Freddie Mac 2015 Annual Report Download - page 28

Management's Discussion and Analysis Consolidated Results of Operations | Derivative Gains (Losses)
Freddie Mac 2015 Form 10-K 26
• Changes in the composition of our derivative portfolio - The mix and balance of our derivative
portfolio changes from period to period as we enter into or terminate derivative instruments to
respond to changes in interest rates and changes in the balances and modeled characteristics of our
assets and liabilities. Changes in the composition of our derivative portfolio will affect the derivative
gains and losses we recognize in a given period, thereby affecting the volatility of comprehensive
income.
While our sensitivity to interest rates on an economic basis remains low based on our models, our
exposure to earnings volatility resulting from our use of derivatives has increased in recent years as we
have changed the mix of our derivative portfolio to align with the changing duration of our hedged assets
and liabilities. We believe the impact of derivatives on our GAAP financial results should be considered in
the context of our overall interest-rate risk profile, including our PMVS and duration gap results. For more
information about our interest-rate risk management activities and the sensitivity of reported earnings to
those activities, see “Risk Management - Interest Rate Risk And Other Market Risks.”
COMPONENTS OF DERIVATIVE GAINS (LOSSES)
The table below presents the components of derivative gains (losses).
Year Ended December 31, Change 2015-2014 Change 2014-2013
(in millions) 2015 2014 2013 $ % $ %
Fair value changes:
Change in interest-rate swaps $ (778) $ (7,294) $ 8,598 $6,516 (89)% $ (15,892) (185)%
Change in option-based derivatives 258 1,437 (2,422) (1,179) (82) 3,859 (159)
Accrual of periodic cash settlements (2,198) (2,625) (3,467) 427 (16) 842 (24)
Other 22 191 (77)(169) (88) 268 (348)
Derivative gains (losses) $ (2,696) $ (8,291) $ 2,632 $5,595 (67)% $ (10,923) (415)%
Key Drivers:
• We recognized derivative losses in 2015 primarily from the accrual of periodic cash settlements. Fair
value changes were less significant in 2015, as interest rates declined slightly.
• We recognized derivative losses in 2014 primarily as a result of the impact of a flattening yield curve
as shorter-term interest rates increased and longer-term interest rates declined during 2014.
• We recognized derivative gains in 2013 primarily as a result of an increase in longer-term interest
rates.