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Derivatives and Hedging Activities
9 Months Ended
Sep. 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 its assessment of the credit risk of the Company’s derivative counterparties as of September 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 September 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$330  $236  $  $9
Foreign exchange contracts - Net investment hedges189  191  92  57
Total derivatives designated as hedging instruments519  427  92  66
Derivatives not designated as hedging instruments:      
Foreign exchange contracts, including certain embedded derivatives(a)201  117  149  135
Total derivatives, gross720  544  241  201
Less: Cash collateral netting on interest rate contracts(b) (256)(155)
Derivative asset and derivative liability netting(c) (99)(107)(99)(107)
Total derivatives, net(d)$365$282$142$94

  • Includes foreign currency derivatives embedded in certain operating agreements.
  • Represents the offsetting of derivatives and the right to reclaim cash collateral (a receivable) or the obligation to return cash collateral (a payable) arising from derivatives 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 $24 million as of September 30, 2016, none of which was sold or repledged. Such non-cash collateral economically reduced the Company’s risk exposure to $341 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 $144 million and $149 million as of September 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 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, 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 $17.0 billion and $18.8 billion of its fixed-rate debt to floating-rate debt using interest rate swaps as of September 30, 2016 and December 31, 2015, 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)2016201520162015
Interest rate derivative contracts$(123)$108$103$82
Hedged items134(114)(90)(85)
Net hedge ineffectiveness$11$(6)$13$(3)

The Company also recognized a net reduction in interest expense on long-term debt of $55 million and $73 million for the three months ended September 30, 2016 and 2015, respectively, and $173 million and $214 million for the nine months ended September 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 a loss of $18 million and a gain of $384 million for the three months ended September 30, 2016 and 2015, respectively, and gains of $25 million and $545 million for the nine months ended September 30, 2016 and 2015, respectively, with any ineffective portion recognized in Other expenses during the period of change. Specifically, the net hedge ineffectiveness recognized was nil and a gain of $1 million for the nine months ended September 30, 2016 and 2015, respectively. Other amounts related to foreign exchange contracts reclassified from AOCI into Other expenses included a gain of $5 million and nil for the nine months ended September 30, 2016 and 2015, respectively. There were no amounts related to foreign exchange contracts reclassified from AOCI into Other expenses during the three months ended September 30, 2016 and 2015.

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 $4 million and $3 million for the three months ended September 30, 2016 and 2015, respectively, and a net loss of $12 million and a net gain of $102 million for the nine months ended September 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 September 30, 2015, gains of $19 million and $15 million for the three and nine months ended September 30, 2015, respectively. These amounts should have been disclosed as gains of $8 million and $389 million, respectively, which are the amounts used to calculate the above-referenced net loss of $3 million and net gain of $102 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 resulted in a gain of $1 million and a loss of $4 million for the three months ended September 30, 2016 and 2015, respectively, and a gain of $7 million and a loss of $2 million for the nine months ended September 30, 2016 and 2015, respectively, and are recognized in Card Member services and other expense.