Derivatives, Hedging Activities and Interest Expense (Disclosure)

9 Months Ended

Dec. 31, 2011

General Discussion Of Derivative Instruments And Hedging Activities Abstract

Derivative Instruments And Hedging Activities Disclosure Text Block

Note 8 – Derivatives, Hedging Activities and Interest Expense

Derivative Instruments

We use derivatives as part of our risk management strategy to hedge against changes in interest rate and foreign currency risks. We manage these risks by entering into derivative transactions with the intent to minimize fluctuations in earnings, cash flows and fair value adjustments of assets and liabilities caused by market volatility. We enter into derivatives for risk management purposes only, and our use of derivatives is limited to the management of interest rate and foreign currency risks.

Our derivative activities are authorized and monitored by our Asset-Liability Committee, which provides a framework for financial controls and governance to manage market risks. We use internal models for analyzing and incorporating data from internal and external sources in developing various hedging strategies. We incorporate the resulting hedging strategies into our overall risk management strategies.

Our approach to asset-liability management involves hedging our risk exposures so that changes in interest rates have a limited effect on our net interest margin and cash flows. Our liabilities consist mainly of fixed and floating rate debt, denominated in various currencies, which we issue in the global capital markets, while our assets consist primarily of U.S. dollar denominated, fixed rate receivables. We enter into interest rate swaps, foreign currency swaps and foreign currency forwards to hedge the interest rate and foreign currency risks that result from the different characteristics of our assets and liabilities. Our resulting asset liability profile is consistent with the overall risk management strategy directed by the Asset-Liability Committee. Gains and losses on these derivatives are recorded in interest expense.

Credit Risk Related Contingent Features

Certain of our derivative contracts are governed by International Swaps and Derivatives Association (“ISDA”) Master Agreements. Substantially all of these ISDA Master Agreements contain reciprocal ratings triggers providing either party with an option to terminate the agreement at market value in the event of a ratings downgrade of the other party below a specified threshold. These agreements require the transfer of collateral on either a monthly or daily basis depending on the counterparty. Agreements which require monthly collateral exchanges contain provisions thatlower the threshold at which that party would be required to post collateral to the other party upon specified downgrades in a party's credit rating. Under our agreements, which require daily transfers, the threshold for collateral transfers is zero.

The aggregate fair value of derivative instruments that contain credit risk related contingent features that were in a net liability position at December 31, 2011 was $39 million, excluding embedded derivatives and adjustments made for our own non-performance risk. In the normal course of business, we posted $24 million of collateral with counterparties with which we were in a net liability position at December 31, 2011. If our credit ratings were to have declined to “A+”, we would not have been required to post any additional collateral. However, if our ratings were to have declined to “BBB+” or below, we would have been required to post $37 million of additional collateral to the counterparties with which we were in a liability position at December 31, 2011. In order to settle all derivative instruments that were in a net liability position at December 31, 2011, excluding embedded derivatives and adjustments made for our own non-performance risk, we would have been required to pay $39 million.

Note 8 - Derivatives, Hedging Activities and Interest Expense (Continued)
Derivative Activity Impact on Financial Statements
The table below shows the location and amount of derivatives at December 31, 2011 as reported in the
Consolidated Balance Sheet:
		Hedge accounting				Non-hedge				Total
		derivatives				accounting derivatives
		Notional		Fair		Notional		Fair		Notional		Fair
(Dollars in millions)					value				value				value
Other assets
Interest rate swaps		$	465	$	63	$	19,800	$	437	$	20,265	$	500
Foreign currency swaps			3,284		1,197		14,186		2,280		17,470		3,477
	Total	$	3,749	$	1,260	$	33,986	$	2,717	$	37,735	$	3,977
Counterparty netting													(1,018)
Collateral held													(2,294)
	Carrying value of derivative contracts – Other assets											$	665
Other liabilities
Interest rate swaps		$	-	$	-	$	46,471	$	980	$	46,471	$	980
Interest rate caps			-		-		50		-		50		-
Foreign currency swaps			1,456		52		895		48		2,351		100
Embedded derivatives			-		-		140		43		140		43
	Total	$	1,456	$	52	$	47,556	$	1,071	$	49,012	$	1,123
Counterparty netting													(1,018)
Collateral posted													(24)
	Carrying value of derivative contracts – Other liabilities											$	81

