16
AT&T Retirement
Savings
Plan
AT&T Puerto Rico
Retirement Savings
Plan
Notes to Financial Statements (Continued)
(Dollars in Thousands)
Derivative Financial Instruments
In the normal course of operations, Group Trust
assets and liabilities held in the AT&T
Stable Value
Fund (Stable Value
Fund) may
include derivative financial instruments (futures
and foreign currency forward contracts). These instruments involve,
in varying
degrees, elements of credit and market volatility risks in
excess of more traditional investment holdings such as equity and
debt
instruments. The intent is to use derivative financial instruments as
an economic hedge to manage market volatility and
foreign
currency exchange rate risk associated with the Stable Value
Fund’s investment assets. The gains
(losses) are located on the Statement
of Changes in Net Assets Available
for Benefits as Net Loss from Investment in AT&T
Savings Plan Master Trust to the extent of
the
Plans’ ownership in the AT&T
Master Trust. The Group Trust’s
fiduciaries do not anticipate any material adverse effect
on the Group
Trust’s
financial position resulting from its involvement in these instruments.
At December 31, 2019 and 2018, the fair value of derivative financial
instruments held by the AT&T
Master Trust was not material.
Futures Contracts
The primary risk managed
by the Group Trust using futures
contracts is the price risk associated with investments. On
behalf of the
AT&T
Master Trust, investment managers
for the Group Trust enter into various futures
contracts to economically hedge investments
in domestic securities. These contracts, which are
considered derivatives under ASC Topic
815,
Derivatives and Hedging
agreements between two parties to buy or sell a security
or financial interest at a set price on a future date and are standardized
and
exchange-traded. Upon entering into such a contract on behalf
of the Group Trust, the investment manager
is required to pledge to the
broker an amount of cash or securities equal to the
minimum “initial margin” requirements of the exchange
on which the contract is
traded. Pursuant to the contract, the investment manager
agrees to receive from or pay to the broker an amount of cash equal to
the
daily fluctuation in the value of the contract. Such
receipts or payments are known as variation margin and are
recorded on a daily
basis by the trustee as a realized gain or loss equal to
the difference in the value of the contract between daily
closing prices. Upon
entering into such contracts, the Group Trust
bears the risk of interest or exchange rates or securities prices moving
unexpectedly, in
which case, the Group Trust may
not achieve the anticipated benefits of the futures contracts and
may realize a loss. With futures,
there is minimal counterparty credit risk to the Group Trust
since futures are exchange traded and the exchange’s
clearinghouse, as
counterparty to all exchange traded futures, guarantees the
futures against default. The investments in the Group Trust
are subject to
equity price risk and interest rate risk, in the normal course
of pursuing its investment objectives. The U.S. interest rate
futures held in
the portfolio as of December 31, 2019 and 2018
were used primarily to hedge and manage the duration risk of
the portfolio.
Foreign Currency Contracts
The primary risks managed by the Group Trust
using foreign currency forward contracts is the foreign currency
exchange rate risk
associated with the Group Trust’s
investments denominated in foreign currencies. On
behalf of the AT&T
Master Trust, investment
managers for the Group Trust enter into
forward foreign currency contracts, which are agreements to exchange
foreign currencies at a
specified future date at a specified rate, the terms of which
are not standardized on an exchange. These contracts are intended
to
minimize the effect of currency fluctuations
on the performance of investments denominated in foreign
currencies. Although in some
cases, forward foreign currency contracts are used to express
a view on the direction of a particular currency,
risk arises both from the
possible inability of the counterparties to meet the
terms of the contracts (credit risk) and from movement in foreign
currency
exchange rates (market risk). Foreign currency forward
contracts are entered into with major banks to minimize
credit risk, and
accordingly, no credit
reserve has been established against these amounts.
The contracts are recorded at fair value on the date
the contract is entered into, which is typically zero. The fair
value of the foreign
currency contracts are disclosed in unsettled trades and
other of the Group Trust and are included
in the Statement of Net Assets
Available for
Benefits to the extent of the Plans’ ownership in the AT&T
Master Trust.
Fully Benefit-Responsive Investment Contracts
The Stable Value
Fund consists of fully benefit-responsive investment contracts
with various financial institutions and insurance
companies which can be accounted for by the Plans at contract value.
Generally contract value represents contributions made under
the contract, plus earnings, less participant withdrawals and
administrative expenses.