4.	Derivative Financial Instruments

Our risk management strategy and use of and accounting for derivatives have not materially changed from that discussed in our 2015 Form 10-K. Please refer to “Note 7 — Derivative Financial Instruments” in our 2015 Form 10-K for a full discussion.

Summary of Derivative Financial Statement Impact

The following tables summarize the fair values and notional amounts of all derivative instruments at June 30, 2016 and December 31, 2015, and their impact on other comprehensive income and earnings for the three and six months ended June 30, 2016 and 2015.

Impact of Derivatives on Consolidated Balance Sheet


		Cash Flow						Fair Value						Trading						Total
(Dollars in millions)	Hedged Risk Exposure	June 30, 2016			Dec. 31, 2015			June 30, 2016			Dec. 31, 2015			June 30, 2016			Dec. 31, 2015			June 30, 2016			Dec. 31, 2015
Fair Values⁽¹⁾
Derivative Assets:
Interest rate swaps	Interest rate	$	—		$	—		$	1,006		$	694		$	92		$	32		$	1,098		$	726
Cross-currency interest rate swaps	Foreign currency & interest rate		—			—			10			2			—			—			10			2
Other⁽²⁾	Interest rate		—			—			—			—			1			—			1			—

Total derivative assets⁽³⁾			—			—			1,016			696			93			32			1,109			728
Derivative Liabilities:
Interest rate swaps	Interest rate		(280	)		(89	)		—			(3	)		(65	)		(68	)		(345	)		(160	)
Floor Income Contracts	Interest rate		—			—			—			—			(406	)		(365	)		(406	)		(365	)
Cross-currency interest rate swaps	Foreign currency & interest rate		—			—			(835	)		(926	)		(17	)		(62	)		(852	)		(988	)
Other⁽²⁾	Interest rate		—			—			—			—			(8	)		(2	)		(8	)		(2	)

Total derivative liabilities⁽³⁾			(280	)		(89	)		(835	)		(929	)		(496	)		(497	)		(1,611	)		(1,515	)

Net total derivatives		$	(280	)	$	(89	)	$	181		$	(233	)	$	(403	)	$	(465	)	$	(502	)	$	(787	)

⁽¹⁾

Fair values reported are exclusive of collateral held and pledged and accrued interest. Assets and liabilities are presented without consideration of master netting agreements. Derivatives are carried on the balance sheet based on net position by counterparty under master netting agreements, and classified in other assets or other liabilities depending on whether in a net positive or negative position.

⁽²⁾	“Other” includes embedded derivatives bifurcated from securitization debt as well as derivatives related to our Total Return Swap Facility.

⁽³⁾	The following table reconciles gross positions without the impact of master netting agreements to the balance sheet classification:


	Other Assets						Other Liabilities
(Dollar in millions)	June 30, 2016			December 31, 2015			June 30, 2016			December 31, 2015
Gross position	$	1,109		$	728		$	(1,611	)	$	(1,515	)
Impact of master netting agreements		(26	)		(50	)		26			50

Derivative values with impact of master netting agreements (as carried on balance sheet)		1,083			678			(1,585	)		(1,465	)
Cash collateral (held) pledged		(451	)		(759	)		511			466

Net position	$	632		$	(81	)	$	(1,074	)	$	(999	)

The above fair values include adjustments for counterparty credit risk both for when we are exposed to the counterparty, net of collateral postings, and when the counterparty is exposed to us, net of collateral postings. The net adjustments decreased the overall net asset positions at June 30, 2016 and December 31, 2015 by $1 million and $1 million, respectively. In addition, the above fair values reflect adjustments for illiquid derivatives as indicated by a wide bid/ask spread in the interest rate indices to which the derivatives are indexed. These adjustments decreased the overall net asset positions at June 30, 2016 and December 31, 2015 by $29 million and $31 million, respectively.


	Cash Flow				Fair Value				Trading				Total
(Dollars in billions)	Jun. 30, 2016		Dec. 31, 2015		Jun. 30, 2016		Dec. 31, 2015		Jun. 30, 2016		Dec. 31, 2015		Jun. 30, 2016		Dec. 31, 2015
Notional Values:
Interest rate swaps	$	14.7	$	9.5	$	11.5	$	12.6	$	32.0	$	33.8	$	58.2	$	55.9
Floor Income Contracts		—		—		—		—		16.5		35.1		16.5		35.1
Cross-currency interest rate swaps		—		—		8.8		9.1		.3		.3		9.1		9.4
Other⁽¹⁾		—		—		—		—		3.0		3.2		3.0		3.2

Total derivatives	$	14.7	$	9.5	$	20.3	$	21.7	$	51.8	$	72.4	$	86.8	$	103.6

⁽¹⁾	“Other” includes embedded derivatives bifurcated from securitization debt as well as derivatives related to our Total Return Swap Facility.

