Fannie Mae 2002 Annual Report Download - page 68

66 FANNIE MAE 2002 ANNUAL REPORT
At December 31, 2002 and December 31, 2001, 100 percent
of our exposure on derivatives, before consideration of
collateral held, was with counterparties rated A or better by
S&P and Moody’s. Five counterparties with credit ratings of
A or better accounted for approximately 92 percent and
98 percent of our exposure on derivatives before
consideration of collateral held at December 31, 2002 and
2001, respectively. Seventy-one percent of our net exposure
of $197 million at December 31, 2002 was with six
counterparties rated AA or better by S&P and Aa or better
by Moody’s. The percentage of our exposure with these six
counterparties ranged from 2 to 23 percent. In comparison,
five counterparties rated AA or better by S&P and Aa or
better by Moody’s accounted for 83 percent of our net
exposure of $110 million at December 31, 2001. The
percentage of our net exposure with counterparties rated
AA or better by S&P and Aa or better by Moody’s fell during
2002 because of a change in the relative mix of our derivative
products in response to changes in market conditions that
shifted the relative level of activity and exposure between
individual counterparties. We mitigate our net exposure
on derivative transactions through a collateral management
policy, which consists of four primary components: (1)
minimum collateral thresholds; (2) collateral valuation
percentages; (3) overcollateralization based on rating
downgrades; and (4) daily monitoring procedures.
•Minimum Collateral Thresholds
Derivative counterparties are obligated to post collateral to
Fannie Mae when we are exposed to credit losses exceeding
agreed-upon thresholds that are based on counterparty
credit ratings. We determine the collateral amount that
counterparties are required to post based on their credit
rating and our level of credit exposure. The amount of
collateral generally must equal the excess of Fannie Mae’s
exposure over the threshold amount. Table 28 presents
Fannie Mae’s general ratings-based collateral thresholds.
TABLE 28: FANNIE MAE RATINGS-BASED
COLLATERAL THRESHOLDS
Dollars in millions
Credit Rating Exposure
S&P Moody’s Threshold
AAA Aaa . . . . . . . . . . . . . . Mutually agreed on
AA+ Aa1 . . . . . . . . . . . . . . $100
AA Aa2 . . . . . . . . . . . . . . 50
AA- Aa3 . . . . . . . . . . . . . . 50
A+ A1 . . . . . . . . . . . . . . . 25
AA2 . . . . . . . . . . . . . . . 10
A- or below A3 or below . . . . . . . . 0 (see Table 29)
•Collateral Valuation Percentages
We require counterparties to post specific types of collateral
to meet their collateral requirements. The collateral posted
by our counterparties at December 31, 2002 was principally
in the form of cash or U.S. Treasury securities with a small
amount of agency MBS. All of the collateral posted by our
counterparties was in the form of cash or U.S. Treasury
securities at December 31, 2001. We assign each type of
collateral a specific valuation percentage based on its relative
risk. For example, cash receives a 100 percent valuation,
while certain U.S. Treasury instruments may receive only
a 98 percent valuation percentage. In cases where the
valuation percentage for a certain type of collateral is less
than 100 percent, we require counterparties to post an
additional amount of collateral to meet their requirements.
•Overcollateralization Based on Low Credit Ratings
We further reduce our net exposure on derivatives by
generally requiring overcollateralization from counterparties
whose credit ratings have dropped below predetermined
levels. Counterparties falling below these levels must post
collateral beyond the amounts previously noted to meet their
overall requirements. Table 29 presents Fannie Mae’s
standard valuation percentages for overcollateralization
based on counterparty credit ratings. The percentage of
additional collateral is applied to the initial amount of
collateral required to be posted.
TABLE 29: FANNIE MAE STANDARD COLLATERAL
VALUATION PERCENTAGES
Additional Percentage
Credit Rating of Collateral to be Posted
A/A2 or above . . . . . . . . . . . . . . . . . . . . . . . . . . 0%
A-/A3 to BBB+/Baa1 . . . . . . . . . . . . . . . . . . . . 10
BBB/Baa2 or below . . . . . . . . . . . . . . . . . . . . . 25
•Frequent Monitoring Procedures
We mark our collateral position daily against exposure
using both internal and external pricing models and compare
these calculations to our counterparties’ valuations. Both
Fannie Mae and our derivative counterparties transfer
collateral within two business days based on the agreed-upon
valuation. Pursuant to Fannie Mae’s collateral agreements we
reserve the right to value exposure and collateral adequacy at
any time. A New York-based third-party custodian holds all
of the collateral posted to Fannie Mae and monitors the value
on a daily basis.