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Derivatives, Hedging Activities and Interest Expense
 12 Months Ended
Mar. 31, 2012
Derivatives, Hedging Activities and Interest Expense [Abstract]  
Derivatives, Hedging Activities and Interest Expense

Note 7 – 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 and foreign currency swaps 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. During fiscal 2012, we implemented daily valuation and collateral exchange arrangements with a majority of our counterparties on a zero threshold, fully-collateralized basis. Our remaining agreements require monthly collateral exchanges in the amount by which a party's net derivatives position exceeds its ratings-based, specified threshold.

 

Note 7 – Derivatives, Hedging Activities and Interest Expense (Continued)

 

The aggregate fair value of derivative instruments that contain credit risk related contingent features that were in a net liability position at March 31, 2012 was $43 million, excluding embedded derivatives and adjustments made for our own non-performance risk. If our ratings declined to “A+”, we would not be required to post additional collateral. If our ratings were to decline to “BBB+” or below, we would be required to post an additional $18 million of collateral to the counterparties with which we were in a liability position at March 31, 2012. In order to settle all derivative instruments that were in a net liability position at March 31, 2012, excluding embedded derivatives and adjustments made for our own non-performance risk, we would be required to pay $43 million.

Derivative Activity Impact on Financial Statements
                
The table below shows the location and amount of derivatives at March 31, 2012 as reported in the
Consolidated Balance Sheet:
  Hedge accounting  Non-hedge   Total
 derivativesaccounting derivatives   
   Notional Fair   Notional Fair   Notional Fair
(Dollars in millions)  value  value  value
Other assets              
Interest rate swaps$ 465$ 59 $ 15,804$ 380 $ 16,269$ 439
Foreign currency swaps  3,291  772   9,866  1,449   13,157  2,221
Embedded derivatives  -  -   -  -   -  -
 Total$ 3,756$ 831 $ 25,670$ 1,829 $ 29,426$ 2,660
                
Counterparty netting and collateral1            (2,590)
 Carrying value of derivative contracts – Other assets$ 70
                
Other liabilities              
Interest rate swaps$ -$ - $ 51,175$ 1,008 $ 51,175$ 1,008
Interest rate caps  -  -   50  -   50  -
Foreign currency swaps  437  29   987  44   1,424  73
Embedded derivatives  -  -   92  24   92  24
 Total$ 437$ 29 $ 52,304$ 1,076 $ 52,741$ 1,105
                
Counterparty netting and collateral1            (1,038)
 Carrying value of derivative contracts – Other liabilities$ 67
                
1 Collateral represents cash received or deposited under reciprocal arrangements that we have entered into with our derivative counterparties. As of March 31, 2012, we held collateral of $1,748 million and posted collateral of $196 million.

Note 7 – 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 1
 derivativesaccounting 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 and collateral2            (3,449)
 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 and collateral2            (886)
 Carrying value of derivative contracts – Other liabilities$ 203
                
1 Certain prior period amounts have been reclassified to conform to the current period presentation.
2 Collateral represents cash received or deposited under reciprocal agreements that we have entered into with our derivatives counterparties. As of March 31, 2011, we held collateral of $2,567 million and posted collateral of $4 million.

Note 7 – 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 fiscal 2012, 2011 and 2010 as reported in our Consolidated Statement of Income:

    Years ended March 31,
(Dollars in millions) 2012  20111  20101
Interest expense on debt2$ 1,677 $ 1,943 $ 2,278
Interest expense on hedge accounting derivatives2  (221)   (449)   (722)
Interest expense on non-hedge accounting foreign currency        
 swaps2  (386)   (379)   (352)
Interest expense on non-hedge accounting interest rate swaps2  606   807   1,003
  Interest expense on debt and derivatives2  1,676   1,922   2,207
           
(Gain) loss on hedge accounting derivatives:        
 Interest rate swaps3  (6)   (2)   19
 Foreign currency swaps3  23   (832)   (1,512)
  Loss (gain) on hedge accounting derivatives  17   (834)   (1,493)
Less hedged item: change in fair value of fixed rate debt  (38)   801   1,456
  Ineffectiveness related to hedge accounting derivatives3  (21)   (33)   (37)
           
(Gain) loss from foreign currency transactions and non-hedge        
accounting derivatives:        
  (Gain) loss on foreign currency transactions  (182)   1,494   1,111
  (Gain) on foreign currency swaps3  (84)   (1,595)   (1,106)
  (Gain) on interest rate swaps3  (89)   (174)   (152)
Total interest expense $ 1,300 $ 1,614 $ 2,023

1 Certain prior period amounts have been reclassified to conform to the current period presentation.

2 Amounts represent net interest settlements and changes in accruals.

3       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.

  Years ended March 31,
(Dollars in millions) 2012  2011  2010
          
(Gain) loss related to hedge accounting derivatives$ (3) $ (2) $ 15
(Gain) loss on non-hedge accounting foreign currency swaps  (6)   5   12
Loss on non-hedge accounting interest rate swaps  -   2   30
Total credit valuation adjustment allocated to interest expense$ (9) $ 5 $ 57