Fannie Mae 2006 Annual Report Download - page 163

analysis contemplate only certain movements in interest rates and are performed at a particular point in time
based on the estimated fair value of our existing portfolio. These sensitivity analyses do not incorporate other
factors that may have a significant effect, most notably the value from expected future business activities and
strategic actions that management may take to manage interest rate risk. As such, these analyses are not
intended to provide precise forecasts of the effect a change in market interest rates would have on us.
Operational Risk Management
Operational risk can manifest itself in many ways, including accounting or operational errors, business
disruptions, fraud, technological failures and other operational challenges resulting from failed or inadequate
internal controls. These events may potentially result in financial losses and other damage to our business,
including reputational harm. In 2006, we implemented a new operational risk management framework that
includes policies designed to identify, measure, monitor and manage operational risks across the company. In
November 2006, we submitted a detailed three-year plan on the design and implementation of this framework
to OFHEO as required by our consent order with OFHEO. Our operational risk management framework is
based on the Basel Committee guidance on sound practices for the management of operational risk broadly
adopted by U.S. commercial banks comparable in size to Fannie Mae. The framework incorporates elements
such as the monitoring of operational loss events, tracking of key risk indicators, use of common terminology
to describe risks and self-assessments of risks and controls in place to mitigate operational risks. We have
recently hired several new senior officers with significant expertise in operational risk management to
implement this new framework.
In addition to the corporate operational risk oversight function, we also maintain programs for the
management of our exposure to other key operational risks, such as mortgage fraud, breaches in information
security and external disruptions to business continuity. These risks are not unique to us and are inherent in
the financial services industry.
Liquidity Risk Management
Liquidity risk is the risk to our earnings and capital that would arise from an inability to meet our cash
obligations in a timely manner. Because liquidity is essential to our business, we have adopted a
comprehensive liquidity risk policy that is designed to provide us with sufficient flexibility to address both
liquidity events specific to our business and market-wide liquidity events. Our liquidity risk policy governs our
management of liquidity risk and outlines our methods for measuring and monitoring liquidity risk. Our
liquidity risk policy, which has been approved by our Board of Directors, outlines the roles and responsibilities
for managing liquidity risk within the company.
We conduct daily liquidity management activities to achieve the goals of our liquidity risk policy. The primary
tools that we employ for liquidity management include the following:
• daily monitoring and reporting of our liquidity position;
• daily forecasting of our ability to meet our liquidity needs over a 90-day period without relying upon the
issuance of unsecured debt;
• daily monitoring of market and economic factors that may impact our liquidity;
• a defined escalation process for bringing any liquidity issues or concerns that may arise to the attention
of higher levels of our management;
• routine testing of our ability to rely upon identified sources of liquidity;
• periodic reporting of our liquidity position to management and oversight by the Market Risk Committee
and Board of Directors;
• periodic review and testing of our liquidity management controls by our Internal Audit department;
• maintaining unencumbered mortgage assets that are available as collateral for secured borrowings
pursuant to repurchase agreements or for sale; and
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