Freddie Mac 2014 Annual Report Download - page 67

62 Freddie Mac
Gains (Losses) on Retirement of Other Debt
We refer to the debt securities we issue to fund our business operations as other debt. We repurchase or call our
outstanding other debt securities from time to time when we believe it is economically beneficial and to manage the mix of
liabilities funding our assets. When we repurchase or call outstanding debt securities, or debt holders put outstanding debt
securities to us, we recognize a gain or loss to the extent the amount paid to redeem the debt security differs from its carrying
value. See “NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES” for more information regarding our
accounting policies related to debt retirements.
Gains (losses) on retirement of other debt were $29 million, $132 million, and $(77) million during 2014, 2013, and
2012, respectively.
We recognized gains on the retirement of other debt in 2014 and 2013 primarily as a result of exercising our call option
for other debt held at premiums. Losses on the retirement of other debt in 2012 primarily resulted from write-offs of
unamortized debt issuance costs related to calls of other debt securities.
For more information, see “LIQUIDITY AND CAPITAL RESOURCES — Liquidity — Other Debt Securities.”
Derivative Gains (Losses)
The table below presents derivative gains (losses) reported in our consolidated statements of comprehensive income. See
“NOTE 9: DERIVATIVES — Table 9.2 — Gains and Losses on Derivatives” for information about gains and losses related to
specific categories of derivatives.
Derivatives that are not in hedge accounting relationships are accounted for differently than derivatives that are in hedge
accounting relationships. For derivatives that are not in hedge accounting relationships, all fair value changes, as well as the
accrual of periodic settlements, are recorded in current period income as derivative gains (losses). We did not have any
derivatives in hedge accounting relationships at December 31, 2014 and 2013. However, AOCI includes amounts related to
closed cash flow hedges. These amounts are reclassified to earnings when the forecasted transactions affect earnings. If it is
probable that the forecasted transaction will not occur, then the deferred gain or loss associated with the forecasted transaction
is reclassified into earnings immediately.
While derivatives are an important aspect of our strategy to manage interest-rate risk, they increase the volatility of
reported comprehensive income because fair value changes on derivatives are included in comprehensive income, while fair
value changes associated with several of the types of assets and liabilities being economically hedged are not. As a result, there
can be timing mismatches affecting current period earnings, which may not be reflective of the underlying economics of our
business. The mix of our derivative portfolio, in conjunction with the mix of our assets and liabilities, affects the volatility of
comprehensive income.
Table 17 — Derivative Gains (Losses)
Year Ended December 31,
2014 2013 2012
(in millions)
Interest-rate swaps $ (7,294) $ 8,598 $ (204)
Option-based derivatives 1,437 (2,422) 1,250
Other derivatives(1) 191 (77) 308
Accrual of periodic settlements (2,625) (3,467) (3,802)
Total $ (8,291) $ 2,632 $ (2,448)
(1) Primarily includes futures, foreign-currency swaps, commitments, credit derivatives and swap guarantee derivatives. Our last foreign-currency swaps
matured in January 2014.
Gains (losses) on our derivative portfolio includes both derivative fair value changes and the accrual of periodic
settlements. Gains (losses) on our derivative portfolio can change based on changes in: (a) interest rates, yield curves and
implied volatility; and (b) the mix and balance of products in our derivative portfolio. The mix and balance of our derivatives
change from period to period as we respond to changing interest rate environments and changes in our asset and liability
balances and characteristics. A receive-fixed swap results in our receipt of a fixed interest-rate payment from our counterparty
in exchange for a variable-rate payment. Conversely, a pay-fixed swap requires us to make a fixed interest-rate payment to our
counterparty in exchange for a variable-rate payment. Receive-fixed swaps increase in value and pay-fixed swaps decrease in
value when interest rates decrease (with the opposite being true when interest rates increase). The accrual of periodic
settlements represents the net amount we accrue for interest-rate swap payments we will make or receive during a period. We
record derivative losses when we are a net payer and record derivatives gains when we are a net receiver of swap payments.
Our option-based derivatives primarily include purchased call and put swaptions, and also include caps and floors, and
options on exchange-traded futures. Purchased call and put swaptions, where we make premium payments when we purchase
them, are options for us to enter into receive- and pay-fixed swaps, respectively. Conversely, written call and put swaptions,
where we receive premium payments when our counterparty purchases them, are options for our counterparty to enter into
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