Fannie Mae 2014 Annual Report Download - page 236

FANNIE MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
F-21
purchase or sell the existing security settles within the period of time that is customary in the market in which those trades
take place.
Additionally, contracts for the forward purchase or sale of when-issued and to-be-announced (“TBA”) securities are exempt
from the derivative accounting requirements if there is no other way to purchase or sell that security, delivery of that security
and settlement will occur within the shortest period possible for that type of security, and it is probable at inception and
throughout the term of the individual contract that physical delivery of the security will occur. Since our commitments for the
purchase of when-issued and TBA securities can be net settled and we do not document that physical settlement is probable,
we account for all such commitments as derivatives.
Derivative Instruments
We recognize all derivatives as either assets or liabilities in our consolidated balance sheets at their fair value on a trade date
basis. We report derivatives in a gain position after offsetting by counterparty in “Other assets” and derivatives in a loss
position after offsetting by counterparty in “Other liabilities” in our consolidated balance sheets.
We offset the carrying amounts of certain derivatives that are in gain positions and loss positions with the same counterparty
as well as cash collateral receivables and payables associated with derivative positions under master netting arrangements.
We offset these amounts only when we have the legal right to offset under the contract and we have met all of the offsetting
conditions.
We evaluate financial instruments that we purchase or issue and other financial and non-financial contracts for embedded
derivatives. To identify embedded derivatives that we must account for separately, we determine if: (1) the economic
characteristics of the embedded derivative are not clearly and closely related to the economic characteristics of the financial
instrument or other contract (i.e., the hybrid contract); (2) the financial instrument or other contract itself is not already
measured at fair value with changes in fair value included in earnings; and (3) a separate instrument with the same terms as
the embedded derivative would meet the definition of a derivative. If the embedded derivative meets all three of these
conditions we elect to carry the hybrid contract in its entirety at fair value with changes in fair value recorded in earnings.
Collateral
We enter into various transactions where we pledge and accept collateral, the most common of which are our derivative
transactions. Required collateral levels vary depending on the credit rating and type of counterparty. We also pledge and
receive collateral under our repurchase and reverse repurchase agreements. In order to reduce potential exposure to
repurchase counterparties, a third-party custodian typically maintains the collateral and any margin. We monitor the fair value
of the collateral received from our counterparties, and we may require additional collateral from those counterparties, as we
deem appropriate.
Cash Collateral
We record cash collateral accepted from a counterparty that we have the right to use as “Cash and cash equivalents” and cash
collateral accepted from a counterparty that we do not have the right to use as “Restricted cash” in our consolidated balance
sheets. We net our obligation to return cash collateral pledged to us against the fair value of derivatives in a gain position
recorded in “Other assets” in our consolidated balance sheets as part of our counterparty netting calculation.
For derivative positions with the same counterparty under master netting arrangements where we pledge cash collateral, we
remove it from “Cash and cash equivalents” and net the right to receive it against the fair value of derivatives in a loss
position recorded in “Other liabilities” in our consolidated balance sheets as a part of our counterparty netting calculation.
Non-Cash Collateral
We classify securities pledged to counterparties as either “Investments in securities” or “Cash and cash equivalents” in our
consolidated balance sheets. Securities pledged to counterparties that have been consolidated with the underlying assets
recognized as loans are included as “Mortgage loans” in our consolidated balance sheets.
Our liability to third party holders of Fannie Mae MBS that arises as the result of a consolidation of a securitization trust is
collateralized by the underlying loans and/or mortgage-related securities.