General. The Bank may enter into interest rate swaps (including callable, putable, and basis swaps); and cap and floor agreements (collectively, interest rate exchange agreements or derivatives). Most of the Bank’s interest rate exchange agreements are executed in conjunction with the origination of advances or the issuance of consolidated

obligations to create variable rate structures. The interest rate exchange agreements are generally executed at the same time the advances and consolidated obligations are transacted and generally have the same maturity dates as the related hedged instrument. The Bank transacts most of its derivatives with large banks and major broker-dealers. Some of these banks and broker-dealers or their affiliates buy, sell, and distribute consolidated obligations. Derivatives may be either uncleared or cleared. In an uncleared derivative transaction, the Bank’s counterparty is the executing bank or broker-dealer. In a cleared derivative transaction, the Bank may execute the transaction either directly with the executing bank or broker-dealer or on a swap execution facility, but in either case, the Bank’s counterparty is a derivatives clearing organization or clearinghouse once the derivative transaction has been accepted for clearing. The Bank is not a derivatives dealer and does not trade derivatives for short-term profit.

Additional uses of interest rate exchange agreements include: (i) offsetting embedded features in assets and liabilities, (ii) hedging anticipated issuance of debt, (iii) matching against consolidated obligation discount notes to create the equivalent of callable or non-callable fixed rate debt, (iv) modifying the repricing frequency of assets and liabilities, (v) matching against certain advances and consolidated obligations for which the Bank elected the fair value option, and (vi) exactly offsetting other derivatives cleared at a derivatives clearing organization. The Bank’s use of interest rate exchange agreements results in one of the following classifications: (i) a fair value hedge of an underlying financial instrument or (ii) an economic hedge of assets, liabilities, or other derivatives.

Interest Rate Swaps – An interest rate swap is an agreement between two entities to exchange cash flows in the future. The agreement sets the dates on which the cash flows will be paid and the manner in which the cash flows will be calculated. One of the simplest forms of an interest rate swap involves the promise by one party to pay cash flows equivalent to the interest on a notional principal amount at a predetermined fixed rate for a given period of time. In return for this promise, the party receives cash flows equivalent to the interest on the same notional principal amount at a variable rate for the same period of time. The variable rate received or paid by the Bank in most interest rate exchange agreements is based on a daily repricing index, such as the Secured Overnight Financing Rate (SOFR) or the effective Fed Funds rate.

Interest Rate Caps and Floors – In a cap agreement, additional cash flow is generated if the price or interest rate of an underlying variable rate rises above a certain threshold (or cap) price. In a floor agreement, additional cash flow is generated if the price or interest rate of an underlying variable rate falls below a certain threshold (or floor) price. Caps and floors may be used in conjunction with assets or liabilities. In general, caps and floors are designed as protection against the interest rate on a variable rate asset or liability rising above or falling below a certain level.

Hedging Activities. The Bank documents at inception all relationships between derivatives designated as hedging instruments and hedged items, its risk management objectives and strategies for undertaking various hedge transactions, and its method of assessing hedge effectiveness. Derivatives designated as fair value hedges may be transacted to hedge: (i) assets and liabilities on the Statements of Condition, (ii) firm commitments, or (iii) forecasted transactions. The Bank also formally assesses (both at hedge inception and on an ongoing basis) whether the hedging derivatives have been effective in offsetting changes in the fair value of hedged items attributable to the hedged risk and whether those derivatives may be expected to remain effective hedges in future periods. The Bank typically uses regression analyses or other statistical analyses to assess the effectiveness of its hedges. When it is determined that a derivative has not been or is not expected to be effective as a hedge, the Bank discontinues hedge accounting prospectively.

