Derivatives, Hedging Activities, and Interest Expense

12 Months Ended

Mar. 31, 2013

Derivatives, Hedging Activities and Interest Expense [Abstract]

Derivatives, Hedging Activities and Interest Expense

Note 7 – Derivatives, Hedging Activities and Interest Expense

Derivative Instruments

We use derivatives as part of our risk management strategy to hedge interest rate and foreign currency risks. We enter into derivative transactions with the intent to minimize fluctuations in earnings, cash flows and fair value adjustments of assets and liabilities caused by market movements. 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 (“ALCO”), 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 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. Our liabilities consist mainly of fixed and floating rate debt, denominated in various currencies, which we issue in the global capital markets, while our assets consist primarily of U.S. dollar denominated, fixed rate receivables. We enter into interest rate swaps and foreign currency swaps to hedge the interest rate and foreign currency risks that result from the different characteristics of our assets and liabilities. Our resulting asset liability profile is consistent with the overall risk management strategy directed by the ALCO. 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 partybelow a specified threshold. As of March 31, 2013 we have daily valuation and collateral exchange arrangements with all of our counterparties. Our collateral arrangements with substantially all our counterparties include a zero threshold, full collateralization arrangement.

The aggregate fair value of derivative instruments that contain credit risk related contingent features that were in a net liability position at March 31, 2013was $5million, excluding embedded derivatives and adjustments made for our own non-performance risk.Due to our arrangements whereby we fully collateralize without regard to credit ratings, we would not be required to post additional collateral to the counterparties with which we were in a net liability position at March 31, 2013, even if our credit ratings were to decline. In order to settle all derivative instruments that were in a net liability position at March 31, 2013, excluding embedded derivatives and adjustments made for our own non-performance risk, we would be required to pay $5million.

Note 7 – Derivatives, Hedging Activities and Interest Expense (Continued)

Derivative Activity Impact on Financial Statements

The table below shows the financial statement line item and amount of derivatives at March 31, 2013 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	$	44	$	22,336	$	536	$	22,801	$	580
Foreign currency swaps			1,246		491		7,498		648		8,744		1,139
	Total	$	1,711	$	535	$	29,834	$	1,184	$	31,545	$	1,719
Counterparty netting and collateral													(1,661)
	Carrying value of derivative contracts – Other assets											$	58
Other liabilities
Interest rate swaps		$	-	$	-	$	51,342	$	766	$	51,342	$	766
Interest rate caps			-		-		50		-		50		-
Foreign currency swaps			790		29		3,103		102		3,893		131
Embedded derivatives			-		-		64		12		64		12
	Total	$	790	$	29	$	54,559	$	880	$	55,349	$	909
Counterparty netting and collateral													(892)
	Carrying value of derivative contracts – Other liabilities											$	17

Collateral consists of cash received or deposited under reciprocal arrangements that we have entered into with our derivative counterparties. As of March 31, 2013, we held collateral of $953 million which offset derivative assets and posted collateral of $184 million which offset derivative liabilities. We also held collateral of $3 million which we did not use to offset derivative assets and we posted collateral of $6 million which we did not use to offset derivative liabilities.

Note 7 – Derivatives, Hedging Activities and Interest Expense (Continued)

The table below shows the financial statement line item and amounts of derivatives at March 31, 2012 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	$	59	$	15,804	$	380	$	16,269	$	439
Foreign currency swaps			3,291		772		9,866		1,449		13,157		2,221
	Total	$	3,756	$	831	$	25,670	$	1,829	$	29,426	$	2,660
Counterparty netting and collateral													(2,590)
	Carrying value of derivative contracts – Other assets											$	70
Other liabilities
Interest rate swaps		$	-	$	-	$	51,175	$	1,008	$	51,175	$	1,008
Interest rate caps			-		-		50		-		50		-
Foreign currency swaps			437		29		987		44		1,424		73
Embedded derivatives			-		-		92		24		92		24
	Total	$	437	$	29	$	52,304	$	1,076	$	52,741	$	1,105
Counterparty netting and collateral													(1,038)
	Carrying value of derivative contracts – Other liabilities											$	67

Collateral represents cash received or deposited under reciprocal arrangements that we have entered into with our derivative counterparties. As of March 31, 2012, we held collateral of $1,748 million which offset derivative assets and posted collateral of $196 million which offset derivative liabilities.

Note 7 – Derivatives, Hedging Activities and Interest Expense (Continued)

The following table summarizes the components of interest expense, including the financial statement line item and amount of gains or losses on derivative instruments and related hedged items, for fiscal 2013, 2012 and 2011as reported in our Consolidated Statement of Income:

				Years ended March 31,
(Dollars in millions)				2013		2012		2011
Interest expense on debt			$	1,330	$	1,677	$	1,943
Interest income on hedge accounting derivatives				(103)		(221)		(449)
Interest income on non-hedge accounting foreign currency
	swaps			(258)		(386)		(379)
Interest expense on non-hedge accounting interest rate swaps				359		606		807
		Interest expense on debt and derivatives		1,328		1,676		1,922
Loss (gain) on hedge accounting derivatives:
	Interest rate swaps			15		(6)		(2)
	Foreign currency swaps			274		23		(832)
		Loss (gain) on hedge accounting derivatives		289		17		(834)
Less hedged item: change in fair value of fixed rate debt				(299)		(38)		801
		Ineffectiveness related to hedge accounting derivatives		(10)		(21)		(33)
(Gain) loss from foreign currency transactions and non-hedge
accounting derivatives:
		(Gain) loss on foreign currency transactions		(430)		(182)		1,494
		Loss (gain) on foreign currency swaps		431		(84)		(1,595)
		(Gain) on interest rate swaps		(379)		(89)		(174)
Total interest expense			$	940	$	1,300	$	1,614

Interest expense on debt and derivatives represents net interest settlements and changes in accruals. Gains and losses from hedge accounting derivatives, non-hedge accounting derivatives, and foreign currency transactions exclude net interest settlements and changes in accruals.

The following table summarizes the relative fair value allocation of derivative credit valuation adjustments within interest expense.

	Years ended March 31,
(Dollars in millions)		2013		2012		2011
(Gain) loss related to hedge accounting derivatives	$	(2)	$	(3)	$	(2)
(Gain) loss on non-hedge accounting foreign currency swaps		-		(6)		5
Loss on non-hedge accounting interest rate swaps		-		-		2
Total credit valuation adjustment allocated to interest expense	$	(2)	$	(9)	$	5