Financial Instruments

3 Months Ended

Mar. 31, 2015

NOTE 11. FINANCIAL INSTRUMENTS

The following table provides information about assets and liabilities not carried at fair value. The table excludes finance leases and non-financial assets and liabilities. Substantially all of the assets discussed below are considered to be Level 3. The vast majority of our liabilities’ fair value can be determined based on significant observable inputs and thus considered Level 2. Few of the instruments are actively traded and their fair values must often be determined using financial models. Realization of the fair value of these instruments depends upon market forces beyond our control, including marketplace liquidity.

	March 31, 2015						December 31, 2014
			Assets (liabilities)						Assets (liabilities)
	Notional		Carrying		Estimated		Notional		Carrying		Estimated
(In millions)	amount		amount (net)		fair value		amount		amount (net)		fair value

Assets
Loans	$	(a)	$	72,748	$	78,974	$	(a)	$	193,214	$	197,833
Other commercial mortgages		(a)		1,430		1,569		(a)		1,427		1,508
Loans held for sale		(a)		76,679		76,797		(a)		1,830		1,855
Other financial instruments(b)		(a)		239		315		(a)		566		786
Liabilities
Borrowings and bank deposits(c)(d)		(a)		(335,941)		(351,046)		(a)		(349,041)		(365,724)
Investment contract benefits		(a)		(2,923)		(3,553)		(a)		(2,970)		(3,565)
Guaranteed investment contracts		(a)		(1,000)		(1,049)		(a)		(1,000)		(1,031)
Insurance - credit life(e)		-		-		-		1,843		(90)		(77)

(a) These financial instruments do not have notional amounts.

(b) Principally comprises cost method investments.

(d) Fair values exclude interest rate and currency derivatives designated as hedges of borrowings. Had they been included, the fair value of borrowings at March 31, 2015 and December 31, 2014 would have been reduced by $4,514 million and $5,020 million, respectively.

(e) Net of reinsurance of none and $964 million at March 31, 2015 and December 31, 2014, respectively.

NOTIONAL AMOUNTS OF LOAN COMMITMENTS

(In millions)	March 31, 2015		December 31, 2014

Ordinary course of business lending commitments(a)	$	2,935	$	3,239
Unused revolving credit lines(b)
Commercial(c)		12,987		14,681
Consumer – principally credit cards		309,688		306,188

(a) Excluded investment commitments of $742 million and $835 million at March 31, 2015 and December 31, 2014, respectively.

(b) Excluded amounts related to inventory financing arrangements, which may be withdrawn at our option, of $13,530 million and $15,041 million at March 31, 2015 and December 31, 2014, respectively.

(c) Included amounts related to commitments of $9,434 million and $10,509 million at March 31, 2015 and December 31, 2014, respectively, associated with secured financing arrangements that could have increased to a maximum of $11,656 million and $12,353 million at March 31, 2015 and December 31, 2014, respectively, based on asset volume under the arrangement.

Securities Repurchase and Reverse Repurchase Arrangements

Our issuances of securities repurchase agreements are insignificant and are limited to activities at certain of our foreign banks primarily for purposes of liquidity management. At March 31, 2015, we were party to repurchase agreements totaling $45 million, which were reported in short-term borrowings on the financial statements. No repurchase agreements were accounted for as off-book financing and we do not engage in securities lending transactions.

We also enter into reverse securities repurchase agreements, primarily for short-term investment with maturities of 90 days or less. At March 31, 2015, we were party to reverse repurchase agreements totaling $12.1 billion, which were reported in cash and equivalents on the financial statements. Under these reverse securities repurchase agreements, we typically lend available cash at a specified rate of interest and hold U.S. or highly-rated European government securities as collateral during the term of the agreement. Collateral value is in excess of amounts loaned under the agreements.

Derivatives and Hedging

As a matter of policy, we use derivatives for risk management purposes and we do not use derivatives for speculative purposes. A key risk management objective for our financial services businesses is to mitigate interest rate and currency risk by seeking to ensure that the characteristics of the debt match the assets they are funding. If the form (fixed versus floating) and currency denomination of the debt we issue do not match the related assets, we typically execute derivatives to adjust the nature and tenor of funding to meet this objective within pre-defined limits. The determination of whether we enter into a derivative transaction or issue debt directly to achieve this objective depends on a number of factors, including market related factors that affect the type of debt we can issue.

