Freddie Mac 2015 Annual Report Download - page 304

Financial Statements Notes to the Consolidated Financial Statements | Note 14
Freddie Mac 2015 Form 10-K 302
The independent validation procedures performed by ERM are intended to ensure that the prices we
receive from third parties are consistent with our observations of market activity, and that fair value
measurements developed using internal data reflect the assumptions that a market participant would use
in pricing our assets and liabilities. These validation procedures include performing a monthly
independent verification of fair value measurements through independent modeling, analytics, and
comparisons to other market source data, if available. Where applicable, prices are back-tested by
comparing actual transaction prices to our fair value measurements. Analytical procedures include
automated checks consisting of prior-period variance analysis, comparisons of actual prices to internally
calculated expected prices based on observable market changes, analysis of changes in pricing ranges,
relative value comparisons, and comparisons using modeled yields. Thresholds are set for each product
category by ERM to identify exceptions that require further analysis. If a price is outside of our established
thresholds, we perform additional verification procedures, including supplemental analytics and/or follow
up discussions with the third-party provider. If we are unable to validate the reasonableness of a given
price, we ultimately do not use that price for fair value measurements in our consolidated financial
statements. These procedures are risk-based and are executed before we finalize the prices used in
preparing our fair value measurements for our financial statements.
In addition to performing the validation procedures noted above, ERM provides independent risk
governance over all valuation processes by establishing and maintaining a corporate-wide valuation
framework and control policy. ERM also independently reviews significant judgments, methodologies, and
valuation techniques to ensure compliance with established policies.
Our Valuation & Finance Model Committee (“Valuation Committee”), which includes representation from
our business areas, ERM, and Finance divisions, provides senior management’s governance over
valuation processes, methodologies, controls and fair value measurements. Identified exceptions are
reviewed and resolved through the verification process and reviewed at the Valuation Committee.
Where models are employed to assist in the measurement and verification of fair values, changes made
to those models during the period are reviewed and approved according to the corporate model change
governance process, with all material changes reviewed at the Valuation Committee. Inputs used by
models are regularly updated for changes in the underlying data, assumptions, valuation inputs, and
market conditions, and are subject to the valuation controls noted above.
Use of Third-Party Pricing Data in Fair Value Measurement
Many of our valuation techniques use, either directly or indirectly, data provided by third-party pricing
services or dealers. The techniques used by these pricing services and dealers to develop the prices
generally are either:
• A comparison to transactions involving instruments with similar collateral and risk profiles, adjusted as
necessary based on specific characteristics of the asset or liability being valued; or
• Industry-standard modeling, such as a discounted cash flow model.
The prices provided by the pricing services and dealers reflect their observations and assumptions
related to market activity, including risk premiums and liquidity adjustments. The models and related
assumptions used by the pricing services and dealers are owned and managed by them and, in many
cases, the significant inputs used in the valuation techniques are not reasonably available to us. However,
we have an understanding of the processes and assumptions used to develop the prices based on our