Freddie Mac 2015 Annual Report Download - page 74

Management's Discussion and Analysis Our Business Segments | Investments
Freddie Mac 2015 Form 10-K 72
for additional information, including the measurement of the interest rate sensitivity of our financial assets
and liabilities.
Typically there is an interest rate risk mismatch between our financial assets and the other debt that we
use to fund those assets. For example, many investors in our callable Medium-term Notes prefer to have
final maturities of 5 years or less. While this type of debt helps us to meet our need for longer-term
liquidity, it may not match the mortgage assets' interest-rate risk characteristics. In this case, we would
typically use interest-rate derivatives to reduce the economic risk exposure between our financial assets
and liabilities. Using our risk management framework described in the "Risk Management - Interest Rate
and Other Market Risks" section, we seek to reduce this impact to low levels.
We also could consider the expected holding periods of our financial assets and liabilities. Our debt terms
are generally shorter than our assets' projected life. As a result, we will likely have to reissue debt to
continue to hold the assets. Changes in spreads on future debt issuances may impact the future cash
flows of our portfolio. We at times attempt to manage the impact of interest-rates on future debt issuance.
Additionally, financial assets that are likely to be sold prior to their final maturity may have a different debt
and derivative mix than financial assets that we plan to hold for a longer period. As a result, interest rate
risk measurements for those assets may include additional assumptions (such as a view on expected
changes in spreads) concerning their price sensitivity rather than just a longer-term view of cash flows.
To manage our interest rate risk, we primarily use interest rate swaps, options, swaptions, and futures.
When we use derivatives to mitigate our risk exposures, we consider a number of factors, including cost,
exposure to counterparty risk, and our overall risk management strategy.
Customers
Our unsecured other debt securities and structured mortgage-related securities are initially purchased by
dealers and redistributed to their customers. The customers for these securities generally include state
and local governments, insurance companies, money managers, central banks, depository institutions,
and pension funds. Our customers under our loan cash purchase program are a variety of lenders, as
discussed in “Single-Family Guarantee - Business Overview - Customers.”
Competition
Our competitors in the Investments segment are firms that invest in loans and mortgage-related assets,
and issue corporate debt, including Fannie Mae, REITs, supranationals (international institutions that
provide development financing for member countries), commercial and investment banks, dealers, thrift
institutions, insurance companies, the Federal Farm Credit Banks, and the FHLBs.