Derivatives and Hedging Activities |
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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:
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:
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. |