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AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
amount equivalent to any reduction in the fair value of its
investment in ICBC in local currency, and in return the
Company pays to the TRC counterparty an amount equivalent to
any increase in the fair value of its investment in local currency,
along with all dividends paid by ICBC, as well as ongoing hedge
costs. The TRC matures on August 1, 2014.
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 exposure. 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 as 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. Counterparty risk exposures are
centrally monitored by the Company. 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 between the
parties. 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.
In relation to the Company’s credit risk, under the terms 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. Based on the
assessment of credit risk of the Company’s derivative
counterparties as of December 31, 2012 and 2011, the Company
does not have derivatives positions that warrant credit valuation
adjustments.
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 the resulting
hedge designation, if any, as discussed below. Refer to Note 3 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) 2012 2011 2012 2011
Derivatives designated as hedging instruments:
Interest rate contracts
Fair value hedges $ 824 $ 999 $—$—
Cash flow hedges ———1
Total return contract
Fair value hedge —13 19 —
Foreign exchange contracts
Net investment hedges 43 344 150 54
Total derivatives designated as hedging instruments $ 867 $ 1,356 $ 169 $55
Derivatives not designated as hedging instruments:
Interest rate contracts $—$1$—$—
Foreign exchange contracts, including certain embedded derivatives(a) 75 159 158 50
Equity-linked embedded derivative(b) ——23
Total derivatives not designated as hedging instruments 75 160 160 53
Total derivatives, gross $ 942 $ 1,516 $ 329 $ 108
Cash collateral netting(c) (326) (587) (21) —
Derivative asset and derivative liability netting(c) (23) (14) (23) (14)
Total derivatives, net $ 593 $ 915 $ 285 $94
(a) Includes foreign currency derivatives embedded in certain operating agreements.
(b) Represents an equity-linked derivative embedded in one of the Company’s investment securities.
(c) As permitted under GAAP, balances represent the netting of cash collateral received and posted under credit support agreements, and the netting of derivative assets
and derivative liabilities under master netting agreements. Additionally, the Company received noncash collateral in the form of security interest in U.S. Treasury
securities with a fair value of $335 million as of December 31, 2012, none of which was sold or repledged. Such noncash collateral effectively reduces the Company’s
risk exposure.
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