Freddie Mac 2010 Annual Report Download - page 173

• LIBOR- and Treasury-based exchange-traded futures; and
• Foreign-currency swaps.
In addition to swaps, futures and purchased options, our derivative positions include written options, swaptions, certain
commitments, swap guarantee derivatives, and credit derivatives.
For more information, see “NOTE 12: DERIVATIVES.”
Derivative-Related Risks
Our use of derivatives exposes us to credit risk with respect to our counterparties to derivative transactions. Through
counterparty selection, all derivative transactions are executed in a manner that seeks to control and reduce counterparty
credit exposure. In order to attempt to minimize the potential replacement cost should a derivative counterparty fail, we
utilize derivative counterparty limits. These counterparty limits, which include current exposure and potential exposure in a
stress scenario, are monitored by members of our Enterprise Risk Management division, which is responsible for establishing
and monitoring credit and counterparty risk tolerances for our business activities. See “MD&A — RISK MANAGEMENT —
Credit Risk — Institutional Credit Risk —Derivative Counterparties” for information on derivative counterparty credit risk.
Our use of derivatives also exposes us to derivative market liquidity risk, which is the risk that we may not be able to
enter into or exit out of derivative transactions at a reasonable cost. A lack of sufficient capacity or liquidity in the
derivatives market could limit our risk management activities, increasing our exposure to interest-rate risk. To help maintain
continuous access to derivative markets, we use a variety of products and transact with many different derivative
counterparties. In addition to OTC derivatives, we also use exchange-traded derivatives, asset securitization activities, callable
debt, and short-term debt to rebalance our portfolio.
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.
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. See “MD&A — RISK MANAGEMENT — Credit Risk — Institutional Credit
Risk — Derivative Counterparties” for additional information on this requirement and our use of a central clearing platform
for interest rate derivatives.
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