Derivatives, Hedging Activities and Interest Expense

3 Months Ended

Jun. 30, 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 swapsand 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.

The aggregate fair value of derivative instruments that contain credit risk related contingent features that were in a net liability position at June 30, 2012 was $23 million, excluding embedded derivatives and adjustments made for our own non-performance risk. If our credit ratings declined by one notch, we would not be required to post additional collateral. If our ratings were to decline by two notches or more, we would be required to post an additional $17 million ofcollateral to the counterparties with which we were in a liability position at June 30, 2012. In order to settle all derivative instruments that were in a net liability position at June 30, 2012, excluding embedded derivatives and adjustments made for our own non-performance risk, we would be required to pay $23 million which would include excess collateral held of $6 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 June 30, 2012 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	$	58	$	16,256	$	602	$	16,721	$	660
Foreign currency swaps			1,576		687		8,349		1,288		9,925		1,975
Embedded derivatives			-		-		-		-		-		-
	Total	$	2,041	$	745	$	24,605	$	1,890	$	26,646	$	2,635
Counterparty netting and collateral													(2,436)
	Carrying value of derivative contracts – Other assets											$	199
Other liabilities
Interest rate swaps		$	-	$	-	$	52,926	$	980	$	52,926	$	980
Interest rate caps			-		-		50		-		50		-
Foreign currency swaps			977		26		1,604		44		2,581		70
Embedded derivatives			-		-		92		27		92		27
	Total	$	977	$	26	$	54,672	$	1,051	$	55,649	$	1,077
Counterparty netting and collateral													(1,027)
	Carrying value of derivative contracts – Other liabilities											$	50

Collateral represents cash received or deposited under reciprocal arrangements that we have entered into with our derivative counterparties. As of June 30, 2012, we held collateral of $1,607 million and posted collateral of $198 million. We had $6 million of excess collateral posted by counterparties whose position shifted from a net asset to a net liability position subsequent to the date collateral was transferred. Similarly, we had $58 million of excess collateral held by counterparties whose position shifted from a net liability to a net asset position subsequent to the date collateral was transferred. 

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, 2012 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	$	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 collateral held													(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 collateral held													(1,038)
	Carrying value of derivative contracts – Other liabilities											$	67

Collateral represents cash received or deposited under reciprocal arrangements that we have entered into with ourderivative counterparties. As of March 31, 2012, we held collateral of $1,748million and posted collateral of $196million.We had $23 million of excess collateral held by counterparties whose position shifted from a netasset to a net liability position subsequent to the date collateral was transferred.  Similarly, we had $7 million of excess collateral posted by counterparties whose position shifted from a net liability to a net asset position subsequent to the date collateral was transferred. 

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 the three months ended June 30, 2012 and 2011 as reported in our Consolidated Statement of Income:

			Three Months Ended
			June 30,
(Dollars in millions)				2012		20111
Interest expense on debt2			$	337	$	481
Interest expense on hedge accounting derivatives2				(27)		(81)
Interest expense on non-hedge accounting foreign currency
	swaps2			(67)		(132)
Interest expense on non-hedge accounting interest rate swaps2				103		180
		Interest expense on debt and derivatives2		346		448
Loss (gain) on hedge accounting derivatives:
	Interest rate swaps3			3		(7)
	Foreign currency swaps3			119		(400)
		Loss (gain) on hedge accounting derivatives		122		(407)
Less hedged item: change in fair value of fixed rate debt				(125)		403
		Ineffectiveness related to hedge accounting derivatives3		(3)		(4)
(Gain) loss from foreign currency transactions and non-hedge
accounting derivatives:
		(Gain) loss on foreign currency transactions3		(44)		704
		(Gain) on foreign currency swaps3		(32)		(809)
		(Gain) loss on interest rate swaps3		(209)		118
Total interest expense			$	58	$	457

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

2Amounts represent net interest settlements and changes in accruals.

3Amounts 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 for the three months ended June 30, 2012 and 2011:
	Three Months Ended
	June 30,
(Dollars in millions)		2012		2011
Loss related to hedge accounting derivatives	$	1	$	2
Loss on non-hedge accounting foreign currency swaps		4		5
Loss on non-hedge accounting interest rate swaps		1		1
Total credit valuation adjustment allocated to interest expense	$	6	$	8