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Derivatives and Hedging Activities | 12 Months Ended
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Dec. 31, 2017
Disclosure Text Block Abstract |
Derivatives and Hedging Activities | NOTE 14 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 re ason, are an integral component of the Company’s market risk management. The Company does not transact in derivatives for trading purposes. Market risk is the risk to earnings or asset and liability values resulting from movements in market prices. The Com pany’s market risk exposures include: Interest rate risk due to changes in the relationship between interest rates on the Company’s assets (such as loans, receivables and investment securities) and interest rates on the Company’s liabilities (such as debt and deposits); and Foreign exchange risk related to earnings, funding, transactions and investments in currencies other than the U.S. dollar. The Company centrally monitors market risks using market risk limits and escalation triggers as defined in its As set/Liability Management Policy. The Company’s market exposures are in large part byproducts of the delivery of its products and services. Interest rate risk primarily arises through the funding of Card Member receivables and fixed-rate loans with variabl e-rate borrowings, as well as through the risk to net interest margin from changes in the relationship betwee n benchmark rates such as Prime, LIBOR and the overnight indexed swap rate. Interest rate exposure within the Company’s charge card and fixed-rate lending products is managed by varying the proportion of total funding provided by short-term and variable-rate debt and deposits compared to fixed-rate debt and deposits. In addition, interest rate swaps are used from time to time to economically convert fixed-rate debt obligations to variable-rate obligations, or to convert variable-rate debt obligations to fixed-rate obligations. The Company may change the mix between variable-rate and fixed-rate funding based on changes in business volumes and mix, amon g other factors. Foreign exchange risk is generated by Card Member cross-currency charges, foreign currency balance sheet exposures, foreign subsidiary equity and foreign currency earnings in entities outside the United States. The Company’s foreign excha nge risk is managed primarily by entering into agreements to buy and sell currencies on a spot basis or by hedging this market exposure, to the extent it is economically justified, through various means, including the use of derivatives such as foreign exc hange forwards and cross-currency swap contracts. Derivatives may give rise to counterparty credit risk, which is the risk that a derivative counterparty will default on, or otherwise be unable to perform pursuant to, an uncollateralized derivative exposur e. The Company manages this risk by considering the current exposure, which is the replacement cost of contracts on the measurement date, as well as estimating the maximum potential value of the contracts over the next 12 months, considering such factors a s the volatility of the underlying or reference index. To mitigate derivative credit risk, counterparties are required to be pre-approved by the Company and rated as investment grade, and counterparty risk exposures are centrally monitored. Additionally, in order to mitigate the bilateral counterparty credit risk associated with derivatives, the Company has in certain instances entered into master netting agreements with its derivative counterparties, which provide a right of offset for certain exposures b etween the parties. A majority of the Company’s derivative assets and liabilities as of December 31, 2017 and 2016 are subject to such master netting agreements with its derivative counterparties, and there are no instances in which management makes an accounting policy election to not net assets and liabilities subject to an enforceable master netting agreement on the Company’s Consolidated Balance Sheets. To further mitigate bilateral counterparty credit risk, the Company exercises its rights under executed credit support agreements with certain of its derivative counterparties. These agreements require that, in the event the fair value change in the net derivatives position between the two parties exceeds certain dollar thresholds, the party in the net liability position posts collateral to its counterparty. All derivative contracts cleared through a central clearinghouse are collateralized to the full amount of the fair value of the contracts. In relation to the Company’s credit risk, under the term s 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. The Company has no individually significant derivative counterparties and therefore, no significant risk exposure to any single derivative counterparty. Based on its assessment of the credit risk of the Company’s derivative counterparties as of December 31, 2017 an d 2016, no credit risk adjustment to the derivative portfolio was required. The Company’s derivatives are carried at fair value on the Consolidated Balance Sheets. The accounting for changes in fair value depends on the instruments’ intended use and t he resulting hedge designation, if any, as discussed below. Refer to Note 15 for a description of the Company’s methodology for determining the fair value of derivatives. The following table summarizes the total fair value, excluding interest accruals, of derivative assets and liabilities as of December 31:
