Fannie Mae 2010 Annual Report Download - page 185

asset-backed securities. See “Liquidity and Capital Management—Liquidity Management—Liquidity Risk
Management Practices and Contingency Planning—Cash and Other Investments Portfolio” for more detailed
information on our cash and other investments portfolio. Our counterparty risk is primarily with financial
institutions and U.S. Treasury.
Our cash and other investments portfolio, which totaled $61.8 billion as of December 31, 2010, included
$31.5 billion of U.S. Treasury securities and $10.3 billion of unsecured positions all of which were short-term
deposits with financial institutions which had short-term credit ratings of A-1, P-1, F1 (or equivalent) or
higher from Standard & Poor’s, Moody’s and Fitch ratings, respectively. As of December 31, 2009, our cash
and other investments portfolio totaled $69.4 billion and included $45.8 billion of unsecured positions with
issuers of corporate debt securities or short-term deposits with financial institutions, of which approximately
92% were with issuers which had short-term credit ratings of A-1, P-1, F1 (or its equivalent) or higher from
Standard & Poor’s, Moody’s and Fitch ratings, respectively.
We monitor the credit risk position of our cash and other investments portfolio by duration and rating level. In
addition, we monitor the financial position and any downgrades of these counterparties. The outcome of our
monitoring could result in a range of events, including selling some of these investments. If one of our
primary cash and other investments portfolio counterparties fails to meet its obligations to us under the terms
of the investments, it could result in financial losses to us and have a material adverse effect on our earnings,
liquidity, financial condition and net worth. During 2010, we evaluated the growing uncertainty of the stability
of various European economies and financial institutions and as a result of this evaluation, reduced the number
of counterparties in our cash and other investments portfolio in those markets and began to lend to remaining
counterparties on a secured basis.
Derivatives Counterparties
Our derivative credit exposure relates principally to interest rate and foreign currency derivatives contracts. We
estimate our exposure to credit loss on derivative instruments by calculating the replacement cost, on a present
value basis, to settle at current market prices all outstanding derivative contracts in a net gain position by
counterparty where the right of legal offset exists, such as master netting agreements, and by transaction where
the right of legal offset does not exist. Derivatives in a gain position are included in our consolidated balance
sheets in “Other assets.”
We expect our credit exposure on derivative contracts to fluctuate with changes in interest rates, implied
volatility and the collateral thresholds of the counterparties. Typically, we seek to manage this exposure by
contracting with experienced counterparties that are rated A- (or its equivalent) or better. These counterparties
consist of large banks, broker-dealers and other financial institutions that have a significant presence in the
derivatives market.
We also manage our exposure to derivatives counterparties by requiring collateral in specified instances. 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. We analyze credit
exposure on our derivative instruments daily and make collateral calls as appropriate based on the results of
internal pricing models and dealer quotes. In the case of a bankruptcy filing by an interest rate or foreign
currency derivative counterparty or other default by the counterparty under the derivative contract, we would
have the right to terminate all outstanding derivative contracts with that counterparty and may retain collateral
previously posted by that counterparty to the extent that we are in a net gain position on the termination date.
Our net credit exposure on derivatives contracts decreased to $152 million as of December 31, 2010, from
$238 million as of December 31, 2009. We had outstanding interest rate and foreign currency derivative
transactions with 15 counterparties as of December 31, 2010 and 16 counterparties as of December 31, 2009.
Derivatives transactions with nine of our counterparties accounted for approximately 90% of our total
outstanding notional amount as of December 31, 2010, with each of these counterparties accounting for
between approximately 5% and 19% of the total outstanding notional amount. In addition to the 15
counterparties with whom we had outstanding notional amounts as of December 31, 2010, we had master
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