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Derivative Financial Instruments
 9 Months Ended
Sep. 30, 2016
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivative Financial Instruments
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 September 30, 2016 and December 31, 2015, and their impact on other comprehensive income and earnings for the three and nine months ended September 30, 2016 and 2015.

Impact of Derivatives on Consolidated Balance Sheet

 

   

 

     Cash Flow     Fair Value     Trading     Total  

(Dollars in millions)

   Hedged Risk
Exposure		     Sept. 30,
2016		     Dec. 31,
2015		     Sept. 30,
2016		     Dec. 31,
2015		     Sept. 30,
2016		     Dec. 31,
2015		     Sept. 30,
2016		     Dec. 31,
2015		  

Fair Values(1)

                  

Derivative Assets:

                  

Interest rate swaps

     Interest rate      $ —     $ —     $ 857      $ 694      $ 73      $ 32      $ 930      $ 726   

Cross-currency interest rate swaps

    
 		 Foreign currency
& interest rate		  
  		     —       —       18        2        —       —       18        2   

Other(2)

     Interest rate        —       —       —       —       1        —       1        —  
   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Total derivative assets(3)

       —       —       875        696        74        32        949        728   

Derivative Liabilities:

                  

Interest rate swaps

     Interest rate        (207 )      (89 )      —       (3 )      (65 )      (68 )      (272 )      (160 ) 

Floor Income Contracts

     Interest rate        —       —       —       —       (293 )      (365 )      (293 )      (365 ) 

Cross-currency interest rate swaps

    
 		 Foreign currency
& interest rate		  
  		     —       —       (731 )      (926 )      (11 )      (62 )      (742 )      (988 ) 

Other(2)

     Interest rate        —       —       —       —       (11 )      (2 )      (11 )      (2 ) 
   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Total derivative liabilities(3)

       (207 )      (89 )      (731 )      (929 )      (380 )      (497 )      (1,318 )      (1,515 ) 
   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Net total derivatives

     $ (207 )    $ (89 )    $ 144      $ (233 )    $ (306 )    $ (465 )    $ (369 )    $ (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)

   September 30,
2016		     December 31,
2015		     September 30,
2016		     December 31,
2015		  

Gross position

   $ 949      $ 728      $ (1,318 )    $ (1,515 ) 

Impact of master netting agreements

     (19 )      (50 )      19        50   
 

 

 

    

 

 

    

 

 

    

 

 

  

Derivative values with impact of master netting agreements (as carried on balance sheet)

     930        678        (1,299 )      (1,465 ) 

Cash collateral (held) pledged

     (425 )      (759 )      407        466   
 

 

 

    

 

 

    

 

 

    

 

 

  

Net position

   $ 505      $ (81 )    $ (892 )    $ (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 September 30, 2016 and December 31, 2015 by $3 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 September 30, 2016 and December 31, 2015 by $30 million and $31 million, respectively.

 

      Cash Flow      Fair Value      Trading      Total  

(Dollars in billions)

    Sept. 30,
2016		      Dec. 31,
2015		      Sept. 30,
2016		      Dec. 31,
2015		      Sept. 30,
2016		      Dec. 31,
2015		      Sept. 30,
2016		      Dec. 31,
2015		  

Notional Values:

                        

Interest rate swaps

    $ 14.7       $ 9.5       $ 12.2       $ 12.6       $ 29.0       $ 33.8       $ 55.9       $ 55.9   

Floor Income Contracts

      —        —        —        —        16.5         35.1         16.5         35.1   

Cross-currency interest rate swaps

      —        —        8.6         9.1         .3         .3         8.9         9.4   

Other(1)

      —        —        —        —        3.0         3.2         3.0         3.2   
  

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

  

Total derivatives

    $ 14.7       $ 9.5       $ 20.8       $ 21.7       $ 48.8       $ 72.4       $ 84.3       $ 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 September 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

   $ (149 )    $ 209      $ 62      $ 83      $ 175      $ (234 )    $ 88      $ 58   

Cross-currency interest rate swaps

     112        (6 )      (22 )      (1 )      (81 )      35        9        28   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Total fair value derivatives

     (37 )      203        40        82        94        (199 )      97        86   

Cash Flow Hedges:

                

Interest rate swaps

     —       —       (20 )      —       —       —       (20 )      —  
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Total cash flow derivatives

     —       —       (20 )      —       —       —       (20 )      —  

Trading:

                

Interest rate swaps

     (20 )      82        14        10        —       —       (6 )      92   

Floor Income Contracts

     113        69        (28 )      (164 )      —       —       85        (95 ) 

Cross-currency interest rate swaps

     6        7        (1 )      (1 )      —       —       5        6   

Other

     (3 )      13        (1 )      —       —       —       (4 )      13   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Total trading derivatives

     96        171        (16 )      (155 )      —       —       80        16   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Total

     59        374        4        (73 )      94        (199 )      157        102   

Less: realized gains (losses) recorded in interest expense

     —       —       20        82        —       —       20        82   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Gains (losses) on derivative and hedging activities, net

   $ 59      $ 374      $ (16 )    $ (155 )    $ 94      $ (199 )    $ 137      $ 20   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

 

(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.”
    Nine Months Ended September 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

   $ 166      $ 95      $ 201      $ 265      $ (172 )    $ (111 )    $ 195      $ 249   

Cross-currency interest rate swaps

     210        (547 )      (58 )      3        (135 )      682        17        138   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Total fair value derivatives

     376        (452 )      143        268        (307 )      571        212        387   

Cash Flow Hedges:

                

Interest rate swaps

     —       —       (31 )      —       —       —       (31 )      —  
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Total cash flow derivatives

     —       —       (31 )      —       —       —       (31 )      —  

Trading:

                

Interest rate swaps

     44        94        35        30        —       —       79        124   

Floor Income Contracts

     147        312        (222 )      (489 )      —       —       (75 )      (177 ) 

Cross-currency interest rate swaps

     51        3        (3 )      (3 )      —       —       48        —  

Other

     (8 )      9        (2 )      (2 )      —       —       (10 )      7   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Total trading derivatives

     234        418        (192 )      (464 )      —       —       42        (46 ) 
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Total

     610        (34 )      (80 )      (196 )      (307 )      571        223        341   

Less: realized gains (losses) recorded in interest expense

     —       —       112        268        —       —       112        268   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Gains (losses) on derivative and hedging activities, net

   $ 610      $ (34 )    $ (192 )    $ (464 )    $ (307 )    $ 571      $ 111      $ 73   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

 

(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)

    September 30,
2016		      December 31,
2015		  

Collateral held:

      

Cash (obligation to return cash collateral is recorded in short-term borrowings)(1)

    $ 425       $ 759   

Securities at fair value — corporate derivatives (not recorded in the financial statements)(2)

      376         —  

Securities at fair value — on-balance sheet securitization derivatives (not recorded in financial statements)(3)

      394         301   
  

 

 

     

 

 

  

Total collateral held

    $ 1,195       $ 1,060   
  

 

 

     

 

 

  

Derivative asset at fair value including accrued interest

    $ 1,062       $ 896   
  

 

 

     

 

 

  

Collateral pledged to others:

      

Cash (right to receive return of cash collateral is recorded in investments)

    $ 407       $ 466   
  

 

 

     

 

 

  

Total collateral pledged

    $ 407       $ 466   
  

 

 

     

 

 

  

Derivative liability at fair value including accrued interest and premium receivable

    $ 1,343       $ 1,395   
  

 

 

     

 

 

  

 

(1) 

At September 30, 2016 and December 31, 2015, $0 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 $594 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.