Freddie Mac 2015 Annual Report Download - page 6

Introduction About Freddie Mac | Executive Summary
Freddie Mac 2015 Form 10-K 4
Variability of Earnings
Our financial results are subject to significant earnings variability from period to period. This variability is
primarily driven by:
• Interest-Rate Volatility — We hold assets and liabilities that expose us to interest-rate risk. Through
our use of derivatives, we manage our exposure to interest-rate risk on an economic basis to a low
level as measured by our models. However, the way we account for our financial assets and liabilities
(i.e., some are measured at amortized cost, while others are measured at fair value), including
derivatives, creates volatility in our earnings when interest rates fluctuate. Based upon the
composition of our financial assets and liabilities, including derivatives, at December 31, 2015, we
generally recognize fair value losses in earnings when interest rates decline. This volatility generally
is not indicative of the underlying economics of our business. This volatility and the declining capital
reserve required under the terms of the Purchase Agreement (ultimately reaching zero in 2018) will
increase the risk of our having a negative net worth and being required to draw from Treasury. We are
exploring ways in which we can limit or manage our exposure to this volatility. For information about
the sensitivity of our financial results to interest-rate volatility, see "MD&A - Risk Management -
Interest-Rate Risk and Other Market Risks."
• Spread Volatility — Spread volatility (i.e., credit spreads, liquidity spreads, risk premiums, etc.), or
OAS, is the risk associated with changes in interest rates in excess of benchmark rates. We hold
assets and liabilities that expose us to spread volatility, which may contribute to significant earnings
volatility. For financial assets and liabilities measured at fair value, we generally recognize fair value
losses when spreads widen. However, we may enter into transactions or take other steps to limit or
manage our exposure to spread volatility.
• Non-Recurring Events — From time to time, we have experienced and will likely continue to
experience significant earnings volatility from non-recurring events, including events such as
settlements with counterparties and changes in certain valuation allowances.