Freddie Mac 2009 Annual Report Download - page 279

during 2008, we designated certain derivative positions as cash flow hedges of changes in cash flows associated with our
forecasted issuances of debt, consistent with our risk management goals, in an effort to reduce interest rate risk related
volatility in our consolidated statements of operations. In conjunction with our entry into conservatorship on September 6,
2008, we determined that we could no longer assert that the associated forecasted issuances of debt were probable of
occurring and, as a result, we ceased designating derivative positions as cash flow hedges associated with forecasted
issuances of debt. The previous deferred amount related to these hedges remains in our AOCI balance and will be recognized
into earnings over the expected time period for which the forecasted issuances of debt impact earnings. Any subsequent
changes in fair value of those derivative instruments are included in derivative gains (losses) on our consolidated statements
of operations. As a result of our discontinuance of this hedge accounting strategy, we transferred $27.6 billion in notional
amount and $(488) million in fair value from open cash flow hedges to closed cash flow hedges on September 6, 2008.
The carrying value of our derivatives on our consolidated balance sheets is equal to their fair value, including net
derivative interest receivable or payable, net trade/settle receivable or payable and is net of cash collateral held or posted,
where allowable by a master netting agreement. 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. Cash collateral we obtained from
counterparties to derivative contracts that has been offset against derivative assets, net at December 31, 2009 and
December 31, 2008 was $3.1 billion and $4.3 billion, respectively. Cash collateral we posted to counterparties to derivative
contracts that has been offset against derivative liabilities, net at December 31, 2009 and December 31, 2008 was
$5.6 billion and $5.8 billion, respectively. We are subject to collateral posting thresholds based on the credit rating of our
long-term senior unsecured debt securities from S&P or Moody’s. In the event our credit ratings fall below certain specified
rating triggers or are withdrawn by S&P or Moody’s, the counterparties to the derivative instruments are entitled to full
overnight collateralization on derivative instruments in net liability positions. The aggregate fair value of all derivative
instruments with credit-risk-related contingent features that are in a liability position on December 31, 2009, is $6.0 billion
for which we have posted collateral of $5.6 billion in the normal course of business. If the credit-risk-related contingent
features underlying these agreements were triggered on December 31, 2009, we would be required to post an additional
$0.4 billion of collateral to our counterparties.
At December 31, 2009 and December 31, 2008, there were no amounts of cash collateral that were not offset against
derivative assets, net or derivative liabilities, net, as applicable. See “NOTE 19: CONCENTRATION OF CREDIT AND
OTHER RISKS” for further information related to our derivative counterparties.
As shown in Table 13.3 the total AOCI, net of taxes, related to derivatives designated as cash flow hedges was a loss of
$2.9 billion and $3.7 billion at December 31, 2009 and 2008, respectively, composed of deferred net losses on closed cash
flow hedges. Closed cash flow hedges involve derivatives that have been terminated or are no longer designated as cash flow
hedges. Fluctuations in prevailing market interest rates have no impact on the deferred portion of AOCI relating to losses on
closed cash flow hedges.
Over the next 12 months, we estimate that approximately $665 million, net of taxes, of the $2.9 billion of cash flow
hedging losses in AOCI, net of taxes, at December 31, 2009 will be reclassified into earnings. The maximum remaining
length of time over which we have hedged the exposure related to the variability in future cash flows on forecasted
transactions, primarily forecasted debt issuances, is 24 years. However, over 70% and 90% of AOCI, net of taxes, relating to
closed cash flow hedges at December 31, 2009, will be reclassified to earnings over the next five and ten years, respectively.
Table 13.3 presents the changes in AOCI, net of taxes, related to derivatives designated as cash flow hedges. Net change
in fair value related to cash flow hedging activities, net of tax, represents the net change in the fair value of the derivatives
that were designated as cash flow hedges, after the effects of our federal statutory tax rate of 35% for cash flow hedges
closed prior to 2008 and a tax rate of 35%, with a full valuation allowance for cash flow hedges closed during 2008, to the
extent the hedges were effective. Net reclassifications of losses to earnings, net of tax, represents the AOCI amount that was
recognized in earnings as the originally hedged forecasted transactions affected earnings, unless it was deemed probable that
the forecasted transaction would not occur. If it is probable that the forecasted transaction will not occur, then the deferred
gain or loss associated with the hedge related to the forecasted transaction would be reclassified into earnings immediately.
For further information on our deferred tax assets, net valuation allowance see “NOTE 15: INCOME TAXES.”
276 Freddie Mac