The Bank is exposed to interest rate risk primarily from the effect of interest rate changes on its interest-earning assets and its related funding sources. The goal of the Bank’s interest rate risk management strategy is not to eliminate interest rate risk, but to manage it within appropriate limits. To mitigate the risk of loss, the Bank has established policies and procedures, which include guidelines on the amount of exposure to interest rate changes it is willing to accept.

The Bank enters into derivative contracts to manage the interest rate risk exposures inherent in its otherwise unhedged assets and funding positions. Finance Agency regulations and the Bank’s risk management policies establish guidelines for derivatives, prohibit trading in or the speculative use of derivatives, and limit credit risk arising from derivatives.

Derivative financial instruments are used by the Bank to achieve its financial and risk management objectives. The Bank reevaluates its hedging strategies periodically and may change the hedging techniques it uses or may adopt new strategies. The most common ways in which the Bank uses derivatives are to:

The notional amount of derivatives serves as a factor in determining periodic interest payments and 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 and market risk. The risks of derivatives can be measured meaningfully on a portfolio basis that takes 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 Bank’s notional amount and fair value of derivative instruments and total derivative assets and liabilities. Total derivative assets and liabilities include the effect of netting adjustments and cash collateral. For purposes of this disclosure, the derivative values include the fair value of derivatives and the related accrued interest (dollars in millions):



	March 31, 2020							December 31, 2019
	Notional Amount		Derivative Assets		Derivative Liabilities			Notional Amount		Derivative Assets		Derivative Liabilities
Derivatives designated as hedging instruments (fair value hedges)
Interest rate swaps	$	37,610	$	55	$	360		$	37,684	$	31	$	159
Derivatives not designated as hedging instruments (economic hedges)
Interest rate swaps	1,858		12		89			1,038		8		43
Forward settlement agreements (TBAs)	342		—		7			122		—		—
Mortgage loan purchase commitments	348		4		—			127		—		—
Total derivatives not designated as hedging instruments	2,548		16		96			1,287		8		43
Total derivatives before netting and collateral adjustments	$	40,158	71		456			$	38,971	39		202
Netting adjustments and cash collateral¹			162		(447		)			63		(201		)
Total derivative assets and derivative liabilities			$	233	$	9				$	102	$	1

The following tables summarize the income effect from fair value hedging relationships recorded in net interest income as well as total income (expense) by product recorded on the Statements of Income (dollars in millions):



	For the Three Months Ended March 31, 2020
	Interest Income (Expense)
	Advances			Available-for-Sale Securities			Consolidated Obligation Bonds
Total interest income (expense) recorded on the Statements of Income¹	$	399		$	75		$	(410	)
Net interest income effect from fair value hedging relationships
Interest rate contracts
Derivatives²	$	(435	)	$	(316	)	$	237
Hedged items³	423			290			(233		)
Total net interest income effect from fair value hedging relationships	$	(12	)	$	(26	)	$	4



	For the Three Months Ended March 31, 2019
	Interest Income (Expense)
	Advances			Available-for-Sale Securities			Consolidated Obligation Bonds
Total income (expense) recorded on the Statements of Income¹	$	715		$	143		$	(595	)
Net income effect from fair value hedging relationships
Interest rate contracts
Derivatives²	$	(78	)	$	(81	)	$	67
Hedged items³	103			86			(135		)
Total net income effect from fair value hedging relationships	$	25		$	5		$	(68	)



	March 31, 2020
Line Item on Statements of Condition	Amortized Cost of Hedged Asset/ Liability¹		Changes in Fair Value for Active Hedging Relationships Included in Amortized Cost		Basis Adjustments for Discontinued Hedging Relationships Included in Amortized Cost			Cumulative Amount of Fair Value Hedging Adjustments
Advances	$	18,330	$	557	$	22		$	579
Available-for-sale securities	6,539		458		—			458
Consolidated obligation bonds	16,339		247		(13		)	234



	December 31, 2019
Line Item on Statements of Condition	Amortized Cost of Hedged Asset/ Liability¹		Changes in Fair Value for Active Hedging Relationships Included in Amortized Cost		Basis Adjustments for Discontinued Hedging Relationships Included in Amortized Cost			Cumulative Amount of Fair Value Hedging Adjustments
Advances	$	14,806	$	146	$	10		$	156
Available-for-sale securities	6,221		167		—			167
Consolidated obligation bonds	20,256		16		(15		)	1

The following table summarizes the components of “Net gains (losses) on derivatives and hedging activities” as presented on the Statements of Income (dollars in millions).



	For the Three Months Ended
	March 31,
	2020			2019
Derivatives not designated as hedging instruments (economic hedges)
Interest rate swaps	$	(45	)	(12		)
Forward settlement agreements (TBAs)	(8		)	(1		)
Mortgage loan purchase commitments	7			1
Net interest settlements	(2		)	—
Net gains (losses) on derivatives and hedging activities	$	(48	)	$	(12	)

The Bank is subject to credit risk due to the risk of nonperformance by counterparties to its derivative contracts. The Bank manages credit risk through credit analyses, collateral requirements, and adherence to the requirements set forth in the Bank’s policies, U.S. Commodity Futures Trading Commission regulations, and Finance Agency regulations.