The notional amounts of derivative contracts represent the basis upon which interest and other payments are calculated and are reported gross, except for offsetting foreign currency forward contracts that are executed in order to manage our currency risk of net investment in foreign subsidiaries. Of the outstanding notional amount of $227,000 million, approximately 98% or $223,000 million is associated with reducing or eliminating the interest rate, currency or market risk between financial assets and liabilities in our financial services businesses. The instruments used in these activities are designated as hedges when practicable. When we are not able to apply hedge accounting, or when the derivative and the hedged item are both recorded in earnings concurrently, the derivatives are deemed economic hedges and hedge accounting is not applied. This most frequently occurs when we hedge a recognized foreign currency transaction (e.g., a receivable or payable) with a derivative. Since the effects of changes in exchange rates are reflected concurrently in earnings for both the derivative and the transaction, the economic hedge does not require hedge accounting.

FAIR VALUE OF DERIVATIVES

	March 31, 2015				December 31, 2014
(In millions)	Assets		Liabilities		Assets		Liabilities

Derivatives accounted for as hedges
Interest rate contracts	$	6,106	$	241	$	5,859	$	461
Currency exchange contracts		3,154		1,398		2,435		779
Other contracts		-		-		-		-
		9,260		1,639		8,294		1,240

Derivatives not accounted for as hedges
Interest rate contracts		152		137		186		141
Currency exchange contracts		728		3,667		598		2,910
Other contracts		54		14		26		22
		934		3,818		810		3,073

Gross derivatives recognized in statement of
financial position
Gross derivatives		10,194		5,457		9,104		4,313
Gross accrued interest		947		(31)		1,398		(18)
		11,141		5,426		10,502		4,295

Amounts offset in statement of financial position
Netting adjustments(a)		(4,872)		(4,877)		(3,705)		(3,713)
Cash collateral(b)		(3,312)		(493)		(3,695)		(502)
		(8,184)		(5,370)		(7,400)		(4,215)

Net derivatives recognized in statement of
financial position
Net derivatives		2,957		56		3,102		80

Amounts not offset in statement of
financial position
Securities held as collateral(c)		(2,148)		-		(3,083)		-

Net amount	$	809	$	56	$	19	$	80

Derivatives are classified in the captions “Other assets” and “Other liabilities” and the related accrued interest is classified in “Other receivables” and “Other liabilities” in our financial statements.

The netting of derivative receivables and payables is permitted when a legally enforceable master netting agreement exists. Amounts include fair value adjustments related to our own and counterparty non-performance risk. At March 31, 2015 and December 31, 2014, the cumulative adjustment for non-performance risk was a gain (loss) of $5 million and $8 million, respectively.
Excluded excess cash collateral received and posted of $118 million and $255 million at March 31, 2015, respectively, and $57 million and $211 million at December 31, 2014, respectively.
Excluded excess securities collateral received of $192 million and $305 million at March 31, 2015 and December 31, 2014, respectively.

FAIR VALUE HEDGES

We use interest rate and currency exchange derivatives to hedge the fair value effects of interest rate and currency exchange rate changes on local and non-functional currency denominated fixed-rate debt. For relationships designated as fair value hedges, changes in fair value of the derivatives are recorded in earnings within interest along with offsetting adjustments to the carrying amount of the hedged debt.

EARNINGS EFFECTS OF FAIR VALUE HEDGING RELATIONSHIPS

	Three months end March 31
		2015				2014
		Gain (loss)		Gain (loss)		Gain (loss)		Gain (loss)
		on hedging		on hedged		on hedging		on hedged
(In millions)		derivatives		items		derivatives		items

Interest rate contracts	$	1,060	$	(1,091)	$	990	$	(1,005)
Currency exchange contracts		(7)		6		2		(3)

Fair value hedges resulted in $(32) million and $(16) million of ineffectiveness in the three months ended March 31, 2015 and 2014, respectively. In both the three months ended March 31, 2015 and 2014, there were insignificant amounts excluded from the assessment of effectiveness.

CASH FLOW HEDGES

We use interest rate, currency exchange and commodity derivatives to reduce the variability of expected future cash flows associated with variable rate borrowings and commercial purchase and sale transactions, including commodities. For derivatives that are designated in a cash flow hedging relationship, the effective portion of the change in fair value of the derivative is reported as a component of AOCI and reclassified into earnings contemporaneously and in the same caption with the earnings effects of the hedged transaction.

					Gain (loss) reclassified
	Gain (loss) recognized in AOCI				from AOCI into earnings
	for the three months ended March 31				for the three months ended March 31
(In millions)	2015		2014		2015		2014


Interest rate contracts	$	(3)	$	3	$	(39)	$	(69)
Currency exchange contracts		(1,038)		183		(953)		134
Total(a)	$	(1,041)	$	186	$	(992)	$	65

(a) Gain (loss) is recorded in revenues from services and interest when reclassified to earnings.

