Ally Bank 2014 Annual Report Download - page 143

Table of Contents
Notes to Consolidated Financial Statements
Ally Financial Inc. • Form 10-K
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reports and the reporting of credit information; impose underwriting requirements; regulate marketing techniques and practices; require the
safeguarding of nonpublic information about customers; and regulate servicing practices, including the assessment, collection, foreclosure,
claims handling, and investment and interest payments on escrow accounts.
Ally Bank is required to satisfy regulatory net worth requirements. Failure to meet minimum capital requirements can initiate certain
mandatory actions by federal, state, and foreign agencies that could have a material effect on our results of operations and financial condition.
Ally Bank was in compliance with these requirements at December 31, 2014.
Insurance Companies
Certain of our Insurance companies are subject to certain minimum aggregate capital requirements, net asset and dividend restrictions
under applicable state and foreign insurance law, and the rules and regulations promulgated by various U.S. and foreign regulatory agencies.
Under various state and foreign insurance regulations, dividend distributions may be made only from statutory unassigned surplus, with
approvals required from the regulatory authorities for dividends in excess of certain statutory limitations. At December 31, 2014, the
maximum dividend that could be paid by the U.S. insurance subsidiaries over the next twelve months without prior statutory approval was
$106 million.
22. Derivative Instruments and Hedging Activities
We enter into interest rate, foreign-currency, and equity swaps, futures, forwards, options, and swaptions in connection with our market
risk management activities. Derivative instruments are used to manage interest rate risk relating to specific groups of assets and liabilities,
including automotive loan assets and debt. We use foreign exchange contracts to mitigate foreign-currency risk associated with foreign-
currency-denominated debt, foreign exchange transactions, and our net investment in foreign subsidiaries. In addition, we also enter into
equity option contracts to manage our exposure to the equity markets. Our primary objective for utilizing derivative financial instruments is to
manage interest rate risk associated with our fixed and variable rate assets and liabilities, foreign exchange risks related to our foreign-
currency denominated assets and liabilities, and market risks related to our investment portfolio and certain of our executive share-based
compensation plans.
Interest Rate Risk
We monitor our mix of fixed- and variable-rate assets and liabilities. When it is cost-effective to do so, we may enter into interest rate
swaps, forwards, futures, options, and swaptions to achieve our desired mix of fixed- and variable-rate assets and liabilities. We execute
interest rate swaps, forwards, futures, options, and swaptions to modify our exposure to interest rate risk by converting certain fixed-rate
instruments to a variable-rate and certain variable-rate instruments to a fixed-rate. We use a mix of both derivatives that qualify for hedge
accounting treatment and economic hedges.
Derivatives qualifying for hedge accounting consist of receive-fixed swaps designated as fair value hedges of specific fixed-rate debt
obligations, pay-fixed swaps designated as fair value hedges of specific portfolios of fixed-rate held-for-investment retail automotive loan
assets, and pay-fixed swaps designated as cash flow hedges of the expected future cash flows in the form of interest payments on certain
outstanding variable-rate borrowings associated with our secured debt.
We also execute economic hedges, which consist of interest rate swaps and interest rate caps held to mitigate interest rate risk associated
with our debt portfolio. We also use interest rate swaps to economically hedge our net fixed-versus-variable interest rate exposure. We enter
into economic hedges in the form of short-dated, exchange-traded Eurodollar futures to hedge the interest rate exposure of our fixed-rate
automotive loans, as well as forwards, options, and swaptions to economically hedge our net fixed-versus-variable interest rate exposure.
In the past, we used a multitude of derivative instruments to manage interest rate risk related to MSRs, mortgage loan commitments, and
mortgage loans held-for-sale. They included, but were not limited to, interest rate swaps, forward sales of mortgage backed securities, interest
rate futures contracts, options on U.S. Treasuries, swaptions, interest rate floors, and interest rate caps. Since we no longer have exposures to
these activities, we no longer utilize these hedge strategies as of December 31, 2014.
Foreign Exchange Risk
We enter into derivative financial instrument contracts to mitigate the risk associated with variability in cash flows related to our various
foreign-currency exposures.
We enter into foreign-currency forwards with external counterparties as net investment hedges of foreign exchange exposure on our
investments in foreign subsidiaries. However, we have reduced our foreign exchange exposure to net investments in foreign operations
through the sales and disposals of discontinued international businesses. Refer to Note 2 for further details on these sales.
Our remaining foreign subsidiaries in wind-down maintain both assets and liabilities in local currencies. These local currencies are
generally the subsidiaries' functional currencies for accounting purposes. Foreign-currency-exchange-rate gains and losses arise when the
assets or liabilities of our subsidiaries are denominated in currencies that differ from its functional currency. In addition, our equity is
impacted by the cumulative translation adjustments resulting from the translation of foreign subsidiary results; this impact is reflected in our
accumulated other comprehensive income (loss).