Freddie Mac 2014 Annual Report Download - page 97

92 Freddie Mac
Our available-for-sale securities net unrealized gains (losses) recorded in AOCI was $2.5 billion and $1.0 billion at
December 31, 2014 and 2013, respectively. This improvement in AOCI was primarily due to fair value gains resulting from the
impact of spread tightening on our non-agency mortgage-related securities and the movement of these securities with
unrealized losses towards maturity.
RISK MANAGEMENT
Risk Management
Overview
Our investment and credit guarantee activities expose us to three broad categories of risk: (a) credit risk; (b) interest-rate
and other market risks; and (c) operational risk.
Risk management is a critical aspect of our business. Our ability to identify, measure, mitigate, and report risk is critical
to our ability to maintain risk at an appropriate level.
See “RISK FACTORS” for additional information regarding certain risks material to our business. See
“QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK” for information about our interest rate
and other market risks.
Risk Management Framework
We manage risk using a three-lines-of-defense risk management framework. The first line of defense, defined generally
as our business units, is responsible for identifying, assessing, measuring, mitigating and reporting the risks in their business. In
the first line of defense role, each business unit is responsible for managing its risks in conformance with the risk guidelines,
risk policies and risk limits approved by the Board, the Risk Committee of our Board and executive management. The second
line of defense, our Enterprise Risk Management and Compliance divisions, is accountable for: (a) reporting risk to senior
management and, as needed, the Board; (b) managing risks at the corporate level and setting the overall risk appetite and
framework for monitoring risk; and (c) providing oversight of the first line. The second line of defense provides company-wide
leadership and oversight to help ensure effective and consistent understanding and management of risks by our business units.
The third line of defense, our Internal Audit division, provides independent assurance related to the design and effectiveness of
the company’s risk management, internal control and governance processes through its audit, assurance, and advisory work.
The Internal Audit division reports independently to the Audit Committee of the Board. For more information about our
Board’s role in oversight of risk management, see “CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND
DIRECTOR INDEPENDENCE — Board Leadership Structure and Role in Risk Oversight.”
The company has in place a governance structure including enterprise wide oversight provided by the Board, CERO and
CCO, as well as our Enterprise Risk Management Committee, chaired by the CERO, which is responsible for overseeing the
establishment of enterprise risk policies; monitoring risk through risk reporting and analysis; and the development and
execution of the framework for managing market, operational, counterparty and credit risk.
We utilize an internal economic capital framework and models in our risk management process. Our economic capital
framework provides a risk-based measurement of capital which reflects relevant market, credit, counterparty, and operational
risks. We assign economic capital internally to asset classes based on their respective risks. We consider economic capital an
input when we make economic decisions, establish risk limits and measure profitability.
Risk Profile
The following risk profile sections describe our current risk environment and include a discussion of quantitative and/or
qualitative assessments of specific risks. During 2014, we made enhancements to our risk management framework. These
enhancements are designed to strengthen risk ownership in our business units and add clarity to risk management roles and
responsibilities. We believe these enhancements will improve our risk management effectiveness. As part of this effort, we are
re-organizing certain activities across the company. During our transition, we may experience elevated operational risks. We are
actively managing this risk.
Credit Risk Overview
We are subject primarily to two types of credit risk: (a) mortgage credit risk; and (b) institutional credit risk. Mortgage
credit risk is the risk that a borrower will fail to make timely payments on a mortgage we own or guarantee. Institutional credit
risk is the risk that a counterparty that has entered into a business contract or arrangement with us will fail to meet its
obligations to us.
Mortgage Credit Risk Overview
We are exposed to mortgage credit risk principally in our single-family credit guarantee and multifamily mortgage
portfolios because we either hold the mortgage assets or have guaranteed mortgages in connection with the issuance of a
Freddie Mac mortgage-related security, or other guarantee commitment. All mortgages that we purchase or guarantee have an
inherent risk of default. We are also exposed to mortgage credit risk related to our investments in non-Freddie Mac mortgage-
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