Investments – The Bank may invest in U.S. Treasury and agency obligations as well as agency MBS. In the past, the Bank has also invested in PLRMBS rated AAA at the time of acquisition. The interest rate and prepayment risk associated with these investment securities is managed through a combination of debt issuance and derivatives. The Bank may manage prepayment risk and interest rate risk by funding investment securities with consolidated

obligations that have call features or by hedging the prepayment risk with a combination of consolidated obligations and callable swaps. The Bank may execute callable swaps in conjunction with the issuance of certain liabilities to create funding that is economically equivalent to fixed rate callable debt. Although these derivatives are economic hedges against prepayment risk and are designated to individual liabilities, they do not receive either fair value or cash flow hedge accounting treatment. Investment securities may be classified as trading, AFS, or HTM.

The Bank may also manage the risk arising from changing market prices or cash flows of investment securities classified as trading or AFS by entering into interest rate exchange agreements that offset the changes in fair value or cash flows of the securities. Hedge relationships that involve trading securities are designated as economic hedges, while hedge relationships that involve AFS securities are designated as fair value hedges. For trading securities that have been designated as an economic hedge, the market value changes of both the trading securities and the associated interest rate exchange agreements are included in other income in the Statements of Income. For AFS securities that have been hedged and qualify as a fair value hedge, the Bank records the portion of the change in the fair value of the investment related to the risk being hedged in interest income together with the related change in the fair value of the derivative, and records the remainder of the change in the fair value of the investment in AOCI as “Net unrealized gain/(loss) on AFS securities.”

Advances – The Bank offers a wide range of advances structures to meet members’ funding needs. These advances may have maturities up to 30 years with fixed or adjustable rates and may include early termination features or options. The Bank may use derivatives to adjust the repricing and options characteristics of advances to more closely match the characteristics of the Bank’s funding liabilities. In general, whenever a member executes a fixed rate advance, fixed rate advance with embedded options, or a variable rate advance with embedded options, the Bank will simultaneously execute an interest rate exchange agreement with terms that offset the terms and any embedded options in the advance. The combination of the advance and the interest rate exchange agreement effectively creates a variable rate asset. Fixed rate advances without options that are offset with an interest rate exchange agreement are generally treated as fair value hedges. Advances with embedded options are recorded using the fair value option and are economically hedged using interest rate exchange agreements.

Mortgage Loans – The Bank’s investment portfolio includes fixed rate mortgage loans. The prepayment options embedded in mortgage loans can result in extensions or contractions in the expected repayment of these investments, depending on changes in estimated prepayment speeds. The Bank manages the interest rate risk and prepayment risk associated with fixed rate mortgage loans through a combination of debt issuance and derivatives. The Bank uses both callable and non-callable debt to achieve cash flow patterns and market value sensitivities for liabilities similar to those expected on the mortgage loans. Net income could be reduced if the Bank replaces prepaid mortgage loans with lower-yielding assets and the Bank’s higher funding costs are not reduced accordingly.

The Bank executes callable swaps in conjunction with the issuance of certain consolidated obligations to create funding that is economically equivalent to fixed rate callable bonds. Although these derivatives are economic hedges against the prepayment risk of specific loan pools and are referenced to individual liabilities, they do not receive either fair value or cash flow hedge accounting treatment.

Consolidated Obligations – Consolidated obligation bonds may be structured to meet the Bank’s or the investors’ needs. Common structures include fixed rate bonds with or without call options and adjustable rate bonds with or without embedded options. In general, when bonds are issued, the Bank simultaneously executes an interest rate exchange agreement with terms that offset the terms and embedded options, if any, of the consolidated obligation bond. This combination of the consolidated obligation bond and the interest rate exchange agreement effectively creates an adjustable rate bond. These transactions generally receive fair value hedge accounting treatment.

When the Bank issues consolidated obligation discount notes, it may also simultaneously enter into an interest rate exchange agreement to convert the fixed rate discount note to an adjustable rate discount note. This type of hedge is treated as an economic hedge.

In addition, when certain consolidated obligation bonds for which the Bank has elected the fair value option are issued, the Bank simultaneously executes an interest rate exchange agreement with terms that economically offset the terms of the consolidated obligation bond. However, this type of hedge is treated as an economic hedge because these combinations do not meet the requirements for fair value hedge accounting treatment.

