Freddie Mac 2011 Annual Report Download - page 204

Table 74 — Derivative Impact on PMVS-L (50 bps)
Before
Derivatives
After
Derivatives
Effect of
Derivatives
(in millions)
At:
December 31, 2011. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,470 $465 $(2,005)
December 31, 2010. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,614 $588 $(3,026)
Duration Gap Results
We actively measure and manage our duration gap exposure on a daily basis. In addition to duration gap
management, we also measure and manage the price sensitivity of our portfolio to eleven different specific interest rate
changes from three months to 30 years. The price sensitivity of an instrument to specific changes in interest rates is
known as the instrument’s key rate duration risk. By managing our duration exposure both in aggregate through duration
gap and to specific changes in interest rates through key rate duration, we expect to limit our exposure to interest rate
changes for a wide range of interest rate yield curve scenarios. Our average duration gap, rounded to the nearest month,
for the months of December 2011 and 2010 was zero months in both periods. Our average duration gap, rounded to the
nearest month, during the years ended December 31, 2011 and 2010 was zero months in both periods.
The disclosure in our Monthly Volume Summary reports, which are available on our website at www.freddiemac.com
and in current reports on Form 8-K we file with the SEC, reflects the average of the daily PMVS-L, PMVS-YC and
duration gap estimates for a given reporting period (a month, quarter or year).
Derivative-Related Risks
Our use of derivatives exposes us to credit risk with respect to our counterparties to derivative transactions. Through
counterparty selection, all derivative transactions are executed in a manner that seeks 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. Board-level counterparty limits are approved by the Board’s Business and Risk
Committee. Management and Board counterparty limits, which include current exposure and potential exposure in a stress
scenario, are monitored by members of our Enterprise Risk Management division, which is responsible for establishing
and monitoring credit and counterparty risk tolerances for our business activities and reporting to the Business and Risk
Committee as appropriate. See “MD&A — RISK MANAGEMENT — Credit Risk — Institutional Credit Risk —
Derivative Counterparties” for information on derivative counterparty credit risk.
Our use of derivatives also exposes us to derivative market liquidity risk, which 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 a number of 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.
The Dodd-Frank Act will require that, in the future, many types of derivatives be centrally cleared and traded on
exchanges or comparable trading facilities. See “MD&A — RISK MANAGEMENT — Credit Risk — Institutional Credit
Risk — Derivative Counterparties” for additional information on this requirement and our use of a central clearing
platform for interest rate derivatives.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
199 Freddie Mac