Derivative Instruments

12 Months Ended

Oct. 31, 2012

Derivative Instruments

Derivative Instruments

Note 22.  Derivative Instruments

The Company’s outstanding derivatives have been transacted with both unrelated external counterparties and with John Deere. For derivatives transacted with John Deere, the Company utilizes a centralized hedging center structure in which John Deere enters into a derivative transaction with an unrelated external counterparty and simultaneously enters into a derivative transaction with the Company. Except for collateral provisions, the terms of the transaction between the Company and John Deere are identical to the terms of the transaction between John Deere and its unrelated external counterparty.

Certain of the Company’s derivative agreements executed directly with unrelated external counterparties contain credit support provisions that require the Company to post collateral based on reductions in credit ratings. At October 31, 2012 and 2011, there were no aggregate liability positions for derivatives with credit-risk-related contingent features. The Company, due to its credit rating and amounts of net liability positions, has not posted any collateral. If the credit-risk-related contingent features were triggered, the Company would be required to post full collateral for any liability position, prior to considering applicable netting provisions.

Derivative instruments are subject to significant concentrations of credit risk to the banking sector. The Company manages individual unrelated external counterparty exposure by setting limits that consider the credit rating of the unrelated external counterparty and the size of other financial commitments and exposures between the Company and the unrelated external counterparty banks. All interest rate derivatives are transacted under International Swaps and Derivatives Association (ISDA) documentation. Some of these agreements executed with unrelated external counterparties include credit support provisions. Each master agreement executed with an unrelated external counterparty permits the net settlement of amounts owed in the event of default. The maximum amount of loss that the Company would incur on derivatives transacted directly with unrelated external counterparties, if the counterparties to those derivative transactions fail to meet their obligations, not considering collateral received or netting arrangements, was $230 million and $270 million as of October 31, 2012 and 2011, respectively. The amount of collateral received at October 31, 2012 and 2011 to offset this potential maximum loss was $36 million and $25 million, respectively. The netting provisions of the agreements would reduce the maximum amount of loss the Company would incur if the unrelated external counterparties to derivative instruments fail to meet their obligations by an additional $63 million and $38 million as of October 31, 2012 and 2011, respectively. None of the concentrations of risk with any individual unrelated external counterparty was considered significant at October 31, 2012 and 2011.

The Company also has ISDA agreements with John Deere that permit the net settlement of amounts owed between counterparties in the event of early termination. In addition, the Company has agreed to absorb any losses and expenses John Deere incurs if an unrelated external counterparty fails to meet its obligations on a derivative transaction that John Deere entered into to manage exposures of the Company. The maximum amount of loss that the Company would incur on derivatives transacted with John Deere if the unrelated external counterparty would fail to meet its obligations, considering both the netting arrangements as well as the loss sharing agreement, was $341 million and $151 million as of October 31, 2012 and 2011, respectively.

Cash Flow Hedges

Certain interest rate and cross-currency interest rate contracts (swaps) were designated as hedges of future cash flows from borrowings. The total notional amounts of the receive-variable/pay-fixed interest rate contracts at October 31, 2012 and 2011 were $2,850 million and $1,350 million, respectively. The total notional amount of the cross-currency interest rate contracts was $853 million at October 31, 2012 and 2011, respectively. The effective portions of the fair value gains or losses on these cash flow hedges were recorded in other comprehensive income (OCI) and subsequently reclassified into interest expense or administrative and operating expenses (foreign exchange) in the same periods during which the hedged transactions affected earnings. These amounts offset the effects of interest rate or foreign currency exchange rate changes on the related borrowings. Any ineffective portions of the gains or losses on all cash flow interest rate contracts designated as cash flow hedges were recognized currently in interest expense or administrative and operating expenses (foreign exchange) and were not material during any years presented. The cash flows from these contracts were recorded in operating activities in the statements of consolidated cash flows.

The amount of loss recorded in OCI at October 31, 2012 that is expected to be reclassified to interest expense or administrative and operating expenses in the next twelve months if interest rates or exchange rates remain unchanged is approximately $9 million after-tax. These contracts mature in up to 23 months. There were no gains or losses reclassified from OCI to earnings based on the probability that the original forecasted transaction would not occur.

Fair Value Hedges

Certain interest rate contracts (swaps) were designated as fair value hedges of borrowings. The total notional amounts of the receive-fixed/pay-variable interest rate contracts at October 31, 2012 and 2011 were $8,688 million and $7,276 million, respectively. The effective portions of the fair value gains or losses on these contracts were offset by fair value gains or losses on the hedged items (fixed-rate borrowings). Any ineffective portions of the gains or losses were recognized currently in interest expense. The ineffective portions were losses of $1 million and $4 million during 2012 and 2011, respectively. The cash flows from these contracts were recorded in operating activities in the statements of consolidated cash flows.

