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DERIVATIVE INSTRUMENTS

9 Months Ended

Aug. 01, 2021

DERIVATIVE INSTRUMENTS

DERIVATIVE INSTRUMENTS

(20) Derivative Instruments

It is the Company’s policy that derivative transactions are executed only to manage exposures arising in the normal course of business and not for the purpose of creating speculative positions or trading. The Company’s financial services operations manage the relationship of the types and amounts of their funding sources to their receivable and lease portfolio in an effort to diminish risk due to interest rate and foreign currency fluctuations, while responding to favorable financing opportunities. The Company also has foreign currency exposures at some of its foreign and domestic operations related to buying, selling, and financing in currencies other than the functional currencies. In addition, the Company has interest rate exposure at certain equipment operations units for below market retail financing programs that are used as sales incentives and are offered for extended periods.

All derivatives are recorded at fair value on the balance sheet. Cash collateral received or paid is not offset against the derivative fair values on the balance sheet. Each derivative is designated as a cash flow hedge, a fair value hedge, or remains undesignated. All designated hedges are formally documented as to the relationship with the hedged item as well as the risk-management strategy. Both at inception and on an ongoing basis the hedging instrument is assessed as to its effectiveness. If and when a derivative is determined not to be highly effective as a hedge, the underlying hedged transaction is no longer likely to occur, the hedge designation is removed, or the derivative is terminated, hedge accounting is discontinued.

Cash Flow Hedges

Certain interest rate contracts (swaps) were designated as hedges of future cash flows from borrowings. The total notional amounts of the receive-variable/pay-fixed interest rate contracts at August 1, 2021, November 1, 2020, and August 2, 2020 were $1,750 million, $1,550 million, and $1,900 million, respectively. Fair value gains or losses on cash flow hedges were recorded in OCI and are subsequently reclassified into interest expense in the same periods during which the hedged transactions affected earnings. These amounts offset the effects of interest rate changes on the related borrowings. The cash flows from these contracts were recorded in operating activities in the statement of consolidated cash flows.

The amount of loss recorded in OCI at August 1, 2021 that is expected to be reclassified to interest expense in the next twelve months if interest rates remain unchanged is approximately $4 million after-tax. No gains or losses were reclassified from OCI to earnings based on the probability that the original forecasted transaction would not occur.

Fair Value Hedges

Certain interest rate contracts (swaps) were designated as fair value hedges of borrowings. The total notional amounts of the receive-fixed/pay-variable interest rate contracts at August 1, 2021, November 1, 2020, and August 2, 2020 were $8,658 million, $7,239 million, and $8,850 million, respectively. The fair value gains or losses on these contracts were generally offset by fair value gains or losses on the hedged items (fixed-rate borrowings) with both items recorded in interest expense.

The amounts recorded in the consolidated balance sheet related to borrowings designated in fair value hedging relationships were as follows in millions of dollars:


					Cumulative Increase (Decrease) of Fair
					Value Hedging Adjustments Included in
					the Carrying Amount
		Carrying			Active
		Amount of			Hedging			Discontinued
		Hedged Item			Relationships			Relationships			Total
August 1, 2021
Long-term borrowings due within one year		$	188		$	4		$	(1)		$	3
Long-term borrowings			8,888			263			190			453

November 1, 2020
Long-term borrowings due within one year		$	155		$	2		$	3		$	5
Long-term borrowings			7,725			543			122			665

August 2, 2020
Long-term borrowings due within one year		$	480		$	6		$	2		$	8
Long-term borrowings			9,140			754			40			794

Long-term borrowings due within one year are presented in short-term borrowings.

Derivatives Not Designated as Hedging Instruments

The Company has certain interest rate contracts (swaps), foreign currency exchange contracts (futures, forwards, and swaps), and cross-currency interest rate contracts (swaps), which were not formally designated as hedges. These derivatives were held as economic hedges for underlying interest rate or foreign currency exposures, primarily for certain borrowings, purchases or sales of inventory, and below market retail financing programs. The total notional amounts of these interest rate swaps at August 1, 2021, November 1, 2020, and August 2, 2020 were $9,195 million, $8,514 million, and $7,522 million, the foreign exchange contracts were $6,328 million, $4,903 million, and $4,790 million, and the cross-currency interest rate contracts were $197 million, $113 million, and $125 million, respectively. The fair value gains or losses from the interest rate contracts were recognized currently in interest expense or net sales and the gains or losses from foreign exchange contracts in cost of sales or other operating expenses, generally offsetting over time the expenses on the exposures being hedged. The cash flows from these non-designated contracts were recorded in operating activities in the statement of consolidated cash flows.

