Derivatives and Hedging Activities

6 Months Ended

Jun. 30, 2015

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivatives and Hedging Activities

4. Derivatives and Hedging Activities

Credco uses derivative financial instruments (derivatives) to manage exposures to various market risks. These instruments derive their value from an underlying variable or multiple variables, including interest rate 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 engage in derivatives for trading purposes.

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. Based on the assessment of credit risk of Credco’s derivative counterparties as of June 30, 2015 and December 31, 2014, Credco does not have derivative positions that warrant credit valuation adjustments.

The following table summarizes the total fair value, excluding interest accruals, of derivative assets and liabilities as of June 30, 2015 and December 31, 2014:

			Other Assets				Accrued Interest and Other Liabilities
			Fair Value				Fair Value
(Millions)			2015		2014		2015		2014
Derivatives designated as hedging instruments:
	Interest rate contracts
		Fair value hedges	$	93	$	90	$	5	$	4
	Foreign exchange contracts
		Net investment hedges		32		186		13		―
Total derivatives designated as hedging instruments				125		276		18		4
Derivatives not designated as hedging instruments:
	Foreign exchange contracts			51		73		64		49
Total derivatives, gross				176		349		82		53
Less: Cash collateral netting (a)				(84)		(63)		―		―
Derivative asset and derivative liability netting (b)				(50)		(50)		(50)		(50)
Total derivatives, net (c)			$	42	$	236	$	32	$	3

• Represents the offsetting of derivative instruments and the right to reclaim cash collateral (a receivable) or the obligation to return cash collateral (a payable) arising from derivative instrument(s) executed with the same counterparty under an enforceable master netting arrangement. From time to time, Credcoalso receives non-cash collateral from counterparties in the form of security interests in U.S. Treasury securities,which reduces Credco’s risk exposure, but does not reduce the net exposure on Credco’s Consolidated Balance Sheets.Credco had such non-cash collateral as of December 31, 2014, with a fair value of $40 million, none of which was sold or repledged. Credco did not have any such non-cash collateral as of June 30, 2015. Additionally, Credco posted $103 million and $91million as ofJune 30, 2015 and December 31, 2014, 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 counterparty under an enforceable master netting arrangement.
• Credco has no individually significant derivative counterparties and therefore, no significant risk exposure to any single derivative counterparty. The total net derivative assets and derivative liabilities are presented within Other assets and Accrued interest and other liabilities on Credco’s Consolidated Balance Sheets.

A majority of Credco’s derivative assets and liabilities as of June 30, 2015 and December 31, 2014 are subject to master netting agreements with its derivative counterparties. In addition, Credco has no derivative amounts subject to enforceable master netting arrangements that are not offset on Credco’s Consolidated Balance Sheets.

Fair Value Hedges

Credco is exposed to interest rate risk associated with its fixed-rate long-term debt. Credco uses interest rate swaps to economically convert certain fixed-rate debt obligations to floating-rate obligations at the time of issuance. As ofJune 30, 2015and December 31, 2014, Credco hedged $15.2 billion and $14.7 billion, respectively, of its fixed-rate debt to floating-rate debt using interest rate swaps.

The following table summarizes the impact on the Consolidated Statements of Income and Retained Earnings associated with Credco’s fair value hedgesfor the three and six months endedJune 30:

Three Months Ended June 30: (Millions)
	Gains (losses) recognized in income
	Derivative contract					Hedged item					Net hedge
		Amount					Amount				ineffectiveness
Derivative relationship	Income Statement Line Item	2015		2014		Income Statement Line Item	2015		2014		2015		2014
Interest rate contracts	Other expenses	$	(45)	$	(6)	Other expenses	$	45	$	10	$	―	$	4
Six Months Ended June 30: (Millions)
	Gains (losses) recognized in income
	Derivative contract					Hedged item					Net hedge
		Amount					Amount				ineffectiveness
Derivative relationship	Income Statement Line Item	2015		2014		Income Statement Line Item	2015		2014		2015		2014
Interest rate contracts	Other expenses	$	3	$	(42)	Other expenses	$	1	$	47	$	4	$	5

Credco also recognized a net reduction in interest expense on long-term debt of $44 million and $50 million for the three months ended June 30, 2015 and 2014, respectively, and $86 million and $95 million for the six months ended June 30, 2015 and 2014, respectively, primarily related to the net settlements (interest accruals) on Credco’s interest rate derivatives designated as fair value hedges.

Net Investment Hedges

The effective portion of the gain or (loss) on net investment hedges, net of taxes, recorded in Accumulated Other Comprehensive Loss as part of the cumulative translation adjustment, was $22 million and $(50) million for the three months ended June 30, 2015 and 2014, respectively, and $85 million and $(126) million for the six months ended June 30, 2015 and 2014, respectively,with any ineffective portion recognized in Other expenses during the period of change. During the three and six months endedJune 30, 2015 and 2014no ineffectiveness was recognized in either of these two periods.

The following table summarizes the impact on the Consolidated Statements of Income and retained earnings associated with Credco’sderivatives not designated as hedges for the three and six months endedJune 30:

		Pretax (losses) gains
		Three Months Ended				Six Months Ended
		June 30,				June 30,
		Amount				Amount
Description (Millions)	Income Statement Line Item	2015		2014		2015		2014
Foreign exchange contracts	Other expenses	$	(17)	$	(58)	$	(31)	$	63
Total		$	(17)	$	(58)	$	(31)	$	63