Freddie Mac 2011 Annual Report Download - page 144

$71 million. Our similar exposure as of December 31, 2010 was $32 million. Three counterparties each accounted for
greater than 10% and collectively accounted for 97% of our net uncollateralized exposure to derivative counterparties,
excluding commitments, at December 31, 2011. These counterparties were HSBC Bank USA, Royal Bank of Scotland,
and UBS AG., all of which were rated “A” or above by S&P as of February 27, 2012.
Approximately 99% of our counterparty credit exposure for OTC interest-rate swaps, option-based derivatives,
foreign-currency swaps, and purchased interest rate caps was collateralized at December 31, 2011 (excluding amounts
related to our posting of cash collateral in excess of our derivative liability as determined at the counterparty level). The
remaining exposure was primarily due to exposure amounts below the applicable counterparty collateral posting threshold,
as well as market movements during the time period between when a derivative was marked to fair value and the date we
received the related collateral. In some instances, these market movements result in us having provided collateral that has
fair value in excess of our obligation, which represents our overcollateralization exposure. Collateral is typically
transferred within one business day based on the values of the related derivatives.
In the event a derivative counterparty defaults, our economic loss may be higher than the uncollateralized exposure
of our derivatives if we are not able to replace the defaulted derivatives in a timely and cost-effective fashion. We could
also incur economic loss if the collateral held by us cannot be liquidated at prices that are sufficient to recover the amount
of such exposure. We monitor the risk that our uncollateralized exposure to each of our OTC counterparties for interest-
rate swaps, option-based derivatives, foreign-currency swaps, and purchased interest rate caps will increase under certain
adverse market conditions by performing daily market stress tests. These tests, which involve significant management
judgment, evaluate the potential additional uncollateralized exposure we would have to each of these derivative
counterparties on OTC derivatives contracts assuming certain changes in the level and implied volatility of interest rates
and certain changes in foreign currency exchange rates over a brief time period. Our actual exposure could vary
significantly from amounts forecasted by these tests.
The total exposure on our OTC forward purchase and sale commitments, which are treated as derivatives for
accounting purposes, was $38 million and $103 million at December 31, 2011 and December 31, 2010, respectively.
These commitments are uncollateralized. Because the typical maturity of our forward purchase and sale commitments is
less than 60 days and they are generally settled through a clearinghouse, we do not require master netting and collateral
agreements for the counterparties of these commitments. However, we monitor the credit fundamentals of the
counterparties to our forward purchase and sale commitments on an ongoing basis in an effort to ensure that they continue
to meet our internal risk-management standards.
Selected European Sovereign and Non-Sovereign Exposures
The sovereign debt of Spain, Italy, Ireland, Portugal, and Greece (which we refer to herein as “troubled European
countries”) and the credit status of financial institutions with significant exposure to the troubled European countries has
been adversely impacted due to weaknesses in the economic and fiscal situations of those countries. Moody’s and
Standard & Poor’s recently downgraded a number of European countries, including Italy, Spain, and Portugal. We are
monitoring our exposures to these countries and institutions.
As of December 31, 2011, we did not hold any debt issued by the governments of these troubled European countries
and did not hold any financial instruments entered into with sovereign governments in those countries. As of that date, we
also did not hold any debt issued by corporations or financial institutions domiciled in these troubled European countries
and did not hold any other financial instruments entered into with corporations or financial institutions domiciled in those
countries. For purposes of this discussion, we consider an entity to be domiciled in a country if its parent entity is
headquartered in that country.
Our derivative portfolio and cash and other investments portfolio counterparties include a number of major European
and non-European financial institutions. Many of these institutions operate in Europe, and we believe that all of these
financial institutions have direct or indirect exposure to these troubled European countries. For many of these institutions,
their direct and indirect exposures to these troubled European countries change on a daily basis. We monitor our major
counterparties’ exposures to troubled European countries, and adjust our exposures and risk limits to individual
counterparties accordingly. Our exposures to derivative portfolio and cash and other investments portfolio counterparties
are described in “Derivative Counterparties,” “Cash and Other Investments Counterparties” and “NOTE 16:
CONCENTRATION OF CREDIT AND OTHER RISKS.”
In recent months, we have taken a number of actions designed to reduce our exposures to certain derivative portfolio
and cash and other investments portfolio counterparties due to their exposure to troubled European countries, including
substantially reducing our derivative exposure limits, our limits on the amount of unsecured overnight deposits, and our
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