FEDERAL HOME LOAN MORTGAGE CORP | 2013 | FY | 3

NOTE 9: DERIVATIVES
Use of Derivatives
We use derivatives primarily to manage the interest rate and prepayment risk associated with our investments in mortgage-related assets, net of related liabilities. We analyze the interest-rate sensitivity of financial assets and liabilities on a daily basis across a variety of interest-rate scenarios based on market prices and models. We use derivatives to hedge interest-rate sensitivity mismatches between our assets and liabilities. For example, if rates increase and the duration of our assets extends more than the duration of our liabilities, we would rebalance our interest-rate exposure by entering into pay-fixed interest-rate swaps or selling Treasury-derivatives. If rates decrease and the duration of our assets shortens more than the duration of our liabilities, we would rebalance our interest-rate exposure by entering into receive-fixed interest-rate swaps or purchasing Treasury-derivatives. When we use derivatives to mitigate our exposures, we consider a number of factors, including cost, exposure to counterparty risk, and our overall risk management strategy.
We classify derivatives into three categories: (a) exchange-traded derivatives; (b) cleared derivatives; and (c) OTC derivatives. Cleared derivatives refer to those interest-rate swaps that the U.S. Commodity Futures Trading Commission has determined are subject to the central clearing requirement of the Dodd-Frank Act. OTC derivatives refer to those derivatives that are neither exchange-traded derivatives nor cleared derivatives.
Types of Derivatives
We principally use the following types of derivatives:
•
LIBOR- and Euribor-based interest-rate swaps;
•
LIBOR- and Treasury-based options (including swaptions); and
•
LIBOR- and Treasury-based exchange-traded futures.
In addition to swaps, futures, and purchased options, our derivative positions include written options and swaptions, commitments, swap guarantees, and credit derivatives.
Written Options and Swaptions
Written call and put swaptions are sold to counterparties allowing them the option to enter into receive- and pay-fixed interest rate swaps, respectively. Written call and put options on mortgage-related securities give the counterparty the right to execute a contract under specified terms, which generally occurs when we are in a liability position. We may, from time to time, write other derivative contracts such as interest-rate futures.
Commitments
We routinely enter into commitments that include our: (a) commitments to purchase and sell investments in securities; (b) commitments to purchase mortgage loans; and (c) commitments to purchase and extinguish or issue debt securities of our consolidated trusts. Most of these commitments are considered derivatives and therefore are subject to the accounting guidance for derivatives and hedging.
Swap Guarantee Derivatives
In connection with some of the guarantee arrangements pertaining to multifamily housing revenue bonds and multifamily pass-through certificates, we may also guarantee the sponsor’s or the borrower’s obligations as a counterparty on any related interest-rate swaps used to mitigate interest-rate risk, which are accounted for as swap guarantee derivatives.
Credit Derivatives
We entered into credit-risk sharing agreements for certain credit enhanced multifamily housing revenue bonds held by third parties in exchange for a monthly fee. In addition, we have purchased mortgage loans containing debt cancellation contracts, which provide for mortgage debt or payment cancellation for borrowers who experience unanticipated losses of income dependent on a covered event. The rights and obligations under these agreements have been assigned to the servicers. However, in the event the servicer does not perform as required by contract we would be obligated under our guarantee to make the required contractual payments.
For a discussion of our significant accounting policies related to derivatives, see “NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — Derivatives.”
Derivative Assets and Liabilities at Fair Value
The table below presents the location and fair value of derivatives reported on our consolidated balance sheets.
Table 9.1 — Derivative Assets and Liabilities at Fair Value
 
 
December 31, 2013
 
December 31, 2012
 
Notional or
Contractual
Amount
 
Derivatives at Fair Value
 
Notional or
Contractual
Amount
 
Derivatives at Fair Value
 
Assets
 
Liabilities
 
Assets
 
Liabilities
 
(in millions)
Total derivative portfolio
 
 
 
 
 
 
 
 
 
 
 
Derivatives not designated as hedging instruments under the accounting guidance for derivatives and hedging
 
 
 
 
 
 
 
 
 
 
 
Interest-rate swaps:
 
 
 
 
 
 
 
 
 
 
 
Receive-fixed
$
281,727

 
$
4,475

 
$
(2,438
)
 
$
275,099

 
$
13,782

 
$
(97
)
Pay-fixed
242,597

 
5,540

 
(10,879
)
 
270,092

 
177

 
(30,147
)
Basis (floating to floating)
300

 
4

 
—

 
2,300

 
6

 
—

Total interest-rate swaps
524,624

 
10,019

 
(13,317
)
 
547,491

 
13,965

 
(30,244
)
Option-based:
 
 
 
 
 
 
 
 
 
 
 
Call swaptions
 
 
 
 
 
 
 
 
 
 
 
Purchased
59,290

 
2,373

 
—

 
37,650

 
7,360

 
—

Written
5,945

 
—

 
(201
)
 
6,195

 
—

 
(749
)
Put Swaptions
 
 
 
 
 
 
 
 
 
 
 
Purchased
33,410

 
698

 
—

 
43,200

 
288

 
—

Other option-based derivatives(1)
23,365

 
1,041

 
(3
)
 
31,540

 
2,449

 
(1
)
Total option-based
122,010

 
4,112

 
(204
)
 
118,585

 
10,097

 
(750
)
Futures
50,270

 
—

 
—

 
41,123

 
37

 
(2
)
Foreign-currency swaps
528

 
39

 
—

 
1,167

 
73

 
(6
)
Commitments
18,731

 
61

 
(69
)
 
25,530

 
20

 
(47
)
Credit derivatives
5,386

 
—

 
(6
)
 
