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Derivatives and Hedging Activities
 9 Months Ended
Sep. 30, 2016
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivatives and Hedging Activities

4. Derivatives and Hedging Activities

Credco 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 rates and foreign exchange rates, 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 Credco’s market risk management. Credco does not transact in derivatives for trading purposes.

In relation to Credco’s credit risk, under the terms of the derivative agreements it has with its various counterparties, Credco 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 its assessment of the credit risk of Credco’s derivative counterparties as of September 30, 2016 and December 31, 2015, Credco 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 September 30, 2016 and December 31, 2015:

Other AssetsOther Liabilities
Fair ValueFair Value
(Millions)2016201520162015
Derivatives designated as hedging instruments:
Interest rate contracts - Fair value hedges$170$64$―$9
Foreign exchange contracts - Net investment hedges54305613
Total derivatives designated as hedging instruments224945622
Derivatives not designated as hedging instruments:
Foreign exchange contracts10762533
Total derivatives, gross3311566155
Less: Cash collateral netting on interest rate contracts (a)(170)(53)――
Derivative asset and derivative liability netting (b)(25)(33)(25)(33)
Total derivatives, net (c)$136$70$36$22

  • Represents the offsetting of derivatives and the right to reclaim cash collateral (a receivable) or the obligation to return cash collateral (a payable) arising from derivatives executed with the same counterparty under an enforceable master netting arrangement. Additionally, Credco posted $124 million and $128 million as of September 30, 2016 and December 31, 2015, respectively, as initial margin on its 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.
  • Represents the amount of netting of derivative assets and derivative liabilities executed with the same counterparty under an enforceable master netting arrangement.
  • Credco has no individually significant derivative counterparties and therefore, no significant risk exposure to any single derivative counterparty. The total net derivative assets and net derivative liabilities are presented within Other assets and Accrued interest and Other liabilities, respectively, on the Consolidated Balance Sheets.

A majority of Credco’s derivative assets and liabilities as of September 30, 2016 and December 31, 2015 are subject to master netting agreements with its derivative counterparties. Credco has no derivative amounts subject to enforceable master netting arrangements that are not offset on the Consolidated Balance Sheets.

Fair Value Hedges

Credco is exposed to interest rate risk associated with its fixed-rate long-term debt. Credco uses interest rate swaps to economically convert certain fixed-rate debt obligations to floating-rate obligations at the time of issuance. Credco hedged $14.1 billion and $15.9 billion of its fixed-rate debt to floating-rate debt using interest rate swaps as of September 30, 2016 and December 31, 2015, respectively.

The following table summarizes the gains (losses) recognized in Other expenses associated with Credco’s fair value hedges for the three and nine months ended September 30:

Three Months Ended September 30,Nine Months Ended September 30,
(Millions)2016201520162015
Interest rate derivative contracts$(90)$89$115$91
Hedged items100(93)(101)(91)
Net hedge ineffectiveness$10$(4)$14$―

Credco also recognized a net reduction in interest expense on long-term debt of $32 million and $ 47 million for the three months ended September 30, 2016 and 2015, respectively, and $100 million and $133 million for the nine months ended September 30, 2016 and 2015, respectively, primarily related to the net settlements (interest accruals) on Credco’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 (AOCI) as part of the cumulative translation adjustment, was a loss of $(29) million and a gain of $188 million for the three months ended September 30, 2016 and 2015, respectively, and a loss of $(28) million and a gain of $274 million for the nine months ended September 30, 2016 and 2015, respectively, with any ineffective portion recognized in Other expenses during the period of change. During the three and nine months ended September 30, 2016 and 2015, Credco did not reclassify any amounts from AOCI to earnings as a component of Other expenses and no ineffectiveness was recognized in either period.

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 gain of $ 3 million and a net loss of $6 million for the three months ended September 30, 2016 and 2015, respectively, and net gains of $ 1 million and $22 million for the nine months ended September 30, 2016 and 2015, respectively, and are recognized in Other expenses.

Related to its derivatives not designated as hedges, Credco previously disclosed in Note 4 to the Consolidated Financial Statements in its Quarterly Report on Form 10-Q for the period ended September 30, 2015, gains of $42 million and $11 million, respectively, for the three and nine months ended September 30, 2015. These amounts should have been disclosed as gains of $12 million and $291 million, respectively, which are the amounts used to calculate the above-referenced net loss of $6 million and net gain of $22 million. Similarly, Credco is revising the full year 2015 and 2014 amounts of change in fair value of its derivatives not designated as hedges previously disclosed in Note 6 to the Consolidated Financial Statements in its Annual Report on Form 10-K for the year ended December 31, 2015, from a loss of $5 million to a gain of $293 million for 2015 and from a gain of $133 million to a gain of $587 million for 2014. Due to the netting as described in the above paragraph, these changes to the previously disclosed amounts have no impact on Credco’s Consolidated Statements of Income and Retained Earnings, Balance Sheets or Cash Flows.