Derivatives, Hedging Activities and Interest Expense (Disclosure)

3 Months Ended

Jun. 30, 2011

General Discussion Of Derivative Instruments And Hedging Activities Abstract

Derivative Instruments And Hedging Activities Disclosure Text Block

Note 8 – Derivatives, Hedging Activities and Interest Expense

Derivative Instruments

We use derivatives as part of our risk management strategy to hedge against changes in interest rate and foreign currency risks. We manage these risks by entering into derivative transactions with the intent to minimize fluctuations in earnings, cash flows and fair value adjustments of assets and liabilities caused by market volatility. We enter into derivatives for risk management purposes only, and our use of derivatives is limited to the management of interest rate and foreign currency risks.

Our derivative activities are authorized and monitored by our Asset-Liability Committee, which provides a framework for financial controls and governance to manage market risks. We use internal models for analyzing and incorporating data from internal and external sources in developing various hedging strategies. We incorporate the resulting hedging strategies into our overall risk management strategies.

Our liabilities consist mainly of fixed and floating rate debt, denominated in various currencies, which we issue in the global capital markets. We hedge the risks inherent in these fixed rate and foreign currency denominated liabilities by entering into pay float interest rate swaps, foreign currency swaps and foreign currency forwards, which effectively convert our obligations into U.S. dollar denominated, 3-month LIBOR based payments.Gains and losses on these derivatives are recorded in interest expense.

Our assets consist primarily of U.S. dollar denominated, fixed rate receivables. Our approach to asset-liability management involves hedging our risk exposures so that changes in interest rates have a limited effect on our net interest margin and cash flows. We use pay fixed interest rate swaps and caps, executed on a portfolio basis, to manage the interest rate risk of these assets. Our resulting asset liability profile is consistent with the overall risk management strategy directed by the Asset-Liability Committee. Gains and losses on these derivatives are recorded in interest expense.

Credit Risk Related Contingent Features

Certain of our derivative contracts are governed by International Swaps and Derivatives Association (“ISDA”) Master Agreements. Substantially all of these ISDA Master Agreements contain reciprocal ratings triggers providing either party with an option to terminate the agreement at market value in the event of a ratings downgrade of the other party below a specified threshold. In addition, upon specified downgrades in a party's credit ratings, the threshold at which that party would be required to post collateral to the other party would be lowered.

Note 8 – Derivatives, Hedging Activities and Interest Expense (Continued)

The aggregate fair value of derivative instruments that contain credit risk related contingent features that were in a net liability position at June 30, 2011 was $144 million, excluding embedded derivatives and adjustments made for our own non-performance risk. In the normal course of business, we did not post any collateral with counterparties with which we were in a net liability position at June 30, 2011. If our credit ratings were to have declined to “A+”, we would have been required to post $7 million of collateral to the counterparties with which we were in a liability position at June 30, 2011. If our credit ratings were to have declined to “BBB+” or below, we would have been required to post $144 million of additional collateral to the counterparties with which we were in a liability position at June 30, 2011. In order to settle all derivative instruments that were in a net liability position at June 30, 2011, excluding embedded derivatives and adjustments made for our own non-performance risk, we would have been required to pay $144 million.

Derivative Activity Impact on Financial Statements
The table below shows the location and amount of derivatives at June 30, 2011 as reported in the
Consolidated Balance Sheet:
		Hedge accounting				Non-hedge					Total
		derivatives				accounting derivatives
			Notional		Fair		Notional		Fair		Notional		Fair
(Dollars in millions)					value				value				value
Other assets
Interest rate swaps		$	465	$	61	$	13,331	$	231	$	13,796	$	292
Foreign currency swaps			5,188		1,896		16,330		3,195		21,518		5,091
Embedded derivatives			-		-		10		1		10		1
	Total	$	5,653	$	1,957	$	29,671	$	3,427	$	35,324	$	5,384
Counterparty netting													(993)
Collateral held													(3,120)
	Carrying value of derivative contracts – Other assets											$	1,271
Other liabilities
Interest rate swaps		$	-	$	-	$	54,338	$	1,073	$	54,338	$	1,073
Interest rate caps			-		-		50		-		50		-
Foreign currency swaps			1,773		61		91		2		1,864		63
Embedded derivatives			-		-		154		41		154		41
	Total	$	1,773	$	61	$	54,633	$	1,116	$	56,406	$	1,177
Counterparty netting													(993)
Collateral posted													-
	Carrying value of derivative contracts – Other liabilities											$	184

