Fannie Mae 2014 Annual Report Download - page 148

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As of December 31, 2014 and 2013, we had sixteen counterparties with whom we may transact OTC derivatives transactions,
all of which had enforceable master netting arrangements. We had outstanding notional amounts with all these counterparties
and the highest concentration by our total outstanding notional amount was approximately 11% as of December 31, 2014 and
14% as of December 31, 2013.
See “Note 9, Derivative Instruments” and “Note 17, Netting Arrangements” for additional information on our derivative
contracts as of December 31, 2014 and 2013.
Mortgage Originators, Investors and Dealers
We are routinely exposed to pre-settlement risk through the purchase or sale of closed mortgage loans and mortgage-related
securities with mortgage originators, mortgage investors and mortgage dealers. The risk is the possibility that the
counterparty will be unable or unwilling to either deliver 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 by monitoring and managing these exposures.
Debt Security 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. We manage these risks by
establishing approval standards, monitoring our exposure positions and monitoring 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.
Other
We filed claims as a creditor in the bankruptcy case of Lehman Brothers, which filed for bankruptcy in September 2008. In
January 2014, we resolved our outstanding unsecured bankruptcy claims against Lehman Brothers for an allowed amount of
$2.15 billion. As of December 31, 2014, we had received distributions totaling $634 million pursuant to the Lehman Brothers
plan of reorganization, representing approximately 29% of the allowed amount. We may receive additional distributions in
the future, but under the terms of the Lehman Brothers plan of reorganization, we expect that the total amount we will receive
will constitute only a portion of the $2.15 billion allowed amount. Due to the uncertainty of future payments, we recognize
income in our consolidated statement of operations related to these claims upon notification of a claim payout.
Market Risk Management, Including Interest Rate Risk Management
We are subject to market risk, which includes interest rate risk, spread risk and liquidity risk. These risks arise from our
mortgage asset investments. Interest rate risk is the risk of loss in value or expected future earnings that may result from
changes to interest rates. Spread risk or basis risk is the resulting impact of changes in the spread between our mortgage
assets and our debt and derivatives we use to hedge our position. Liquidity risk is the risk that we will not be able to meet our
funding obligations in a timely manner.
Interest Rate Risk Management
Our goal is to manage market risk to be neutral to movements in interest rates and volatility, subject to model constraints and
prevailing market conditions. We employ an integrated interest rate risk management strategy that allows for informed risk
taking within pre-defined corporate risk limits. Decisions regarding our strategy in managing interest rate risk are based upon
our corporate market risk policy and limits that are established by our Chief Market Risk Officer and our Chief Risk Officer
and are subject to review and approval by our Board of Directors. Our Capital Markets Group has primary responsibility for
executing our interest rate risk management strategy.
We have actively managed the interest rate risk of our “net portfolio,” which is defined below, through the following
techniques: (1) asset selection and structuring (that is, by identifying or structuring mortgage assets with attractive