Derivatives and Hedging Activities

9 Months Ended

Sep. 30, 2011

Derivatives and Hedging Activities [Abstract]

Derivatives and Hedging Activities

6.Derivatives and Hedging Activities

Credco uses derivative financial instruments (derivatives) to manage exposure to various market risks. Market risk is the risk to earnings or value resulting from movements in market prices. Credco's market risk exposure is primarily generated by:

• Interest rate risk in its funding activities; and
• Foreign exchange risk in its operations outside the United States.

General principles and the overall framework for managing market risk across American Express and its subsidiaries, including Credco, are defined in the Market Risk Policy, which is the responsibility of the Asset-Liability Committee (ALCO). Market risk limits and escalation triggers in that policy are approved by the ALCO and by the Enterprise-wide Risk Management Committee (ERMC). Market risk is centrally monitored for compliancewith policy and limits by the Market Risk Committee, which reports into the ALCO and is chaired by the Chief Market Risk Officer of American Express. Market risk management is also guided by policies covering the use of derivatives, funding and liquidity and investments.

Derivatives derive their value from an underlying variable or multiple variables, including interest rate and foreign exchange rate. 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 engage in derivatives for trading purposes.

Interest rate exposure within Credco's charge card and fixed-rate lending products is managed by varying the proportion of total funding provided by short-term and variable-rate debt compared to fixed-rate debt. In addition, interest rate swaps are used from time to time to synthetically convert fixed-rate debt obligations to variable-rate obligations or to convert variable-rate debt obligations to fixed-rate obligations. Credco may change the mix between variable-rate and fixed-rate funding based on changes in business volumes and mix, among other factors.

Foreign exchange risk is generated by (i) funding foreign currency cardmember receivables and loans with U.S. dollars and (ii) foreign subsidiary equity and foreign currency earnings in units outside the United States. Credco hedges this market exposure to the extent it is economically justified through various means, including the use of derivatives such as foreign exchange forwards and cross-currency swap contracts, which can help “lock-in” the value of Credco's exposure to specific currencies. Exposures from foreign subsidiary equity in Credco's units outside the United States are hedged through various means, including the use of foreign currency debt and foreign exchange forwards executed either by Credco or TRS.

Derivatives may give rise to counterparty credit risk, which is the risk that a derivative counterparty will default on, or otherwise be unable to perform pursuant to, an uncollateralized derivative exposure. Credco manages this risk by considering the current exposure, which is the replacement cost of contracts on the measurement date, as well as estimating the maximum potential value of the contracts over the next 12 months, considering such factors as the volatility of the underlying or reference index. To mitigate derivative credit risk, counterparties are required to be pre-approved and rated as investment grade. Counterparty risk exposures are monitored by American Express' Institutional Risk Management Committee (IRMC). The IRMC formally reviews large institutional exposures to ensure compliance with American Express' ERMC guidelines and procedures and determines the risk mitigation actions, when necessary. Additionally, in order to mitigate the bilateral counterparty credit risk associated with derivatives, Credco has in certain instances entered into master netting agreements with its derivative counterparties thatprovide a right of offset for certain exposures between the parties.To further mitigate bilateral counterparty credit risk, during the third quarter of 2011 Credco exercised its rights under executed credit support agreements with certain of its derivative counterparties. These agreements require that, in the event the fair value change in the net derivatives position between the two parties exceeds certain dollar thresholds, the party in the net liability position posts collateral to its counterparty.

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. As of September 30, 2011 and December 31, 2010, the counterparty credit risk associated with Credco's derivatives was not significant.

Credco's derivatives are carried at fair value on the Consolidated Balance Sheets. The accounting for changes in fair value depends on the instruments' intended use and the resulting hedge designation, if any, as discussed below. Refer to Note 2 for a description of Credco's methodology for determining the fair value of its derivatives.

The following table summarizes the total gross fair value, excluding interest accruals, of derivative assets and liabilities as of September 30, 2011 and December 31, 2010:

			Deferred Charges and Other Assets				Accrued Interest and Other Liabilities
			Fair Value				Fair Value
(Millions)			2011		2010		2011		2010
Derivatives designated as hedging instruments:
	Interest rate contracts
		Fair value hedges	$	530	$	444	$	2	$	38
		Cash flow hedges		―		2		1		2
	Foreign exchange contracts
		Net investment hedges		79		―		―		16
Total derivatives designated as hedging instruments			$	609	$	446	$	3	$	56
Derivatives not designated as hedging instruments:
	Interest rate contracts		$	1	$	1	$	3	$	3
	Foreign exchange contracts			58		51		121		22
Total derivatives not designated as hedging instruments			$	59	$	52	$	124	$	25
Total derivatives gross			$	668	$	498	$	127	$	81
Cash collateral netting(a)				(345)		―		―		―
Derivative asset and derivative liability netting(a)				(11)		(1)		(11)		(1)
Total derivatives, net			$	312	$	497	$	116	$	80

• As permitted under GAAP,balances represent the netting of cash collateral received and posted under credit support agreements, and the netting of derivative assets and derivative liabilities under master netting agreements.

