Fannie Mae 2002 Annual Report Download - page 66

64 FANNIE MAE 2002 ANNUAL REPORT
Table 26 shows the additions and maturities of derivatives by type during 2001 and 2002, along with the expected maturities of
derivatives outstanding at December 31, 2002.
TABLE 26: DERIVATIVE ACTIVITY AND MATURITY DATA
Pay-Fixed/Receive-Variable Swaps2
Receive-Fixed
Pay Receive Pay-Variable Basis Caps and
Dollars in millions Amount Rate3Rate3Swaps Swaps Swaptions Other4Total
Notional amounts1:
Balance at January 1, 2001 . . . . . . . . . . . . . . . . . $ 153,737 6.74% 6.79% $ 59,174 $ 14,559 $ 82,528 $ 14,742 $ 324,740
Additions . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90,787 5.39 3.95 33,230 46,150 168,350 100 338,617
Maturities5 . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,844 6.41 4.20 53,335 13,655 30,935 1,449 130,218
Balance at December 31, 2001 . . . . . . . . . . . . . . 213,680 6.21 2.47 39,069 47,054 219,943 13,393 533,139
Additions . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35,117 5.17 1.90 57,949 13,275 239,925 7,889 354,155
Maturities5 . . . . . . . . . . . . . . . . . . . . . . . . . . . 80,285 5.00 1.70 44,648 34,804 62,000 8,962 230,699
Balance on December 31, 2002 . . . . . . . . . . . $168,512 6.07% 1.67% $52,370 $25,525 $397,868 $12,320 $656,595
Future Maturities of Notional Amounts6
2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 26,230 5.03% 1.68% $ 15,422 $ 18,090 $ 122,718 $ — $ 182,460
2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,330 5.60 1.68 4,875 6,795 39,100 4,147 70,247
2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,600 6.28 1.67 6,355 170 28,200 1,200 46,525
2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,450 6.19 1.60 3,650 100 12,350 616 28,166
2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,350 5.45 1.69 6,050 100 23,275 — 44,775
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . 89,552 6.51 1.66 16,018 270 172,225 6,357 284,422
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 168,512 6.07% 1.67% $ 52,370 $ 25,525 $ 397,868 $ 12,320 $ 656,595
1Dollars represent notional amounts that indicate only the amount on which payments are being calculated and do not represent the amount at risk of loss.
2Notional amounts include callable swaps of $35 billion and $32 billion with weighted-average pay rates of 6.75 percent and 6.72 percent and weighted-average receive rates of 1.68 percent and 2.54 percent
at December 31, 2002 and December 31, 2001, respectively.
3The weighted-average interest rate payable and receivable is as of the date indicated. The interest rates of the swaps may be variable-rate, so these rates may change as prevailing interest rates change.
4Includes foreign currency swaps, futures contracts, and derivative instruments that provide a hedge against interest rate fluctuations.
5Include matured, called, exercised, and terminated amounts.
6Based on stated maturities. Assumes that variable interest rates remain constant at December 31, 2002 levels.
Derivative Counterparty Risk
At December 31, 2002, over 99 percent of the $657 billion
notional amount of our outstanding derivative transactions
were with counterparties rated A or better both by Standard
& Poor’s (S&P) and Moody’s Investors Services (Moody’s).
Our derivative instruments were diversified among 21 and
23 counterparties at year-end 2002 and 2001, respectively,
to reduce our credit risk concentrations. At December 31,
2002, eight counterparties with credit ratings of A or better
represented approximately 76 percent of the total notional
amount of outstanding derivatives transactions. The
outstanding notional amount for each of these eight
counterparties ranged between 5 percent and 15 percent
of our total outstanding notional amount at December 31,
2002. Each of the remaining counterparties accounted for
less than 5 percent of the total outstanding notional amount
at December 31, 2002. In comparison, eight counterparties
with credit ratings of A or better accounted for
approximately 78 percent of the total notional outstanding
amount at December 31, 2001.
The primary credit exposure that we have on a derivative
transaction is that a counterparty might default on payments
due, which could result in having to replace the derivative
with a different counterparty at a higher cost. The exposure
to counterparty default after offsetting arrangements, such as
master netting agreements and the value of related collateral,
is the appropriate measure of the actual credit risk of
derivative contracts.
We believe the risk of loss on Fannie Mae’s derivatives book is low for
three primary reasons:
(1) our stringent counterparty eligibility standards;
(2) our conservative collateral policy, which has provisions requiring
collateral on our derivative contracts in gain positions; and
(3) our intensive exposure monitoring and management.
Fannie Mae has never experienced a loss on a derivative
transaction due to credit default by a counterparty. The
credit risk on our derivative transactions is low because our
counterparties are of very high credit quality. Our
counterparties consist of large banks, broker-dealers, and
other financial institutions that have a significant presence
in the derivatives market, most of whom are based in the
United States. We manage derivative counterparty credit risk
by contracting only with experienced counterparties that
have high credit ratings. We initiate derivative contracts only
with counterparties rated A or better. As an additional