Freddie Mac 2014 Annual Report Download - page 129

124 Freddie Mac
81% of our net uncollateralized exposure to derivative counterparties, excluding cleared and exchange-traded derivatives,
commitments, swap guarantee derivatives, certain written options, and certain credit derivatives at December 31, 2014. All
three of these counterparties, JP Morgan Chase Bank, Barclays Bank PLC, and UBS AG, were rated “A” or above using the
lower of S&P’s or Moody’s rating stated in terms of the S&P equivalent as of February 5, 2015.
Our net derivative asset on our consolidated balance sheets related to cleared and exchange-traded derivatives was $128
million as of December 31, 2014, which includes the cash collateral that we have posted for initial and variation margin. In
addition, we have posted non-cash collateral of $2.3 billion for initial margin as of December 31, 2014. We net our exposure to
cleared derivatives by clearinghouse and clearing member. Exchange-traded derivatives are settled on a daily basis through the
payment of variation margin. The net amount of our exposure to cleared and exchange-traded derivatives relates to our posting
of initial margin. The amount of initial margin we must post for cleared and exchange-traded derivatives may be based, in part,
on S&P or Moody’s credit rating of our long-term senior unsecured debt securities. The lowering or withdrawal of our credit
rating by S&P or Moody’s may increase our obligation to post margin collateral, depending on the amount of the counterparty’s
exposure to Freddie Mac with respect to the derivative transactions. For information about margin we have posted in
connection with cleared and exchange-traded derivatives and our other derivatives, see “NOTE 10: COLLATERAL AND
OFFSETTING OF ASSETS AND LIABILITIES — Collateral Pledged.”
In the event an OTC derivative or cleared derivative counterparty defaults, our economic loss may be higher than the
uncollateralized exposure of our derivatives if we are not able to replace the defaulted derivatives in a timely and cost-effective
fashion (e.g., due to a significant interest rate movement during the period or other factors). We could also incur economic loss
if non-cash collateral posted to us by the defaulting counterparty and held by the custodian cannot be liquidated at prices that
are sufficient to recover the amount of such exposure. We regularly review the market values of the securities pledged to us to
manage our exposure to loss. When non-cash collateral is posted to us, we require collateral in excess of our exposure to satisfy
the net obligation to us in accordance with the counterparty agreement. See “NOTE 10: COLLATERAL AND OFFSETTING
OF ASSETS AND LIABILITIES — Derivative Portfolio — Master Netting and Collateral Agreements” for more information
about our maximum loss for accounting purposes and concentrations of counterparty risk related to derivative counterparties.
In addition, we have OTC interest-rate swap and option-based derivative liabilities where we post collateral to
counterparties in accordance with agreed upon thresholds. Pursuant to certain collateral agreements we have with these
counterparties, the collateral posting threshold we are assigned is based on S&P or Moody’s credit rating of our long-term
senior unsecured debt securities. The lowering or withdrawal of our credit rating by S&P or Moody’s may increase our
obligation to post collateral, depending on the amount of the counterparty’s exposure to Freddie Mac with respect to the
derivative transactions. For information about margin we have posted in connection with OTC derivatives, see “NOTE 10:
COLLATERAL AND OFFSETTING OF ASSETS AND LIABILITIES — Collateral Pledged.”
Operational Risk
Overview
We define operational risk as the risk of loss resulting from inadequate or failed internal processes, people, systems or
external events. Operational risk is inherent in all of our activities. Events that may evidence operational risk include: (a)
accounting or operational errors; (b) business interruptions; (c) fraudulent acts; (d) inappropriate acts by employees; (e)
information security incidents; or (f) vendors who do not perform in accordance with their contracts. These events could result
in financial loss, legal and regulatory fines, and reputational harm.
Operational Risk Management Framework
Our operational risk management framework includes risk identification, assessment, measurement, mitigation and
reporting. When operational risk events are identified, our policies require that the events be documented and analyzed to
determine whether changes are required in our systems and/or processes to further mitigate the risk of future events. For more
information, see “Risk Management — Risk Management Framework.”
We have made and are making considerable enhancements to our risk management framework. During 2013, we adopted
an integrated enterprise risk management framework that enables us to place more focus on high risk business processes and
activities. During 2014, we leveraged this enterprise risk management framework to implement a redesigned and enhanced
three-lines-of-defense methodology. We plan to use this redesigned and enhanced three-lines-of-defense methodology to both
strengthen risk ownership in our business units and add clarity to risk management roles and responsibilities. As part of this
effort, we have moved or are moving several key functions within the organization to better align business decision-making
with the first line of defense. We believe these enhancements will improve our risk management effectiveness. During our
implementation period, we may experience elevated operational risks. We are actively managing this risk.
To ensure the continued operating effectiveness of the risk management program, the company has in place a governance
structure including enterprise wide oversight provided by the Board, CERO and CCO, as well as the following management
committees: (a) the Enterprise Risk Management Committee, chaired by the CERO; (b) the Operational Risk Subcommittee,
chaired by the CERO, which provides an advisory, information sharing and governance forum to oversee operational risks; and
(c) the Remediation Committee, chaired by the CCO, which provides governance and oversight of management activities to
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