Derivative Financial Instruments and Hedging Activities

We are exposed to certain risks arising from both our business operations and economic conditions. We manage economic risks, including interest rate risk primarily by managing the amount, sources, and duration of our assets and liabilities and the use of derivative financial instruments. Specifically, we enter into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. Our derivative financial instruments are used to manage differences in the amount, timing, and duration of our known or expected cash receipts and our known or expected cash payments principally related to our borrowings.

Certain of our foreign operations expose us to fluctuations of foreign interest rates and exchange rates. We primarily finance our earning assets with debt in the same currency to minimize the impact to earnings from our exposure to fluctuations in exchange rates. When we use a different currency, these fluctuations may impact the value of our cash receipts and payments in terms of our functional currency. We enter into derivative financial instruments to protect the value or fix the amount of certain assets and liabilities in terms of the relevant functional currency. The table below presents the gross amounts of fair value of our derivative instruments and the associated notional amounts:



	December 31, 2018						December 31, 2017
	Notional		Fair Value of Assets^(a)		Fair Value of Liabilities^(a)		Notional		Fair Value of Assets^(a)		Fair Value of Liabilities^(a)
Derivatives designated as hedges
Fair value hedges
Interest rate swaps	$	9,533	$	42	$	231	$	11,110	$	2	$	290
Foreign currency swaps	1,829		37		60		—		—		—
Cash flow hedges
Interest rate swaps	768		8		—		2,177		15		—
Foreign currency swaps	2,075		43		58		1,574		103		—
Derivatives not designated as hedges
Interest rate contracts	99,666		372		520		81,938		329		207
Foreign currency swaps	—		—		—		1,201		104		—
Total^(b)	$	113,871	$	502	$	869	$	98,000	$	553	$	497

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(a)

The gross amounts of the fair value of our assets and liabilities are included in other assets and other liabilities, respectively. Amounts accrued for interest payments in a net receivable position are included in other assets. Amounts accrued for interest payments in a net payable position are included in other liabilities. All our derivatives are categorized within Level 2 of the fair value hierarchy. The fair value for Level 2 instruments was derived using the market approach based on observable market inputs including quoted prices of similar instruments and foreign exchange and interest rate forward curves.

(b)

We primarily enter into derivative instruments through AmeriCredit Financial Services, Inc. (AFSI); however, our SPEs may also be parties to derivative instruments. Agreements between AFSI and its derivative counterparties include rights of setoff for positions with offsetting values or for collateral held or posted. At December 31, 2018 and December 31, 2017, the fair value of assets and liabilities available for offset was $320 million and $284 million. At December 31, 2018 and December 31, 2017, we held $30 million and $25 million and posted $451 million and $299 million of collateral available for netting.

The following amounts were recorded in the consolidated balance sheet related to items designated and qualifying as hedged items in fair value hedging relationships:



	December 31, 2018
	Carrying Amount of Hedged Items		Cumulative Amount of Fair Value Hedging Adjustments^(a)
Unsecured debt	$	17,923	$	459

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(a)	Includes $247 million of adjustments remaining on hedged items for which hedge accounting has been discontinued.

The tables below present the effect of our derivative financial instruments in the consolidated statements of income:



	Income (Losses) Recognized In Income
	Year Ended December 31, 2018
	Interest Expense^(a)			Operating Expenses^(b)
Fair value hedges
Hedged items - interest rate swaps	$	83		$	—
Interest rate swaps	(102		)	—
Hedged items - foreign currency swaps	—			(17		)
Foreign currency swaps	(5		)	18
Cash flow hedges
Interest rate swaps	14			—
Foreign currency swaps	(49		)	(114		)
Derivatives not designated as hedges
Interest rate contracts	26			—
Foreign currency swaps	(44		)	(142		)
Total	$	(77	)	$	(255	)

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(a)	Total interest expense was $3.2 billion for 2018.


(b)	Activity is offset by translation activity also recorded in operating expenses related to foreign currency-denominated loans. Total operating expense was $1.5 billion for 2018.



	Income (Losses) Recognized In Income
	Years Ended December 31,
	2017		2016
Fair value hedges
Interest rate swaps^(a)(b)	$	42	$	(7	)
Cash flow hedges
Interest rate swaps^(a)	3		(3		)
Foreign currency swaps^(c)	121		39
Derivatives not designated as hedges
Interest rate contracts^(a)	40		27
Foreign currency swaps^(c)(d)	86		—
Total	$	292	$	56

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(a)	Recognized in earnings as interest expense.


(b)	Includes hedge ineffectiveness which reflects the net change in the fair value of interest rate swaps offset by the change in fair value of hedged debt attributable to the hedged risk.


(c)	Recognized in earnings as operating expenses and interest expense.


(d)	Activity is partially offset by translation activity (included in operating expenses) related to foreign currency-denominated loans.

The tables below present the effect of our derivative financial instruments in the consolidated statements of comprehensive income:



	Gains (Losses) Recognized In Accumulated Other Comprehensive Loss
	Years Ended December 31,
	2018			2017		2016
Fair value hedges
Foreign currency swaps	$	(3	)	$	—	$	—
Cash flow hedges
Interest rate swaps	3			5		4
Foreign currency swaps	(89		)	81		(20		)
Total	$	(89	)	$	86	$	(16	)



	(Gains) Losses Reclassified From Accumulated Other Comprehensive Loss Into Income^(a)(b)
	Years Ended December 31,
	2018			2017			2016
Fair value hedges
Foreign currency swaps	$	3		$	—		$	—
Cash flow hedges
Interest rate swaps	(7		)	(1		)	2
Foreign currency swaps	86			(86		)	31
Total	$	82		$	(87	)	$	33

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(a)	All amounts reclassified from accumulated other comprehensive loss were recorded to interest expense.


(b)	During the next twelve months, we estimate $11 million will be reclassified into pretax earnings from derivatives designated for hedge accounting.