Derivatives, Hedging Activities and Interest Expense

3 Months Ended

Jun. 30, 2015

Derivative Instruments And Hedging Activities Disclosure [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 our Asset Liability Committee which provides a framework for financial controls and governance to manage market risk.

Credit Risk Related Contingent Features

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, 2015, 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.  However, due to the time required to move collateral, there may be a delay of up to one day between the exchange of collateral and the valuation of our derivatives.

The aggregate fair value of derivative instruments that contain credit risk related contingent features that were in a net liability position at June 30, 2015 was $43 million, excluding adjustments made for our own non-performance risk.  However, we would not be required to post additional collateral to the counterparties with which we were in a net liability position at June 30, 2015 if our credit ratings were to decline, since we fully collateralize without regard to credit ratings with these counterparties.

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:

	As of June 30, 2015
	Hedge accounting				Non-hedge
	derivatives				accountingderivatives				Total
			Fair				Fair				Fair
	Notional		value		Notional		value		Notional		value
Other assets
Interest rate swaps	$	-	$	-	$	27,318	$	370	$	27,318	$	370
Foreign currency swaps		271		18		1,399		260		1,670		278
Total	$	271	$	18	$	28,717	$	630	$	28,988	$	648
Counterparty netting and collateral held												(601	)
Carrying value of derivative    contracts – Other assets											$	47
Other liabilities
Interest rate swaps	$	-	$	-	$	63,997	$	339	$	63,997	$	339
Interest rate caps		-		-		30		-		30		-
Foreign currency swaps		251		48		12,355		1,582		12,606		1,630
Total	$	251	$	48	$	76,382	$	1,921	$	76,633	$	1,969
Counterparty netting and collateral posted												(1,926	)
Carrying value of derivative    contracts – Other liabilities											$	43

As of June 30, 2015, we held collateral of $138 million, which offset derivative assets, and posted collateral of $1,463 million, which offset derivative liabilities.  We also held excess collateral of $9 million, which we did not use to offset derivative assets, and we posted excess collateral of $15 million, which we did not use to offset derivative liabilities.   

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

	As of March 31, 2015
	Hedge accounting				Non-hedge
	derivatives				accountingderivatives				Total
			Fair				Fair				Fair
	Notional		value		Notional		value		Notional		value
Other Assets
Interest rate swaps	$	190	$	4	$	26,549	$	467	$	26,739	$	471
Foreign currency swaps		271		24		913		193		1,184		217
Total	$	461	$	28	$	27,462	$	660	$	27,923	$	688
Counterparty netting and collateral held												(635	)
Carrying value of derivative    contracts – Other assets											$	53
Other liabilities
Interest rate swaps	$	-	$	-	$	64,852	$	386	$	64,852	$	386
Interest rate caps		-		-		50		-		50		-
Foreign currency swaps		251		43		12,971		1,845		13,222		1,888
Total	$	251	$	43	$	77,873	$	2,231	$	78,124	$	2,274
Counterparty netting and collateral posted												(2,184	)
Carrying value of derivative    contracts – Other liabilities											$	90

As of March 31, 2015, we held collateral of $145 million which offset derivative assets, and posted collateral of $1,694 million which offset derivative liabilities.  We also held excess collateral of $10 million which we did not use to offset derivative assets, and we posted excess collateral of $2 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, as reported in our Consolidated Statement of Income:

	Three Months Ended
	June 30,
	2015			2014
Interest expense on debt	$	323		$	321
Interest income on hedge accounting derivatives		(4	)		(15	)
Interest income on non-hedge accounting foreign currency    swaps		(34	)		(55	)
Interest expense on non-hedge accounting interest rate swaps		27			37
Interest expense on debt and derivatives,  net		312			288
Loss on hedge accounting derivatives:
Interest rate swaps		-			5
Foreign currency swaps		15			(1	)
Loss on hedge accounting derivatives		15			4
Less hedged item:  change in fair value of fixed rate debt		(15	)		(4	)
Ineffectiveness related to hedge accounting derivatives		-			-
Loss (gain) from foreign currency transactions and non-hedge accounting    derivatives:
Loss on non-hedge accounting foreign currency    transactions		354			80
Gain on non-hedge accounting foreign currency swaps		(234	)		(155	)
Loss (gain) on non-hedge accounting interest rate    swaps		76			(83	)
Total interest expense	$	508		$	130

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 for counterparty and non-performance credit risk within interest expense is not significant for the three months ended June 30, 2015 and 2014 as we fully collateralize our derivatives without regard to credit ratings.