Freddie Mac 2014 Annual Report Download - page 131

126 Freddie Mac
• collateral that we are required to pledge to third parties in connection with secured financing and daily trade activities.
In accordance with contracts with certain derivative counterparties, we post collateral for derivatives in a net loss
position, after netting by counterparty, above agreed-upon posting thresholds. See “NOTE 10: COLLATERAL AND
OFFSETTING OF ASSETS AND LIABILITIES” for information about assets we pledge as collateral; and
• administrative expenses.
We fund our cash needs primarily by issuing short-term and long-term debt. Other sources of cash include:
• interest and principal payments on and sales of securities or mortgage loans that we hold in our mortgage-related
investments portfolio or cash and other investments portfolio;
• repurchase transactions with counterparties;
• management and guarantee fees we receive in connection with our guarantee activities (excluding those fees
associated with the legislated 10 basis point increase we remit to Treasury); and
• quarterly draws from Treasury under the Purchase Agreement, which are made if we have a quarterly deficit in our net
worth.
In addition to the uses and sources of cash described above, we are involved in various legal proceedings, including those
discussed in “LEGAL PROCEEDINGS,” which may result in a need to use cash to settle claims or pay certain costs or receipt
of cash from settlements.
We believe that the support provided by Treasury pursuant to the Purchase Agreement currently enables us to maintain
our access to the debt markets and to have adequate liquidity to conduct our normal business activities. However, the costs and
availability of our debt funding could vary for a number of reasons, including the uncertainty about the future of the GSEs and
any future downgrades in our credit ratings or the credit ratings of the U.S. government. For more information, see “Other Debt
Securities — Credit Ratings.”
We make extensive use of the Federal Reserve's payment system in our business activities. The Federal Reserve requires
that we fully fund our accounts at the Federal Reserve Bank of New York to the extent necessary to cover cash payments on our
debt and mortgage-related securities each day, before the Federal Reserve Bank of New York, acting as our fiscal agent, will
initiate such payments. Although we seek to maintain sufficient intraday liquidity to fund our activities through the Federal
Reserve's payment system, we have limited access to cash once the debt markets are closed for the day. Insufficient cash may
cause our account to be overdrawn, potentially resulting in penalties and reputational harm.
For more information on our short- and long-term liquidity needs, see “CONTRACTUAL OBLIGATIONS.”
Our securities and other obligations are not guaranteed by the U.S. government and do not constitute a debt or obligation
of the U.S. government or any agency or instrumentality thereof, other than Freddie Mac. We continue to manage our debt
issuances to remain in compliance with the aggregate indebtedness limits set forth in the Purchase Agreement.
Liquidity Management
Maintaining sufficient liquidity is of primary importance to and a cost of our business. Under our liquidity management
practices and policies, we:
• manage intraday cash needs and provide for the contingency of an unexpected cash demand (e.g., we do not have
access to the Federal Reserve’s discount window);
• maintain cash and non-mortgage investments to enable us to meet ongoing cash obligations for a limited period of
time, assuming no access to unsecured debt markets;
• maintain unencumbered securities with a value greater than or equal to the largest projected daily cash shortfall for an
extended period of time, assuming no access to unsecured debt markets; and
• manage the maturity of our unsecured debt based on our asset profile.
To facilitate cash management, we forecast cash outflows and inflows using assumptions and models. These forecasts
help us to manage our liabilities with respect to asset purchases and runoff. Differences between actual and forecast cash
outflows and inflows could result in higher costs, as we could issue a higher amount of debt than needed, unexpectedly need to
issue debt, or overdraw our accounts at the Federal Reserve Bank of New York. We maintain daily cash reserves to manage this
risk.
During 2014, the majority of the funds in our liquidity and contingency operating portfolio was deposited with the
Federal Reserve Bank of New York, invested in U.S. Treasury securities, or invested in securities purchased under agreements
to resell. In the event of a downgrade of a position or counterparty, as applicable, below minimum rating requirements, we
make an assessment whether to exit the existing position or continue to do business with the counterparty.
Our ability to maintain sufficient liquidity, including by pledging mortgage-related and other securities as collateral to
other institutions, could cease or change rapidly and the cost of the available funding could increase significantly due to
changes in market interest rates, market confidence, operational risks, and other factors. For more information, see “RISK
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