Derivatives and Hedging Activities

9 Months Ended

Sep. 30, 2021

Derivative Instruments and Hedging Activities Disclosure [Abstract]

We use derivative financial instruments to manage exposures to various market risks. These instruments derive their value from an underlying variable or multiple variables, including interest rates and foreign exchange rates, 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 our market risk management. We do not transact in derivatives for trading purposes.

A majority of our derivative assets and liabilities as of September 30, 2021 and December 31, 2020 are subject to master netting agreements with our derivative counterparties. Accordingly, where appropriate, we have elected to present derivative assets and liabilities with the same counterparty on a net basis in the Consolidated Balance Sheets.

In relation to our credit risk, certain of our bilateral derivative agreements include provisions that allow our counterparties to terminate the agreement in the event of a downgrade of our debt credit rating below investment grade and settle the outstanding net liability position. As of September 30, 2021, these derivatives were not in a material net liability position. Based on our assessment of the credit risk of our derivative counterparties and our own credit risk as of September 30, 2021 and December 31, 2020, 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, 2021 and December 31, 2020:


	Other Assets Fair Value				Other Liabilities Fair Value
(Millions)	2021		2020		2021		2020
Derivatives designated as hedging instruments:
Fair value hedges - Interest rate contracts (a)	$	308	$	500	$	—	$	—
Net investment hedges - Foreign exchange contracts	102		24		47		474
Total derivatives designated as hedging instruments	410		524		47		474
Derivatives not designated as hedging instruments:
Foreign exchange contracts	121		105		72		228
Total derivatives, gross	531		629		119		702
Derivative asset and derivative liability netting (b)	(74)		(98)		(74)		(98)
Cash collateral netting (c)	(310)		(500)		(3)		(16)
Total derivatives, net	$	147	$	31	$	42	$	588

(a)For our centrally cleared derivatives, variation margin payments are legally characterized as settlement payments as opposed to collateral.

(b)Represents the amount of netting of derivative assets and derivative liabilities executed with the same counterparty under an enforceable master netting arrangement.

(c)Represents the offsetting of the fair value of bilateral interest rate contracts and certain foreign exchange contracts with the right to cash collateral held from the counterparty or cash collateral posted with the counterparty.

We posted $15 million and $34 million as of September 30, 2021 and December 31, 2020, respectively, as initial margin on our centrally cleared interest rate swaps; such amounts are recorded within Other assets on the Consolidated Balance Sheets and are not netted against the derivative balances.

Fair Value Hedges

We are exposed to interest rate risk associated with our fixed-rate debt obligations. At the time of issuance, certain fixed-rate long-term 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. We had $12.9 billion and $15.8 billion of fixed-rate debt obligations designated in fair value hedging relationships as of September 30, 2021 and December 31, 2020, respectively.

The following table presents the gains and losses recognized in Interest expense on the Consolidated Statements of Income associated with the fair value hedges of our fixed-rate long-term debt for the three and nine months ended September 30:


	Gains (losses)
	Three Months Ended September 30,				Nine Months Ended September 30,
(Millions)	2021		2020		2021		2020
Fixed-rate long-term debt	$	59	$	96	$	257	$	(497)
Derivatives designated as hedging instruments	(58)		(97)		(257)		504
Total	$	1	$	(1)	$	—	$	7

The carrying values of the hedged liabilities, recorded within Long-term debt on the Consolidated Balance Sheets, were $13.2 billion and $16.4 billion as of September 30, 2021 and December 31, 2020, respectively, including the cumulative amount of fair value hedging adjustments of $365 million and $622 million for the respective periods.

We recognized net decreases of $60 million and $81 million in Interest expense on Long-term debt for the three months ended September 30, 2021 and 2020, respectively, and net decreases of $196 million and $183 million for the nine months ended September 30, 2021 and 2020, respectively, primarily related to the net settlements including interest accruals on our interest rate derivatives designated as fair value hedges.

Net Investment Hedges

We primarily designate foreign currency derivatives as net investment hedges to reduce our exposure to changes in currency exchange rates on our investments in non-U.S. subsidiaries. We had notional amounts of approximately $11.4 billion and $10.5 billion of foreign currency derivatives designated as net investment hedges as of September 30, 2021 and December 31, 2020, respectively. The gain or loss on net investment hedges, net of taxes, recorded in AOCI as part of the cumulative translation adjustment, was a gain of $155 million and a loss of $170 million for the three months ended September 30, 2021 and 2020, respectively, and gains of $53 million and $223 million for the nine months ended September 30, 2021 and 2020, respectively. Net investment hedge reclassifications out of AOCI into the Consolidated Statements of Income, net of taxes, were not significant for any of the three and nine months ended September 30, 2021 and 2020.

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. We had notional amounts of approximately $16.8 billion and $14.4 billion as of September 30, 2021 and December 31, 2020, respectively. The changes in the fair value of the derivatives and the related underlying foreign currency exposures resulted in a net loss of $10 million and a net gain of $4 million for the three months ended September 30, 2021 and 2020, respectively, and a net loss of $24 million and a net gain of $22 million for the nine months ended September 30, 2021 and 2020, respectively, that are recognized in Other, net expenses in the Consolidated Statements of Income.