Fannie Mae 2006 Annual Report Download - page 310

Additionally, we require collateral in specified instances to limit our counterparty credit risk exposure. We
have a collateral management policy with provisions for requiring collateral on interest rate and foreign
currency derivative contracts in net gain positions based upon the counterparty’s credit rating. The collateral
includes cash, U.S. Treasury securities, agency debt and agency mortgage-related securities. A third-party
custodian holds for us all of the collateral posted to us and monitors the value on a daily basis. We monitor
credit exposure on our derivative instruments daily and make collateral calls as appropriate based on the
results of internal pricing models and dealer quotes. The table below displays the credit exposure on
outstanding derivative instruments by counterparty credit ratings, as well as the notional amount outstanding
and the number of counterparties as of December 31, 2006 and 2005.
AAA AA A Subtotal Other
(2)
Total
Credit Rating
(1)
As of December 31, 2006
(Dollars in millions)
Credit loss exposure
(3)
. . . . . . . . . . . . . . . . . . . . . . $ — $ 3,219 $ 1,552 $ 4,771 $ 65 $ 4,836
Collateral held
(4)
. . . . . . . . . . . . . . . . . . . . . . . . . . — 2,598 1,510 4,108 — 4,108
Exposure net of collateral . . . . . . . . . . . . . . . . . . . . $ — $ 621 $ 42 $ 663 $ 65 $ 728
Additional information:
Notional amount . . . . . . . . . . . . . . . . . . . . . . . . . . $750 $537,293 $206,881 $744,924 $469 $745,393
Number of counterparties . . . . . . . . . . . . . . . . . . . . 1 17 3 21
AAA AA A Subtotal Other
(2)
Total
Credit Rating
(1)
As of December 31, 2005
(Dollars in millions)
Credit loss exposure
(3)
. . . . . . . . . . . . . . . . . . . . . . $ — $ 3,012 $ 2,641 $ 5,653 $ 72 $ 5,725
Collateral held
(4)
. . . . . . . . . . . . . . . . . . . . . . . . . . — 2,515 2,476 4,991 — 4,991
Exposure net of collateral . . . . . . . . . . . . . . . . . . . . $ — $ 497 $ 165 $ 662 $ 72 $ 734
Additional information:
Notional amount . . . . . . . . . . . . . . . . . . . . . . . . . . $775 $323,141 $319,423 $643,339 $776 $644,115
Number of counterparties . . . . . . . . . . . . . . . . . . . . 1 14 6 21
(1)
We manage collateral requirements based on the lower credit rating of the legal entity as issued by Standard & Poor’s and Moody’s.
The credit rating reflects the equivalent Standard & Poor’s rating for any ratings based on Moody’s scale.
(2)
Includes MBS options, defined benefit mortgage insurance contracts, certain forward starting debt and swap credit enhancements
accounted for as derivatives.
(3)
Represents the exposure to credit loss on derivative instruments, which is estimated by calculating the cost, on a present value basis,
to replace all outstanding contracts in a gain position. Derivative gains and losses with the same counterparty are presented net where
a legal right of offset exists under an enforceable master netting agreement. This table excludes mortgage commitments accounted for
as derivatives.
(4)
Represents the collateral held as of December 31, 2006 and 2005, adjusted for the collateral transferred subsequent to December 31
based on credit loss exposure limits on derivative instruments as of December 31, 2006 and 2005. Settlement dates vary by
counterparty and range from one to three business days following the credit loss exposure valuation dates as of December 31, 2006
and 2005. The value of the collateral is reduced in accordance with counterparty agreements to help ensure recovery of any loss
through the disposition of the collateral. We posted collateral of $303 million and $476 million related to our counterparties credit
exposure to us as of December 31, 2006 and 2005, respectively.
As of December 31, 2006, all of our interest rate and foreign currency derivative transactions, consisting of
$663 million net collateral exposure and $744.9 billion notional amount, were with counterparties rated A or
better by Standard & Poor’s and Moody’s. To reduce our credit risk concentration, our interest rate and foreign
currency derivative instruments were diversified among 21 counterparties that we had outstanding transactions
F-79
FANNIE MAE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)