Wells Fargo 2015 Annual Report Download - page 204

Note 14: Guarantees, Pledged Assets and Collateral (continued)
SECURITIES LENDING AND OTHER INDEMNIFICATIONS As
a securities lending agent, we lend debt and equity securities
from participating institutional clients’ portfolios to third-party
borrowers. These arrangements are for an indefinite period of
time, and we indemnify our clients against default by the
borrower in returning these lent securities. This indemnity is
supported by collateral received from the borrowers and is
generally in the form of cash or highly liquid securities that are
marked to market daily. For the transactions subject to the
indemnifications, the fair value of securities loaned out at
December 31, 2015 and 2014, totaled $0 million and
$211 million, respectively. The fair value of collateral supporting
the loaned securities was $0 million and $218 million at
December 31, 2015 and 2014, respectively.
We use certain third-party clearing agents to clear and settle
transactions on behalf of some of our institutional brokerage
customers. We indemnify the clearing agents against loss that
could occur for non-performance by our customers on
transactions that are not sufficiently collateralized. Transactions
subject to the indemnifications may include customer
obligations related to the settlement of margin accounts and
short positions, such as written call options and securities
borrowing transactions. Outstanding customer obligations were
$352 million and $950 million and the related collateral was
$1.5 billion and $5.6 billion at December 31, 2015 and 2014,
respectively. Our estimate of maximum exposure to loss, which
requires judgment regarding the range and likelihood of future
events, was $1.8 billion as of December 31, 2015, and $5.7 billion
as of December 31, 2014.
We enter into other types of indemnification agreements in
the ordinary course of business under which we agree to
indemnify third parties against any damages, losses and
expenses incurred in connection with legal and other
proceedings arising from relationships or transactions with us.
These relationships or transactions include those arising from
service as a director or officer of the Company, underwriting
agreements relating to our securities, acquisition agreements
and various other business transactions or arrangements.
Because the extent of our obligations under these agreements
depends entirely upon the occurrence of future events, we are
unable to determine our potential future liability under these
agreements. We do, however, record a liability for residential
mortgage loans that we expect to repurchase pursuant to various
representations and warranties. See Note 9 (Mortgage Banking
Activities) for additional information on the liability for
mortgage loan repurchase losses.
WRITTEN PUT OPTIONS Written put options are contracts
that give the counterparty the right to sell to us an underlying
instrument held by the counterparty at a specified price and may
include options, floors, caps and credit default swaps. These
written put option contracts generally permit net settlement.
While these derivative transactions expose us to risk if the option
is exercised, we manage this risk by entering into offsetting
trades or by taking short positions in the underlying instrument.
We offset substantially all put options written to customers with
purchased options. Additionally, for certain of these contracts,
we require the counterparty to pledge the underlying instrument
as collateral for the transaction. Our ultimate obligation under
written put options is based on future market conditions and is
only quantifiable at settlement. See Note 16 (Derivatives) for
additional information regarding written derivative contracts.
LOANS AND MHFS SOLD WITH RECOURSE In certain loan
sales or securitizations, we provide recourse to the buyer
whereby we are required to indemnify the buyer for any loss on
the loan up to par value plus accrued interest. We provide
recourse, predominantly to the GSEs, on loans sold under
various programs and arrangements. Predominantly all of these
programs and arrangements require that we share in the loans’
credit exposure for their remaining life by providing recourse to
the GSE, up to 33.33% of actual losses incurred on a pro-rata
basis in the event of borrower default. Under the remaining
recourse programs and arrangements, if certain events occur
within a specified period of time from transfer date, we have to
provide limited recourse to the buyer to indemnify them for
losses incurred for the remaining life of the loans. The maximum
exposure to loss reported in the accompanying table represents
the outstanding principal balance of the loans sold or securitized
that are subject to recourse provisions or the maximum losses
per the contractual agreements. However, we believe the
likelihood of loss of the entire balance due to these recourse
agreements is remote, and amounts paid can be recovered in
whole or in part from the sale of collateral. During 2015 and
2014 we repurchased $6 million and $14 million, respectively, of
loans associated with these agreements. We also provide
representation and warranty guarantees on loans sold under the
various recourse programs and arrangements. Our loss exposure
relative to these guarantees is separately considered and
provided for, as necessary, in determination of our liability for
loan repurchases due to breaches of representation and
warranties. See Note 9 (Mortgage Banking Activities) for
additional information on the liability for mortgage loan
repurchase losses.
FACTORING GUARANTEES Under certain factoring
arrangements, we are required to purchase trade receivables
from third parties, generally upon their request, if receivable
debtors default on their payment obligations.
OTHER GUARANTEES We are members of exchanges and
clearing houses that we use to clear our trades and those of our
customers. It is common that all members in these organizations
are required to collectively guarantee the performance of other
members. Our obligations under the guarantees are based on
either a fixed amount or a multiple of the collateral we are
required to maintain with these organizations. We have not
recorded a liability for these arrangements as of the dates
presented in the previous table because we believe the likelihood
of loss is remote.
Other guarantees also include liquidity agreements and
contingent performance arrangements. We provide liquidity to
certain off-balance sheet entities that hold securitized fixed-rate
municipal bonds and consumer or commercial assets that are
partially funded with the issuance of money market and other
short-term notes. See Note 8 (Securitization and Variable
Interest Entities) for additional information on securitization
and VIEs.
Under our contingent performance arrangements, we are
required to pay the counterparties to transactions related to
various customer relationships and lease agreements if third
parties default on certain obligations.
Wells Fargo & Company
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