Derivative Financial Instruments that Qualify for Hedge Accounting

Derivatives executed for hedge accounting purposes are documented and designated as such when Credco enters into the contracts. In accordance with its risk management policies, Credco structures its hedges with very similar terms to the hedged items. Credco formally assesses, at inception of the hedge accounting relationship and on a quarterly basis, whether derivatives designated as hedges are highly effective in offsetting the fair value or cash flows of the hedged items. These assessments usually are made through the application of a regression analysis method. If it is determined that a derivative is not highly effective as a hedge, Credco will discontinue the application of hedge accounting.

Fair Value Hedges

A fair value hedge involves a derivative designated to hedge Credco's exposure to future changes in the fair value of an asset or a liability, or an identified portion thereof that is attributable to a particular risk. Credco is exposed to interest rate risk associated with its fixed-rate long-term debt. Credco uses interest rate swaps to synthetically convert certain fixed-rate long-term debt obligations to floating-rate obligations at the time of issuance. As ofSeptember 30, 2011 and December 31, 2010, Credco hedged $10.6 billion and$8.9 billion, respectively, of its fixed-rate debt to floating-rate debt using interest rate swaps.

To the extent the fair value hedge is effective, the gain or loss on the hedging instrument offsets the loss or gain on the hedged item attributable to the hedged risk. Any difference between the changes in the fair value of the derivative and the hedged item is referred to as hedge ineffectiveness and is reflected in earnings as a component of other, net expenses. Hedge ineffectiveness may be caused by differences between the debt's interest coupon and the benchmark rate, which are primarily due to credit spreads at inception of the hedging relationship that are not reflected in the valuation of the interest rate swap. Furthermore, hedge ineffectiveness may be caused by changes in the relationship between 3-month LIBOR and 1-month LIBOR rates, as these so-called basis spreads may impact the valuation of the interest rate swap without causing an offsetting impact in the value of the hedged debt. If a fair value hedge is de-designated or no longer considered to be effective, changes in fair value of the derivative continue to be recorded through earnings but the hedged asset or liability is no longer adjusted for changes in fair value due to changes in interest rates. The existing basis adjustment of the hedged asset or liability is then amortized or accreted as an adjustment to yield over the remaining life of that asset or liability.

The following table summarizes the impact on the Consolidated Statements of Income and Retained Earnings associated with Credco's hedgesof fixed-rate long-term debt:

• As permitted under GAAP,balances represent the netting of cash collateral received and posted under credit support agreements, and the netting of derivative assets and derivative liabilities under master netting agreements.

Derivative Financial Instruments that Qualify for Hedge Accounting

Derivatives executed for hedge accounting purposes are documented and designated as such when Credco enters into the contracts. In accordance with its risk management policies, Credco structures its hedges with very similar terms to the hedged items. Credco formally assesses, at inception of the hedge accounting relationship and on a quarterly basis, whether derivatives designated as hedges are highly effective in offsetting the fair value or cash flows of the hedged items. These assessments usually are made through the application of a regression analysis method. If it is determined that a derivative is not highly effective as a hedge, Credco will discontinue the application of hedge accounting.

Fair Value Hedges

A fair value hedge involves a derivative designated to hedge Credco's exposure to future changes in the fair value of an asset or a liability, or an identified portion thereof that is attributable to a particular risk. Credco is exposed to interest rate risk associated with its fixed-rate long-term debt. Credco uses interest rate swaps to synthetically convert certain fixed-rate long-term debt obligations to floating-rate obligations at the time of issuance. As ofSeptember 30, 2011 and December 31, 2010, Credco hedged $10.6 billion and$8.9 billion, respectively, of its fixed-rate debt to floating-rate debt using interest rate swaps.

