Derivatives and Hedging Activities

3 Months Ended

Mar. 31, 2019

Derivative Instruments and Hedging Activities Disclosure [Abstract]

4. Derivatives and Hedging Activities

Credco uses 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 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, certain of Credco’s bilateral derivative agreements include provisions that allow counterparties to terminate the agreement in the event of a downgrade of Credco’s debt credit rating below investment grade and settle the outstanding net liability position. As of March 31, 2019, these derivatives were not in a material net liability position. Based on Credco’s assessment of the credit risk of its derivative counterparties as of March 31, 2019 and December 31, 2018, no credit risk adjustment to the derivative portfolio was required.

A majority of Credco’s derivative assets and liabilities as of March 31, 2019 and December 31, 2018 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.

The following table summarizes the total fair value, excluding interest accruals, of derivative assets and liabilities as of March 31, 2019 and December 31, 2018:

		Other Assets				Other Liabilities
		Fair Value				Fair Value
(Millions)		2019		2018		2019		2018
Derivatives designated as hedging instruments:
	Fair value hedges - Interest rate contracts^(a)(b)	$	―	$	―	$	6	$	―
	Net investment hedges - Foreign exchange contracts		19		57		40		10
Total derivatives designated as hedging instruments			19		57		46		10
Derivatives not designated as hedging instruments:
	Foreign exchange contracts		30		220		114		6
Total derivatives, gross			49		277		160		16
Less: Derivative asset and derivative liability netting^(c)			(27)		(11)		(27)		(11)
Total derivatives, net		$	22	$	266	$	133	$	5

For Credco’s centrally cleared derivatives, variation margin payments are legally characterized as settlement payments as opposed to collateral.
Credco posted $44 million and $55 million as of March 31, 2019 and December 31, 2018, 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 counterparties under an enforceable master netting arrangement.

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 $12.5 billion and $13.8 billion of its fixed-rate debt obligations designated in fair value hedging relationships as of March 31, 2019 and December 31, 2018, respectively.

The following table presents the gains and losses recognized in Interest expense associated with the fair value hedges of Credco’s fixed-rate long-term debt:

		Gains (losses)
		Three Months Ended
		March 31,
(Millions)		2019		2018
Fixed-rate long-term debt	$	(67)	$	115
Derivatives designated as hedging instruments		65		(95)
Total	$	(2)	$	20

The carrying values of the hedged liabilities, recorded within Long-term debt on the Consolidated Balance Sheets, were $12.4 billion and $13.5 billion as of March 31, 2019 and December 31, 2018, respectively, including offsetting amounts of $116 million and $184 million for the respective periods, related to the cumulative amount of fair value hedging adjustments.

Credco recognized a net increase of $32 million and $4 million in Interest expense on long-term debt for the three months ended March 31, 2019 and 2018, respectively, primarily related to the net settlements (interest accruals) on Credco’s interest rate derivatives designated as fair value hedges.

Net Investment Hedges

Credco had notional amounts of approximately $2.9 billion of foreign currency derivatives designated as net investment hedges as of both March 31, 2019 and December 31, 2018. The gain or loss on net investment hedges, net of taxes, recorded in AOCI as part of the cumulative translation adjustment, were losses of $57 million and $43 million for the three months ended March 31, 2019 and 2018, respectively. No amounts associated with net investment hedges were reclassified from AOCI into income for the three months ended March 31, 2019 and 2018.

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 gains of $23 million and $15 million for the three months ended March 31, 2019 and 2018, respectively, and are recognized in Other expenses.