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Derivatives and Hedging Activities
 9 Months Ended
Sep. 30, 2015
Derivative Instruments And Hedging Activities Disclosure [Abstract]  
Derivatives and Hedging Activities

9. Derivatives and Hedging Activities

The Company uses derivative financial instruments (derivatives) to manage exposures to various market risks. These instruments derive their value from an underlying variable or multiple variables, including interest rate, foreign exchange rates, and equity index or price, and are carried at fair value on the Consolidated Balance Sheets. These instruments enable end users to increase, reduce or alter exposure to various market risks and, for that reason, are an integral component of the Company’s market risk management. The Company does not transact in derivatives for trading purposes.

In relation to the Company’s credit risk, under the terms of the derivative agreements it has with its various counterparties, the Company is not required to either immediately settle any outstanding liability balances or post collateral upon the occurrence of a specified credit risk-related event. Based on the assessment of credit risk of the Company’s derivative counterparties as of September 30, 2015 and December 31, 2014, the Company does not have derivative positions that warrant credit valuation adjustments.

The following table summarizes the total fair value, excluding interest accruals, of derivative assets and liabilities as of September 30, 2015 and December 31, 2014:

Other Assets  Other Liabilities
Fair Value  Fair Value
(Millions)2015  2014  2015  2014
Derivatives designated as hedging instruments:      
Interest rate contracts      
Fair value hedges$391  $314  $―  $4
Foreign exchange contracts      
Net investment hedges385  492  102  46
Total derivatives designated as hedging instruments776  806  102  50
Derivatives not designated as hedging instruments:      
Foreign exchange contracts, including certain embedded derivatives(a)146  185  116  114
Total derivatives, gross922  991  218  164
Less: Cash collateral netting(b) (307)(158)―(4)
Derivative asset and derivative liability netting(c) (130)(122)(130)(122)
Total derivatives, net(d)$485$711$88$38

  • Includes foreign currency derivatives embedded in certain operating agreements.
  • Represents the offsetting of derivative instruments and the right to reclaim cash collateral (a receivable) or the obligation to return cash collateral (a payable) arising from derivative instrument(s) executed with the same counterparty under an enforceable master netting arrangement. From time to time, the Company also receives non-cash collateral from counterparties in the form of security interests in U.S. Treasury securities, which reduces the Company’s risk exposure, but does not reduce the net exposure on the Company’s Consolidated Balance Sheets. The Company had such non-cash collateral as of December 31, 2014 with a fair value of $91 million, none of which was sold or repledged. The Company did not have any such non-cash collateral as of September 30, 2015. Additionally, the Company posted $155 million and $114 million as of September 30, 2015 and December 31, 2014, respectively, as initial margin on its centrally cleared interest rate swaps; such amounts are recorded within Other receivables on the Company’s Consolidated Balance Sheets and are not netted against the derivative balances.
  • Represents the amount of netting of derivative assets and derivative liabilities executed with the same counterparty under an enforceable master netting arrangement.
  • The Company has no individually significant derivative counterparties and therefore, no significant risk exposure to any single derivative counterparty. The total net derivative assets and derivative liabilities are presented within Other assets and Other liabilities on the Company’s Consolidated Balance Sheets.

A majority of the Company’s derivative assets and liabilities as of September 30, 2015 and December 31, 2014 are subject to master netting agreements with its derivative counterparties. In addition, the Company has no derivative amounts subject to enforceable master netting arrangements that are not offset on the Company’s Consolidated Balance Sheets.

Fair Value Hedges

Interest Rate Contracts

The Company is exposed to interest rate risk associated with its fixed-rate long-term debt. The Company uses interest rate swaps to economically convert certain fixed-rate debt obligations to floating-rate obligations at the time of issuance. As of September 30, 2015 and December 31, 2014, the Company hedged $18.5 billion and $17.6 billion, respectively, of its fixed-rate debt to floating-rate debt using interest rate swaps.

Total Return Contract

The Company hedged its exposure to changes in the fair value of its equity investment in Industrial and Commercial Bank of China (ICBC) in local currency. The Company used a total return contract (TRC) to transfer its exposure to its derivative counterparty. On July 18, 2014, the Company sold its remaining shares in ICBC and terminated the TRC.

The following table summarizes the impact on the Consolidated Statements of Income associated with the Company’s fair value hedges for the three and nine months ended September 30:

Three Months Ended September 30: (Millions)
  Gains (losses) recognized in income
  Derivative contractHedged item  Net hedge
     Amount  Amount   ineffectiveness
Derivative relationship  Income Statement Line Item   2015  2014Income Statement Line Item  20152014  2015  2014
Interest rate contracts  Other expenses     $108  $(109)Other expenses    $(114)$112  $(6)  $3

Nine Months Ended September 30: (Millions)
  Gains (losses) recognized in income
  Derivative contractHedged item  Net hedge
    Amount  Amount   ineffectiveness
Derivative relationship  Income Statement Line Item  2015  2014Income Statement Line Item  20152014  2015  2014
Interest rate contracts  Other expenses    $82  $(170)Other expenses    $(85)$176  $(3)  $6
Total return contract  Other non-interest revenues  ―  11Other non-interest revenues  ―(11)  ――

The Company also recognized a net reduction in interest expense on long-term debt of $73 million and $74 million for the three months ended September 30, 2015 and 2014, respectively, and $214 million and $217 million for the nine months ended September 30, 2015 and 2014, respectively, primarily related to the net settlements (interest accruals) on the Company’s interest rate derivatives designated as fair value hedges.

Net Investment Hedges

The effective portion of the gain on net investment hedges, net of taxes, recorded in Accumulated Other Comprehensive Loss as part of the cumulative translation adjustment was $384 million and $246 million for the three months ended September 30, 2015 and 2014, respectively, and $545 million and $113 million for the nine months ended September 30, 2015 and 2014, respectively, with any ineffective portion recognized in Other expenses during the period of change. During the three months ended September 30, 2015 and 2014, the Company reclassified nil and $(1) million, respectively, and $1 million and $9 million for the nine months ended September 30, 2015 and 2014, respectively, from Accumulated Other Comprehensive Loss to earnings as a component of Other expenses, including ineffectiveness associated with net investment hedges of nil and $1 million for the three and nine months ended September 30, 2015, respectively.

The following table summarizes the impact on the Consolidated Statements of Income associated with the Company’s derivatives not designated as hedges:

Pretax (losses) gains
Three Months Ended Nine Months Ended
September 30,September 30,
  AmountAmount
Description (Millions)Income Statement Line Item  2015201420152014
Foreign exchange contracts (a)Other expenses  $(19)$2$15$84
Cost of Card Member services   4―(2)4
Total   $(15)$2$13$88

Foreign exchange contracts include forwards and embedded foreign currency derivatives.