Fannie Mae 2009 Annual Report Download - page 336

at a higher cost or may be unable to find a suitable replacement. We estimate our exposure to credit loss on
derivative instruments by calculating the replacement cost, on a present value basis, to settle at current market
prices all outstanding derivative contracts in a net gain position by counterparty where the right of legal offset
exists, such as master netting agreements, and by transaction where the right of legal offset does not exist.
Typically, we seek to manage credit exposure by contracting with experienced counterparties that are rated A-
(or its equivalent) or better. These counterparties consist of large banks, broker-dealers and other financial
institutions that have a significant presence in the derivatives market, most of which are based in the United
States.
We also manage our exposure by requiring counterparties to post collateral. We have a collateral management
policy with provisions for requiring collateral on interest rate and foreign currency derivative contracts in net
gain positions based upon the counterparty’s credit rating. The collateral includes cash, U.S. Treasury
securities, agency debt and agency mortgage-related securities. Cash collateral posted to us prior to July 2009
and non-cash collateral posted to us at any time is held and monitored daily by a third-party custodian. Since
July 2009, cash collateral posted to us is held and monitored by us and transacted through a third party. We
analyze credit exposure on our derivative instruments daily and make collateral calls as appropriate based on
the results of internal pricing models and dealer quotes.
The table below displays our credit exposure on outstanding risk management derivative instruments in a gain
position by counterparty credit ratings, as well as the notional amount outstanding and the number of
counterparties for all risk management derivatives as of December 31, 2009 and 2008.
AAA AA+/AA/AA- A+/A/A- Subtotal Other
(2)
Total
Credit Rating
(1)
As of December 31, 2009
(Dollars in millions)
Credit loss exposure
(3)
. . . . . . . . . . . . . . . . . . . . . . $— $ 658 $ 583 $ 1,241 $ 84 $ 1,325
Less: Collateral held
(4)
. . . . . . . . . . . . . . . . . . . . . . — 580 507 1,087 — 1,087
Exposure net of collateral . . . . . . . . . . . . . . . . . . . . $— $ 78 $ 76 $ 154 $ 84 $ 238
Additional information:
Notional amount
(5)
. . . . . . . . . . . . . . . . . . . . . . . $— $220,791 $623,668 $844,459 $748 $845,207
Number of counterparties
(5)
................. — 7 9 16
AAA AA+/AA/AA- A+/A/A- Subtotal Other
(2)
Total
Credit Rating
(1)
As of December 31, 2008
(Dollars in millions)
Credit loss exposure
(3)
. . . . . . . . . . . . . . . . . . . $ — $ 3,044 $ 686 $ 3,730 $101 $ 3,831
Less: Collateral held
(4)
. . . . . . . . . . . . . . . . . . . — 2,951 673 3,624 — 3,624
Exposure net of collateral . . . . . . . . . . . . . . . . . $ — $ 93 $ 13 $ 106 $101 $ 207
Additional information:
Notional amount
(5)
. . . . . . . . . . . . . . . . . . . . $250 $533,317 $664,155 $1,197,722 $874 $1,198,596
Number of counterparties
(5)
.............. 1 8 10 19
(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 defined benefit mortgage insurance contracts and swap credit enhancements as of December 31, 2009 and
2008, and guaranteed grantor trust swaps as of December 31, 2008, accounted for as derivatives where the right of
legal offset does not exist.
F-78
FANNIE MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)