Freddie Mac 2015 Annual Report Download - page 135

Management's Discussion and Analysis Risk Management | Institutional Credit Risk
Freddie Mac 2015 Form 10-K 133
December 31, 2015
UPB
(dollars in millions) Credit Rating(1)
Credit
Rating
Outlook(1)
Gross
Unrealized
Losses Coverage Outstanding
% of Total
Coverage
Outstanding
Ambac Assurance Corporation (Ambac) Not Rated N/A $ 7 $ 2,888 51%
National Public Finance Guarantee Corp. A- Negative 3 1,046 18%
Financial Guaranty Insurance Company
(FGIC) Not Rated N/A 4 714 12%
MBIA Insurance Corp. B- Stable — 697 12%
Assured Guaranty Municipal Corp. A Stable — 303 5%
Syncora Guarantee Inc. Not Rated N/A — 30 1%
CIFG Assurance North America, Inc. Not Rated N/A — 30 1%
Total $ 14 $ 5,708 100%
(1) Ratings and outlooks are for the corporate entity to which we have the greatest exposure. Coverage amounts may include
coverage provided by consolidated affiliates and subsidiaries of the counterparty. Latest rating available as of February 4,
2016. Represents the lower of S&P and Moody’s credit ratings and outlooks stated in terms of the S&P equivalent.
We expect to receive substantially less than full payment of our claims from Ambac and FGIC as these
companies are either insolvent or in rehabilitation. We believe that we will also likely receive substantially
less than full payment of our claims from some of our other bond insurers because we believe they also
lack sufficient ability to fully meet all of their expected lifetime claims-paying obligations to us as such
claims emerge. Some of our bond insurers are in runoff mode and not writing new business.
Derivative Counterparties
Overview
We use cleared derivatives, exchange-traded derivatives, and OTC derivatives, and are exposed to the
non-performance of each of our derivative counterparties. The Investments segment manages this risk for
the company. Our derivative counterparty credit exposure relates principally to interest-rate derivative
contracts. We maintain internal standards for approving new derivative counterparties, clearinghouses,
and clearing members.
• Cleared derivatives - Beginning with contracts executed or modified on or after June 10, 2013, the
types of interest-rate swaps that we use most frequently became subject to the central clearing
requirement of the Dodd-Frank Act, which has resulted in additional costs. We are required to post
initial and variation margin with our clearing members in connection with such transactions. Our
exposure to the clearinghouses we use to clear such interest-rate derivatives, and to the clearing
members that administer our transactions once accepted for clearing, has increased and may
become more concentrated over time. This concentration exposes us to the risk of a failure of a
clearinghouse. However, the use of cleared derivatives mitigates our institutional credit risk exposure
to individual counterparties because a central counterparty is substituted for individual counterparties.
The amount of initial margin we must post for cleared and exchange-traded derivatives may be
based, in part, on S&P or Moody’s credit rating of our long-term senior unsecured debt securities. The
lowering or withdrawal of our credit rating by S&P or Moody’s may increase our obligation to post
margin, depending on the amount of the counterparty’s exposure to Freddie Mac with respect to the
derivative transactions.
• Exchange-traded derivatives - We are required to post initial and variation margin with our clearing