To the extent the fair value hedge is effective, the gain or loss on the hedging instrument offsets the loss or gain on the hedged item attributable to the hedged risk. Any difference between the changes in the fair value of the derivative and the hedged item is referred to as hedge ineffectiveness and is reflected in earnings as a component of other, net expenses. Hedge ineffectiveness may be caused by differences between the debt's interest coupon and the benchmark rate, which are primarily due to credit spreads at inception of the hedging relationship that are not reflected in the valuation of the interest rate swap. Furthermore, hedge ineffectiveness may be caused by changes in the relationship between 3-month LIBOR and 1-month LIBOR rates, as these so-called basis spreads may impact the valuation of the interest rate swap without causing an offsetting impact in the value of the hedged debt. If a fair value hedge is de-designated or no longer considered to be effective, changes in fair value of the derivative continue to be recorded through earnings but the hedged asset or liability is no longer adjusted for changes in fair value due to changes in interest rates. The existing basis adjustment of the hedged asset or liability is then amortized or accreted as an adjustment to yield over the remaining life of that asset or liability.

The following table summarizes the impact on the Consolidated Statements of Income and Retained Earnings associated with Credco's hedgesof fixed-rate long-term debt:

For the Three Months Ended September 30:
(Millions)	Gains (losses) recognized in income
	Derivative contract					Hedged item					Net hedge
		Amount					Amount				ineffectiveness
Derivative Relationship	Location	2011		2010		Location	2011		2010		2011		2010
Interest rate contracts	Other, net expenses	$	108	$	100	Other, net expenses	$	(97)	$	(106)	$	11	$	(6)
For the Nine Months Ended September 30:
(Millions)	Gains (losses) recognized in income
	Derivative contract					Hedged item					Net hedge
		Amount					Amount				ineffectiveness
Derivative Relationship	Location	2011		2010		Location	2011		2010		2011		2010
Interest rate contracts	Other, net expenses	$	121	$	300	Other, net expenses	$	(118)	$	(286)	$	3	$	14

Credco also recognized a net reduction in interest expense on long-term debt and other of $65 million and $63 million for the three months ended September 30, 2011 and 2010, respectively, primarily related to the net settlements (interest accruals) on Credco's interest rate derivatives designated as fair value hedges.For the nine months ended September 30, 2011 and 2010, the impact on interest expense was a net reduction in interest expense on long-term debt and other of $191 million and $192 million, respectively.

Cash Flow Hedges

A cash flow hedge involves a derivative designated to hedge Credco's exposure to variable future cash flows attributable to a particular risk. Such exposures may relate to either an existing recognized asset or liability, or a forecasted transaction. Credco hedges existing long-term variable-rate debt, the rollover of short-term borrowings and the anticipated forecasted issuance of additional funding through the use of derivatives, primarily interest rate swaps. These derivative instruments synthetically convert floating-rate debt obligations to fixed-rateobligations for the duration of the instrument. As ofSeptember 30, 2011 and December 31, 2010, Credco hedged $0.3 billion and $0.8 billion, respectively, of its floating-rate debt using interest rate swaps.

For derivatives designated as cash flow hedges, the effective portion of the gain or loss on the derivatives is recorded in AOCI and reclassified into earnings when the hedged cash flows are recognized in earnings. The amount that is reclassified into earnings is presented in the Consolidated Statements of Income and Retained Earningsin the same line item in which the hedged instrument or transaction is recognized, primarily in interest expense. Any ineffective portion of the gain or loss on the derivatives is reported as a component of other, net expenses. If a cash flow hedge is de-designated or terminated prior to maturity, the amount previously recorded in AOCI is recognized into earnings over the period that the hedged item impacts earnings. If a hedge relationship is discontinued because it is probable that the forecasted transaction will not occur according to the original strategy, any related amounts previously recorded in AOCI are recognized into earnings immediately.

In the normal course of business, as the hedged cash flows are recognized into earnings, Credco expects to reclassify $1 million of net pretax losses on derivatives from AOCI into earnings during the next 12 months.

The following table summarizes the impact of cash flow hedges on the Consolidated Statements of Income and Retained Earnings:

For the Three Months Ended September 30:
(Millions)		Gains (losses) recognized in income
				Amount
				reclassified from					Net hedge
				AOCI into income					ineffectiveness
			Location	2011		2010		Location	2011		2010
Cash flow hedges:(a)
	Interest rate contracts		Interest expense	$	—	$	(1)	Other, net expenses	$	—	$	—
For the Nine Months Ended September 30:
(Millions)			Gains (losses) recognized in income
				Amount
				reclassified from					Net hedge
				AOCI into income					ineffectiveness
			Location	2011		2010		Location	2011		2010
Cash flow hedges:(a)
	Interest rate contracts		Interest expense	$	(1)	$	(3)	Other, net expenses	$	—	$	—

• During the three and nine months ended September 30, 2011 and 2010, there were no forecasted transactions that were considered no longer probable to occur.

