Derivative Financial Instruments and Hedging Activities

3 Months Ended

Mar. 31, 2023

Derivative Instruments and Hedging Activities Disclosure [Abstract]

DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES

DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES

In the normal course of business, our operations are exposed to global market risks, including the effect of changes in interest rates and foreign currency exchange rates. To manage these risks, we enter into highly effective derivative contracts. We have elected to apply hedge accounting to certain derivatives. Derivatives that are designated in hedging relationships are evaluated for effectiveness using regression analysis at the time they are designated and throughout the hedge period. Some derivatives do not qualify for hedge accounting; for others, we elect not to apply hedge accounting.

Income Effect of Derivative Financial Instruments

The gains/(losses), by hedge designation, reported in income for the periods ended March 31 were as follows (in millions):

	First Quarter
	2022		2023
Fair value hedges
Interest rate contracts
Net interest settlements and accruals on hedging instruments	$	76	$	(140)
Fair value changes on hedging instruments	(986)		250
Fair value changes on hedged debt	991		(279)
Cross-currency interest rate swap contracts
Net interest settlements and accruals on hedging instruments	(3)		(14)
Fair value changes on hedging instruments	(37)		22
Fair value changes on hedged debt	41		(19)
Derivatives not designated as hedging instruments
Interest rate contracts	123		(12)
Foreign currency exchange contracts (a)	(2)		(22)
Cross-currency interest rate swap contracts	(227)		85
Total	$	(24)	$	(129)

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(a)Reflects forward contracts between us and an affiliated company.

NOTE 7. DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES (Continued)

Balance Sheet Effect of Derivative Financial Instruments

Derivative assets and liabilities are reported on the balance sheets at fair value and are presented on a gross basis. The notional amounts of the derivative instruments do not necessarily represent amounts exchanged by the parties and are not a direct measure of our financial exposure. We also enter into master agreements with counterparties that may allow for netting of exposures in the event of default or breach of the counterparty agreement. Collateral represents cash received or paid under reciprocal arrangements that we have entered into with our derivative counterparties, which we do not use to offset our derivative assets and liabilities.

The fair value of our derivative instruments and the associated notional amounts were as follows (in millions):

	December 31, 2022						March 31, 2023
	Notional		Fair Value of Assets		Fair Value of Liabilities		Notional		Fair Value of Assets		Fair Value of Liabilities
Fair value hedges
Interest rate contracts	$	16,883	$	—	$	1,653	$	19,042	$	15	$	1,302
Cross-currency interest rate swap contracts	885		—		161		1,421		4		135
Derivatives not designated as hedging instruments
Interest rate contracts	63,210		931		483		57,312		753		397
Foreign currency exchange contracts	4,219		41		76		4,970		7		74
Cross-currency interest rate swap contracts	6,635		15		653		6,115		38		528
Total derivative financial instruments, gross (a) (b)	$	91,832	$	987	$	3,026	$	88,860	$	817	$	2,436

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(a)At December 31, 2022 and March 31, 2023, we held collateral of $210 million and $180 million, respectively, and we posted collateral of $193 million and $172 million, respectively.

(b)At December 31, 2022 and March 31, 2023, the fair value of assets and liabilities available for counterparty netting was $166 million and $211 million, respectively. All derivatives are categorized within Level 2 of the fair value hierarchy.