Fair values of derivative instruments in the condensed consolidated balance sheet were as follows in millions of dollars:


		August 1			November 1			August 2
Other Assets		2021			2020			2020
Designated as hedging instruments:
Interest rate contracts		$	332		$	586		$	806

Not designated as hedging instruments:
Interest rate contracts			57			83			89
Foreign exchange contracts			41			48			57
Cross-currency interest rate contracts			2			8			9
Total not designated			100			139			155

Total derivative assets		$	432		$	725		$	961

Accounts Payable and Accrued Expenses
Designated as hedging instruments:
Interest rate contracts		$	40		$	14		$	24

Not designated as hedging instruments:
Interest rate contracts			43			74			91
Foreign exchange contracts			67			26			55
Cross-currency interest rate contracts			2			1
Total not designated			112			101			146

Total derivative liabilities		$	152		$	115		$	170

The classification and gains (losses) including accrued interest expense related to derivative instruments on the statement of consolidated income consisted of the following in millions of dollars:


		Three Months Ended						Nine Months Ended
		August 1			August 2			August 1			August 2
		2021			2020			2021			2020
Fair Value Hedges:
Interest rate contracts - Interest expense		$	146		$	78		$	(79)		$	589

Cash Flow Hedges:
Recognized in OCI
Interest rate contracts - OCI (pretax)			(1)			(1)			(1)			(18)

Reclassified from OCI
Interest rate contracts - Interest expense			(3)			(7)			(11)			(13)

Not Designated as Hedges:
Interest rate contracts - Net sales		$	(2)		$	(2)		$	3		$	(26)
Interest rate contracts - Interest expense *			(2)			(1)			(6)			2
Foreign exchange contracts - Cost of sales			(7)			(28)			(107)			64
Foreign exchange contracts - Other operating expenses *			(5)			(49)			(209)			125
Total not designated		$	(16)		$	(80)		$	(319)		$	165

* Includes interest and foreign exchange gains (losses) from cross-currency interest rate contracts.

Counterparty Risk and Collateral

Derivative instruments are subject to significant concentrations of credit risk to the banking sector. The Company manages individual counterparty exposure by setting limits that consider the credit rating of the counterparty, the credit default swap spread of the counterparty, and other financial commitments and exposures between the Company and the counterparty banks. All interest rate derivatives are transacted under International Swaps and Derivatives Association (ISDA) documentation. Some of these agreements include credit support provisions. Each master agreement permits the net settlement of amounts owed in the event of default or termination.

Certain of the Company’s derivative agreements contain credit support provisions that may require the Company to post collateral based on the size of the net liability positions and credit ratings. The aggregate fair value of all derivatives with credit-risk-related contingent features that were in a net liability position at August 1, 2021, November 1, 2020, and August 2, 2020, was $87 million, $89 million, and $115 million, respectively. In accordance with the limits established in these agreements, the Company posted no cash collateral at August 1, 2021, November 1, 2020, or August 2, 2020. In addition, the Company paid $8 million of cash collateral that was outstanding at August 1, 2021 to participate in an international futures market to hedge currency exposure, not included in the table below.

Derivatives are recorded without offsetting for netting arrangements or collateral. The impact on the derivative assets and liabilities related to netting arrangements and any collateral received or paid was as follows in millions of dollars:


		Gross Amounts			Netting
August 1, 2021		Recognized			Arrangements			Collateral			Net Amount
Assets		$	432		$	(94)		$	(88)		$	250
Liabilities			152			(94)			(2)			56


		Gross Amounts			Netting
November 1, 2020		Recognized			Arrangements			Collateral			Net Amount
Assets		$	725		$	(93)		$	(274)		$	358
Liabilities			115			(93)						22


		Gross Amounts			Netting
August 2, 2020		Recognized			Arrangements			Collateral			Net Amount
Assets		$	961		$	(120)		$	(332)		$	509
Liabilities			170			(120)						50