive Loss to earnings as a component of Other expenses. Ineffectiveness associated with net investment hedges of $1 million was recognized as a component of Other expenses for the three months and six months ended June 30, 2015.

The following table summarizes the impact on the Consolidated Statements of Income associated with the Company’s derivatives not designated as hedges for the three and six months endedJune 30:

		Pretax gains (losses)
		Three Months Ended				Six Months Ended
		June 30,				June 30,
		Amount				Amount
Description (Millions)	Income Statement Line Item	2015		2014		2015		2014
Interest rate contracts	Other expenses	$	―	$	―	$	―	$	83
Foreign exchange contracts(a)	Other expenses		40		(50)		(4)		―
	Cost of Card Member services		4		2		3		3
Total		$	44	$	(48)	$	(1)	$	86

Foreign exchange contracts include forwards and embedded foreign currency derivatives.