Derivatives and Hedging Activities

6 Months Ended

Jun. 30, 2011

Derivatives and Hedging Activities[Abstract]

Derivatives and Hedging Activities

Note 15. Derivatives and Hedging Activities.

General — The FHLBNY may enter into interest-rate swaps, swaptions, and interest-rate cap and floor agreements to manage its exposure to changes in interest rates. The FHLBNY may also use callable swaps to potentially adjust the effective maturity, repricing frequency, or option characteristics of financial instruments to achieve risk management objectives. The FHLBNY uses derivatives in three ways: by designating them as a fair value or cash flow hedge of an underlying financial instrument or a forecasted transaction that qualifies for hedge accounting treatment; by acting as an intermediary; or by designating the derivative as an asset-liability management hedge (i.e., an “economic hedge”). A new cash flow hedging strategy was implemented in the first quarter of 2011 (as described below), and aside from the adoption of the new strategy, there were no significant changes to hedging activities from those described in detail in the audited financial statements included in the FHLBNY’s most recent Form 10-K, filed on March 25, 2011. The following is a summary of the more significant elements of the FHLBNY’s derivative and hedging activities.

Hedging Activities. The Bank documents all relationships between derivative hedging instruments and hedged items, its risk management objectives and strategies for undertaking various hedge transactions, and its method of assessing effectiveness. This process includes linking all derivatives that are designated as fair value or cash flow hedges to: (i) assets and liabilities on the balance sheet, (ii) firm commitments, or (iii) forecasted transactions. The Bank also formally assesses (both at the hedge’s inception and at least quarterly on an ongoing basis) whether the derivatives that are used in hedging transactions have been effective in offsetting changes in the fair value or cash flows of hedged items and whether those derivatives may be expected to remain effective 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 when: (i) it determines that the derivative is no longer effective in offsetting changes in the fair value or cash flows of a hedged item (including hedged items such as firm commitments or forecasted transactions); (ii) the derivative and/or the hedged item expires or is sold, terminated, or exercised; (iii) it is no longer probable that the forecasted transaction will occur in the originally expected period; (iv) a hedged firm commitment no longer meets the definition of a firm commitment; (v) it determines that designating the derivative as a hedging instrument is no longer appropriate; or (vi) it decides to use the derivative to offset changes in the fair value of other derivatives or instruments carried at fair value.

Intermediation — As an additional service to its members, the Bank enters into offsetting interest rate exchange agreements, acting as an intermediary between exactly offsetting derivatives transactions with members and other counterparties. The offsetting derivatives used in intermediary activities 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.

Recently adopted cash flow hedging strategy — In the first quarter of 2011, the Bank executed cash flow hedges of the rolling issuance of discount notes. In these hedges, the Bank enters into interest rate swap agreements with unrelated swap dealers and designates the swaps as hedges of the variable quarterly interest payments on the discount note borrowing program expected to be accomplished by a series of issuances of discount notes with 91-day terms over periods that are generally between 7-10 years. The FHLBNY will continue issuing new 91-day discount notes over the terms of the swap as each outstanding discount note matures. The interest on the FHLBank discount notes are expected to be highly correlated with 3-month LIBOR and will be determined each time the notes are issued. The interest rate swaps require a settlement every 91 days, and the variable rate, which is based on the 3-month LIBOR, is reset immediately following each payment. The swaps are expected to eliminate the risk of variability of cash flows for each forecasted discount note issuances every 91 days. The FHLBNY performs prospective hedge effectiveness analysis at inception of the hedges. The FHLBNY also performs an on-going retrospective hedge effectiveness analysis at least every quarter to also provide assurance that the hedges will remain highly effective. The fair values of the interest rate swaps are recorded in AOCI and ineffectiveness, if any, is measured using the “hypothetical derivative method” and recorded in earnings. The effective portion remains in AOCI. The Bank monitors the credit standing of the derivative counterparty each quarter.

