Freddie Mac 2014 Annual Report Download - page 128

123 Freddie Mac
for individual counterparties. Our exposure to individual counterparties associated with interest-rate swaps should
decrease over time due to the central clearing requirement.
• Exchange-traded derivatives: We are an active user of exchange-traded derivatives, such as Treasury and Eurodollar
futures, and options on futures, and are required to post initial and variation margin with our clearing member in
connection with such transactions. The posting of this margin exposes us to institutional credit risk in the event that
our clearing member or the exchange’s clearinghouse fail to meet their obligations. However, the use of exchange-
traded derivatives mitigates our institutional credit risk exposure to individual counterparties because a central
counterparty is substituted for individual counterparties, and changes in the value of open exchange-traded contracts
are settled daily via payments made through the financial clearinghouse established by each exchange.
• OTC derivatives: OTC derivatives refer to those derivatives that are neither cleared derivatives nor exchange-traded
derivatives. OTC derivatives expose us to institutional credit risk to individual counterparties, because these
transactions are executed and settled directly between us and each counterparty, exposing us to potential losses if a
counterparty fails to meet its contractual obligations. When our net position with a counterparty in OTC derivatives
subject to a master netting agreement has a market value above zero (i.e., it would be an asset reported as derivative
assets, net on our consolidated balance sheets), the counterparty is obligated to deliver collateral in the form of cash,
securities, or a combination of both, in an amount equal to that market value (less a small unsecured “threshold”
amount in most cases) as necessary to satisfy its net obligation to us under the master netting agreement. The collateral
posting thresholds assigned to these counterparties depend on the credit rating of the counterparty and are based on our
credit risk policies.
Risk Profile
The table below reconciles the net asset fair value of derivative contracts on our consolidated balance sheets to our net
exposure after considering non-cash collateral held, which is not netted on our consolidated balance sheets.
Table 57 — Derivative Counterparty Credit Exposure
As of December 31, 2014
Ratings of OTC interest-rate swaps and swaptions
counterparties
Number of
Counter-
parties(1)
Net Derivative
Asset on the
Consolidated
Balance Sheets(2)
Non-Cash
Collateral Held
by Us(3)
Net Derivative
Asset Less
Non-Cash
Collateral
Held by Us
Cleared and
Exchange-
Traded Initial
Margin and
OTC Non-Cash
Collateral Posted
by Us in Excess
of Exposure
(dollars in millions)
AA- or above 4 $ 175 $ (159) $ 16 $ —
A+, A or A- 11 452 (294) 158 386
BBB+ or below 2 — — — 4
Total OTC 17 627 (453) 174 390
Cleared and exchange-traded derivatives(4) 128 — 128 2,269
Other derivatives(5) 67 — 67 —
Total $ 822 $ (453) $ 369 $ 2,659
(1) Based on legal entities. We use the lower of S&P and Moody's ratings to manage collateral requirements. In this table, the Moody's rating of the legal
entity is stated in terms of the S&P equivalent.
(2) Includes cash collateral posted by us in excess of exposure.
(3) Does not include the fair value amount of non-cash collateral held by us that exceeds the associated net asset presented on the consolidated balance
sheets.
(4) The ultimate parent entities of the clearinghouses we use were rated AA- and BBB as of December 31, 2014.
(5) Consists primarily of commitments and ACIS insurance contracts.
Over time, our exposure to individual derivative counterparties varies depending on changes in fair values, which are
affected by changes in interest rates, yield curves, the implied volatility of interest rates, and the amount of derivatives held.
Approximately 94% of our exposure at fair value for OTC interest-rate swap and option-based derivatives was
collateralized at December 31, 2014 (excluding amounts related to our posting of cash collateral in excess of our derivative
liability as determined at the counterparty level). The remaining exposure was primarily due to market movements during the
time period between when a derivative was measured at fair value and when we received the related collateral, as well as
exposure amounts below the applicable counterparty collateral posting threshold. In some instances, these market movements
result in us having provided collateral that has fair value in excess of our obligation, which represents our overcollateralization
exposure. Collateral is typically transferred within one business day based on the values of the related derivatives.
The concentration of our derivative exposure among our primary OTC derivative counterparties remains high. This
concentration could further increase. Three counterparties each accounted for greater than 10% and collectively accounted for
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