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Derivatives, Hedging Activities, and Interest Expense
3 Months Ended
Jun. 30, 2014
Derivatives, Hedging Activities and Interest Expense [Abstract]  
Derivatives, Hedging Activities and Interest Expense

Note 7 – Derivatives, Hedging Activities and Interest Expense

 

Derivative Instruments

 

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 use of derivative transactions is intended to reduce long-term fluctuations in cash flows and fair value adjustments of assets and liabilities caused by market movements. All of our derivative activities are authorized and monitored by our management and the Asset Liability Committee which provides a framework for financial controls and governance to manage market risk.

 

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 June 30, 2014, 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 June 30, 2014 was $3 million, excluding adjustments made for our own non-performance risk. We would not be required to post additional collateral to the counterparties with which we were in a net liability position at June 30, 2014 if our credit ratings were to decline since we fully collateralize without regard to credit ratings with these counterparties. In order to settle all derivative instruments that were in a net liability position at June 30, 2014, excluding adjustments made for our own non-performance risk, we would be required to pay $3 million.

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

 

Derivative Activity Impact on Financial Statements

 

The following tables show the financial statement line item and amount of our derivative assets and liabilities that are reported in the Consolidated Balance Sheet at June 30, 2014 and March 31, 2014.

                    
   Hedge accounting  Non-hedge  Total
As of June 30, 2014  derivativesaccounting derivatives    
   Notional Fair  Notional Fair  Notional Fair
(Dollars in millions)   value  value  value
Other assets                  
Interest rate swaps $ 465 $ 21 $ 27,382 $ 357 $ 27,847 $ 378
Foreign currency swaps   852   351   7,646   671   8,498   1,022
 Total $ 1,317 $ 372 $ 35,028 $ 1,028 $ 36,345 $ 1,400
                    
Counterparty netting and collateral              (1,313)
 Carrying value of derivative contracts – Other assets        $ 87
                    
Other liabilities                  
Interest rate swaps $ - $ - $ 57,536 $ 454 $ 57,536 $ 454
Interest rate caps   -   -   50   -   50   -
Foreign currency swaps   157   11   3,472   169   3,629   180
 Total $ 157 $ 11 $ 61,058 $ 623 $ 61,215 $ 634
                    
Counterparty netting and collateral              (631)
 Carrying value of derivative contracts – Other liabilities        $ 3

As of June 30, 2014, we held collateral of $928 million which offset derivative assets, and posted collateral of $246 million which offset derivative liabilities. We also posted collateral of $10 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, 2014 derivativesaccounting derivatives    
   Notional Fair  Notional Fair  Notional Fair
(Dollars in millions)   value  value  value
Other Assets                  
Interest rate swaps $ 465 $ 25 $ 25,942 $ 336 $ 26,407 $ 361
Foreign currency swaps   852   342   7,374   532   8,226   874
 Total $ 1,317 $ 367 $ 33,316 $ 868 $ 34,633 $ 1,235
                    
Counterparty netting and collateral held              (1,186)
 Carrying value of derivative contracts – Other assets       $ 49
                    
Other liabilities                  
Interest rate swaps $ - $ - $ 57,689 $ 553 $ 57,689 $ 553
Interest rate caps   -   -   50   -   50   -
Foreign currency swaps   157   14   3,822   238   3,979   252
 Total $ 157 $ 14 $ 61,561 $ 791 $ 61,718 $ 805
                    
Counterparty netting and collateral held              (799)
 Carrying value of derivative contracts – Other liabilities       $ 6

As of March 31, 2014, we held collateral of $718 million which offset derivative assets, and posted collateral of $331 million which offset derivative liabilities. We also held collateral of $5 million which we did not use to offset derivative assets and we posted collateral of $3 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 and losses on derivative instruments and related hedged items, for the three months ended June 30, 2014 and 2013 as reported in our Consolidated Statement of Income:

 

   Three Months Ended
   June 30,
(Dollars in millions)2014  2013
Interest expense on debt$ 321 $ 318
Interest expense on hedge accounting derivatives  (15)   (24)
Interest expense on non-hedge accounting foreign currency     
 swaps  (55)   (51)
Interest expense on non-hedge accounting interest rate swaps  37   66
  Interest expense on debt and derivatives  288   309
        
Loss on hedge accounting derivatives:     
 Interest rate swaps  5   6
 Foreign currency swaps  (1)   44
  Loss on hedge accounting derivatives  4   50
Less hedged item: change in fair value of fixed rate debt  (4)   (51)
  Ineffectiveness related to hedge accounting derivatives  -   (1)
        
(Gain) loss from foreign currency transactions and non-hedge     
accounting derivatives:     
  Loss (gain) on non-hedge accounting foreign currency transactions  80   (450)
  (Gain) loss on non-hedge accounting foreign currency swaps  (155)   566
  (Gain) loss on non-hedge accounting interest rate swaps  (83)   112
Total interest expense $ 130 $ 536

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 relative fair value allocation of derivative credit value adjustments within interest expense is not significant for the three months ended June 30, 2014 and 2013 as we fully collateralize our derivatives without regard to credit ratings.