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 Credco or the counterparty to terminate the agreement and settle the fair value of existing positions in the event of a downgrade of one’s party credit rating below investment grade. As of March 31, 2020, these derivatives were not in a net liability position. Based on Credco’s assessment of the credit risk of its derivative counterparties and its own credit risk as of March 31, 2020 and December 31, 2019, no credit risk adjustment to the derivative portfolio was required.

A majority of Credco’s derivative assets and liabilities as of March 31, 2020 and December 31, 2019 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, 2020 and December 31, 2019:


	Other Assets						Other Liabilities
	Fair Value						Fair Value
(Millions)	2020		2019		2020		2019
Derivatives designated as hedging instruments:
Fair value hedges - Interest rate contracts ^(a)(b)	$	—	$	—	$	—	$	—
Net investment hedges - Foreign exchange contracts	319		12		8		44
Total derivatives designated as hedging instruments	319		12		8		44
Derivatives not designated as hedging instruments:
Foreign exchange contracts	647		31		60		182
Total derivatives, gross	966		43		68		226
Derivative asset and derivative liability netting ^(c)	(63)		(27)		(63)		(27)
Total derivatives, net	$	903	$	16	$	5	$	199

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

(b)Credco posted $35 million and $20 million as of March 31, 2020 and December 31, 2019, 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.

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

Credco is exposed to interest rate risk associated with its 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. Credco has $6.8 billion and $8.8 billion of its fixed-rate debt obligations designated in fair value hedging relationships as of March 31, 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 Credco’s fixed-rate long-term debt for the three months ended March 31:


	Gains (losses)
	Three Months Ended March 31,
(Millions)	2020		2019
Fixed-rate long-term debt	$	(66)	$	(67)
Derivatives designated as hedging instruments	79		65
Total	$	13	$	(2)

The carrying values of the hedged liabilities, recorded within Long-term debt on the Consolidated Balance Sheets, were $6.8 billion and $8.7 billion as of March 31, 2020 and December 31, 2019, respectively, including the cumulative amount of fair value hedging adjustments of $64 million and $(2) million for the respective periods.

Credco recognized net increases of $2 million and $32 million in Interest expense on long-term debt for the three months ended March 31, 2020 and 2019, respectively, primarily related to the net settlements (interest accruals) on Credco’s interest rate derivatives designated as fair value hedges.

Credco had notional amounts of approximately $2.9 billion and $3.0 billion of foreign currency derivatives designated as net investment hedges as of March 31, 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 gain of $346 million and a loss of $57 million for the three months ended March 31, 2020 and 2019, respectively.

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 $11 million and $23 million for the three months ended March 31, 2020 and 2019, respectively, that are recognized in Other, net expenses on the Consolidated Statements of Income.