Freddie Mac 2012 Annual Report Download - page 178

• strict standards for approving new derivative counterparties, clearing organizations, and clearing firms;
• ongoing monitoring and internal analysis of our positions with, and credit rating of, each counterparty, clearing
organization, and clearing firm;
• managing diversification mix among counterparties;
• master netting agreements and collateral agreements; and
• stress-testing to evaluate potential exposure under possible adverse market scenarios.
On an ongoing basis, we review the credit fundamentals of all of our OTC derivative counterparties, clearing
organizations, and clearing firms 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.
All of our OTC derivative counterparties are major financial institutions and are experienced participants in the OTC
derivatives market. On June 21, 2012, Moody’s downgraded the credit ratings of several banks, which resulted in changes to
their collateral posting thresholds with us and a reduction of certain activities we undertake with these counterparties. In
order to mitigate the credit risk we face from lower rated derivative counterparties, we are enhancing our collateral
management process to require such counterparties to post additional collateral to us in an amount that exceeds our credit
exposure to the counterparty. Additionally, the CFTC and other regulatory agencies, including FHFA, have issued proposed
margin rules that generally would require counterparties to OTC swaps to post collateral as initial margin for all trades even
where there are no counterparty credit exposures. See “NOTE 15: CONCENTRATION OF CREDIT AND OTHER RISKS”
for additional information.
The relative concentration of our derivative exposure among our primary derivative counterparties remains high as
compared to historical levels. This concentration has increased significantly since 2008 primarily due to industry
consolidation and the failure or weakening of certain counterparties, and could further increase.
The table below summarizes our exposure to our derivative counterparties, which represents the net positive fair value
of derivative contracts, related accrued interest and collateral held by us from our counterparties, after netting by
counterparty as applicable (i.e., net amounts due to us under derivative contracts which are recorded as derivative assets). In
addition, we have derivative liabilities where we post collateral to counterparties. Pursuant to certain collateral agreements
we have with derivative counterparties, the amount of collateral that we are required to post is based on the credit rating of
our long-term senior unsecured debt securities from S&P or Moody’s. The lowering or withdrawal of our credit rating by
S&P or Moody’s may increase our obligation to post collateral, depending on the amount of the counterparty’s exposure to
Freddie Mac with respect to the derivative transactions. At December 31, 2012, our collateral posted exceeded our collateral
held. See “CONSOLIDATED BALANCE SHEETS ANALYSIS — Derivative Assets and Liabilities, Net” and “Table 31 —
Derivative Fair Values and Maturities” for a reconciliation of fair value to the amounts presented on our consolidated balance
sheets as of December 31, 2012, which includes both cash collateral held and posted by us, net.
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