Freddie Mac 2015 Annual Report Download - page 266

Financial Statements Notes to the Consolidated Financial Statements | Note 8
Freddie Mac 2015 Form 10-K 264
Exchange-traded derivatives include standardized interest-rate futures contracts and options on futures
contracts. Cleared derivatives refer to those interest-rate swaps that the U.S. Commodity Futures Trading
Commission has determined are subject to the central clearing requirement of the Dodd-Frank Act. OTC
derivatives refer to those derivatives that are neither exchange-traded derivatives nor cleared derivatives.
TYPES OF DERIVATIVES
We principally use the following types of derivatives:
• LIBOR-based interest-rate swaps;
• LIBOR- and Treasury-based options (including swaptions); and
• LIBOR- and Treasury-based exchange-traded futures.
In addition to swaps, futures, and purchased options, our derivative positions include written options and
swaptions, commitments, and credit derivatives.
Written Options and Swaptions
Written call and put swaptions are sold to counterparties allowing them the option to enter into receive-
and pay-fixed interest rate swaps, respectively. Written call and put options on mortgage-related
securities give the counterparty the right to execute a contract under specified terms, which generally
occurs when we are in a liability position. We may, from time to time, write other derivative contracts such
as interest-rate futures.
Commitments
We routinely enter into commitments that include commitments to:
• Purchase and sell investments in securities;
• Purchase loans; and
• Purchase and extinguish or issue debt securities of our consolidated trusts.
Most of these commitments are considered derivatives and therefore are subject to the accounting
guidance for derivatives and hedging.
Credit Derivatives
We have purchased loans containing debt cancellation contracts, which provide for mortgage debt or
payment cancellation for borrowers who experience unanticipated losses of income dependent on a
covered event. The rights and obligations under these agreements have been assigned to the servicers.
However, in the event the servicer does not perform as required by contract we would be obligated under
our guarantee to make the required contractual payments.