Freddie Mac 2010 Annual Report Download - page 267

loans and the accrued interest. The loss incurred in 2008 associated with this transaction is included in other expenses on our
consolidated statements of operations. See “NOTE 21: LEGAL CONTINGENCIES” for further information on this claim.
As of December 31, 2010 and 2009, there were $91.6 billion and $94.7 billion, respectively, of cash and other non-
mortgage assets invested with institutional counterparties or the Federal Reserve Bank. As of December 31, 2010, these
primarily included: (a) $31.3 billion of cash equivalents invested in 45 counterparties that had short-term credit ratings of
A-1 or above on the S&P or equivalent scale; (b) $3.4 billion of federal funds sold with three counterparties that had short-
term S&P ratings of A-1 or above; (c) $0.3 billion of federal funds sold with one counterparty that had a short-term S&P
rating of A-2; (d) $42.1 billion of securities purchased under agreements to resell with nine counterparties that had short-
term S&P ratings of A-1 or above; (e) $0.7 billion of securities purchased under agreements to resell with one counterparty
that had short-term S&P rating of A-2; and (f) $13.3 billion of cash deposited with the Federal Reserve Bank. The
December 31, 2009 counterparty credit exposure includes amounts on our consolidated balance sheet as well as those off-
balance sheet that we entered into on behalf of our securitization trusts that were not consolidated.
Derivative 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.
Derivative Counterparties
Our use of derivatives exposes us to counterparty credit risk, which arises from the possibility that the derivative
counterparty will not be able to meet its contractual obligations. Exchange-traded derivatives, such as futures contracts, do
not measurably increase our counterparty 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
counterparty credit risk because transactions are executed and settled between us and our counterparty. Our use of OTC
interest-rate swaps, option-based derivatives and foreign-currency swaps is subject to rigorous internal credit and legal
reviews. All our OTC derivatives counterparties are major financial institutions and are experienced participants in the OTC
derivatives market.
Master Netting and Collateral Agreements
We use master netting and collateral agreements to reduce our credit risk exposure to our active OTC derivative
counterparties for interest-rate swaps, option-based derivatives and foreign-currency swaps. Master netting agreements
provide for the netting of amounts receivable and payable from an individual counterparty, which reduces our exposure to a
single counterparty in the event of default. On a daily basis, the market value of each counterparty’s derivatives outstanding
is calculated to determine the amount of our net credit exposure, which is equal to derivatives in a net gain position by
counterparty after giving consideration to collateral posted. Our collateral agreements require most counterparties to post
collateral for the amount of our net exposure to them above the applicable threshold. Bilateral collateral agreements are in
place for the majority of our counterparties. Collateral posting thresholds are tied to a counterparty’s credit rating. Derivative
exposures and collateral amounts are monitored on a daily basis using both internal pricing models and dealer price quotes.
Collateral is typically transferred within one business day based on the values of the related derivatives. This time lag in
posting collateral can affect our net uncollateralized exposure to derivative counterparties.
Collateral posted by a derivative counterparty is typically in the form of cash, although U.S. Treasury securities, Freddie
Mac mortgage-related securities, or our debt securities may also be posted. In the event a counterparty defaults on its
obligations under the derivatives agreement and the default is not remedied in the manner prescribed in the agreement, we
have the right under the agreement to direct the custodian bank to transfer the collateral to us or, in the case of non-cash
collateral, to sell the collateral and transfer the proceeds to us.
Our uncollateralized exposure to counterparties for OTC interest-rate swaps, option-based derivatives, foreign-currency
swaps, and purchased interest-rate caps, after applying netting agreements and collateral, was $32 million and $128 million
at December 31, 2010 and 2009, respectively. In the event that all of our counterparties for these derivatives were to have
defaulted simultaneously on December 31, 2010, our maximum loss for accounting purposes would have been approximately
$32 million. One of our counterparties, HSBC Bank USA, which was rated AA⫺as of February 11, 2011, accounted for
greater than 10% of our net uncollateralized exposure to derivatives counterparties at December 31, 2010.
The total exposure on our OTC forward purchase and sale commitments, which are treated as derivatives, was
$103 million and $81 million at December 31, 2010 and 2009, respectively. These commitments are uncollateralized.
Because the typical maturity of our forward purchase and sale commitments is less than 60 days and they are generally
settled through a clearinghouse, we do not require master netting and collateral agreements for the counterparties of these
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