Hedged Items

Consolidated Obligations — The FHLBNY manages the risk arising from changing market prices and volatility of a consolidated obligation by matching the cash inflows on the derivative with the cash outflow on the consolidated obligation. The hedge transactions may be executed upon or after the issuance of consolidated obligations. When such transactions qualify for hedge accounting, they are treated as fair value hedges under the accounting standards for derivatives and hedging. The FHLBNY has also elected to use the FVO for certain consolidated obligation bonds and discount notes, and these were measured under the accounting standards for FVO at fair value. To mitigate the volatility resulting from changes in fair values of bonds and notes designated under the FVO, the Bank has also executed interest rate swaps as economic hedges of the bonds and notes.

Anticipated Debt Issuance — The Bank may enter into interest rate swaps for the anticipated issuances of fixed rate bonds to hedge the cost of funding. These hedges are designated and accounted for as cash flow hedges. The interest rate swap is terminated upon issuance of the fixed rate bond, with the effective portion of the realized gain or loss on the interest rate swap recorded in other comprehensive income. Realized gains and losses reported in AOCI are recognized as earnings in the periods in which earnings are affected by the cash flows of the fixed rate bonds.

Advances — The Bank offers a wide array of advance 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/or 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 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 embedded options, if any, in the advance. The combination of the advance and the interest rate exchange agreement effectively creates a variable rate asset. With a putable fixed-rate advance borrowed by a member, the FHLBNY may purchase from the member a put option that enables the FHLBNY to effectively convert an advance from fixed-rate to floating-rate by exercising the put option and terminating the advance at par on the pre-determined put exercise dates. Typically, the FHLBNY will exercise the option in a rising interest rate environment. The FHLBNY may hedge a putable advance by entering into a cancelable interest rate swap in which the FHLBNY pays to the swap counterparty fixed-rate cash flows and receives variable-rate cash flows. The swap counterparty can cancel the swap on the put date, which would normally occur in a rising rate environment, and the FHLBNY can terminate the advance and extend additional credit to the member on new terms. When such transactions qualify for hedge accounting, they are treated as fair value hedges under the accounting standards for derivatives and hedging. The Bank has not elected the FVO for any advances.

Firm Commitment Strategies — Mortgage delivery commitments are considered derivatives under the accounting standards for derivatives and hedging, and the FHLBNY accounts for them as freestanding derivatives, recording the fair values of mortgage loan delivery commitments on the balance sheet with an offset to current period earnings. Fair values were insignificant for all periods reported. The FHLBNY may also hedge a firm commitment for a forward starting advance through the use of an interest-rate swap. If a hedged firm commitment no longer qualifies as a fair value hedge, the hedge would be terminated and net gains and losses would be recognized in current period earnings.

Credit Risk — The contractual or notional amount of derivatives reflects the involvement of the FHLBNY in the various classes of financial instruments, but it does not measure the credit risk exposure of the FHLBNY, and the maximum credit exposure of the FHLBNY is substantially less than the notional amount. The maximum credit risk is the estimated cost of replacing favorable interest-rate swaps, forward agreements, mandatory delivery contracts for mortgage loans and purchased caps and floors (“derivatives”) if the counterparty defaults and the related collateral, if any, is of insufficient value to the FHLBNY.

The FHLBNY uses collateral agreements to mitigate counterparty credit risk in derivatives. When the FHLBNY has more than one derivative transaction outstanding with counterparty, and a legally enforceable master netting agreement exists with the counterparty, the exposure (less collateral held) represents the appropriate measure of credit risk. Substantially all derivative contracts are subject to master netting agreements or other right of offset arrangements. At June 30, 2011 and December 31, 2010, the Bank’s credit exposure, representing derivatives in a fair value net gain position, was approximately $33.0 million, and $22.0 million after the recognition of any cash collateral held by the FHLBNY. The credit exposures at June 30, 2011 and December 31, 2010 included $31.4 million and $6.1 million in net interest receivable.

