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Derivatives and Hedging Activities
 3 Months Ended
Mar. 31, 2017
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 March 31, 2017 and December 31, 2016, no 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, 2017 and December 31, 2016:

Other AssetsOther Liabilities
Fair ValueFair Value
(Millions)2017201620172016
Derivatives designated as hedging instruments:
Fair value hedges - Interest rate contracts (a)$―$22$―$69
Net investment hedges - Foreign exchange contracts4151961
Total derivatives designated as hedging instruments41739670
Derivatives not designated as hedging instruments:
Foreign exchange contracts371287928
Total derivatives, gross4130117598
Less: Cash collateral netting (b)(c)―(2)―(49)
Derivative asset and derivative liability netting (d)(10)(27)(10)(27)
Total derivatives, net (e)$31$272$165$22

  • Effective January 2017, the Central Clearing Party changed the legal characterization of variation margin payments for centrally cleared derivatives to be settlement payments, as opposed to collateral. As of March 31, 2017, centrally cleared derivatives are fully collateralized.
  • 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 derivatives executed with the same counterparty under an enforceable master netting arrangement.
  • Credco held no non-cash collateral as of March 31, 2017 and December 31, 2016, respectively. To mitigate counterparty credit risk related to derivatives, Credco may accept non-cash collateral from its derivatives counterparties. Additionally, Credco posted $155 million and $144 million as of March 31, 2017 and December 31, 2016, respectively, as initial margin on its centrally cleared interest rate swaps; such amounts are recorded within Other assets on Credco’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.
  • 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 Credco’s Consolidated Balance Sheets.

A majority of Credco’s derivative assets and liabilities as of March 31, 2017 and December 31, 2016 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 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. Credco has $17.1 billion and $14.8 billion of its fixed-rate debt obligations designated as fair value hedges as of March 31, 2017 and December 31, 2016, respectively.

The following table summarizes the losses recognized in Other expenses associated with Credco’s fair value hedges for the three months ended March 31:

Three Months Ended March 31,
(Millions)20172016
Interest rate derivative contracts$(50)$142
Hedged items29(146)
Net hedge ineffectiveness losses$(21)$(4)

Credco also recognized a net reduction in interest expense on long-term debt of $22 million and $ 34 million for the three months ended March 31, 2017 and 2016, 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 loss on net investment hedges, net of taxes, recorded in accumulated other comprehensive income (loss) (AOCI) as part of the cumulative translation adjustment, was $128 million and $51 million for the three months ended March 31, 2017 and 2016, respectively, with any ineffective portion recognized in Other expenses during the period of change. No ineffectiveness or other amounts associated with net investment hedges were reclassified from AOCI into income for the three months ended March 31, 2017 and 2016.

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 $ 4 million and a net loss of $1 million for the three months ended March 31, 2017 and 2016, respectively, and are recognized in Other expenses.