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Derivatives and Hedging Activities
 9 Months Ended
Sep. 30, 2017
Derivative Instruments And Hedging Activities Disclosure [Abstract]  
Derivatives and Hedging Activities

9. Derivatives and Hedging Activities

The Company uses derivative financial instruments (derivatives) to manage exposures to various market risks. These instruments derive their value from an underlying variable or multiple variables, including interest rates, foreign exchange rates, and equity index or price, and are carried at fair value on the Consolidated Balance Sheets. These instruments enable end users to increase, reduce or alter exposure to various market risks and, for that reason, are an integral component of the Company’s market risk management. The Company does not transact in derivatives for trading purposes.

In relation to the Company’s credit risk, under the terms of the derivative agreements it has with its various counterparties, the Company is not required to either immediately settle any outstanding liability balances or post collateral upon the occurrence of a specified credit risk-related event. Based on its assessment of the credit risk of the Company’s derivative counterparties as of September 30, 2017 and December 31, 2016, no credit risk adjustment to the derivative portfolio was required.

The following table summarizes the total fair value, excluding interest accruals, of derivative assets and liabilities as of September 30, 2017 and December 31, 2016:

Other Assets Fair Value  Other Liabilities Fair Value
(Millions)2017  2016  2017  2016
Derivatives designated as hedging instruments:      
Fair value hedges - Interest rate contracts(a)$26  $111  $15  $69
Net investment hedges - Foreign exchange contracts41  347  210  35
Total derivatives designated as hedging instruments67  458  225  104
Derivatives not designated as hedging instruments:      
Foreign exchange contracts, including certain embedded derivatives(b)168  308  102  176
Total derivatives, gross235  766  327  280
Less: Cash collateral netting(c)(d) (17)(54)(8)(68)
Derivative asset and derivative liability netting(e) (92)(157)(92)(157)
Total derivatives, net(f)$126$555$227$55

  • Effective January 2017, the Central Clearing Party (CCP) changed the legal characterization of variation margin payments for centrally cleared derivatives to be settlement payments, as opposed to collateral. Accordingly, the amounts disclosed for 2017 related to centrally cleared derivatives are based on gross assets of $11 million and liabilities of $87 million net of variation margin of $11 million and $79 million, respectively. The Company also maintained several bilateral interest rate contracts that are not subject to the CCP’s rule change and amounts related to such contracts are shown gross of any collateral exchanged.
  • Includes foreign currency derivatives embedded in certain operating agreements.
  • Represents the offsetting of the fair value of bilateral interest rate contracts and certain foreign exchange contracts with the right to reclaim cash collateral or the obligation to return cash collateral.
  • The Company held no non-cash collateral as of September 30, 2017. As of December 31, 2016, the Company received non-cash collateral from a counterparty in the form of security interests in U.S. Treasury securities, with a fair value of $18 million, none of which was sold or repledged. Such non-cash collateral economically reduced the Company’s risk exposure to $537 million as of December 31, 2016, but did not reduce the net exposure on the Company’s Consolidated Balance Sheets. Additionally, the Company posted $152 million and $169 million as of September 30, 2017 and December 31, 2016, respectively, as initial margin on its centrally cleared interest rate swaps; such amounts are recorded within Other receivables on the Consolidated Balance Sheets and are not netted against the derivative balances.
  • Represents the amount of netting of derivative assets and derivative liabilities executed with the same counterparty under an enforceable master netting arrangement.
  • The Company has no individually significant derivative counterparties and therefore, no significant risk exposure to any single derivative counterparty. The total net derivative assets and net derivative liabilities are presented within Other assets and Other liabilities, respectively, on the Consolidated Balance Sheets.

A majority of the Company’s derivative assets and liabilities as of September 30, 2017 and December 31, 2016 are subject to master netting agreements with its derivative counterparties. The Company has no derivative amounts subject to enforceable master netting arrangements that are not offset on the Consolidated Balance Sheets.

Fair Value Hedges

The Company is exposed to interest rate risk associated with its fixed-rate long-term debt obligations. At the time of issuance, certain fixed-rate debt obligations are designated in fair value hedging relationships, using interest rate swaps, to economically convert the fixed interest rate to a floating interest rate. The Company has $20.7 billion and $17.7 billion of fixed-rate debt obligations designated in fair value hedging relationships as of September 30, 2017 and December 31, 2016, respectively.

The following table summarizes the gains (losses) recognized in Other expenses associated with the Company’s fair value hedges for the three and nine months ended September 30:

Three Months Ended September 30,Nine Months Ended September 30,
(Millions)2017201620172016
Interest rate derivative contracts$(31)$(123)$(100)$103
Hedged items3913464(90)
Net hedge ineffectiveness$8$11$(36)$13

The Company also recognized a net reduction in interest expense on long-term debt of $24 million and $55 million for the three months ended September 30, 2017 and 2016, respectively, and $105 million and $173 million for the nine months ended September 30, 2017 and 2016, respectively, primarily related to the net settlements (interest accruals) on the Company’s interest rate derivatives designated as fair value hedges.

Net Investment Hedges

The effective portion of the gain or loss on net investment hedges, net of taxes, recorded in AOCI as part of the cumulative translation adjustment, were losses of $184 million and $18 million for the three months ended September 30, 2017 and 2016, respectively, and a loss of $515 million and a gain of $25 million for the nine months ended September 30, 2017 and 2016, respectively, with any ineffective portion recognized in Other expenses during the period. The net hedge ineffectiveness recognized was nil for both the three and nine months ended September 30, 2017 and 2016. Other amounts related to foreign exchange contracts reclassified from AOCI into Other expenses included a loss of $18 million and nil for the three months ended September 30, 2017 and 2016, respectively, and a loss of $18 million and a gain of $5 million for the nine months ended September 30, 2017 and 2016, respectively.

Derivatives Not Designated as Hedges

The changes in the fair value of derivatives that are not designated as hedges are intended to offset the related foreign exchange gains or losses of the underlying foreign currency exposures. The changes in the fair value of the derivatives and the related underlying foreign currency exposures resulted in net losses of $15 million and $4 million for the three months ended September 30, 2017 and 2016, respectively, and net losses of $36 million and $12 million for the nine months ended September 30, 2017 and 2016, respectively, and are recognized in Other expenses.

The changes in the fair value of an embedded derivative resulted in gains of $1 million for both the three months ended September 30, 2017 and 2016, and a loss of $1 million and a gain of $7 million for the nine months ended September 30, 2017 and 2016, respectively, which are recognized in Card Member services and other expense.