Freddie Mac 2010 Annual Report Download - page 63

sensitive business data, processed and stored in, and transmitted through, our computer systems and networks, or otherwise
cause interruptions or malfunctions in our operations or the operations of our customers or counterparties, which could result
in significant losses or reputational damage. We may be required to expend significant additional resources to modify our
protective measures or to investigate and remediate vulnerabilities or other exposures, and we may be subject to litigation
and financial losses that are not fully insured.
We rely on third parties for certain important functions, including some that are critical to financial reporting, our
mortgage-related investment activity and mortgage loan underwriting. Any failures by those vendors could disrupt our
business operations.
We outsource certain key functions to external parties, including: (a) processing functions for trade capture, market risk
management analytics, and financial instrument valuation; (b) custody and recordkeeping for our mortgage-related
investments; (c) processing functions for mortgage loan underwriting and servicing; and (d) certain services we provide to
Treasury in our role as program compliance agent under HAMP. We may enter into other key outsourcing relationships in
the future. If one or more of these key external parties were not able to perform their functions for a period of time, at an
acceptable service level, or for increased volumes, our business operations could be constrained, disrupted or otherwise
negatively impacted. Our use of vendors also exposes us to the risk of a loss of intellectual property or of confidential
information or other harm. We may also be exposed to reputational harm, to the extent vendors do not conduct their
activities under appropriate ethical standards. Financial or operational difficulties of an outside vendor could also hurt our
operations if those difficulties interfere with the vendor’s ability to provide services to us.
Our risk management efforts may not effectively mitigate the risks we seek to manage.
We could incur substantial losses and our business operations could be disrupted if we are unable to effectively identify,
manage, monitor and mitigate operational risks, interest rate and other market risks and credit risks related to our business.
Our risk management policies, procedures and techniques may not be sufficient to mitigate the risks we have identified or to
appropriately identify additional risks to which we are subject. See “QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK” and “MD&A — RISK MANAGEMENT” for a discussion of our approach to
managing the risks we face.
Legal and Regulatory Risks
The Dodd-Frank Act and related regulation may adversely affect our business activities and financial results.
The Dodd-Frank Wall Street Reform and Consumer Protection Act, which was signed into law on July 21, 2010,
significantly changed the regulation of the financial services industry and could affect us in substantial and unforeseeable
ways and have an adverse effect on our business, results of operations, financial condition, liquidity and net worth. For
example, the Dodd-Frank Act and related future regulatory changes could impact the value of assets that we hold, require us
to change certain of our business practices, impose significant additional costs on us, limit the products we offer, require us
to increase our regulatory capital, or make it more difficult for us to retain and recruit management and other valuable
employees. We will also face a more complicated regulatory environment due to the Dodd-Frank Act and related future
regulatory changes, which will increase compliance costs and could divert management attention or other resources. The
Dodd-Frank Act and related future regulatory changes will also significantly affect many aspects of the financial services
industry and potentially change the business practices of our customers and counterparties; it is possible that any such
changes could adversely affect our business and financial results.
Implementation of the Dodd-Frank Act is being accomplished through numerous rulemakings, many of which are
expected to be finalized in 2011. The final effects of the legislation will not be known with certainty until these rulemakings
are complete. The Dodd-Frank Act also mandates the preparation of studies of a wide range of issues, which could lead to
additional legislative or regulatory changes. It could be difficult for us to comply with any future regulatory changes in a
timely manner, due to the potential scope and number of such changes, which could limit our operations and expose us to
liability.
The long-term impact of the Dodd-Frank Act and related future regulatory changes on our business and the financial
services industry will depend on a number of factors that are difficult to predict, including our ability to successfully
implement any changes to our business, changes in consumer behavior and our competitors’ and customers’ responses to the
Dodd-Frank Act and related future regulatory changes.
Examples of aspects of the Dodd-Frank Act that may significantly affect us include the following:
• The new Financial Stability Oversight Council could designate Freddie Mac as a non-bank financial company to be
subject to supervision and regulation by the Federal Reserve. If this occurs, the Federal Reserve will have authority to
examine Freddie Mac and we may be required to meet more stringent prudential standards than those applicable to
60 Freddie Mac