13
BellSouth Savings and Security Plan
Notes to Financial Statements (Continued)
(Dollars in Thousands)
Derivative Financial Instruments
In the normal course of operations, Group Trust
assets and liabilities held in the AT&T
Stable Value
Fund (Stable Value
Fund) may
include derivative financial instruments (futures and foreign
currency forward contracts). These instruments involve,
in varying
degrees, elements of credit and market volatility risks in
excess of more traditional investment holdings such as equity and
debt
instruments. The intent is to use derivative financial instruments as
an economic hedge to manage market volatility and
foreign
currency exchange rate risk associated with the Stable Value
Fund’s investment assets. The gains
(losses) are located on the Statement
of Changes in Net Assets Available
for Benefits as Net Income from Investment in AT&T
Savings Group Investment Trust to the
extent of the Plan’s ownership
in the Group Trust. The Group Trust’s
fiduciaries do not anticipate any material adverse effect
on the
Group Trust’s
financial position resulting from its involvement in these instruments.
In addition to the derivative financial instruments held
by the Group Trust, the Plan also
holds derivative financial instruments as Plan
investments in its own trust. The income is located on
the Statements
of Changes in Net Assets Available
for Benefits a component of
net appreciation in fair value of investments.
At December 31, 2019 and 2018, the fair value of derivative financial
instruments held by the Group Trust and the
Plan was not
Futures Contracts
The primary risk managed by the Group Trust
using futures contracts is the price risk associated with investments.
On behalf of the
Group Trust, investment managers enter
into various futures contracts to economically hedge investments. These
contracts, which are
considered derivatives under Accounting Standards Codification
Topic 815,
Derivatives and Hedging
are agreements between two
parties to buy or sell a security or financial interest at a
set price on a future date and are standardized and exchange
-traded. Upon
entering into such a contract on behalf of the Group
Trust, the investment manager is requ
ired to pledge to the broker an amount of
cash or securities equal to the minimum “initial margin”
requirements of the exchange on which the contract is traded.
Pursuant to the
contract, the investment manager agrees to receive
from or pay to the broker an amount of cash equal to the
daily fluctuation in the
value of the contract. Such receipts or payments are
known as variation margin and are recorded
on a daily basis by the trustee as a
realized gain or loss equal to the difference
in the value of the contract between daily closing prices. Upon
entering into such
contracts, the Group Trust bears the risk
of interest or exchange rates or securities prices moving unexpectedly,
in which case, the
Group Trust may not achieve the anticipated
benefits of the futures contracts and may realize a loss. With
futures, there is minimal
counterparty credit risk to the Group Trust
since futures are exchange traded and the exchange’s
clearinghouse, as counterparty to all
exchange traded futures, guarantees the futures against default.
The investments in the Group Trust
are subject to equity price risk and
interest rate risk, in the normal course of pursuing its investment
objectives. The U.S. interest rate futures held in the portfolio as
of
December 31, 2019 and 2018 were used primarily to hedge
and manage the duration risk of the portfolio.
The futures held in the Plan as of December 31, 2019
and 2018, were used primarily to maintain the target
allocations of the portfolio.
Foreign Currency Contracts
The primary risks managed by the Group Trust
using foreign currency forward contracts is the foreign currency
exchange rate risk
associated with the Group Trust’s
investments denominated in foreign currencies. On
behalf of the Group Trust, investment managers
enter into forward foreign currency contracts, which are
agreements to exchange foreign currencies at a specified future
date at a
specified rate, the terms of which are not standardized
on an exchange. These contracts are intended to minimize the
effect of currency
fluctuations on the performance of investments denominated
in foreign currencies. Although in some cases, forward foreign
currency
contracts are used to express a view on the direction
of a particular currency,
risk arises both from the possible inability of the
counterparties to meet the terms of the contracts (credit
risk) and from movement in foreign currency exchange rates (market
risk).
Foreign currency forward contracts are entered
into with major banks to minimize credit risk, and accordingly,
no credit reserve has
been established against these amounts. The contracts are
recorded at fair value on the date the contract is entered into,
which is
Fully Benefit-Responsive Investment Contracts
The Stable Value
Fund consists of fully benefit-responsive investment contracts
with various financial institutions and insurance
companies which can be accounted for by the Plans at contract value.
Generally contract value represents contributions made under
the contract, plus earnings, less participant withdrawals and
administrative expenses.