Offsetting Derivatives – The Bank enters into derivatives to offset the economic effect of other derivatives that are no longer designated to advances, investments, or consolidated obligations. Offsetting derivatives do not receive hedge accounting treatment and are separately marked to market through earnings. The net result of the accounting for these derivatives does not significantly affect the operating results of the Bank.

The notional amount of an interest rate exchange agreement serves as a factor in determining periodic interest payments or cash flows received and paid. However, the notional amount of derivatives represents neither the actual amounts exchanged nor the overall exposure of the Bank to credit risk and market risk. The risks of derivatives can be measured meaningfully on a portfolio basis by taking into account the counterparties, the types of derivatives, the items being hedged, and any offsets between the derivatives and the items being hedged.

The following table summarizes the notional amount and fair value of derivative instruments, including the effect of netting adjustments and cash collateral as of March 31, 2020, and December 31, 2019. For purposes of this disclosure, the derivative values include the fair value of derivatives and related accrued interest.



	March 31, 2020							December 31, 2019
	Notional Amount of Derivatives		Derivative Assets		Derivative Liabilities			Notional Amount of Derivatives		Derivative Assets			Derivative Liabilities
Derivatives designated as hedging instruments:
Interest rate swaps	$	46,837	$	24	$	1,011		$	39,622	$	31		$	370
Total	46,837		24		1,011			39,622		31			370
Derivatives not designated as hedging instruments:
Interest rate swaps	70,963		18		44			60,424		13			14
Interest rate caps and floors	980		—		—			980		—			—
Mortgage delivery commitments	87		3		—			46		—			—
Total	72,030		21		44			61,450		13			14
Total derivatives before netting and collateral adjustments	$	118,867	45		1,055			$	101,072	44			384
Netting adjustments and cash collateral⁽¹⁾			17		(1,055		)			(11		)	(384		)
Total derivative assets and total derivative liabilities			$	62	$	—				$	33		$	—



	Three Months Ended March 31, 2020
	Interest Income/(Expense)
	Advances			AFS Securities			Consolidated Obligation Bonds
Total interest income/(expense) presented in the Statements of Income	$	279		$	51		$	(276	)
Gain/(loss) on fair value hedging relationships
Derivatives⁽¹⁾	$	(651	)	$	(968	)	$	26
Hedged items	610			893			(23		)
Net gain/(loss) on fair value hedging relationships	$	(41	)	$	(75	)	$	3



	Three Months Ended March 31, 2019
	Interest Income/(Expense)
	Advances			AFS Securities			Consolidated Obligation Bonds
Total income/(expense) presented in the Statements of Income	$	498		$	79		$	(455	)
Gain/(loss) on fair value hedging relationships
Derivatives⁽¹⁾	$	(82	)	$	(128	)	$	19
Hedged items	103			117			(28		)
Net gain/(loss) on fair value hedging relationships	$	21		$	(11	)	$	(9	)



	March 31, 2020
Hedged Item Type	Amortized Cost of Hedged Asset/(Liability)⁽¹⁾			Basis Adjustments for Active Hedging Relationships Included in Amortized Cost			Basis Adjustments for Discontinued Hedging Relationships Included in Amortized Cost		Cumulative Amount of Fair Value Hedging Basis Adjustments
Advances	$	32,880		$	804		$	8	$	812
AFS securities	14,195			1,275			49		1,324
Consolidated obligation bonds	(2,707		)	(32		)	—		(32		)



	Three Months Ended
	March 31, 2020			March 31, 2019
	Gain/(Loss)			Gain/(Loss)
Derivatives not designated as hedging instruments:
Economic hedges:
Interest rate swaps	$	(143	)	$	(23	)
Interest rate caps and floors	—			(1		)
Net settlements	(8		)	(5		)
Mortgage delivery commitments	4			1
Net gain/(loss) on derivatives and hedging activities	$	(147	)	$	(28	)

Credit Risk – The Bank is subject to credit risk from potential nonperformance by counterparties to the interest rate exchange agreements. All of the Bank’s agreements governing uncleared derivative transactions contain master netting provisions to help mitigate the credit risk exposure to each counterparty. The Bank manages counterparty credit risk through credit analyses and collateral requirements and by following the requirements of the Bank’s risk management policies, credit guidelines, and Finance Agency and other regulations. The Bank also requires credit support agreements on all uncleared derivatives.