Derivative counterparties are also exposed to credit losses resulting from potential nonperformance risk of FHLBNY with respect to derivative contracts. Derivative counterparties’ exposure to the FHLBNY is measured by derivatives in a fair value loss position from the FHLBNY’s perspective, which from the counterparties’ perspective is a gain. At June 30, 2011 and December 31, 2010, derivatives in a net unrealized loss position, which represented the counterparties’ exposure to the potential non-performance risk of the FHLBNY, were $694.4 million and $954.9 million after deducting $2.4 billion and $2.7 billion of cash collateral pledged by the FHLBNY at those dates to the exposed counterparties. However, the FHLBNY is also exposed to the risk of derivative counterparties defaulting on the terms of the derivative contracts and failing to return cash deposited with counterparties. If such an event were to occur, the FHLBNY would be forced to replace derivatives by executing similar derivative contracts with other counterparties. To the extent that the FHLBNY receives cash from the replacement trades that is less than the amount of cash deposited with the defaulting counterparty, the FHLBNY’s cash pledged as deposit is exposed to credit risk of the defaulting counterparty. Derivative counterparties holding the FHLBNY’s cash as pledged collateral were rated Single-A or better at June 30, 2011, and based on credit analyses and collateral requirements, the management of the FHLBNY does not anticipate any credit losses on its derivative agreements.

The aggregate fair value of the FHLBNY’s derivative instruments that were in a net liability position at June 30, 2011 was approximately $694.4 million. Many of the Credit Support Amount (“CSA”) agreements with swap dealers stipulate that so long as the FHLBNY retains its GSE status, ratings downgrades would not result in the posting of additional collateral. Other CSA agreements would require the FHLBNY to post additional collateral based solely on an adverse change in the credit rating of the FHLBNY by Standard & Poor’s (“S&P”) and Moody’s. In the event of a split rating, the lower rating will apply. On August 8, 2011, S&P downgraded the credit rating of the FHLBank long-term debt from AAA to AA+/Negative and lowered one notch the credit ratings of those FHLBanks rated AAA (including the Federal Home Loan Bank of New York) to AA+/Negative. On August 2, 2011, Moody’s had affirmed the AAA status of the FHLBank’s long-term debt and the AAA credit rating of the FHLBNY.

On the assumption that the FHLBNY will retain its status as a GSE, the FHLBNY estimates that the one notch downgrade of FHLBNY’s credit rating by S&P would have permitted swap dealers and counterparties to make additional collateral calls of up to $328.5 million. Additional collateral postings upon downgrade were estimated based on the factors in the individual collateral posting provisions of the CSA with each counterparty and the exposure as of June 30, 2011.

The following table summarizes outstanding notional balances and estimated fair values of the derivatives outstanding (in thousands):

	June 30, 2011
	Notional Amount of
	Derivatives		Derivative Assets			Derivative Liabilities
Fair value of derivative instruments
Derivatives designated in hedging relationships
Interest rate swaps-fair value hedges	$	90,296,768	$	866,818		$	3,905,260
Interest rate swaps-cash flow hedges		815,000		2,718			11,672
Total derivatives in hedging instruments		91,111,768		869,536			3,916,932
Derivatives not designated as hedging instruments
Interest rate swaps		18,729,954		14,395			8,239
Interest rate caps or floors		1,900,000		28,724			51
Mortgage delivery commitments		31,428		23			172
Other*		550,000		7,954			7,365
Total derivatives not designated as hedging instruments		21,211,382		51,096			15,827
Total derivatives before netting and collateral adjustments	$	112,323,150		920,632			3,932,759
Netting adjustments				(798,026	)		(798,026	)
Cash collateral and related accrued interest				(89,600	)		(2,440,364	)
Total collateral and netting adjustments				(887,626	)		(3,238,390	)
Total reported on the Statements of Condition			$	33,006		$	694,369