Impact of Derivatives on Consolidated Statements of Income


	Three Months Ended June 30,
	Unrealized Gain (Loss) on Derivatives⁽¹⁾⁽²⁾						Realized Gain (Loss) on Derivatives⁽³⁾						Unrealized Gain (Loss) on Hedged Item⁽¹⁾						Total Gain (Loss)
(Dollars in millions)	2016			2015			2016			2015			2016			2015			2016			2015
Fair Value Hedges:
Interest rate swaps	$	71		$	(235	)	$	68		$	86		$	(68	)	$	252		$	71		$	103
Cross-currency interest rate swaps		(275	)		302			(20	)		3			252			(340	)		(43	)		(35	)

Total fair value derivatives		(204	)		67			48			89			184			(88	)		28			68
Cash Flow Hedges:
Interest rate swaps		—			—			(11	)		—			—			—			(11	)		—

Total cash flow derivatives		—			—			(11	)		—			—			—			(11	)		—
Trading:
Interest rate swaps		11			(5	)		11			9			—			—			22			4
Floor Income Contracts		7			171			(56	)		(163	)		—			—			(49	)		8
Cross-currency interest rate swaps		25			(5	)		(1	)		(1	)		—			—			24			(6	)
Other		(4	)		(2	)		(1	)		(1	)		—			—			(5	)		(3	)

Total trading derivatives		39			159			(47	)		(156	)		—			—			(8	)		3

Total		(165	)		226			(10	)		(67	)		184			(88	)		9			71
Less: realized gains (losses) recorded in interest expense		—			—			37			89			—			—			37			89

Gains (losses) on derivative and hedging activities, net	$	(165	)	$	226		$	(47	)	$	(156	)	$	184		$	(88	)	$	(28	)	$	(18	)

⁽¹⁾	Recorded in “Gains (losses) on derivative and hedging activities, net” in the consolidated statements of income.

⁽²⁾	Represents ineffectiveness related to cash flow hedges.

⁽³⁾	For fair value and cash flow hedges, recorded in interest expense. For trading derivatives, recorded in “Gains (losses) on derivative and hedging activities, net.”


	Six Months Ended June 30,
	Unrealized Gain (Loss) on Derivatives⁽¹⁾⁽²⁾						Realized Gain (Loss) on Derivatives⁽³⁾						Unrealized Gain (Loss) on Hedged Item⁽¹⁾					Total Gain (Loss)
(Dollars in millions)	2016			2015			2016			2015			2016			2015		2016			2015
Fair Value Hedges:
Interest rate swaps	$	315		$	(115	)	$	139		$	182		$	(347	)	$	123	$	107		$	190
Cross-currency interest rate swaps		99			(540	)		(36	)		4			(54	)		647		9			111

Total fair value derivatives		414			(655	)		103			186			(401	)		770		116			301
Cash Flow Hedges:
Interest rate swaps		—			—			(11	)		—			—			—		(11	)		—

Total cash flow derivatives		—			—			(11	)		—			—			—		(11	)		—
Trading:
Interest rate swaps		63			13			20			20			—			—		83			33
Floor Income Contracts		34			243			(194	)		(325	)		—			—		(160	)		(82	)
Cross-currency interest rate swaps		45			(5	)		(2	)		(2	)		—			—		43			(7	)
Other		(5	)		(4	)		(1	)		(2	)		—			—		(6	)		(6	)

Total trading derivatives		137			247			(177	)		(309	)		—			—		(40	)		(62	)

Total		551			(408	)		(85	)		(123	)		(401	)		770		65			239
Less: realized gains (losses) recorded in interest expense		—			—			92			186			—			—		92			186

Gains (losses) on derivative and hedging activities, net	$	551		$	(408	)	$	(177	)	$	(309	)	$	(401	)	$	770	$	(27	)	$	53

⁽¹⁾	Recorded in “Gains (losses) on derivative and hedging activities, net” in the consolidated statements of income.

⁽²⁾	Represents ineffectiveness related to cash flow hedges.

⁽³⁾	For fair value and cash flow hedges, recorded in interest expense. For trading derivatives, recorded in “Gains (losses) on derivative and hedging activities, net.”

Collateral

Collateral held and pledged related to derivative exposures between us and our derivative counterparties are detailed in the following table:


(Dollars in millions)	June 30, 2016		December 31, 2015
Collateral held:
Cash (obligation to return cash collateral is recorded in short-term borrowings)⁽¹⁾	$	451	$	759
Securities at fair value — corporate derivatives (not recorded in the financial statements)⁽²⁾		503		—
Securities at fair value — on-balance sheet securitization derivatives (not recorded in financial statements)⁽³⁾		391		301

Total collateral held	$	1,345	$	1,060

Derivative asset at fair value including accrued interest	$	1,272	$	896

Collateral pledged to others:
Cash (right to receive return of cash collateral is recorded in investments)	$	511	$	466

Total collateral pledged	$	511	$	466

Derivative liability at fair value including accrued interest and premium receivable	$	1,610	$	1,395

⁽¹⁾	At June 30, 2016 and December 31, 2015, $11 million and $2 million, respectively, were held in restricted cash accounts.

⁽²⁾	The Company has the ability to sell or re-pledge securities it holds as collateral.

⁽³⁾	The trusts do not have the ability to sell or re-pledge securities they hold as collateral.

Our corporate derivatives contain credit contingent features. At our current unsecured credit rating, we have fully collateralized our corporate derivative liability position (including accrued interest and net of premiums receivable) of $781 million with our counterparties. Downgrades in our unsecured credit rating would not result in any additional collateral requirements, except to increase the frequency of collateral calls. Two counterparties have the right to terminate the contracts based on our current unsecured credit rating. We are currently in an asset position with these derivative counterparties (including accrued interest and net of premiums receivable). Trust related derivatives do not contain credit contingent features related to our or the trusts’ credit ratings.