Net Investment Hedges

A net investment hedge is used to hedge future changes in currency exposure of a net investment in a foreign operation. Credco primarily designates foreign currency derivatives, typically foreign exchange forwards, and on occasion foreign currency denominated debt, as hedges of net investments in certain foreign operations. These instruments reduce exposure to changes in currency exchange rates on Credco's investments in non-U.S. subsidiaries. The effective portion of the gain or loss on net investment hedges recorded in AOCI, as part of the cumulative translation adjustment, was $64 million and $(18) million for the three months ended September 30, 2011 and 2010, respectively. For the nine months ended September 30, 2011and 2010, the effective portion of the gain or loss on net investment hedges was $26 million and $(47) million, respectively. Any ineffective portion of the gain or loss on net investment hedges is recognized in other, net expenses during the period of change. No ineffectiveness or otheramounts were reclassified from AOCI into income for the nine months ended September 30, 2011 or2010.

Derivatives Not Designated as Hedges

Credco has derivatives that act as economic hedges, but are not designated for hedge accounting purposes. Foreign currency transactions and non-U.S. dollar cash flow exposures from time to time may be partially or fully economically hedged through foreign currency contracts, primarily foreign exchange forwards, options and cross-currency swaps. These hedges generally mature within one year. Foreign currency contracts involve the purchase and sale of a designated currency at an agreed upon rate for settlement on a specified date. The changes in the fair value of the derivatives effectively offset the related foreign exchange gains or losses on the underlying balance sheet exposures. From time to time, Credco may enter into interest rate swaps to specifically manage funding costs related to American Express' proprietary card business.

For derivatives that are not designated as hedges, changes in fair value are reported in current period earnings.

The following table summarizes the impact of derivatives not designated as hedges on the Consolidated Statements of Income and Retained Earnings:

• During the three and nine months ended September 30, 2011 and 2010, there were no forecasted transactions that were considered no longer probable to occur.

Net Investment Hedges

A net investment hedge is used to hedge future changes in currency exposure of a net investment in a foreign operation. Credco primarily designates foreign currency derivatives, typically foreign exchange forwards, and on occasion foreign currency denominated debt, as hedges of net investments in certain foreign operations. These instruments reduce exposure to changes in currency exchange rates on Credco's investments in non-U.S. subsidiaries. The effective portion of the gain or loss on net investment hedges recorded in AOCI, as part of the cumulative translation adjustment, was $64 million and $(18) million for the three months ended September 30, 2011 and 2010, respectively. For the nine months ended September 30, 2011and 2010, the effective portion of the gain or loss on net investment hedges was $26 million and $(47) million, respectively. Any ineffective portion of the gain or loss on net investment hedges is recognized in other, net expenses during the period of change. No ineffectiveness or otheramounts were reclassified from AOCI into income for the nine months ended September 30, 2011 or2010.

Derivatives Not Designated as Hedges

Credco has derivatives that act as economic hedges, but are not designated for hedge accounting purposes. Foreign currency transactions and non-U.S. dollar cash flow exposures from time to time may be partially or fully economically hedged through foreign currency contracts, primarily foreign exchange forwards, options and cross-currency swaps. These hedges generally mature within one year. Foreign currency contracts involve the purchase and sale of a designated currency at an agreed upon rate for settlement on a specified date. The changes in the fair value of the derivatives effectively offset the related foreign exchange gains or losses on the underlying balance sheet exposures. From time to time, Credco may enter into interest rate swaps to specifically manage funding costs related to American Express' proprietary card business.

For derivatives that are not designated as hedges, changes in fair value are reported in current period earnings.

The following table summarizes the impact of derivatives not designated as hedges on the Consolidated Statements of Income and Retained Earnings:

For the Three Months Ended September 30:	Gains (losses) recognized in income
		Amount
(Millions)	Location	2011		2010
Foreign exchange contracts	Other, net expenses	$	(6)	$	105
Total		$	(6)	$	105
For the Nine Months Ended September 30:	Gains (losses) recognized in income
		Amount
(Millions)	Location	2011		2010
Interest rate contracts	Other, net expenses	$	—	$	1
Foreign exchange contracts	Other, net expenses		6		83
	Interest expense		—		43
Total		$	6	$	127