Freddie Mac 2010 Annual Report Download - page 118

to reduce our overall exposure to derivative counterparties. Exchange-traded derivatives do not measurably increase our
institutional credit risk because changes in the value of open exchange-traded contracts are settled daily through a financial
clearinghouse established by each exchange. OTC derivatives, however, expose us to institutional credit risk because
transactions are executed and settled directly between us and the counterparty. When our net position with an OTC
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.
The Dodd-Frank Act will require that, in the future, many types of derivatives be centrally cleared and traded on
exchanges or comparable trading facilities. Pursuant to the Dodd-Frank Act, the CFTC is in the process of determining the
types of derivatives that must be subject to this requirement. In addition, we continue to work with the Chicago Mercantile
Exchange and other parties to implement a central clearing platform for interest rate derivatives and we executed two trades
through this platform in the fourth quarter of 2010, beginning on the first day it became operationally ready. We will be
exposed to institutional credit risk with respect to the Chicago Mercantile Exchange or other comparable exchanges or
trading facilities in the future, to the extent we use them to clear and trade derivatives, and to the members of such clearing
organizations that execute and submit our transactions for clearing.
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. A large number of OTC derivative counterparties have credit ratings below AA–. Our OTC derivative
counterparties that have credit ratings below AA– are required to post collateral if our net exposure to them on derivative
contracts exceeds $1 million. See “NOTE 19: CONCENTRATION OF CREDIT AND OTHER RISKS” for additional
information.
The relative concentration of our derivative exposure among our primary derivative counterparties remains high. This
concentration increased in the last several years due to industry consolidation and the failure of certain counterparties, and
could further increase. Table 41 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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