Derivatives and Hedging

6 Months Ended

Jun. 30, 2012

Derivatives and Hedging

Derivatives and Hedging

13.  Derivatives and Hedging

The Company is exposed to market risks, including changes in foreign currency exchange rates and interest rates.  To manage the risk related to these exposures, the Company enters into various derivative instruments that reduce these market risks by creating offsetting exposures.  The Company does not enter into derivative transactions for trading or speculative purposes.

Foreign Exchange Risk Management

The Company is exposed to foreign exchange risk when it receives revenues, pays expenses, or enters into intercompany loans denominated in a currency that differs from its functional currency.  The Company uses foreign exchange derivatives, typically forward contracts, options and cross currency swaps, to reduce its overall exposure to the effects of currency fluctuations on cash flows.  These exposures are hedged, on average, for less than two years; however, in limited instances, the Company has hedged certain exposures up to five years in the future.

The Company also uses foreign exchange derivatives, typically forward contracts and options, to hedge its net investments in foreign operations for up to two years in the future.

The Company also uses foreign exchange derivatives, typically forward contracts and options, to manage the currency exposure of the Company’s global liquidity profile for one year in the future. These derivatives are not accounted for as hedges, and changes in fair value are recorded each period in Other income (expense) in the Condensed Consolidated Statements of Income.

Interest Rate Risk Management

The Company holds variable-rate short-term brokerage and other operating deposits. The Company uses interest rate derivatives, typically swaps, to reduce its exposure to the effects of interest rate fluctuations on the forecasted interest receipts from these deposits for up to two years in the future.

Certain derivatives also give rise to credit risks from the possible non-performance by counterparties.  The credit risk is generally limited to the fair value of those contracts that are favorable to the Company.  The Company has limited its credit risk by using International Swaps and Derivatives Association (“ISDA”) master agreements, collateral and credit support arrangements, entering into non-exchange-traded derivatives with highly-rated major financial institutions and by using exchange-traded instruments.  The Company monitors the credit worthiness of, and exposure to, its counterparties.  As of June 30, 2012, all net derivative positions were free of credit risk contingent features.  In addition, the Company has received collateral of $6 million from counterparties for derivatives subject to collateral support arrangement as of June 30, 2012. The Company has not pledged any collateral as of June 30, 2012.

The notional and fair values of derivative instruments are as follows (in millions):

	Notional Amount				Derivative Assets (1)				Derivative Liabilities (2)
	June 30, 2012		December 31, 2011		June 30, 2012		December 31, 2011		June 30, 2012		December 31, 2011
Derivatives accounted for as hedges:
Interest rate contracts	$	361	$	702	$	18	$	16	$	—	$	—
Foreign exchange contracts	1,377		1,297		216		140		257		188
Total	1,738		1,999		234		156		257		188
Derivatives not accounted for as hedges:
Foreign exchange contracts	272		246		3		1		1		1
Total	$	2,010	$	2,245	$	237	$	157	$	258	$	189

(1) Included within Other current assets or Other non-current assets

(2) Included within Other current liabilities or Other non-current liabilities

The amounts of derivative gains (losses) recognized in the Condensed Consolidated Financial Statements for the three and six months ended June 30, 2012 and 2011 are as follows (in millions):

Gain (Loss) recognized in Accumulated	Three months ended June 30,						Six months ended June 30,
Other Comprehensive Loss:	2012			2011			2012			2011
Cash Flow Hedges:
Interest rate contracts	$	—		$	—		$	—		$	(2	)
Foreign exchange contracts	(32		)	(22		)	(30		)	(21		)
Total	(32		)	(22		)	(30		)	(23		)
Foreign Net Investment Hedges:
Foreign exchange contracts	$	11		$	(4	)	$	1		$	(17	)

Gain (Loss) reclassified from Accumulated Other Comprehensive Loss into Income (Effective Portion):
Cash Flow Hedges:
Interest rate contracts (1)	$	—		$	—		$	—		$	—
Foreign exchange contracts (2)	(8		)	(18		)	(16		)	(15		)
Total	(8		)	(18		)	(16		)	(15		)
Foreign Net Investment Hedges:
Foreign exchange contracts	$	—		$	—		$	—		$	—

(1) Included within Fiduciary investment income and Interest expense

(2) Included within Other income (expense) and Interest expense

	Three months ended June 30,						Six months ended June 30,
	Amount of Gain (Loss) Recognized in Income on Derivative (1)		Amount of Gain (Loss) Recognized in Income on Related Hedge Item (2)				Amount of Gain (Loss) Recognized in Income on Derivative (1)			Amount of Gain (Loss) Recognized in Income on Related Hedge Item (2)
	2012	2011	2012		2011		2012	2011		2012		2011
Fair value hedges:
Foreign exchange contracts	1	5	(1	)	(4	)	3	(2	)	(3	)	4

(1) Relates to fixed rate debt

(2) Included in Interest expense

It is estimated that approximately $31 million of pretax losses currently included within Accumulated other comprehensive loss will be reclassified into earnings in the next twelve months.

The amount of gain (loss) recognized in income on the ineffective portion of derivatives for the three and six months ended June 30, 2012 and 2011 was not material.

During the three and six months ended June 30, 2012, the Company recorded a gain of $1 million and $7 million, respectively, in Other income (expense) for foreign exchange derivatives not designated or qualifying as hedges.  During the three and six months ended June 30, 2011, the Company recorded a gain of $1 million and no gain (loss), respectively, in Other income (expense) for foreign exchange derivatives not designated or qualifying as hedges.