|  |  | Other Assets Fair Value |  | Other Liabilities Fair Value
(Millions) |  | 2017 |  | 2016 |  | 2017 |  | 2016
Derivatives designated as hedging instruments: |  |  |  |  |  |  |  |  |  |  |  |
| Fair value hedges - Interest rate contracts(a) |  | $ | 11 |  | $ | 111 |  | $ | 34 |  | $ | 69
| Net investment hedges - Foreign exchange contracts |  |  | 117 |  |  | 347 |  |  | 89 |  |  | 35
Total derivatives designated as hedging instruments |  |  | 128 |  |  | 458 |  |  | 123 |  |  | 104
Derivatives not designated as hedging instruments: |  |  |  |  |  |  |  |  |  |  |  |
| Foreign exchange contracts, including certain embedded derivatives(b) |  |  | 82 |  |  | 308 |  |  | 95 |  |  | 176
Total derivatives, gross |  |  | 210 |  |  | 766 |  |  | 218 |  |  | 280
Less: Cash collateral netting(c) (d) |  |  | (6) |  |  | (54) |  |  | (45) |  |  | (68)
| Derivative asset and derivative liability netting(e) |  |  | (80) |  |  | (157) |  |  | (80) |  |  | (157)
Total derivatives, net |  | $ | 124 |  | $ | 555 |  | $ | 93 |  | $ | 55
Effective January 2017, the Central Clearing Party (CCP) changed the legal characterization of variation margin payments for centrally cleared derivatives to be settlement pay ments, as opposed to collateral. As of December 31, 2017, there was no unsettled derivative asset or liability with the CCP. The Company also maintained several bilateral interest rate contracts that are not subject to the CCP’s rule change and amounts related to such contracts are shown gross of any collateral exchanged. Includes fore ign currency derivatives embedded in certain operating agreements. Represents the offsetting of the fair value of bilateral interest rate contracts and certain foreign exchange contracts with the right to reclaim cash collateral or the obligation to return cash collateral. The Company held no non-cash collateral as of December 31, 2017. As of December 31, 2016, t he Company received non-cash collateral from a counterparty in the form of security interests in U.S. Treasury securities, wit h a fair value of $18 million, none of which was sold or repledged. Such non-cash collateral economically reduced the Company’s risk exposure to $537 million as of December 31, 2016, but did not reduce the net exposure on the Company’s Consolidated Balance Sheets. Addition ally, the Com pany posted $146 million and $16 9 million as of December 31, 2017 and 2016, respectively, as initial margin on its centrally cleared interest rate swaps; such amounts are recorded within Other receivables on the Consolidated Balance She ets 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. Derivative Financial Instruments That Qualify For Hedge Accounting Derivatives executed for hedge accounting purposes are documented and designated as such when the Company enters into the contracts. In accordance with its risk management policies, the Company structures its hedges with terms similar to those of the item being hedged. The Company formally assesses, at inception of the hedge accounting relationship and on a quarterly basis, whether derivatives designated as hedges are highly effective in offsetting the fair value or cash flows of the hedged items. These assessments usually are made through the application of a regression analysis method. If it is determined that a derivative is not highly effective as a hedge, the Company will discontinue the application of hedge accounting. Fair Value Hedges A fair value hedge involves a derivative designated to hedge the Company’s exposure to future changes in the fair value of an asset or a liability, or an identified portion thereof, that is attributabl e to a particular risk. Interest Rate Contracts The Company is exposed to interest rate risk associated with its fixed-rate long-term debt obligations. At the time of issuance, certain fixed-rate debt obligations are designated in fair value hedging relationships, using interest rate swaps, to economically convert the fixed interest rate to a floating in terest rate. The Company has $23.8 billion and $17.7 billion of fixed-rate debt obli gations designated in fair value hedging relationships as of December 31, 2017 and 2016, respectively. To the extent the fair value hedge is effective, the gain or loss on the hedging instrument offsets the loss or gain