8,307

 
1

 
(5
)
Swap guarantee derivatives
3,477

 
—

 
(31
)
 
3,628

 
—

 
(35
)
Total derivatives not designated as hedging instruments
725,026

 
14,231

 
(13,627
)
 
745,831

 
24,193

 
(31,089
)
Derivative interest receivable (payable)
 
 
1,243

 
(1,835
)
 
 
 
1,409

 
(2,239
)
Netting adjustments(2)
 
 
(14,411
)
 
15,282

 
 
 
(24,945
)
 
33,150

Total derivative portfolio, net
$
725,026

 
$
1,063

 
$
(180
)
 
$
745,831

 
$
657

 
$
(178
)
 
(1)
Primarily includes purchased interest-rate caps and floors.
(2)
Represents counterparty netting and cash collateral netting. Net cash collateral posted was $871 million and $8.2 billion at December 31, 2013 and 2012, respectively.
The carrying value of our derivatives on our consolidated balance sheets is equal to their fair value, including net derivative interest receivable or payable and net trade/settle receivable or payable, and is net of cash collateral held or posted, where allowable. Derivatives in a net asset position are reported as derivative assets, net. Similarly, derivatives in a net liability position are reported as derivative liabilities, net.
Non-cash collateral held is not recognized on our consolidated balance sheets as we do not obtain effective control over the collateral, and non-cash collateral posted is not de-recognized from our consolidated balance sheets as we do not relinquish effective control over the collateral. Therefore, non-cash collateral held or posted is not presented as an offset against derivative assets or derivative liabilities on our consolidated balance sheets.
See “NOTE 10: COLLATERAL AND OFFSETTING OF ASSETS AND LIABILITIES” for information related to our derivative counterparties and collateral held and posted.
Gains and Losses on Derivatives
The table below presents the gains and losses on derivatives reported in our consolidated statements of comprehensive income.
Table 9.2 — Gains and Losses on Derivatives
 
Derivatives not designated as hedging
instruments under the accounting
guidance for derivatives and hedging
Derivative Gains (Losses)(1)
Year Ended December 31,
2013
 
2012
 
2011
 
(in millions)
Interest-rate swaps:
 
 
 
 
 
Receive-fixed
 
 
 
 
 
Foreign-currency denominated
$
(21
)
 
$
(33
)
 
$
(49
)
U.S. dollar denominated
(10,400
)
 
2,686

 
12,686

Total receive-fixed swaps
(10,421
)
 
2,653

 
12,637

Pay-fixed
19,021

 
(2,865
)
 
(22,999
)
Basis (floating to floating)
(2
)
 
8

 
(5
)
Total interest-rate swaps
8,598

 
(204
)
 
(10,367
)
Option based:
 
 
 
 
 
Call swaptions
 
 
 
 
 
Purchased
(2,547
)
 
1,365

 
10,234

Written
546

 
(38
)
 
(2,337
)
Put swaptions
 
 
 
 
 
Purchased
(8
)
 
(273
)
 
(1,614
)
Written
—

 
6

 
14

Other option-based derivatives(2)
(413
)
 
190

 
879

Total option-based
(2,422
)
 
1,250

 
7,176

Futures
21

 
12

 
(150
)
Foreign-currency swaps
30

 
(8
)
 
(41
)
Commitments
(131
)
 
298

 
(1,340
)
Credit derivatives
(3
)
 
—

 
—

Swap guarantee derivatives
9

 
7

 
3

Other(3)
(3
)
 
(1
)
 
(1
)
Subtotal
6,099

 
1,354

 
(4,720
)
Accrual of periodic settlements:(4)
 
 
 
 
 
Receive-fixed interest-rate swaps
3,764

 
3,511

 
4,173

Pay-fixed interest-rate swaps
(7,233
)
 
(7,318
)
 
(9,241
)
Foreign-currency swaps
—

 
4

 
22

Other
2

 
1

 
14

Total accrual of periodic settlements
(3,467
)
 
(3,802
)
 
(5,032
)
Total
$
2,632

 
$
(2,448
)
 
$
(9,752
)
 
(1)
Gains (losses) are reported as derivative gains (losses) on our consolidated statements of comprehensive income.
(2)
Primarily includes purchased interest-rate caps and floors.
(3)
Includes fees and commissions paid on cleared and exchange-traded derivatives and, in 2011, a $3 million benefit related to the bankruptcy of Lehman Brothers Holdings Inc.
(4)
For derivatives not in qualifying hedge accounting relationships, the accrual of periodic cash settlements is recorded in derivative gains (losses) on our consolidated statements of comprehensive income.
Hedge Designation of Derivatives
At December 31, 2013 and 2012, we did not have any derivatives in hedge accounting relationships; however, there are deferred net losses recorded in AOCI related to closed cash flow hedges. Net deferred gains and losses on closed cash flow hedges (i.e., where the derivative is either terminated or redesignated) are included in AOCI until the related forecasted transaction affects earnings or is determined to be probable of not occurring. Amounts reported in AOCI linked to interest payments on long-term debt are recorded in other debt interest expense and amounts not linked to interest payments on long-term debt are recorded in expense related to derivatives. In the years ended December 31, 2013 and 2012, we reclassified from AOCI into earnings (effective portion) a loss of $460 million and $612 million, respectively, related to closed cash flow hedges. See “NOTE 11: STOCKHOLDERS’ EQUITY (DEFICIT) — Accumulated Other Comprehensive Income — Future Reclassifications from AOCI to Net Income Related to Closed Cash Flow Hedges” for information about future reclassifications of deferred net losses related to closed cash flow hedges to net income.

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