Fannie Mae 2010 Annual Report Download - page 186

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netting agreements with three counterparties with whom we may enter into interest rate derivative or foreign
currency derivative transactions in the future.
The Dodd-Frank Act includes additional regulation of the over-the-counter derivatives market that will likely
directly and indirectly affect many aspects of our business and our business partners. Under the Dodd-Frank
Act, if a swap is required by the CFTC to be cleared, it will be unlawful to enter into such a swap unless it is
submitted for clearing to a derivatives clearing organization. In anticipation of those requirements, we cleared
a small number of new interest rate swap transactions with a derivatives clearing organization. The
Dodd-Frank Act also requires certain institutions meeting the definition of “swap dealer” or “major swap
participant” to register with the CFTC. The CFTC and SEC issued joint proposed rules regarding certain
definitions in the Dodd-Frank Act, including the definition of “major swap participant.” See “Legislation and
GSE Reform—Financial Regulatory Reform Legislation: The Dodd-Frank Act” and “Risk Factors” for
additional details regarding the Dodd-Frank Act and risks to our business posed by the Act.
See “Note 10, Derivative Instruments and Hedging Activities” for information on the outstanding notional
amount and additional information on our risk management derivative contracts as of December 31, 2010 and
2009. See “Risk Factors” for a discussion of the risks to our business posed by interest rate risk and a
discussion of the risks to our business as a result of the increasing concentration of our derivatives
counterparties.
Mortgage Originators and Investors
We are routinely exposed to pre-settlement risk through the purchase or sale of closed mortgage loans and
mortgage-related securities with mortgage originators and mortgage investors. The risk is the possibility that
the counterparty will be unable or unwilling to either deliver closed mortgage assets or compensate us for the
cost to cancel or replace the transaction. We manage this risk by determining position limits with these
counterparties, based upon our assessment of their creditworthiness, and monitoring and managing these
exposures.
Debt Security and Mortgage Dealers
The credit risk associated with dealers that commit to place our debt securities is that they will fail to honor
their contracts to take delivery of the debt, which could result in delayed issuance of the debt through another
dealer. The primary credit risk associated with dealers who make forward commitments to deliver mortgage
pools to us is that they may fail to deliver the agreed-upon loans to us on the agreed-upon date, which could
result in our having to replace the mortgage pools at higher cost to meet a forward commitment to sell the
MBS. We manage these risks by establishing approval standards and limits on exposure and monitoring both
our exposure positions and changes in the credit quality of dealers.
Document Custodians
We use third-party document custodians to provide loan document certification and custody services for some
of the loans that we purchase and securitize. In many cases, our lender customers or their affiliates also serve
as document custodians for us. Our ownership rights to the mortgage loans that we own or that back our
Fannie Mae MBS could be challenged if a lender intentionally or negligently pledges or sells the loans that we
purchased or fails to obtain a release of prior liens on the loans that we purchased, which could result in
financial losses to us. When a lender or one of its affiliates acts as a document custodian for us, the risk that
our ownership interest in the loans may be adversely affected is increased, particularly in the event the lender
were to become insolvent. We mitigate these risks through legal and contractual arrangements with these
custodians that identify our ownership interest, as well as by establishing qualifying standards for document
custodians and requiring removal of the documents to our possession or to an independent third-party
document custodian if we have concerns about the solvency or competency of the document custodian.
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