on the hedged item attributable to th e hedged risk. Any difference between the changes in the fair value of the derivative and the changes in the hedged item is referred to as hedge ineffectiveness and is reported as a component of Other expenses. Hedge ineffectiveness may be caused by differ ences between a debt obligation’s interest rate and the benchmark rate, primarily due to credit spreads at inception of the hedging relationship that are not reflected in the fair value of the interest rate swap. Furthermore, hedge ineffectiveness may be caused by changes in 1-month LIBOR, 3-month LIBOR and the overnight indexed swap rate, as spreads between these rates impact the fair value of the interest rate swap without causing an exact offsetting impact to the fair value of the hedged debt. For the periods presented, the Company considers all fair value hedges to be highly effective and did not de-designate any fair value hedge relationships. The following table summarizes the gains (losses) recognized in Other expenses associated with the Company’s fair value hedges for the year ended December 31:
(Millions) |  | 2017 |  | 2016 |  | 2015 |
Other expenses: |  |  |  |  |  |  |  |  |  |
Interest rate derivative contracts |  | $ | (246) |  | $ | (184) |  | $ | (83) |
Hedged items |  |  | 206 |  |  | 163 |  |  | 93 |
Net hedge ineffectiveness (losses) gains |  | $ | (40) |  | $ | (21) |  | $ | 10 |
The Company also recognized a net reduction in interest expense on long-term debt of $133 million, $224 million and $284 million for the years ended December 31, 2017, 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 A net investment hedge is used to hedge future changes in currency exposure of a net investment in a foreign operation. The Company primarily designates foreign currency derivatives, typically foreign exchange forwards, and on occasion foreign currency denominated debt, as hedges of net investments in certain foreign operations. These instruments reduce exposure to change s in currency exchange rates on the Company’s investments in non-U.S. subsidiaries. The effective portion of the gain or loss on net investment hedges, net of taxes, recorded in AOCI as part of the cumulati ve translation adjustment, was a loss of $370 mil l ion and gains of $281 million and $577 million for the years ended December 31, 2017, 2016 and 2015, respectively, with any ineffective portion recognized in Other exp enses during the period. T he net hedge in effectiveness recognized was nil for the year s ended December 31, 2017 and December 31, 2016, and a gain of $1 million for the year ended December 31, 2015. Accumulated losses within AOCI of $31 million, $5 million and nil for the years ended December 31, 2017, 2016 and 2015, respective ly, were reclassified to Other e xpenses upon i nvestment sales or liquidations. Derivatives Not Designated As Hedges The Company has derivatives that act as economic hedges, but are not designated as such for hedge accounting purposes. Foreign currency transactions from time to time may be partially or fully economically hedged through foreign currency contracts, prima rily foreign exchange forwards. These hedges generally mature within one year. Foreign currency contracts involve the purchase and sale of designated currencies at an agreed upon rate for settlement on a specified d ate. The Company also has certain operating agreements containing payments that may be linked to a market rate or price, primarily foreign currency rates. The payment components of these agreements may meet the definition of an embedded derivative, in whi ch case the embedded derivative is accounted for separately and is classified as a foreign exchange contract based on its primary risk exposure. The changes in the fair value of derivatives that are not designated as hedges are intended to offset the rela ted 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 resulted in a net loss of $29 million for the year ended December 31, 2017 and net gains of $1 million and $83 million for t he years ended December 31, 2016 and 2015, respectively, and are recognized in Other expenses. The changes in the fair value of an embedded derivative was nil for the year ended December 31, 2017 and res ulted in gains of $9 million and $5 million for t he years ended December 31, 2016 and 2015, respectively, and are recognized in Card Member services and other expense s.

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- Definition The entire disclosure for derivative instruments and hedging activities including, but not limited to, risk management strategies, non-hedging derivative instruments, assets, liabilities, revenue and expenses, and methodologies and assumptions used in determining the amounts. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -URI http://asc.fasb.org/topic&trid=2229140 + Details
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