Sallie Mae 2010 Annual Report Download - page 165

9. Derivative Financial Instruments (Continued)
We use basis swaps to minimize earnings variability caused by having different reset characteristics on
our interest-earning assets and interest-bearing liabilities. These swaps possess a term of up to 14 years with a
pay rate indexed to 91-day Treasury bill, 3-month commercial paper, 52-week Treasury bill, LIBOR, Prime,
Consumer Price Index or 1-year constant maturity Treasury rates. The specific terms and notional amounts of
the swaps are determined based on a review of our asset/liability structure, our assessment of future interest
rate relationships, and on other factors such as short-term strategic initiatives. Hedge accounting requires that
when using basis swaps, the change in the cash flows of the hedge effectively offset both the change in the
cash flows of the asset and the change in the cash flows of the liability. Our basis swaps hedge variable
interest rate risk; however, they generally do not meet this effectiveness criterion because the index of the
swap does not exactly match the index of the hedged assets. Additionally, some of our FFELP Loans can earn
at either a variable or a fixed interest rate depending on market interest rates. Prior to the adoption of new
consolidation accounting guidance, we also had basis swaps that did not meet the effectiveness test that
economically hedge off-balance sheet instruments. As a result, these swaps were recorded at fair value with
changes in fair value reflected currently in the statement of income.
F-62
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts, unless otherwise stated)