Fannie Mae 2005 Annual Report Download - page 307

(1)
We manage collateral requirements based on the lower credit rating of the legal entity as issued by Standard & Poor’s
and Moody’s. The credit rating reflects the equivalent Standard & Poor’s rating for any ratings based on Moody’s
scale.
(2)
Includes MBS options, defined benefit mortgage insurance contracts, forward starting debt and swap credit enhance-
ments accounted for as derivatives.
(3)
Represents the exposure to credit loss on derivative instruments, which is estimated by calculating the cost, on a
present value basis, to replace all outstanding contracts in a gain position. Derivative gains and losses with the same
counterparty are presented net where a legal right of offset exists under an enforceable master netting agreement. This
table excludes mortgage commitments accounted for as derivatives.
(4)
Represents the collateral held as of December 31, 2005 and 2004, adjusted for the collateral transferred subsequent to
December 31 based on credit loss exposure limits on derivative instruments as of December 31, 2005 and 2004. Settle-
ment dates vary by counterparty and range from one to three business days following the credit loss exposure valuation
dates of December 31, 2005 and 2004. The value of the collateral is reduced in accordance with counterparty agree-
ments to help ensure recovery of any loss through the disposition of the collateral. We posted non-cash collateral of
$476 and $56 million related to our counterparties credit exposure to us as of December 31, 2005 and 2004,
respectively.
As of December 31, 2005, all of our interest rate and foreign currency derivative transactions, consisting of
$662 million net collateral exposure and $643.3 billion notional amount, were with counterparties rated A or
better by Standard & Poor’s and Moody’s. To reduce our credit risk concentration, our interest rate and foreign
currency derivative instruments were diversified among 21 counterparties as of December 31, 2005. Of the
$72 million in other derivatives as of December 31, 2005, approximately 96% of the net exposure consisted of
mortgage insurance contracts, which were all with counterparties rated better than A by any of Standard &
Poor’s, Moody’s or Fitch. As of December 31, 2005, the largest net exposure to a single interest rate and
foreign currency counterparty was with a counterparty rated AA, which represented approximately $87 million,
or 12%, of our total net exposure of $734 million.
As of December 31, 2004, all of our interest rate and foreign currency derivative transactions, consisting of
$454 million net collateral exposure and $689.4 billion notional amount, were with counterparties rated A or
better by Standard & Poor’s and Moody’s. To reduce our credit risk concentration, our interest rate and foreign
currency derivative instruments were diversified among 23 counterparties as of December 31, 2004. Of the
$88 million in other derivatives as of December 31, 2004, approximately 98% of the net exposure consisted of
mortgage insurance contracts, which were all with counterparties rated better than A by any of Standard &
Poor’s, Moody’s or Fitch. As of December 31, 2004, the largest net exposure to a single interest rate and
foreign currency counterparty was with a counterparty rated AA, which represented approximately $70 million,
or 13%, of our total net exposure of $542 million.
Parties Associated with our Off-Balance Sheet Transactions. We enter into financial instrument transactions
that create off-balance sheet credit risk in the normal course of our business. These transactions are designed
to meet the financial needs of our customers, and manage our credit, market or liquidity risks.
We have entered into guaranties that are not recognized in the consolidated balance sheets. Our maximum
potential exposure under these guaranties is $322.3 billion and $444.5 billion as of December 31, 2005 and
2004, respectively. In the event that we would be required to make payments under these guaranties, we would
pursue recovery through our right to the collateral backing the underlying loans, available credit enhancements
and recourse with third-parties that provide a maximum coverage of $37.0 billion and $42.6 billion as of
December 31, 2005 and 2004, respectively.
F-78
FANNIE MAE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)