Derivatives and Hedging

9 Months Ended

Sep. 30, 2014

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivatives and Hedging

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 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, or other transactions that are denominated in a currency other than 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, and to manage the currency exposure of the Company's global liquidity profile, including monetary assets or liabilities that are denominated in a non-functional currency of an entity, for up to 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 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 at the balance sheet date is generally limited to the fair value of those contracts that are favorable to the Company.  The Company has reduced its credit risk by (1) using International Swaps and Derivatives Association master agreements, collateral and credit support arrangements, (2) entering into non-exchange-traded derivatives with highly-rated major financial institutions and (3) using exchange-traded instruments.  The Company monitors the creditworthiness of, and exposure to, its counterparties.  As of September 30, 2014, all net derivative positions were free of credit risk contingent features.  The Company has not received or pledged any collateral related to derivative arrangements as of September 30, 2014.

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

	Notional Amount				Derivative Assets (1)				Derivative Liabilities (2)
	September 30, 2014		December 31, 2013		September 30, 2014		December 31, 2013		September 30, 2014		December 31, 2013
Derivatives accounted for as hedges:
Interest rate contracts	$	—	$	171	$	—	$	9	$	—	$	—
Foreign exchange contracts	1,106		1,191		55		71		65		93
Total	1,106		1,362		55		80		65		93
Derivatives not accounted for as hedges:
Foreign exchange contracts	184		215		—		—		—		—
Total	$	1,290	$	1,577	$	55	$	80	$	65	$	93

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(1) Included within Other current assets ($25 million and $46 million at September 30, 2014 and December 31, 2013, respectively) or Other non-current assets ($30 million and $34 million at September 30, 2014 and December 31, 2013, respectively).

(2) Included within Other current liabilities ($17 million and $51 million at September 30, 2014 and December 31, 2013, respectively) or Other non-current liabilities ($48 million and $42 million at September 30, 2014 and December 31, 2013, respectively).

Offsetting of financial assets and derivatives assets are as follows (in millions):

	Gross Amounts of Recognized Assets				Gross Amounts Offset in the Statement of Financial Position						Net Amounts of Assets Presented in the Statement of Financial Position (1)
	September 30, 2014		December 31, 2013		September 30, 2014			December 31, 2013			September 30, 2014		December 31, 2013
Derivatives accounted for as hedges:
Interest rate contracts	$	—	$	9	$	—		$	—		$	—	$	9
Foreign exchange contracts	55		71		(15		)	(30		)	40		41
Total	55		80		(15		)	(30		)	40		50
Derivatives not accounted for as hedges:
Foreign exchange contracts	—		—		—			—			—		—
Total	$	55	$	80	$	(15	)	$	(30	)	$	40	$	50

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(1) Included within Other current assets ($13 million and $18 million at September 30, 2014 and December 31, 2013, respectively) or Other non-current assets ($27 million and $32 million at September 30, 2014 and December 31, 2013, respectively).

Offsetting of financial liabilities and derivative liabilities are as follows (in millions):

	Gross Amounts of Recognized Liabilities				Gross Amounts Offset in the Statement of Financial Position						Net Amounts of Liabilities Presented in the Statement of Financial Position (1)
	September 30, 2014		December 31, 2013		September 30, 2014			December 31, 2013			September 30, 2014		December 31, 2013
Derivatives accounted for as hedges:
Interest rate contracts	$	—	$	—	$	—		$	—		$	—	$	—
Foreign exchange contracts	65		93		(15		)	(30		)	50		63
Total	65		93		(15		)	(30		)	50		63
Derivatives not accounted for as hedges:
Foreign exchange contracts	—		—		—			—			—		—
Total	$	65	$	93	$	(15	)	$	(30	)	$	50	$	63

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(1) Included within Other current liabilities ($5 million and $23 million at September 30, 2014 and December 31, 2013, respectively) or Other non-current liabilities ($45 million and $40 million at September 30, 2014 and December 31, 2013, respectively).

The amounts of derivative gains (losses) recognized in the Condensed Consolidated Financial Statements for the three and nine months endedSeptember 30, 2014 and 2013 are as follows (in millions):

Gain (Loss) recognized in Accumulated Other Comprehensive Loss:	Three months ended September 30,					Nine months ended September 30,
	2014			2013		2014		2013
Cash flow hedges:
Interest rate contracts (1)	$	—		$	—	$	—	$	—
Foreign exchange contracts (2)	(3		)	—		4		(28		)
Total	$	(3	)	$	—	$	4	$	(28	)

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(1) Location of future reclassification from Accumulated Other Comprehensive Loss will be included within Interest expense.

(2) Location of future reclassification from Accumulated Other Comprehensive Loss will be included within Compensation and benefits ($2 million and $3 million loss for the three months ended September 30, 2014 and 2013, respectively, and $14 million gain and $17 million loss for the nine months ended September 30, 2014 and 2013, respectively), Other income ($2 million and $3 million gain for the three months ended September 30, 2014 and 2013, respectively, and $9 million and $11 million loss for the nine months ended September 30, 2014 and 2013, respectively), and Other general expenses ($3 million and $1 million loss for the three and nine months ended September 30, 2014, respectively).

Gain (Loss) reclassified from Accumulated Other Comprehensive Loss into Income (Effective Portion):	Three months ended September 30,					Nine months ended September 30,
	2014		2013			2014			2013
Cash flow hedges:
Interest rate contracts (1)	$	—	$	—		$	(1	)	$	(1	)
Foreign exchange contracts (2)	4		(10		)	(15		)	(7		)
Total	4		(10		)	(16		)	(8		)

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(1) Included within Interest expense

(2) Included within Compensation and benefits ($1 million and $5 million loss for the three months ended September 30, 2014 and 2013, respectively, and $4 million and $9 million loss for the nine months ended September 30, 2014 and 2013,respectively), Other income ($5 million gain and $5 million loss for the three months ended September 30, 2014 and 2013, respectively, and $6 million loss and $3 million gain for the nine months ended September 30, 2014 and 2013, respectively), Interest expenses ($3 million and $8 million loss for the three and nine months ended September 30, 2014, respectively), and Other general expenses ($3 million gain for the three months ended September 30, 2014, and $3 million gain and $1 million loss for the nine months ended September 30, 2014 and 2013, respectively).

The amount of gain (loss) recognized in the Condensed Consolidated Financial Statements is as follows (in millions):

	Three months ended September 30,										Nine months ended September 30,
	Amount of Gain (Loss) Recognized in Income on Derivative (1)						Amount of Gain (Loss) Recognized in Income on Related Hedged Item				Amount of Gain (Loss) Recognized in Income on Derivative (1) (2)						Amount of Gain (Loss) Recognized in Income on Related Hedge Item (1) (2)
	2014			2013			2014		2013		2014			2013			2014		2013
Fair value hedges:
Foreign exchange contracts (2)	$	(9	)	$	(7	)	$	9	$	7	$	(9	)	$	(8	)	$	9	$	8

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(1) Included in Interest expense.

(2) Relates to fixed rate debt.

The Company estimates that approximately $3 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 nine months endedSeptember 30, 2014 and 2013 was not material.

During the three and nine months endedSeptember 30, 2014, the Company recorded a loss of $11 million and $13 million, respectively, in Other income, for foreign exchange derivatives not designated or qualifying as hedges. During the three and nine months endedSeptember 30, 2013, the Company recorded a gain of $3 million and a loss of $15 million, respectively, in Other income, for foreign exchange derivatives not designated or qualifying as hedges.