For cleared derivatives, the clearinghouse is the Bank’s counterparty. The requirement that the Bank post initial and variation margin through a clearing agent, to the clearinghouse, exposes the Bank to institutional credit risk in the event that the clearing agent or the clearinghouse fails to meet its obligations. The use of cleared derivatives, however, mitigates the Bank’s overall credit risk exposure because a central counterparty is substituted for individual counterparties. Variation margin and initial margin are posted for changes in the value and risk profile of cleared derivatives. The Bank has analyzed the enforceability of offsetting rights applicable to its cleared derivative transactions and determined that the exercise of those offsetting rights by a non-defaulting party under these transactions should be upheld under applicable bankruptcy law and Commodity Futures Trading Commission rules in the event of a clearinghouse or clearing agent insolvency and under applicable clearinghouse rules upon a non-insolvency-based event of default of the clearinghouse or clearing agent. Based on this analysis, the Bank presents a net derivative receivable or payable for all of its transactions through a particular clearing agent with a particular clearinghouse.

The Bank’s agreements for uncleared derivative transactions contain provisions that link the Bank’s credit rating from Moody’s Investors Service and S&P Global Ratings to various rights and obligations. Certain of these derivative agreements provide that, if the Bank’s long-term debt rating falls below a specified rating (ranging from A3/A- to Baa3/BBB-), the Bank’s counterparty would have the right, but not the obligation, to terminate all of its outstanding derivative transactions with the Bank; the Bank’s agreements with its clearing agents for cleared derivative transactions have similar provisions with respect to the debt rating of FHLBank System consolidated bonds. If this occurs, the Bank may choose to enter into replacement hedges, either by transferring the existing transactions to another counterparty or entering into new replacement transactions, based on prevailing market rates. The aggregate fair value of all uncleared derivative instruments with credit risk-related contingent features that were in a net derivative liability position (before cash collateral and related accrued interest) at March 31, 2020, was $1,036, for which the Bank had posted cash collateral of $1,070 in the ordinary course of business.



	March 31, 2020
	Derivative Instruments Meeting Netting Requirements
	Amount Recognized		Gross Amount of Netting Adjustments and Cash Collateral			Derivative Instruments Not Meeting Netting Requirements⁽¹⁾		Total Derivative Assets and Total Derivative Liabilities		Noncash Collateral Not Offset That Can Be Sold or Repledged			Net Amount
Derivative Assets
Uncleared	$	15	$	20		$	3	$	38	$	—		$	38
Cleared	27		(3		)	—		24		(643		)	667
Total								$	62				$	705
Derivative Liabilities
Uncleared	$	1,041	$	(1,041	)	$	—	$	—	$	—		$	—
Cleared	14		(14		)	—		—		—			—
Total								$	—				$	—



	December 31, 2019
	Derivative Instruments Meeting Netting Requirements
	Amount Recognized		Gross Amount of Netting Adjustments and Cash Collateral			Total Derivative Assets and Total Derivative Liabilities		Noncash Collateral Not Offset That Can Be Sold or Repledged			Net Amount
Derivative Assets
Uncleared	$	34	$	(16	)	$	18	$	—		$	18
Cleared	10		5			15		(381		)	396
Total						$	33				$	414
Derivative Liabilities
Uncleared	$	382	$	(382	)	$	—	$	—		$	—
Cleared	2		(2		)	—		—			—
Total						$	—				$	—