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 September 30, 2020, these derivatives were not in a significant net liability position. Based on Credco’s assessment of the credit risk of its derivative counterparties and its own credit risk as of September 30, 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 September 30, 2020 and December 31, 2019 are subject to master netting agreements with its derivative counterparties. Credco presents derivative assets and liabilities subject to enforceable netting arrangements with the same counterparty on a net basis on the Consolidated Balance Sheets.

The following table summarizes the total fair value, excluding interest accruals, of derivative assets and liabilities as of September 30, 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	43		12		60		44
Total derivatives designated as hedging instruments	43		12		60		44
Derivatives not designated as hedging instruments:
Foreign exchange contracts	62		31		39		182
Total derivatives, gross	105		43		99		226
Derivative asset and derivative liability netting (c)	(36)		(27)		(36)		(27)
Total derivatives, net	$	69	$	16	$	63	$	199

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

(b)Credco posted $17 million and $20 million as of September 30, 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 $3.5 billion and $8.8 billion of its fixed-rate debt obligations designated in fair value hedging relationships as of September 30, 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 and nine months ended September 30:


	Gains (losses)
		Three Months Ended September 30,				Nine Months Ended September 30,
(Millions)		2020		2019		2020		2019
Fixed-rate long-term debt		$	12	$	(22)	$	(54)	$	(177)
Derivatives designated as hedging instruments		(15)		26		57		183
Total		$	(3)	$	4	$	3	$	6

The carrying values of the hedged liabilities, recorded within Long-term debt on the Consolidated Balance Sheets, were $3.5 billion and $8.7 billion as of September 30, 2020 and December 31, 2019, respectively, including the cumulative amount of fair value hedging adjustments of $52 million and $(2) million for the respective periods.

Credco recognized a net decrease of $15 million and a net increase of $21 million in Interest expense on long-term debt for the three months ended September 30, 2020 and 2019, respectively, and a net decrease of $27 million and a net increase of $81 million for the nine months ended September 30, 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 September 30, 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 loss of $59 million and a gain of $50 million for the three months ended September 30, 2020 and 2019, respectively, and gains of $71 million and $29 million for the nine months ended September 30, 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 $1 million and $20 million for the three months ended September 30, 2020 and 2019, respectively, and $17 million and $69 million for the nine months ended September 30, 2020 and 2019, respectively, that are recognized in Other, net expenses on the Consolidated Statements of Income.