Derivatives, Hedging Activities, and Interest Expense

3 Months Ended

Sep. 30, 2013

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 interest rate and foreign currency risks. We enter into derivative transactions with the intent to reducelong term fluctuations in cash flows and fair value adjustments of assets and liabilities caused by market movements. 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 (“ALCO”), 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 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 ALCO. 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. As of September 30, 2013, we have daily valuation and collateral exchange arrangements with all of our counterparties. Our collateral agreements with substantially all our counterparties include a zero threshold, full collateralization arrangement.

The aggregate fair value of derivative instruments that contain credit risk related contingent features that were in a net liability position at September 30, 2013 was $1 million, excluding embedded derivatives and adjustments made for our own non-performance risk. Since we fully collateralize without regard to credit ratings, we would not be required to post additional collateral to the counterparties with which we were in a net liability position at September 30, 2013, if our credit ratings were to decline. In order to settle all derivative instruments that were in a net liability position at September 30, 2013, excluding embedded derivatives and adjustments made for our own non-performance risk, we would be required to pay $1 million.

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

Impact of Derivative Activities on Financial Statements

The following tables show the financial statement line item and amount of our derivative receivables and payables that are reported in the Consolidated Balance Sheet at September 30, 2013 and March 31, 2013. Derivative receivables and payables are shown before and after netting and collateral adjustments, by accounting designation and by contract type. As permitted by the accounting guidance, where a legally enforceable master netting agreement exists, we have elected to net derivative receivables and derivative payables and the related cash collateral. Our embedded derivative contracts do not meet the accounting guidance permitting netting and are therefore presented gross.

		Hedge accounting				Non-hedge				Total
As of September 30, 2013		derivatives				accounting derivatives
		Notional		Fair		Notional		Fair		Notional		Fair
(Dollars in millions)					value				value				value
Other assets
Interest rate swaps		$	465	$	35	$	20,036	$	371	$	20,501	$	406
Foreign currency swaps			1,182		491		7,431		460		8,613		951
	Total	$	1,647	$	526	$	27,467	$	831	$	29,114	$	1,357
Counterparty netting and collateral													(1,295)
	Carrying value of derivative contracts – Other assets											$	62
Other liabilities
Interest rate swaps		$	-	$	-	$	57,888	$	688	$	57,888	$	688
Interest rate caps			-		-		50		-		50		-
Foreign currency swaps			157		11		3,870		153		4,027		164
Embedded derivatives			-		-		40		9		40		9
	Total	$	157	$	11	$	61,848	$	850	$	62,005	$	861
Counterparty netting and collateral													(851)
	Carrying value of derivative contracts – Other liabilities											$	10

All derivative contracts shown above are subject to master netting agreements, with the exception of embedded derivative contracts. Collateral represents cash received or deposited under reciprocal arrangements that we have entered into with our derivative counterparties. As of September 30, 2013, we held collateral of $781 million which offset derivative assets, and we posted collateral of $337 million which offset derivative liabilities. We also held collateral of $1million which we did not use to offset derivative assets, and we posted collateral of $5 million which we did not use to offset derivative liabilities.

Note 7 – Derivatives, Hedging Activities and Interest Expense (Continued)
		Hedge accounting				Non-hedge				Total
As of March 31, 2013		derivatives				accounting derivatives
		Notional		Fair		Notional		Fair		Notional		Fair
(Dollars in millions)					value				value				value
Other Assets
Interest rate swaps		$	465	$	44	$	22,336	$	536	$	22,801	$	580
Foreign currency swaps			1,246		491		7,498		648		8,744		1,139
	Total	$	1,711	$	535	$	29,834	$	1,184	$	31,545	$	1,719
Counterparty netting and collateral held													(1,661)
	Carrying value of derivative contracts – Other assets											$	58
Other liabilities
Interest rate swaps		$	-	$	-	$	51,342	$	766	$	51,342	$	766
Interest rate caps			-		-		50		-		50		-
Foreign currency swaps			790		29		3,103		102		3,893		131
Embedded derivatives			-		-		64		12		64		12
	Total	$	790	$	29	$	54,559	$	880	$	55,349	$	909
Counterparty netting and collateral held													(892)
	Carrying value of derivative contracts – Other liabilities											$	17

All derivative contracts shown above are subject to master netting agreements, with the exception of embedded derivative contracts. Collateral represents cash received or deposited under reciprocal arrangements that we have entered into with ourderivative counterparties. As of March 31, 2013, we held collateral of $953 million which offset derivative assets,and we posted collateral of $184 million which offset derivative liabilities. We also held collateral of $3 million which we did not use to offset derivative assets, and we posted collateral of $6 million which we did not use to offset derivative liabilities.

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 and six months ended September 30, 2013 and 2012as reported in our Consolidated Statement of Income:

			Three Months Ended					Six Months Ended
			September 30,					September 30,
(Dollars in millions)				2013		2012		2013		2012
Interest expense on debt			$	320	$	347	$	638	$	684
Interest expense on hedge accounting derivatives				(25)		(27)		(49)		(54)
Interest expense on non-hedge accounting foreign currency
	swaps			(54)		(67)		(105)		(134)
Interest expense on non-hedge accounting interest rate swaps				61		95		127		198
		Interest expense on debt and derivatives		302		348		611		694
Loss (gain) on hedge accounting derivatives:
	Interest rate swaps			4		2		10		5
	Foreign currency swaps			(60)		(8)		(16)		111
		(Gain) loss on hedge accounting derivatives		(56)		(6)		(6)		116
Less hedged item: change in fair value of fixed rate debt				55		3		4		(122)
		Ineffectiveness related to hedge accounting derivatives		(1)		(3)		(2)		(6)
Loss (gain) from foreign currency transactions and non-hedge
accounting derivatives:
		Loss (gain) on foreign currency transactions		352		196		(98)		152
		(Gain) loss on foreign currency swaps		(335)		(206)		231		(238)
		(Gain) loss on interest rate swaps		(4)		(52)		108		(261)
Total interest expense			$	314	$	283	$	850	$	341

Interest expense on debt and derivatives represents net interest settlements and changes in accruals. Gains and losses from hedge accounting derivatives and foreign currency transactions 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				Six Months Ended
	September 30,				September 30,
(Dollars in millions)		2013		2012		2013		2012
(Gain) loss related to hedge accounting derivatives	$	-	$	(2)	$	-	$	(1)
(Gain) loss on non-hedge accounting foreign currency swaps		-		(4)		-		-
(Gain) loss on non-hedge accounting interest rate swaps		-		(1)		-		-
Total credit valuation adjustment allocated to interest expense	$	-	$	(7)	$	-	$	(1)