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.

A majority of Credco’s derivative assets and liabilities as of March 31, 2021 and December 31, 2020 are subject to master netting agreements with its derivative counterparties. Accordingly, where appropriate, Credco has elected to present derivative assets and liabilities with the same counterparty on a net basis in the Consolidated Balance Sheets.

In relation to Credco’s credit risk, certain of Credco’s bilateral derivative agreements include provisions that allow Credco’s 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, 2021, these derivatives were not in a material 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, 2021 and December 31, 2020, no credit risk 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, 2021 and December 31, 2020:


	Other Assets				Other Liabilities
	Fair Value				Fair Value
(Millions)	2021		2020		2021		2020
Derivatives designated as hedging instruments:
Fair value hedges - Interest rate contracts (a)	$	—	$	—	$	—	$	—
Net investment hedges - Foreign exchange contracts	35		1		25		195
Total derivatives designated as hedging instruments	35		1		25		195
Derivatives not designated as hedging instruments:
Foreign exchange contracts	25		48		78		89
Total derivatives, gross	60		49		103		284
Derivative asset and derivative liability netting (b)	(20)		(15)		(20)		(15)
Total derivatives, net	$	40	$	34	$	83	$	269

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

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

Credco posted $8 million and $12 million as of March 31, 2021 and December 31, 2020, respectively, as initial margin on its centrally cleared interest rate swaps; such amounts are recorded within Other assets in Credco’s Consolidated Balance Sheets and are not netted against the derivative balances.

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 had $3.5 billion of its fixed-rate debt obligations designated in fair value hedging relationships as of both March 31, 2021 and December 31, 2020.

The following table presents the gains and losses recognized in Interest expense in 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)		2021		2020
Fixed-rate long-term debt		$	11	$	(66)
Derivatives designated as hedging instruments		(12)		79
Total		$	(1)	$	13

The carrying values of the hedged liabilities, recorded within Long-term debt on the Consolidated Balance Sheets, were $3.5 billion as of both March 31, 2021 and December 31, 2020, including the cumulative amount of fair value hedging adjustments of $29 million and $40 million for the respective periods.

Credco recognized a net decrease of $12 million and a net increase of $2 million in Interest expense on Long-term debt for the three months ended March 31, 2021 and 2020, respectively, primarily related to the net settlements (including interest accruals) on Credco’s interest rate derivatives designated as fair value hedges.

Credco primarily designates foreign currency derivatives as net investment hedges to reduce its exposure to changes in currency exchange rates on its investments in non-U.S. subsidiaries. Credco had notional amounts of approximately $3.1 billion and $2.9 billion of foreign currency derivatives designated as net investment hedges as of March 31, 2021 and December 31, 2020, respectively. The gain or loss on net investment hedges, net of taxes, recorded in AOCI as part of the cumulative translation adjustment were gains of $6 million and $346 million for the three months ended March 31, 2021 and 2020, 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 a net loss of $1 million and a net gain of $11 million for the three months ended March 31, 2021 and 2020, respectively, that are recognized in Other, net expenses in the Consolidated Statements of Income.