Freddie Mac 2012 Annual Report Download - page 180

Nearly all 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, 2012 (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.
For futures and clearinghouse-settled derivatives in the table above, exposure, net of collateral does not include the
maintenance margin held by clearing firms or clearinghouses which mitigates our exposure to loss from individual
counterparties. However, maintenance margin held by clearing firms or clearinghouses exposes us to institutional credit risk
in the event that our clearing firm or the exchange’s clearinghouse fail to meet their obligations. The use of exchange-traded
derivatives mitigates our institutional credit risk exposure to individual counterparties because a central counterparty is
substituted for individual counterparties, and changes in the value of open exchange-traded contracts are settled daily via
payments made through the financial clearinghouse established by each exchange.
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 $20 million and $38 million at December 31, 2012 and 2011, respectively. We do not require master netting
and collateral agreements for the counterparties of these commitments. However, the typical maturity of our forward
purchase and sale commitments is less than 60 days, and we monitor the credit fundamentals of the counterparties to these
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 the “troubled European
countries”) and the credit status of financial institutions with significant exposure to the troubled European countries has
been adversely affected due to ongoing weaknesses in the economic and fiscal situations of those countries. In recent periods,
Moody’s and S&P downgraded a number of European countries. We are monitoring our exposures to European countries and
institutions.
As of December 31, 2012, we did not hold any debt issued by the governments of the 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 the 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 the troubled European countries. For many of these institutions, their
direct and indirect exposures to the troubled European countries change on a daily basis. We monitor our major
counterparties’ exposures to the 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 15:
CONCENTRATION OF CREDIT AND OTHER RISKS.”
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