Derivatives and Hedging

9 Months Ended

Sep. 30, 2019

Derivative Instruments and Hedging Activities Disclosure [Abstract]

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 earns revenues, pays expenses, enters into monetary intercompany transfers, or other transactions 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 2 years. These derivatives are accounted for as hedges, and changes in fair value are recorded each period in Other comprehensive income (loss) in the Condensed Consolidated Statements of Comprehensive Income.

The Company also uses foreign exchange derivatives, typically forward contracts and options, to economically hedge 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, typically on a rolling 30-day basis, but may be for up to 1 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.

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



	Notional Amount				Net Amount of Derivative Assets Presented in the Statements of Financial Position ⁽¹⁾				Net Amount of Derivative Liabilities Presented in the Statements of Financial Position ⁽²⁾
	September 30, 2019		December 31, 2018		September 30, 2019		December 31, 2018		September 30, 2019		December 31, 2018
Foreign exchange contracts
Accounted for as hedges	$	607	$	646	$	10	$	17	$	1	$	2
Not accounted for as hedges ⁽³⁾	313		269		—		1		1		6
Total	$	920	$	915	$	10	$	18	$	2	$	8


(1)	Included within Other current assets ($3 million at September 30, 2019 and $3 million at December 31, 2018) or Other non-current assets ($7 million at September 30, 2019 and $15 million at December 31, 2018).


(2)	Included within Other current liabilities ($2 million at September 30, 2019 and $5 million at December 31, 2018) or Other non-current liabilities ($3 million at December 31, 2018).


(3)	These contracts typically are for 30 day durations and executed close to the last day of the most recent reporting month, thereby resulting in nominal fair values at the balance sheet date.

The amounts of derivative gains (losses) recognized in the Financial Statements are as follows (in millions):



	Three Months Ended September 30						Nine Months Ended September 30
	2019			2018			2019			2018
Loss recognized in Accumulated other comprehensive loss	$	(6	)	$	(3	)	$	(14	)	$	(14	)

The amounts of derivative gains (losses) reclassified from Accumulated other comprehensive loss into the Condensed Consolidated Statements of Income are as follows (in millions):



	Three Months Ended September 30						Nine Months Ended September 30
	2019			2018			2019			2018
Total revenue ⁽¹⁾	$	(4	)	$	—		$	(11	)	$	—
Compensation and benefits	—			—			—			1
Other general expense	—			—			—			(2		)
Interest expense	—			—			(1		)	(1		)
Other income (expense) ⁽¹⁾	—			(3		)	—			(7		)
Total	$	(4	)	$	(3	)	$	(12	)	$	(9	)


(1)	With the adoption of new hedge accounting guidance in the first quarter of 2019, gains (losses) on derivatives accounted for as hedges are recognized in Total revenue in the Company’s Condensed Consolidated Statements of Income rather than Other income (expense). Refer to Note 2 “Accounting Principles and Practices” for additional details.

The Company estimates that approximately $14 million of pretax losses currently included within Accumulated other comprehensive loss will be reclassified into earnings in the next twelve months.

During the three and nine months ended September 30, 2019, the Company recorded losses of $16 million and $20 million, respectively, in Other income (expense) for foreign exchange derivatives not accounted for as hedges. During the three and nine months ended September 30, 2018, the Company recorded losses of $4 million and $15 million, respectively, in Other income (expense) for foreign exchange derivatives not accounted for as hedges.

Net Investments in Foreign Operations Risk Management

The Company uses non-derivative financial instruments to protect the value of its investments in a number of foreign subsidiaries. The Company has designated a portion of its euro-denominated commercial paper issuances as a non-derivative hedge of the foreign currency exposure of a net investment in its European operations. The change in fair value of the designated portion of the euro-denominated commercial paper due to changes in foreign currency exchange rates is recorded in Foreign currency translation adjustment, a component of Accumulated other comprehensive loss, to the extent it is effective as a hedge. The foreign currency translation adjustment of the hedged net investments is also recorded in Accumulated other comprehensive loss. Ineffective portions of net investment hedges, if any, are reclassified from Accumulated other comprehensive loss into earnings during the period of change.

The Company had €500 million ($546 million at September 30, 2019 exchange rates) and €220 million ($250 million at December 31, 2018 exchange rates) of outstanding euro-denominated commercial paper at September 30, 2019 and December 31, 2018, respectively, designated as a hedge of the foreign currency exposure of its net investment in its European operations. The unrealized gain recognized in Accumulated other comprehensive loss related to the net investment non derivative hedging instrument was $38 million and $21 million, as of September 30, 2019 and December 31, 2018, respectively.

The Company did not reclassify any deferred gains or losses related to net investment hedges from Accumulated other comprehensive loss to earnings during the three and nine months ended September 30, 2019 and 2018.