The gains (losses) on these contracts and the underlying borrowings recorded in interest expense were as follows (in millions of dollars):

	2012			2011
Interest rate contracts *	$	186.5		$	16.6
Borrowings **	(187.8		)	(20.3		)

*Includes changes in fair value of interest rate contracts excluding net accrued interest income of $145.9 million and $160.7 million during 2012 and 2011, respectively.

**Includes adjustments for fair values of hedged borrowings excluding accrued interest expense of $257.8 million and $250.2 million during 2012 and 2011, respectively.

Derivatives Not Designated as Hedging Instruments

The Company has certain interest rate contracts (swaps and caps), foreign exchange contracts (forwards and swaps) and cross-currency interest rate contracts (swaps), which were not formally designated as hedges. These derivatives were held as economic hedges for underlying interest rate or foreign currency exposures primarily for certain borrowings. The total notional amounts of the interest rate swaps at October 31, 2012 and 2011 were $2,380 million and $2,361 million, the foreign exchange contracts were $1,298 million and $979 million, and the cross-currency interest rate contracts were $78 million and $52 million, respectively. At October 31, 2012 and 2011, there were also $1,445 million and $1,402 million, respectively, of interest rate caps purchased and the same amounts sold at the same capped interest rate to facilitate borrowings through securitization of retail notes. The fair value gains or losses from the interest rate contracts were recognized currently in interest expense and the gains or losses from foreign exchange contracts in administrative and operating expenses, generally offsetting over time the expenses on the exposures being hedged. The cash flows from these non-designated contracts were recorded in operating activities in the statements of consolidated cash flows.

Fair values of derivative instruments in the consolidated balance sheet at October 31 were as follows (in millions of dollars):

	2012		2011
Receivable from John Deere
Designated as hedging instruments:
Interest rate contracts	$	314.2	$	133.1
Cross-currency interest rate contracts	8.7
Total designated	322.9		133.1
Not designated as hedging instruments:
Interest rate contracts	41.6		35.3
Cross-currency interest rate contracts	1.2		.9
Total not designated	42.8		36.2
Other Assets
Designated as hedging instruments:
Interest rate contracts	197.0		237.2
Not designated as hedging instruments:
Interest rate contracts	30.6		31.4
Foreign exchange contracts	1.9
Cross-currency interest rate contracts	.3		1.6
Total not designated	32.8		33.0
Total derivatives	$	595.5	$	439.5
Other Payables to John Deere
Designated as hedging instruments:
Interest rate contracts	$	11.8	$	13.4
Cross-currency interest rate contracts	2.2		1.4
Total designated	14.0		14.8
Not designated as hedging instruments:
Interest rate contracts	13.5		6.2
Cross-currency interest rate contracts	.7
Total not designated	14.2		6.2
Accounts Payable and Accrued Expenses
Designated as hedging instruments:
Cross-currency interest rate contracts	56.3		5.5
Not designated as hedging instruments:
Interest rate contracts	41.3		37.0
Foreign exchange contracts	5.4		47.6
Cross-currency interest rate contracts	.1		.2
Total not designated	46.8		84.8
Total derivatives	$	131.3	$	111.3

The classification and gains (losses) including accrued interest expense related to derivative instruments on the statement of consolidated income consisted of the following (in millions of dollars):

	Expense or OCI Classification	2012			2011			2010
Fair Value Hedges
Interest rate contracts	Interest expense	$	332.4		$	177.3		$	337.8
Cash Flow Hedges
Recognized in OCI
(Effective Portion):
Interest rate contracts	OCI (pretax) *	(22.1		)	(4.7		)	(14.0		)
Foreign exchange contracts	OCI (pretax) *	(38.4		)	36.1			(41.8		)
Reclassified from OCI
(Effective Portion):
Interest rate contracts	Interest expense *	(13.1		)	(20.2		)	(67.2		)
Foreign exchange contracts	Administrative and operating expenses *	(42.3		)	19.3			(11.2		)
Recognized Directly in Income
(Ineffective Portion)		**			**			**
Not Designated as Hedges
Interest rate contracts	Interest expense *	$	(8.6	)	$	(.1	)	$	32.2
Foreign exchange contracts	Administrative and operating expenses *	7.7			(78.3		)	(80.1		)
Total not designated		$	(.9	)	$	(78.4	)	$	(47.9	)

*Includes interest and foreign exchange gains (losses) from cross-currency interest rate contracts.

**The amount is not significant.

Included in the above table are interest expense and administrative and operating expense amounts the Company incurred on derivatives transacted with John Deere. The amount of gain the Company recognized on these affiliate party transactions during 2012 and 2011 was $281 million and $194 million, respectively. As referenced in the VIE section of Note 1, during the first quarter of 2011 the centralized hedging center VIE that was previously consolidated into the Company’s financial statements was merged into JDFS and thus deconsolidated from the Company. Due to this merger having occurred in January 2011, the affiliate party interest expense amounts referenced above for 2011 relate only to activity that took place between the merger date and October 31, 2011.