The Bank transacts most of its derivative transactions with large banks and major broker-dealers. Over-the-counter derivative transactions may be either executed directly with a counterparty (uncleared derivatives) or cleared through a Futures Commission Merchant (i.e., clearings agent) with a Derivative Clearing Organization (cleared derivatives). Once a derivative transaction has been accepted for clearing by a Derivative Clearing Organization (Clearinghouse), the derivative transaction is novated and the executing counterparty is replaced with the Clearinghouse. The Bank is not a derivative dealer and does not trade derivative for short-term profit.

For uncleared derivatives, the degree of credit risk depends on the extent to which master netting arrangements are included in the derivative contracts to mitigate the risk. The Bank requires collateral agreements on its uncleared derivatives.

Certain of the Bank’s uncleared derivative instruments contain provisions that require the Bank to post additional collateral with its counterparties if there is deterioration in the Bank’s credit rating. If the Bank’s credit rating is lowered by a NRSRO, the Bank may be required to deliver additional collateral on uncleared derivative instruments in net liability positions, unless the collateral delivery threshold is set to zero. The aggregate fair value of all uncleared derivative instruments with credit-risk related contingent features that were in a net liability position (before cash collateral and related accrued interest) at March 31, 2020 was $7 million, for which the Bank was not required to post collateral in the normal course of business. If the Bank’s credit rating had been lowered from its current rating to the next lower rating, the Bank would not have been required to deliver additional collateral to its uncleared derivative counterparties at March 31, 2020.

For cleared derivatives, the Clearinghouse is the Bank’s counterparty. The Bank utilizes one Clearinghouse, CME Clearing for all cleared derivative transactions. CME Clearing notifies the clearing agent of the required initial margin and daily variation margin requirements, and the clearing agent in turn notifies the Bank.

The Clearinghouse determines initial margin requirements which are considered cash collateral. Generally credit ratings are not factored into the initial margin. However, clearing agents may require additional initial margin to be posted based on credit considerations, including, but not limited to, credit rating downgrades. The Bank was not required to post additional initial margin by its clearing agent, based on credit considerations, at March 31, 2020. Variation margin requirements with CME Clearing are based on changes in the fair value of cleared derivatives and are legally characterized as daily settlement payments, rather than cash collateral.

The requirement that the Bank post initial and variation margin through the clearing agent, to the Clearinghouse, exposes the Bank to institutional credit risk if the clearing agent or the Clearinghouse fails to meet its obligations. The use of cleared derivatives is intended to mitigate credit risk exposure because a central counterparty is substituted for individual counterparties and collateral/payments for changes in the fair value of cleared derivatives is posted daily through a clearing agent.

The Bank presents derivative instruments, related cash collateral received or pledged, and associated accrued interest on a net basis by clearing agent and/or by counterparty when it has met the netting requirements. Additional information regarding these agreements is provided in “Note 1 — Summary of Significant Accounting Policies” in the 2019 Form 10-K.

The Bank has analyzed the enforceability of offsetting rights incorporated in its cleared derivative transactions and has determined that the exercise of those offsetting rights by a non-defaulting party under these transactions should be upheld under applicable law upon an event of default, including a bankruptcy, insolvency, or similar proceeding involving the Clearinghouse or the clearing agent, or both. 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 following tables present the fair value of derivative instruments meeting or not meeting the netting requirements and the related collateral received from or pledged to counterparties (dollars in millions):



	March 31, 2020
	Derivative Instruments Meeting Netting Requirements
	Gross Amount Recognized¹		Gross Amount of Netting Adjustments and Cash Collateral			Derivative Instruments Not Meeting Netting Requirements²		Total Derivative Assets and Total Derivative Liabilities
Derivative Assets
Uncleared derivatives	$	49	$	(43	)	$	4	$	10
Cleared derivatives	18		205			—		223
Total	$	67	$	162		$	4	$	233
Derivative Liabilities
Uncleared derivatives	$	447	$	(438	)	$	—	$	9
Cleared derivatives	9		(9		)	—		—
Total	$	456	$	(447	)	$	—	$	9



	December 31, 2019
	Derivative Instruments Meeting Netting Requirements
	Gross Amount Recognized¹		Gross Amount of Netting Adjustments and Cash Collateral			Derivative Instruments Not Meeting Netting Requirements²		Total Derivative Assets and Total Derivative Liabilities
Derivative Assets
Uncleared derivatives	$	34	$	(28	)	$	—	$	6
Cleared derivatives	5		91			—		96
Total	$	39	$	63		$	—	$	102
Derivative Liabilities
Uncleared derivatives	$	199	$	(198	)	$	—	$	1
Cleared derivatives	3		(3		)	—		—
Total	$	202	$	(201	)	$	—	$	1