Note 8 – Derivatives, Hedging Activities and Interest Expense (Continued)
Derivative Activity Impact on Financial Statements
The table below shows the location and amount of derivatives at March 31, 2011 as reported in the
Consolidated Balance Sheet:
		Hedge accounting				Non-hedge					Total
		derivatives				accounting derivatives
			Notional		Fair		Notional		Fair		Notional		Fair
(Dollars in millions)					value				value				value
Other Assets
Interest rate swaps		$	465	$	54	$	20,074	$	236	$	20,539	$	290
Foreign currency swaps			5,031		1,513		15,874		2,547		20,905		4,060
Embedded derivatives			-		-		10		1		10		1
	Total	$	5,496	$	1,567	$	35,958	$	2,784	$	41,454	$	4,351
Counterparty netting													(886)
Collateral held													(2,563)
	Carrying value of derivative contracts – Other assets											$	902
Other liabilities
Interest rate swaps		$	-	$	-	$	48,688	$	926	$	48,688	$	926
Interest rate caps			-		-		50		1		50		1
Foreign currency swaps			1,930		103		843		7		2,773		110
Embedded derivatives			-		-		259		52		259		52
	Total	$	1,930	$	103	$	49,840	$	986	$	51,770	$	1,089
Counterparty netting													(886)
Collateral posted													-
	Carrying value of derivative contracts – Other liabilities											$	203

Note 8 – Derivatives, Hedging Activities and Interest Expense (Continued)

The following table summarizes the components of interest expense, including the location and amount of gains or losses on derivative instruments and related hedged items, for the three months ended June 30, 2011 and 2010 as reported in our Consolidated Statement of Income:

			Three Months Ended
			June 30,
(Dollars in millions)				2011		2010
Interest expense on debt1			$	481	$	451
Interest expense on pay float hedge accounting derivatives1				(81)		(109)
Interest expense on pay float non-hedge accounting derivatives1,3				(188)		(131)
		Interest expense on debt, net of pay float swaps		212		211
Interest expense on non-hedge pay fixed swaps1				236		309
(Gain) loss on hedge accounting derivatives:
	Interest rate swaps2			(7)		(13)
	Foreign currency swaps2			(400)		514
(Gain) loss on hedge accounting derivatives				(407)		501
Less hedged item: change in fair value of fixed rate debt				403		(510)
		Ineffectiveness related to hedge accounting derivatives2		(4)		(9)
Loss (gain) on foreign currency transactions				704		(608)
(Gain) loss on currency swaps and forwards 2				(809)		503
(Gain) loss on other non-hedge accounting derivatives:
		Pay float swaps2		(96)		(46)
		Pay fixed swaps2		214		131
Total interest expense			$	457	$	491

1 Amounts represent net interest settlements and changes in accruals.

2 Amounts exclude net interest settlements and changes in accruals.

3 Includes interest expense on both non-hedge accounting foreign currency swaps and forwards, and non-hedge interest rate derivatives.

Note 8 – Derivatives, Hedging Activities and Interest Expense (Continued)
The following table summarizes the relative fair value allocation of derivative credit valuation
adjustments within interest expense.
		Three Months Ended
		June 30,
(Dollars in millions)			2011		2010
Ineffectiveness related to hedge accounting derivatives		$	2	$	1
Loss (gain) on currency swaps and forwards			5		(2)
Loss (gain) on non-hedge accounting derivatives:
	Pay float swaps		1		-
	Pay fixed swaps		-		(1)
Total credit valuation adjustment allocated to interest expense		$	8	$	(2)