Freddie Mac 2009 Annual Report Download - page 207

similar characteristics. Based upon the results of that comparison, we remit or receive payments to the derivative
counterparty. In addition, we enter into agreements whereby we assume credit risk for mortgage loans held by third parties
in exchange for a monthly fee, where we are obligated to purchase delinquent mortgage loans in certain circumstances.
In addition, we purchase mortgage loans containing debt cancellation contracts, which provide for mortgage debt or
payment cancellation for borrowers who experience unanticipated losses of income dependent on a covered event. The rights
and obligations under these agreements have been assigned to the servicers. However, in the event the servicer does not
perform as required by contract, under our guarantee, we would be obligated to make the required contractual payments.
Derivative-Related Risks
Our use of derivatives exposes us to derivative market liquidity risk. Through counterparty selection, all derivative
transactions are executed in a manner we believe is seeking to control and reduce counterparty credit exposure. In order to
attempt to minimize the potential replacement cost should a derivative counterparty fail, we utilize derivative counterparty
limits. These counterparty limits, which include current exposure and potential exposure in a stress scenario, are monitored
on a daily basis by members of our Credit and Counterparty Risk Management division, which is responsible for establishing
and monitoring credit and counterparty risk tolerances for our business activities. See “MD&A — RISK MANAGEMENT —
Credit Risks — Derivative Counterparties” for information on derivative counterparty credit risk.
Derivative Market Liquidity Risk
Derivative market liquidity risk is the risk that we may not be able to enter into or exit out of derivative transactions at
a reasonable cost. A lack of sufficient capacity or liquidity in the derivatives market could limit our risk management
activities, increasing our exposure to interest-rate risk. To help maintain continuous access to derivative markets, we use a
variety of products and transact with many different derivative counterparties. In addition to OTC derivatives, we also use
exchange-traded derivatives, asset securitization activities, callable debt and short-term debt to rebalance our portfolio.
On an ongoing basis, we review the credit fundamentals of all of our OTC derivative counterparties to confirm that they
continue to meet our internal standards. We assign internal ratings, credit capital and exposure limits to each counterparty
based on quantitative and qualitative analysis, which we update and monitor on a regular basis. We conduct additional
reviews when market conditions dictate or certain events affecting an individual counterparty occur.
We are actively collaborating with external parties to develop a central clearing platform for interest rate derivatives. We
anticipate being able to clear generic interest rate swaps through a central exchange or clearinghouse sometime in 2010.
204 Freddie Mac