(9) It is the Company’s policy that derivative transactions are executed only to manage exposures arising in the normal course of business and not for the purpose of creating speculative positions or trading. The Company manages the relationship of the types and amounts of its funding sources to its receivable and lease portfolio in an effort to diminish risk due to interest rate and foreign currency fluctuations, while responding to favorable financing opportunities. The Company also has foreign currency exposures at some of its foreign and domestic operations related to financing in currencies other than the functional currencies.

All derivatives are recorded at fair value on the balance sheet. Cash collateral received or paid is not offset against the derivative fair values on the balance sheet. Each derivative is designated as a cash flow hedge, a fair value hedge, or remains undesignated. All designated hedges are formally documented as to the relationship with the hedged item as well as the risk-management strategy. Both at inception and on an ongoing basis the hedging instrument is assessed as to its effectiveness. If and when a derivative is determined not to be highly effective as a hedge, or the underlying hedged transaction is no longer likely to occur, or the hedge designation is removed, or the derivative is terminated, hedge accounting is discontinued. Any past or future changes in the derivative’s fair value, which will not be effective as an offset to the income effects of the item being hedged, are recognized currently in the income statement.

Cash flow hedges

Certain 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 January 31, 2016, October 31, 2015 and January 31, 2015 were $2,650.0 million, $2,800.0 million and $2,550.0 million, 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 in the same periods during which the hedged transactions affected earnings. These amounts offset the effects of interest 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 and were not material during any periods 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 January 31, 2016 that is expected to be reclassified to interest expense in the next twelve months if interest rates remain unchanged is approximately $2.1 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 these receive-fixed/pay-variable interest rate contracts at January 31, 2016, October 31, 2015 and January 31, 2015 were $8,297.9 million, $8,048.6 million and $7,902.9 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 $.5 million and a gain of $2.8 million during the first three months of 2016 and 2015, respectively. The cash flows from these contracts were recorded in operating activities in the statement 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):


	Three Months Ended
	January 31
	2016		2015
Interest rate contracts *	$	71.7	$	168.2
Borrowings **		(72.2)		(165.4)

* Includes changes in fair value of interest rate contracts excluding net accrued interest income of $38.2 million and $43.0 million during the first three months of 2016 and 2015, respectively.

** Includes adjustments for fair values of hedged borrowings excluding accrued interest expense of $64.1 million and $65.6 million during the first three months of 2016 and 2015, 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 these interest rate swaps at January 31, 2016, October 31, 2015 and January 31, 2015 were $2,603.8 million, $2,679.5 million and $2,752.8 million, the foreign exchange contracts were $1,109.7 million, $966.6 million and $1,083.6 million and the cross-currency interest rate contracts were $73.1 million, $75.6 million and $96.8 million, respectively. At January 31, 2016, October 31, 2015 and January 31, 2015 there were also $1,668.7 million, $1,902.1 million and $1,501.5 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 were as follows (in millions of dollars):


	January 31		October 31		January 31
	2016		2015		2015
Receivables from John Deere
Designated as hedging instruments:
Interest rate contracts	$	282.9	$	207.2	$	276.9

Not designated as hedging instruments:
Interest rate contracts		36.0		34.4		39.3
Cross-currency interest rate contracts		13.8		11.5		10.4
Total not designated		49.8		45.9		49.7

Other Assets
Designated as hedging instruments:
Interest rate contracts		87.6		80.9		116.2

Not designated as hedging instruments:
Interest rate contracts		1.6		2.8		6.0
Foreign exchange contracts		13.6		11.3		25.7
Total not designated		15.2		14.1		31.7

Total derivatives	$	435.5	$	348.1	$	474.5

Other Payables to John Deere
Designated as hedging instruments:
Interest rate contracts	$	7.2	$	7.1	$	6.6

Not designated as hedging instruments:
Interest rate contracts		12.3		15.3		15.5
Cross-currency interest rate contracts		.3		.1
Total not designated		12.6		15.4		15.5

Accounts Payable and Accrued Expenses
Not designated as hedging instruments:
Interest rate contracts		21.6		19.8		27.1
Foreign exchange contracts		5.6		5.6		2.4
Total not designated		27.2		25.4		29.5

Total derivatives	$	47.0	$	47.9	$	51.6

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):


		Three Months Ended
	Expense or OCI	January 31
	Classification	2016		2015
Fair Value Hedges:
Interest rate contracts	Interest expense	$	109.9	$	211.2

Cash Flow Hedges:
Recognized in OCI
(Effective Portion):
Interest rate contracts	OCI (pretax)		(2.0)		(3.6)

Reclassified from OCI
(Effective Portion):
Interest rate contracts	Interest expense		(2.1)		(2.1)

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

Not Designated as Hedges:
Interest rate contracts	Interest expense *		(.9)		(3.7)
Foreign exchange contracts	Administrative and operating expenses *		48.6		128.2
Total not designated		$	47.7	$	124.5

* 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 for the three months ended January 31, 2016 and 2015 was $110.9 million and $209.6 million, respectively.

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 the 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 January 31, 2016, October 31, 2015 and January 31, 2015, 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 an amount equal 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 termination. The maximum amount of loss that the Company would incur on derivatives transacted directly with unrelated external counterparties, if counterparties to derivative instruments fail to meet their obligations, not considering collateral received or netting arrangements, was the gross asset 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 in any periods presented.

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 $1.0 million, $2.2 million and $5.2 million as of January 31, 2016, October 31, 2015 and January 31, 2015, 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):


January 31, 2016
Derivatives:	Gross Amounts Recognized		Netting Arrangements		Collateral Received	Net Amount
Assets
External	$	102.8	$	(25.0)		$	77.8
John Deere		332.7		(19.8)			312.9
Liabilities
External		27.2		(25.0)			2.2
John Deere		19.8		(19.8)


October 31, 2015
Derivatives:	Gross Amounts Recognized		Netting Arrangements		Collateral Received	Net Amount
Assets
External	$	95.0	$	(20.3)		$	74.7
John Deere		253.1		(22.5)			230.6
Liabilities
External		25.4		(20.3)			5.1
John Deere		22.5		(22.5)


January 31, 2015
Derivatives:	Gross Amounts Recognized		Netting Arrangements		Collateral Received	Net Amount
Assets
External	$	147.9	$	(29.3)		$	118.6
John Deere		326.6		(21.5)			305.1
Liabilities
External		29.5		(29.3)			.2
John Deere		22.1		(21.5)			.6