Freddie Mac 2012 Annual Report Download - page 184

Depending on market conditions and the mix of derivatives we employ in connection with our ongoing risk
management activities, our derivative portfolio can be either a net source or a net use of cash. For example, depending on the
prevailing interest-rate environment, interest-rate swap agreements could cause us either to make interest payments to
counterparties or to receive interest payments from counterparties. Purchased options require us to pay a premium while
written options allow us to receive a premium.
We are required to pledge collateral to third parties in connection with secured financing and daily trade activities. In
accordance with contracts with certain derivative counterparties, we post collateral to those counterparties for derivatives in a
net loss position, after netting by counterparty, above agreed-upon posting thresholds. See “NOTE 7: INVESTMENTS IN
SECURITIES — Collateral Pledged” for information about assets we pledge as collateral.
We are involved in various legal proceedings, including those discussed in “LEGAL PROCEEDINGS,” which may
result in a use of cash in order to settle claims or pay certain costs.
For more information on our short- and long-term liquidity needs, see “CONTRACTUAL OBLIGATIONS.”
Our securities and other obligations are not guaranteed by the U.S. government and do not constitute a debt or
obligation of the U.S. government or any agency or instrumentality thereof, other than Freddie Mac.
Liquidity Management
Maintaining sufficient liquidity is of primary importance and we continually strive to enhance our liquidity management
practices and policies. Under these practices and policies, we maintain an amount of cash and cash equivalent reserves in the
form of liquid, high quality short-term investments that is intended to enable us to meet ongoing cash obligations for an
extended period, in the event we do not have access to the short- or long-term unsecured debt markets. We also actively
manage the concentration of debt maturities and closely monitor our monthly maturity profile.
Our liquidity management policies generally provide for us to:
• maintain funds sufficient to cover our maximum cash liquidity needs for at least the following 35 calendar days,
assuming no access to the short- or long-term unsecured debt markets;
• limit the proportion of debt maturing within the next year. We actively manage the composition of short- and long-
term debt, as well as our patterns of redemption of callable debt, to manage the proportion of effective short-term debt
to reduce the risk that we will be unable to refinance our debt as it comes due; and
• maintain unencumbered collateral with a value greater than or equal to the largest projected cash shortfall on any one
day over the following 365 calendar days, assuming no access to the short- and long-term unsecured debt markets.
This is based on a daily forecast of all existing contractual cash obligations over the following 365 calendar days.
On February 7, 2013, FHFA provided updated liquidity guidance which generally requires that our liquidity-related
investments be comprised of short-maturity U.S. Treasury or government guaranteed securities, overnight and term
repurchase agreements, unsecured Federal Funds, bank certificates of deposit, and cash. Throughout 2012, we complied with
all requirements under our liquidity management policies or FHFA guidance, as applicable. Furthermore, during 2012 the
majority of the funds used to cover our short-term cash liquidity needs was invested in short-term assets with a rating of
A-1/P-1 or AAA or was issued by a counterparty with that rating. In the event of a downgrade of a position or counterparty,
as applicable, below minimum rating requirements, our credit governance policies require us to exit from the position within
a specified period.
We also continue to manage our debt issuances to remain in compliance with the aggregate indebtedness limits set forth
in the Purchase Agreement.
We continue to monitor events related to the troubled European countries and took a number of actions in 2011
designed to reduce our exposures, including exposures related to certain derivative portfolio and cash and other investments
portfolio counterparties. For more information, see “RISK MANAGEMENT — Credit Risk — Institutional Credit Risk —
Selected European Sovereign and Non-Sovereign Exposures.”
To facilitate cash management, we forecast cash outflows. These forecasts help us to manage our liabilities with respect
to asset purchases and runoff, when financial markets are not in crisis. For further information on our management of
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