Note 8 – Derivatives, Hedging Activities and Interest Expense (Continued)
Derivative Activity Impact on Financial Statements
The table below shows the location and amount of derivatives at March 31, 2011 as reported in the
Consolidated Balance Sheet:
		Hedge accounting				Non-hedge				Total
		derivatives				accounting derivatives
		Notional		Fair		Notional		Fair		Notional		Fair
(Dollars in millions)					value				value				value
Other Assets
Interest rate swaps		$	465	$	54	$	20,074	$	236	$	20,539	$	290
Foreign currency swaps			5,031		1,513		15,874		2,547		20,905		4,060
Embedded derivatives			-		-		10		1		10		1
	Total	$	5,496	$	1,567	$	35,958	$	2,784	$	41,454	$	4,351
Counterparty netting													(886)
Collateral held													(2,563)
	Carrying value of derivative contracts – Other assets											$	902
Other liabilities
Interest rate swaps		$	-	$	-	$	48,688	$	926	$	48,688	$	926
Interest rate caps			-		-		50		1		50		1
Foreign currency swaps			1,930		103		843		7		2,773		110
Embedded derivatives			-		-		259		52		259		52
	Total	$	1,930	$	103	$	49,840	$	986	$	51,770	$	1,089
Counterparty netting													(886)
Collateral posted													-
	Carrying value of derivative contracts – Other liabilities											$	203

Note 8 – Derivatives, Hedging Activities and Interest Expense (Continued)

The following table summarizes the components of interest expense, including the location and amount of gains or losses on derivative instruments and related hedged items, for the three and nine months ended December 31, 2011 and 2010 as reported in our Consolidated Statement of Income:

			Three Months Ended					Nine Months Ended
			December 31,				December 31,
(Dollars in millions)				2011		2010		2011		2010
Interest expense on debt1			$	409	$	486	$	1,295	$	1,476
Interest expense on hedge accounting derivatives1				(44)		(119)		(179)		(370)
Interest expense on non-hedge accounting foreign currency
	swaps1			(87)		(97)		(306)		(264)
Interest expense on non-hedge accounting interest rate swaps1				139		192		492		625
		Interest expense on debt and derivatives1		417		462		1,302		1,467
Loss (gain) on hedge accounting derivatives:
	Interest rate swaps2			5		13		(9)		(9)
	Foreign currency swaps2			134		(164)		40		(706)
		Loss (gain) on hedge accounting derivatives		139		(151)		31		(715)
Less hedged item: change in fair value of fixed rate debt				(139)		140		(38)		692
		Ineffectiveness related to hedge accounting derivatives2		-		(11)		(7)		(23)
Loss (gain) from foreign currency transactions and non-hedge
accounting derivatives:
		Loss (gain) on foreign currency transactions		113		436		(182)		1,264
		(Gain) on foreign currency swaps2		(157)		(389)		(186)		(1,419)
		(Gain) loss on interest rate swaps2		(210)		(264)		(158)		29
Total interest expense			$	163	$	234	$	769	$	1,318

1Amounts represent net interest settlements and changes in accruals.

2 Amounts exclude net interest settlements and changes in accruals.

The following table summarizes the relative fair value allocation of derivative credit valuation adjustments
within interest expense.
	Three Months Ended				Nine Months Ended
	December 31,				December 31,
(Dollars in millions)		2011		2010		2011		2010
Ineffectiveness related to hedge accounting derivatives	$	4	$	(1)	$	9	$	2
Loss on non-hedge accounting foreign currency swaps		(4)		3		3		8
Loss on non-hedge accounting interest rate swaps		1		-		3		2
Total credit valuation adjustment allocated to interest expense	$	1	$	2	$	15	$	12