The total pre-tax amount in AOCI related to cash flow hedges of forecasted transactions was a $160 million loss at March 31, 2015. We expect to transfer $222 million to earnings as an expense in the next 12 months contemporaneously with the earnings effects of the related forecasted transactions. In both the three months ended March 31, 2015 and 2014, we recognized insignificant gains and losses related to hedged forecasted transactions and firm commitments that did not occur by the end of the originally specified period. At March 31, 2015 and 2014, the maximum term of derivative instruments that hedge forecasted transactions was 18 years and 19 years, respectively. See Note 8 for additional information about reclassifications out of AOCI.

For cash flow hedges, the amount of ineffectiveness in the hedging relationship and amount of the changes in fair value of the derivatives that are not included in the measurement of ineffectiveness were insignificant for each reporting period.

NET INVESTMENT HEDGES IN FOREIGN OPERATIONS

We use currency exchange derivatives to protect our net investments in global operations conducted in non-U.S. dollar currencies. For derivatives that are designated as hedges of net investment in a foreign operation, we assess effectiveness based on changes in spot currency exchange rates. Changes in spot rates on the derivative are recorded as a component of AOCI until such time as the foreign entity is substantially liquidated or sold, or upon the loss of a controlling interest in a foreign entity. Additionally, lower of cost or fair value, less cost to sell, assessments of foreign entities classified as held for sale take into account the related AOCI. The change in fair value of the forward points, which reflects the interest rate differential between the two countries on the derivative, is excluded from the effectiveness assessment.

GAINS (LOSSES) RECOGNIZED THROUGH CTA

	Gain (loss) recognized in CTA				Gain (loss) reclassified from CTA
	for the three months ended March 31				for the three months ended March 31
(In millions)	2015		2014		2015		2014

Currency exchange contracts	$	4,989	$	(1,033)	$	785	$	10

Reclassifications from CTA of $974 million and $(3) million were recorded in revenues from services and $(189) million and $13 million in discontinued operations in the three months ended March 31, 2015 and 2014, respectively. The amounts related to the change in the fair value of the forward points that are excluded from the measure of effectiveness were $(44) million and $(142) million in the three months ended March 31, 2015 and 2014, respectively, and were recorded in interest.

FREE STANDING DERIVATIVES

Changes in the fair value of derivatives that are not designated as hedges are recorded in earnings each period. As discussed above, these derivatives are typically entered into as economic hedges of changes in interest rates, currency exchange rates, commodity prices and other risks. Gains or losses related to the derivative are typically recorded in revenues from services, based on our accounting policy. In general, the earnings effects of the item that represent the economic risk exposure are recorded in the same caption as the derivative. Gains (losses) for the three months ended March 31, 2015 on derivatives not designated as hedges were $(2,708) million composed of amounts related to interest rate contracts of $(43) million, currency exchange contracts of $(2,660) million, and other derivatives of $(5) million. These losses were more than offset by the earnings effects from the underlying items that were economically hedged. Gains (losses) for the three months ended March 31, 2014 on derivatives not designated as hedges were $1,078 million composed of amounts related to currency exchange contracts of $1,090 million and other derivatives of $(12) million. These losses were offset by the earnings effects from the underlying items that were economically hedged.

COUNTERPARTY CREDIT RISK

Fair values of our derivatives can change significantly from period to period based on, among other factors, market movements and changes in our positions. We manage counterparty credit risk (the risk that counterparties will default and not make payments to us according to the terms of our agreements) on an individual counterparty basis. Where we have agreed to netting of derivative exposures with a counterparty, we net our exposures with that counterparty and apply the value of collateral posted to us to determine the exposure. We actively monitor these net exposures against defined limits and take appropriate actions in response, including requiring additional collateral.

As discussed above, we have provisions in certain of our master agreements that require counterparties to post collateral (typically, cash or U.S. Treasury securities) when our receivable due from the counterparty, measured at current market value, exceeds a specified limit. The fair value of such collateral was $5,460 million at March 31, 2015, of which $3,312 million was cash and $2,148 million was in the form of securities held by a custodian for our benefit. Under certain of these same agreements, we post collateral to our counterparties for our derivative obligations, the fair value of which was $493 million at March 31, 2015. At March 31, 2015, our exposure to counterparties (including accrued interest), net of collateral we hold, was $798 million. This excludes exposure related to embedded derivatives.

Additionally, our master agreements typically contain mutual downgrade provisions that provide the ability of each party to require termination if the long-term credit rating of the counterparty were to fall below A-/A3. In certain of these master agreements, each party also has the ability to require termination if the short-term rating of the counterparty were to fall below A-1/P-1. Our master agreements also typically contain provisions that provide termination rights upon the occurrence of certain other events, such as a bankruptcy or events of default by one of the parties. If an agreement was terminated under any of these circumstances, the termination amount payable would be determined on a net basis and could also take into account any collateral posted. The net amount of our derivative liability, after consideration of collateral posted by us and outstanding interest payments was $38 million at March 31, 2015. This excludes embedded derivatives.