Fannie Mae 2011 Annual Report Download - page 190

Due to the challenging market conditions, several of our custodial depository counterparties experienced ratings
downgrades and liquidity constraints. In response, we reduced the aggregate amount of our funds permitted to be
held with these counterparties and required more frequent remittances of funds.
Our counterparty exposure relating to principal and interest payments held on our behalf decreased significantly
in recent years as a result of (1) the September 2009 adoption of a rule amending the deposit insurance
regulations on mortgage servicer accounts to extend coverage on these accounts on a “per borrower” basis; and
(2) the Dodd-Frank Act, which permanently increased the amount of federal deposit insurance available to
$250,000 per depositor. The Dodd-Frank Act also provides temporary unlimited coverage through December 31,
2012 for noninterest-bearing transaction accounts. We generally use noninterest-bearing transaction accounts for
otherwise ineligible custodial depository institutions.
Issuers of Investments Held in our Cash and Other Investments Portfolio
Our cash and other investments portfolio primarily consists of cash and cash equivalents, federal funds sold and
securities purchased under agreements to resell or similar arrangements, U.S. Treasury securities and asset-
backed securities. Our cash and other investment counterparties are primarily financial institutions and the
Federal Reserve Bank. See “Liquidity and Capital Management—Liquidity Management—Cash and Other
Investments Portfolio” for more detailed information on our cash and other investments portfolio.
Our cash and other investments portfolio, which totaled $113.4 billion as of December 31, 2011, included $48.3
billion of U.S. Treasury securities. We held no unsecured positions as of December 31, 2011. As of
December 31, 2010, our cash and other investments portfolio totaled $61.8 billion and included $31.5 billion of
U.S. Treasury securities and $10.3 billion of unsecured positions, all of which were short-term deposits with
financial institutions that had short-term credit ratings of A-1, P-1, F1 (or equivalent) or higher from S&P’s,
Moody’s and Fitch ratings as of December 31, 2010.
We monitor the credit risk position of our cash and other investments portfolio by duration and rating level. In
addition, we monitor the financial position and any downgrades of these counterparties. The outcome of our
monitoring could result in a range of events, including selling some of these investments. If one of our primary
cash and other investments portfolio counterparties fails to meet its obligations to us under the terms of the
investments, it could result in financial losses to us and have a material adverse effect on our earnings, liquidity,
financial condition and net worth. During 2011, we continued to evaluate the growing uncertainty of the stability
of various European economies and financial institutions and as a result of this evaluation, reduced the number of
counterparties in our cash and other investments portfolio in those markets and began to lend to remaining
counterparties on a secured basis.
Derivative Counterparty Credit Exposure
Our derivative counterparty credit exposure relates principally to interest rate and foreign currency derivatives
contracts. 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 at the counterparty level where the right of legal offset exists. For derivative instruments where the right
of legal offset does not exist, we calculate the replacement cost of the outstanding derivative contracts in a gain
position at the transaction level. The fair value of derivatives in a gain position is included in our consolidated
balance sheets in “Other assets.”
We manage our credit exposure by requiring counterparties to post collateral, which includes cash, U.S. Treasury
securities, agency debt and agency mortgage-related securities. 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 by requiring counterparties to post collateral. We analyze
counterparty credit exposure on our derivative instruments daily and make collateral calls as appropriate based
on the results of internal pricing models and dealer quotes. In the case of a bankruptcy filing by an interest rate or
foreign currency derivative counterparty or other default by the counterparty under the derivative contract, we
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