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Derivatives and Hedging Activities
 6 Months Ended
Jun. 30, 2016
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 the assessment of credit risk of the Company’s derivative counterparties as of June 30, 2016 and December 31, 2015, the Company does not have derivative positions that warrant credit valuation adjustments.

The following table summarizes the total fair value, excluding interest accruals, of derivative assets and liabilities as of June 30, 2016 and December 31, 2015:

Other Assets  Other Liabilities
Fair Value  Fair Value
(Millions)2016  2015  2016  2015
Derivatives designated as hedging instruments:      
Interest rate contracts      
Fair value hedges$452  $236  $―  $9
Foreign exchange contracts      
Net investment hedges216  191  141  57
Total derivatives designated as hedging instruments668  427  141  66
Derivatives not designated as hedging instruments:      
Foreign exchange contracts, including certain embedded derivatives(a)475  117  248  135
Total derivatives, gross1,143  544  389  201
Less: Cash collateral netting(b) (361)(155)――
Derivative asset and derivative liability netting(c) (169)(107)(169)(107)
Total derivatives, net(d)$613$282$220$94

  • Includes foreign currency derivatives embedded in certain operating agreements.
  • Represents the offsetting of derivative instruments and the right to reclaim cash collateral (a receivable) or the obligation to return cash collateral (a payable) arising from derivative instrument(s) executed with the same counterparty under an enforceable master netting arrangement. 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 $30 million as of June 30, 2016, none of which was sold or repledged. Such non-cash collateral economically reduced the Company’s risk exposure to $583 million but did not reduce the net exposure on the Company’s Consolidated Balance Sheets. The Company did not have any such non-cash collateral as of December 31, 2015. Additionally, the Company posted $159 million and $149 million as of June 30, 2016 and December 31, 2015, 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 derivative liabilities are presented within Other assets and Other liabilities on the Consolidated Balance Sheets.

A majority of the Company’s derivative assets and liabilities as of June 30, 2016 and December 31, 2015 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. The Company uses interest rate swaps to economically convert certain fixed-rate debt obligations to floating-rate obligations at the time of issuance. The Company hedged $20.3 billion and $18.8 billion of its fixed-rate debt to floating-rate debt using interest rate swaps as of June 30, 2016 and December 31, 2015, respectively.

The following table summarizes the impact on the Consolidated Statements of Income associated with the Company’s fair value hedges for the three and six months ended June 30:

Three Months Ended June 30 (Millions)
  Gains (losses) recognized in income
  Derivative contractHedged item  Net hedge
     Amount  Amount   ineffectiveness
Derivative relationship  Income Statement Line Item   2016  2015Income Statement Line Item  20162015  2016  2015
Interest rate contracts  Other expenses     $61  $(89)Other expenses    $(53)$85  $8  $(4)

Six Months Ended June 30 (Millions)
  Gains (losses) recognized in income
  Derivative contractHedged item  Net hedge
    Amount  Amount   ineffectiveness
Derivative relationship  Income Statement Line Item  2016  2015Income Statement Line Item  20162015  2016  2015
Interest rate contracts  Other expenses    $226  $(26)Other expenses    $(224)$29  $2  $3

The Company also recognized a net reduction in interest expense on long-term debt of $59 million and $71 million for the three months ended June 30, 2016 and 2015, respectively, and $118 million and $140 million for the six months ended June 30, 2016 and 2015, 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, was $ 135 million and $(34) million for the three months ended June 30, 2016 and 2015, respectively, and $43 million and $161 million for the six months ended June 30, 2016 and 2015, respectively, with any ineffective portion recognized in Other expenses during the period of change.

The following table summarizes the impact on the Consolidated Statements of Income associated with the Company’s net investment hedges for the three and six months ended June 30:

Three Months Ended June 30: (Millions)
  Gains (losses) recognized in income
  Amount reclassified from AOCI into income  Net hedge
        ineffectiveness
Description  Income Statement Line Item   2016  2015Income Statement Line Item  2016  2015
Net investment hedges:
Foreign exchange contracts  Other, net expenses     $5  $―Other, net expenses    $―  $1

Six Months Ended June 30: (Millions)
  Gains (losses) recognized in income
  Amount reclassified from AOCI into income  Net hedge
        ineffectiveness
Description  Income Statement Line Item   2016  2015Income Statement Line Item  2016  2015
Net investment hedges:
Foreign exchange contracts  Other, net expenses     $5  $―Other, net expenses    $―  $1

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 gains of $6 million and $8 million for the three months ended June 30, 2016 and 2015, respectively, and a net loss of $8 million and a net gain of $105 million for the six months ended June 30, 2016 and 2015, respectively, and are recognized in Other expenses.

Related to its derivatives not designated as hedges, the Company previously disclosed in Note 9 to the Consolidated Financial Statements in its Quarterly Report on Form 10-Q for the period ended June 30, 2015, a gain of $40 million for the three months ended June 30, 2015, and a loss of $4 million for the six months ended June 30, 2015. These amounts should have been disclosed as gains of $87 million and $381 million, respectively, which are the amounts used to calculate the above-referenced net gains of $8 million and $105 million. These changes to the previously disclosed amounts have no impact on the Consolidated Statements of Income, Balance Sheets or Cash Flows.

The changes in the fair value of an embedded derivative are nil and a gain of $4 million for the three months ended June 30, 2016 and 2015, respectively, and gains of $6 million and $3 million for the six months ended June 30, 2016 and 2015, respectively, and are recognized in Card Member services and other expense.