Note 21. Derivative Instruments

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, 2014 and 2013 were $3,050 million and $3,100 million, respectively. The total notional amount of the cross-currency interest rate contracts was none and $746 million at October 31, 2014 and 2013, 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 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 statement of consolidated cash flows.

The amount of loss recorded in OCI at October 31, 2014 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 $4 million after-tax. These contracts mature in up to 37 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, 2014 and 2013 were $8,228 million and $6,864 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 a loss of $2.0 million and a gain of $.2 million during 2014 and 2013, respectively. The cash flows from these contracts were recorded in operating activities in the statement of consolidated cash flow.

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

	2014			2013
Interest rate contracts *	$	(12.8	)	$	(237.5	)
Borrowings **	10.8			237.7

* Includes changes in fair value of interest rate contracts excluding net accrued interest income of $161.0 million and $146.6 million during 2014 and 2013, respectively.

** Includes adjustments for fair values of hedged borrowings excluding accrued interest expense of $248.0 million and $237.9 million during 2014 and 2013, 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, 2014 and 2013 were $3,076 million and $2,950 million, the foreign exchange contracts were $1,364 million and $1,339 million, and the cross-currency interest rate contracts were $98 million and $85 million, respectively. At October 31, 2014 and 2013, there were also $1,703 million and $1,641 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 statement of consolidated cash flows.

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

	2014		2013

Receivables from John Deere
Designated as hedging instruments:
Interest rate contracts	$	148.1	$	144.3

Not designated as hedging instruments:
Interest rate contracts	35.6		31.2
Cross-currency interest rate contracts	2.8		1.1
Total not designated	38.4		32.3

Other Assets
Designated as hedging instruments:
Interest rate contracts	107.5		140.5

Not designated as hedging instruments:
Interest rate contracts	9.8		16.3
Foreign exchange contracts	3.1		1.0
Cross-currency interest rate contracts			.1
Total not designated	12.9		17.4

Total derivatives	$	306.9	$	334.5

Other Payables to John Deere
Designated as hedging instruments:
Interest rate contracts	$	35.3	$	71.0
Cross-currency interest rate contracts			.4
Total designated	35.3		71.4

Not designated as hedging instruments:
Interest rate contracts	16.9		13.8
Cross-currency interest rate contracts			.7
Total not designated	16.9		14.5

Accounts Payable and Accrued Expenses
Designated as hedging instruments:
Cross-currency interest rate contracts			16.0

Not designated as hedging instruments:
Interest rate contracts	23.0		29.9
Foreign exchange contracts	8.6		15.8
Total not designated	31.6		45.7

Total derivatives	$	83.8	$	147.6

The classifications 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	2014			2013			2012
Fair Value Hedges
Interest rate contracts	Interest expense	$	148.2		$	(90.9	)	$	332.4

Cash Flow Hedges
Recognized in OCI
(Effective Portion):
Interest rate contracts	OCI (pretax) *	(6.1		)	(14.6		)	(22.1		)
Foreign exchange contracts	OCI (pretax) *	(4.1		)	47.9			(38.4		)

Reclassified from OCI
(Effective Portion):
Interest rate contracts	Interest expense *	(9.8		)	(17.8		)	(13.1		)
Foreign exchange contracts	Administrative and operating expenses *	(5.5		)	39.3			(42.3		)

Recognized Directly in Income
(Ineffective Portion)		**			**			**

Not Designated as Hedges
Interest rate contracts	Interest expense *	$	5.0		$	(4.5	)	$	(8.6	)
Foreign exchange contracts	Administrative and operating expenses *	52.6			20.8			7.7
Total not designated		$	57.6		$	16.3		$	(.9	)

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

** The amounts are 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 the Company recognized on these affiliate party transactions were gains of $146 million and $281 million during 2014 and 2012, respectively, and a loss of $100 million during 2013.

Counterparty Risk and Collateral

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 may require the Company to post collateral based on the size of the net liability positions and credit ratings. At October 31, 2014 and 2013, there were no aggregate liability positions for derivatives with credit-risk-related contingent features. If the credit-risk-related contingent features were triggered, the Company would be required to post collateral up to 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, the credit default swap spread of the counterparty and 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 or early termination. 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 the gross amount of the external derivatives shown in the subsequent table. None of the concentrations of risk with any individual unrelated external counterparty was considered significant at October 31, 2014 and 2013.

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 a loss sharing agreement with John Deere in which it 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, not considering collateral received or netting arrangements, was the gross asset amount of the John Deere derivatives shown in the subsequent table. The loss sharing agreement increases the maximum amount of loss that the Company would incur, after considering collateral received and netting arrangements, by $8 million and $17 million as of October 31, 2014 and 2013, respectively.

Derivatives are recorded without offsetting for netting arrangements or collateral. The impact on the derivative assets and liabilities for external derivatives and those with John Deere related to netting arrangements and any collateral received or paid were as follows (in millions of dollars):

2014

Derivatives:	Gross Amounts Recognized		Netting Arrangements			Collateral Received	Net Amount
Assets
External	$	120.4	$	(24.3	)		$	96.1
John Deere	186.5		(50.4		)		136.1
Liabilities
External	31.6		(24.3		)		7.3
John Deere	52.2		(50.4		)		1.8

2013

Derivatives:	Gross Amounts Recognized		Netting Arrangements			Collateral Received			Net Amount
Assets
External	$	157.9	$	(42.6	)	$	(2.4	)	$	112.9
John Deere	176.6		(82.9		)				93.7
Liabilities
External	61.7		(42.6		)				19.1
John Deere	85.9		(82.9		)				3.0