Freddie Mac 2014 Annual Report Download - page 220

215 Freddie Mac
Derivative Portfolio
Our use of cleared derivatives, exchange-traded derivatives, and OTC derivatives exposes us to institutional credit risk.
The requirement that we post initial and variation margin in connection with exchange-traded derivatives and cleared
derivatives exposes us to institutional credit risk in the event that our clearing members or the clearinghouses fail to meet their
obligations. However, the use of exchange-traded derivatives and cleared 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 and cleared derivatives are settled or collateralized daily via payments made
through the clearinghouse. OTC derivatives, however, expose us to institutional credit risk to individual counterparties because
transactions are executed and settled between us and each counterparty, exposing us to potential losses if a counterparty fails to
meet its contractual obligations.
For a discussion of our derivative counterparties as well as related master netting and collateral agreements, see “NOTE
10: COLLATERAL AND OFFSETTING OF ASSETS AND LIABILITIES.”
NOTE 16: FAIR VALUE DISCLOSURES
The accounting guidance for fair value measurements and disclosures defines fair value, establishes a framework for
measuring fair value, and sets forth disclosure requirements regarding fair value measurements. This guidance applies
whenever other accounting guidance requires or permits assets or liabilities to be measured at fair value. Fair value
measurement assumes that the transaction to sell the asset or transfer the liability takes place either in the principal market for
the asset or liability, or, in the absence of a principal market, in the most advantageous market for the asset or liability.
We use fair value measurements for the initial recording of certain assets and liabilities and periodic remeasurement of
certain assets and liabilities on a recurring or non-recurring basis.
Fair Value Measurements
The accounting guidance for fair value measurements and disclosures establishes a three-level fair value hierarchy that
prioritizes the inputs into the valuation techniques used to measure fair value. The fair value hierarchy gives the highest
priority, Level 1, to measurements based on quoted prices in active markets for identical assets or liabilities. The next highest
priority, Level 2, is given to measurements based on observable inputs other than quoted prices in active markets for identical
assets or liabilities. The lowest priority, Level 3, is given to measurements based on unobservable inputs. Assets and liabilities
are classified in their entirety within the fair value hierarchy based on the lowest level input that is significant to the fair value
measurement.
Assets and Liabilities on Our Consolidated Balance Sheets Measured at Fair Value on a Recurring Basis
The table below presents our assets and liabilities measured on our consolidated balance sheets at fair value on a
recurring basis subsequent to initial recognition, including instruments where we have elected the fair value option, as of
December 31, 2014 and 2013.
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