Freddie Mac 2015 Annual Report Download - page 269

Financial Statements Notes to the Consolidated Financial Statements | Note 9
Freddie Mac 2015 Form 10-K 267
NOTE 9: COLLATERALIZED AGREEMENTS AND
OFFSETTING ARRANGEMENTS
DERIVATIVE PORTFOLIO
Derivative Counterparties
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 cleared
and exchange-traded derivatives, such as cleared interest-rate swaps and futures contracts, exposes us
to institutional credit risk in the event that our clearing members or the financial clearinghouses fail to
meet their obligations. However, the use of cleared and exchange-traded derivatives decreases our credit
risk exposure to individual counterparties because a central counterparty is substituted for individual
counterparties. 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 the credit risk of 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
obligations. We have master netting agreements in place with all of our OTC swap counterparties and we
require counterparties to deliver collateral in the form of cash, securities, or a combination of both when
their net obligation to us is above an agreed upon threshold.
Our use of interest rate swaps and option-based derivatives is subject to internal credit and legal reviews.
On an ongoing basis, we review the credit fundamentals of all of our derivative counterparties,
clearinghouses, and clearing members to confirm that they continue to meet our internal risk
management standards.
Master Netting and Collateral Agreements
We use master netting and collateral agreements to reduce our credit risk exposure to our derivative
counterparties for interest-rate swap and option-based derivatives. Master netting agreements provide for
the netting of amounts receivable and payable from an individual counterparty, which reduces our
exposure to the counterparty in the event of default. On a daily basis, the market value of each
counterparty’s derivatives outstanding is calculated to determine the amount of our net credit exposure,
which is equal to derivatives in a net gain position by counterparty after giving consideration to collateral
posted.
In the event a counterparty defaults on its obligations under the derivatives agreement and the default is
not remedied in the manner prescribed in the agreement, we have the right under the agreement to direct
the custodian bank to transfer the collateral to us or to sell the collateral and transfer the proceeds to us.
At December 31, 2015 and 2014, all amounts of cash collateral related to derivatives with master netting
and collateral agreements were offset against derivative assets, net or derivative liabilities, net, as
applicable.
In the event that all of our counterparties for OTC interest-rate swaps and option-based derivatives were
to have defaulted simultaneously on December 31, 2015, our maximum loss for accounting purposes
after applying netting agreements and collateral on an individual counterparty basis would have been