Ally Bank 2014 Annual Report Download - page 144

Table of Contents
Notes to Consolidated Financial Statements
Ally Financial Inc. • Form 10-K
132
We utilize a cross-currency swap to economically hedge foreign exchange exposure on foreign-currency-denominated debt by converting
the funding currency to our functional currency. This swap was entered into concurrent with the debt issuance with the terms of the derivative
matching the terms of the underlying debt.
We also enter into foreign currency forwards to economically hedge our foreign denominated debt, our centralized lending program, and
foreign-denominated third party loans. The hedge of foreign denominated debt was entered into concurrent with the debt issuance with the
terms of the derivative matching the terms of the underlying debt. The centralized lending program manages liquidity for our subsidiary
businesses, but as of December 31, 2014, this activity is immaterial. Foreign-currency-denominated loan agreements are executed with our
foreign subsidiaries in their local currencies. We evaluate our foreign-currency exposure resulting from intercompany lending and manage our
currency risk exposure by entering into foreign-currency derivatives with external counterparties. Our remaining foreign-currency derivatives,
such as hedges of foreign-denominated third party loans, are recorded at fair value with changes recorded as income offsetting the gains and
losses on the associated foreign-currency transactions.
Market Risk
We enter into equity options to economically hedge our exposure to the equity markets. We purchase options to assume a long position
on certain equities and write options to assume a short position.
During the year ended December 31, 2014, we also entered into prepaid equity forward contracts to economically hedge the price risk
associated with certain of our executive share-based compensation plans described in Note 24. The prepaid equity forward contracts are
hybrid instruments containing an embedded forward contract, which is considered a derivative instrument. The embedded derivative
instrument is bifurcated from the host contract and is recorded at fair value with changes in fair value recorded in compensation and benefits
expense. The balance of the prepaid component of these equity forward contracts is $74 million as of December 31, 2014, and was recorded
within other assets on the Consolidated Balance Sheet.
Counterparty Credit Risk
Derivative financial instruments contain an element of credit risk if counterparties are unable to meet the terms of the agreements. Credit
risk associated with derivative financial instruments is measured as the net replacement cost should the counterparties that owe us under the
contract completely fail to perform under the terms of those contracts, assuming no recoveries of underlying collateral as measured by the
market value of the derivative financial instrument.
To mitigate the risk of counterparty default, we maintain collateral agreements with certain counterparties. The agreements require both
parties to maintain collateral in the event the fair values of the derivative financial instruments meet established thresholds. In the event that
either party defaults on the obligation, the secured party may seize the collateral. Generally, our collateral arrangements are bilateral such that
we and the counterparty post collateral for the value of our total obligation to each other. Contractual terms provide for standard and
customary exchange of collateral based on changes in the market value of the outstanding derivatives. The securing party posts additional
collateral when their obligation rises or removes collateral when it falls. We also have unilateral collateral agreements whereby we are the
only entity required to post collateral.
Certain derivative instruments contain provisions that require us to either post additional collateral or immediately settle any outstanding
liability balances upon the occurrence of a specified credit risk-related event. If a credit risk-related event had been triggered, the amount of
additional collateral required to be posted by us would have been insignificant.
We placed cash and securities collateral totaling $236 million and $328 million at December 31, 2014 and 2013, respectively, in accounts
maintained by counterparties, $18 million of which relates to non-derivative collateral at December 31, 2014 and December 31, 2013. We
received cash collateral from counterparties totaling $71 million and $159 million at December 31, 2014 and 2013, respectively. The
receivables for collateral placed and the payables for collateral received are included on our Consolidated Balance Sheet in other assets and
accrued expenses and other liabilities, respectively. In certain circumstances, we receive or post securities as collateral with counterparties.
We do not record such collateral received on our Consolidated Balance Sheet unless certain conditions are met. At December 31, 2014 and
2013, we received noncash collateral of $15 million and $18 million, respectively.