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DERIVATIVE INSTRUMENTS

3 Months Ended

Jan. 30, 2022

DERIVATIVE INSTRUMENTS

DERIVATIVE INSTRUMENTS

(18) 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 and foreign currency exposures at certain equipment operations units for sales incentive programs.

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. The cash flows from these contracts were recorded in operating activities in the statement of consolidated cash flows. 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 January 30, 2022, October 31, 2021, and January 31, 2021 were $2,700 million, $2,700 million, and $2,350 million, respectively. Fair value gains or losses on cash flow hedges were recorded in other comprehensive income (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 amount of loss recorded in OCI at January 30, 2022 that is expected to be reclassified to interest expense or other operating expenses in the next twelve months if interest rates or exchange rates remain unchanged is $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 January 30, 2022, October 31, 2021, and

January 31, 2021 were $8,307 million, $8,043 million, and $8,333 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 in millions of dollars follow:


					Cumulative Increase (Decrease) of Fair
					Value Hedging Adjustments Included in
					the Carrying Amount
		Carrying			Active
		Amount of			Hedging			Discontinued
		Hedged Item			Relationships			Relationships			Total
January 30, 2022
Long-term borrowings due within one year		$	185		$	2		$	8		$	10
Long-term borrowings			8,147			(130)			181			51

October 31, 2021
Long-term borrowings due within one year		$	189		$	3		$	(2)		$	1
Long-term borrowings			8,070			29			223			252

January 31, 2021
Long-term borrowings due within one year		$	159		$	2		$	1		$	3
Long-term borrowings			8,713			435			137			572

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 sales incentive programs. The total notional amounts of these interest rate swaps at January 30, 2022, October 31, 2021, and January 31, 2021 were $10,210 million, $10,848 million, and $8,801 million, the foreign exchange contracts were $7,864 million, $7,584 million, and $5,478 million, and the cross-currency interest rate contracts were $303 million, $238 million, and $145 million, respectively. The fair value gains or losses from derivatives not designated as hedging instruments were recorded in the statement of consolidated income, generally offsetting over time the exposure on the hedged item.

Fair values of derivative instruments in the condensed consolidated balance sheet in millions of dollars follow:


		January 30			October 31			January 31
Other Assets		2022			2021			2021
Designated as hedging instruments:
Interest rate contracts		$	102		$	166		$	491

Not designated as hedging instruments:
Interest rate contracts			82			73			77
Foreign exchange contracts			91			31			34
Cross-currency interest rate contracts			24			5			3
Total not designated			197			109			114

Total derivative assets		$	299		$	275		$	605

Accounts Payable and Accrued Expenses
Designated as hedging instruments:
Interest rate contracts		$	185		$	99		$	31

Not designated as hedging instruments:
Interest rate contracts			27			33			66
Foreign exchange contracts			64			94			76
Cross-currency interest rate contracts						2			2
Total not designated			91			129			144

Total derivative liabilities		$	276		$	228		$	175

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
		January 30			January 31
		2022			2021
Fair Value Hedges:
Interest rate contracts - Interest expense		$	(141)		$	(55)

Cash Flow Hedges:
Recognized in OCI
Interest rate contracts - OCI (pretax)			15

Reclassified from OCI
Interest rate contracts - Interest expense			(2)			(5)

Not Designated as Hedges:
Interest rate contracts - Net sales		$	13
Interest rate contracts - Interest expense *			(1)		$	(4)
Foreign exchange contracts - Cost of sales			(1)			(52)
Foreign exchange contracts - Other operating expenses *			147			(126)
Total not designated		$	158		$	(182)

* 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 January 30, 2022, October 31, 2021, and January 31, 2021 was $213 million, $135 million, and $99 million, respectively. In accordance with the limits established in these agreements, the Company posted $18 million of cash collateral at January 30, 2022. The Company posted no cash collateral in accordance with the limits established in those agreements at either October 31, 2021 or January 31, 2021. In addition, the Company paid $8 million of collateral either in cash or pledged securities that was outstanding at January 30, 2022, October 31, 2021, and January 31, 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 in millions of dollars follows:


		Gross Amounts			Netting
January 30, 2022		Recognized			Arrangements			Collateral			Net Amount
Assets		$	299		$	(91)					$	208
Liabilities			276			(91)		$	(19)			166


		Gross Amounts			Netting
October 31, 2021		Recognized			Arrangements			Collateral			Net Amount
Assets		$	275		$	(105)					$	170
Liabilities			228			(105)		$	(5)			118


		Gross Amounts			Netting
January 31, 2021		Recognized			Arrangements			Collateral			Net Amount
Assets		$	605		$	(106)		$	(186)		$	313
Liabilities			175			(106)						69