Freddie Mac 2009 Annual Report Download - page 148

counterparty subject to a master netting agreement has a market value above zero at a given date (i.e., it is an asset reported
as derivative assets, net on our consolidated balance sheets), then the counterparty could potentially be obligated to deliver
cash, securities or a combination of both having that market value necessary to satisfy its obligation to us under the
derivative.
We seek to manage our exposure to institutional credit risk related to our OTC derivative counterparties using several
tools, including:
• review of external rating analyses;
• strict standards for approving new derivative counterparties;
• ongoing monitoring of our positions with each counterparty;
• managing diversification mix among counterparties;
• master netting agreements and collateral agreements; and
• stress-testing to evaluate potential exposure under possible adverse market scenarios.
On an ongoing basis, we review the credit fundamentals of all of our OTC derivative counterparties to confirm that they
continue to meet our internal standards. We assign internal ratings, credit capital and exposure limits to each counterparty
based on quantitative and qualitative analysis, which we update and monitor on a regular basis. We conduct additional
reviews when market conditions dictate or certain events affecting an individual counterparty occur.
All of our OTC derivative counterparties are major financial institutions and are experienced participants in the OTC
derivatives market, despite the large number of counterparties that have credit ratings below AA–. Our OTC derivative
counterparties that have credit ratings below AA– are subject to a collateral posting threshold of $1 million or less. See
“NOTE 19: CONCENTRATION OF CREDIT AND OTHER RISKS” to our consolidated financial statements for additional
information.
The relative concentration of our derivative exposure among our primary derivative counterparties increased in recent
periods due to industry consolidation and the failure of certain counterparties, and could further increase. Table 55
summarizes our exposure to our derivative counterparties, which represents the net positive fair value of derivative contracts,
related accrued interest and collateral held by us from our counterparties, after netting by counterparty as applicable (i.e., net
amounts due to us under derivative contracts).
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