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Derivatives and Hedging Activities
 3 Months Ended
Mar. 31, 2016
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 rates, 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 March 31, 2016 and December 31, 2015, 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 March 31, 2016 and December 31, 2015:

Other Assets  Other Liabilities
Fair Value  Fair Value
(Millions)2016  2015  2016  2015
Derivatives designated as hedging instruments:      
Interest rate contracts      
Fair value hedges$391  $236  $―  $9
Foreign exchange contracts      
Net investment hedges113  191  279  57
Total derivatives designated as hedging instruments504  427  279  66
Derivatives not designated as hedging instruments:      
Foreign exchange contracts, including certain embedded derivatives(a)120  117  177  135
Total derivatives, gross624  544  456  201
Less: Cash collateral netting(b) (324)(155)――
Derivative asset and derivative liability netting(c) (120)(107)(120)(107)
Total derivatives, net(d)$180$282$336$94

  • 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. Additionally, the Company posted $140 million and $149 million as of March 31, 2016 and December 31, 2015, respectively, as initial margin on its centrally cleared interest rate swaps; such amounts are recorded within Other receivables on the 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 Consolidated Balance Sheets.

A majority of the Company’s derivative assets and liabilities as of March 31, 2016 and December 31, 2015 are subject to master netting agreements with its derivative counterparties. The Company has no derivative amounts subject to enforceable master netting arrangements that are not offset on the Consolidated Balance Sheets.

Fair Value Hedges

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. The Company hedged $18.8 billion of its fixed-rate debt to floating-rate debt using interest rate swaps as of both March 31, 2016 and December 31, 2015.

The following table summarizes the impact on the Consolidated Statements of Income associated with the Company’s fair value hedges for the three months ended March 31:

For the Three Months Ended March 31: (Millions)
  Gains (losses) recognized in income
  Derivative contractHedged item  Net hedge
     Amount  Amount   ineffectiveness
Derivative relationship  Income Statement Line Item   2016  2015Income Statement Line Item  20162015  2016  2015
Interest rate contracts  Other expenses     $165  $63Other expenses    $(171)$(57)  $(6)  $6

The Company also recognized a net reduction in interest expense on long-term debt of $59 million and $70 million for the three months ended March 31, 2016 and 2015, 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 or (loss) on net investment hedges, net of taxes, recorded in Accumulated Other Comprehensive Loss as part of the cumulative translation adjustment, was $ (92) million and $195 million for the three months ended March 31, 2016 and 2015, respectively, with any ineffective portion recognized in Other expenses during the period of change. During the three months ended March 31, 2016 and 2015, the Company did not reclassify any amounts from Accumulated Other Comprehensive Loss to earnings as a component of Other expenses and no ineffectiveness was recognized in either period.

Derivatives Not Designated as Hedges

The changes in the fair value of derivatives that are not designated as hedges are intended to offset the related foreign exchange gains or losses of the underlying foreign currency exposures. The changes in the fair value of the derivatives and the related underlying foreign currency exposures totaled a net loss of $13 million and a net gain of $97 million for the three months ended March 31, 2016 and 2015, respectively, and are recognized in Other expenses.

The Company previously disclosed in Note 9 to the Consolidated Financial Statements in the Quarterly Report on Form 10-Q for the period ended March 31, 2015, a loss of $45 million related to derivatives not designated as hedges. This amount should have been disclosed as a gain of $293 million, which is the amount used to calculate the above referenced net gain of $97 million. This change to the previously disclosed amount has no impact on the Consolidated Statements of Income, Balance Sheets or Cash Flows.

The changes in the fair value of an embedded derivative gain of $6 million and nil for the three months ended March 31, 2016 and 2015, respectively, is recognized in Card Member services and other expense.