Sallie Mae 2013 Annual Report Download - page 110

Our investment portfolio is composed of very short-term securities issued by a diversified group of highly
rated issuers, limiting our counterparty exposure. Additionally, our investing activity is governed by Board of
Director approved limits on the amount that is allowed to be invested with any one issuer based on the credit
rating of the issuer, further minimizing our counterparty exposure. Counterparty credit risk is considered when
valuing investments and considering impairment.
Related to derivative transactions, protection against counterparty risk is generally provided by International
Swaps and Derivatives Association, Inc. (“ISDA”) Credit Support Annexes (“CSAs”). CSAs require a
counterparty to post collateral if a potential default would expose the other party to a loss. All derivative
contracts entered into by us and Sallie Mae Bank are covered under such agreements and require collateral to be
exchanged based on the net fair value of derivatives with each counterparty. Our securitization trusts require
collateral in all cases if the counterparty’s credit rating is withdrawn or downgraded below a certain level.
Additionally, securitizations involving foreign currency notes issued after November 2005 also require the
counterparty to post collateral to the trust based on the fair value of the derivative, regardless of credit rating. The
trusts are not required to post collateral to the counterparties. In all cases, our exposure is limited to the value of
the derivative contracts in a gain position net of any collateral we are holding. We consider counterparties’ credit
risk when determining the fair value of derivative positions on our exposure net of collateral.
We have liquidity exposure related to collateral movements between us and our derivative counterparties.
Movements in the value of the derivatives, which are primarily affected by changes in interest rate and foreign
exchange rates, may require us to return cash collateral held or may require us to access primary liquidity to post
collateral to counterparties. If our credit ratings are downgraded from current levels, we may be required to
segregate additional unrestricted cash collateral into restricted accounts.
The table below highlights exposure related to our derivative counterparties at December 31, 2013.
(Dollars in millions)
SLM Corporation
and Sallie Mae Bank
Contracts
Securitization Trust
Contracts
Exposure, net of collateral(1) .................. $83 $968
Percent of exposure to counterparties with credit
ratings below S&P AA- or Moody’s Aa3 ...... 94% 40%
Percent of exposure to counterparties with credit
ratings below S&P A- or Moody’s A3 ........ 0% 0%
(1) Our securitization trusts had total net exposure of $772 million related to financial institutions located in France; of this amount,
$577 million carries a guaranty from the French government. The total exposure relates to $5.1 billion notional amount of
cross-currency interest rate swaps held in our securitization trusts, of which $3.4 billion notional amount carries a guaranty
from the French government. Counterparties to the cross currency interest rate swaps are required to post collateral when their
credit rating is withdrawn or downgraded below a certain level. As of December 31, 2013, no collateral was required to be
posted and we are not holding any collateral related to these contracts. Adjustments are made to our derivative valuations for
counterparty credit risk. The adjustments made at December 31, 2013 related to derivatives with French financial institutions
(including those that carry a guaranty from the French government) decreased the derivative asset value by $63 million. Credit
risks for all derivative counterparties are assessed internally on a continual basis.
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