	December 31, 2010
	Notional Amount of
	Derivatives		Derivative Assets			Derivative Liabilities
Fair value of derivative instruments
Derivatives designated in hedging relationships
Interest rate swaps-fair value hedges	$	93,840,813	$	944,807		$	4,661,102
Interest rate swaps-cash flow hedges		—		—			—
Total derivatives in hedging instruments		93,840,813		944,807			4,661,102
Derivatives not designated as hedging instruments
Interest rate swaps		24,400,547		23,911			12,543
Interest rate caps or floors		1,900,000		41,881			107
Mortgage delivery commitments		29,993		9			523
Other*		550,000		6,069			5,392
Total derivatives not designated as hedging instruments		26,880,540		71,870			18,565
Total derivatives before netting and collateral adjustments	$	120,721,353		1,016,677			4,679,667
Netting adjustments				(994,667	)		(994,667	)
Cash collateral and related accrued interest				—			(2,730,102	)
Total collateral and netting adjustments				(994,667	)		(3,724,769	)
Total reported on the Statements of Condition			$	22,010		$	954,898

* Other: Comprised of swaps intermediated for members.

The categories — “Fair value”, “Mortgage delivery commitment”, and “Cash Flow” hedges — represent derivative transactions in hedging relationships. If any such hedges do not qualify for hedge accounting under the accounting standards for derivatives and hedging, they are classified as “Economic” hedges. Changes in fair values of economic hedges are recorded through the income statement without the offset of corresponding changes in the fair value of the hedged item. Changes in fair values of qualifying derivative transactions designated in fair value hedges are recorded through the income statement with the offset of corresponding changes in the fair values of the hedged items. The effective portion of changes in the fair values of derivatives designated in a qualifying cash flow hedge is recorded in Accumulated other comprehensive income (loss).

Earnings impact of derivatives and hedging activities

The FHLBNY carries all derivative instruments on the Statements of Condition at fair value as Derivative Assets and Derivative Liabilities. If derivatives meet the hedging criteria under hedge accounting rules, including effectiveness measures, changes in fair value of the associated hedged financial instrument attributable to the risk being hedged (benchmark interest-rate risk, which is LIBOR for the FHLBNY) may also be recorded so that some or all of the unrealized fair value gains or losses recognized on the derivatives are offset by corresponding unrealized gains or losses on the associated hedged financial assets and liabilities. The net differential between fair value changes of the derivatives and the hedged items represents hedge ineffectiveness. Hedge ineffectiveness represents the amounts by which the changes in the fair value of the derivatives differ from the changes in the fair values of the hedged items or the variability in the cash flows of forecasted transactions. The net ineffectiveness from hedges that qualify under hedge accounting rules are recorded as a Net realized and unrealized gain (loss) on derivatives and hedging activities in Other income (loss) in the Statements of Income. If derivatives do not qualify for the hedging criteria under hedge accounting rules, but are executed as economic hedges of financial assets or liabilities under a FHLBNY-approved hedge strategy, only the fair value changes of the derivatives are recorded as a Net realized and unrealized gain (loss) on derivatives and hedging activities in Other income (loss) in the Statements of Income.

When the FHLBNY elects to measure certain debt under the accounting designation for FVO, the Bank will typically execute a derivative as an economic hedge of the debt. Fair value changes of the derivatives are recorded as a Net realized and unrealized gain (loss) on derivatives and hedging activities in Other income. Fair value changes of the debt designated under the FVO are also recorded in Other income (loss) as an unrealized (loss) or gain from Instruments held at fair value.

Components of hedging gains and losses from derivatives and hedging activities for the three and six months ended June 30, 2011 are summarized below (in thousands):

	Three months ended June 30,
	2011												2010
										Effect of												Effect of
										Derivatives on												Derivatives on
	Gain (Loss) on			Gain (Loss) on			Earnings			Net Interest			Gain (Loss) on			Gain (Loss) on			Earnings			Net Interest
	Derivative			Hedged Item			Impact			Income 1			Derivative			Hedged Item			Impact			Income 1
Derivatives designated as hedging instruments Interest rate swaps
Advances	$	(535,702	)	$	535,935		$	233		$	(409,875	)	$	(988,013	)	$	986,618		$	(1,395	)	$	(510,594	)
Consolidated obligations		199,887			(198,382	)		1,505			132,687			233,268			(233,457	)		(189	)		172,447
Net gain (loss) related to fair value hedges		(335,815	)		337,553			1,738			(277,188	)		(754,745	)		753,161			(1,584	)		(338,147	)
Cash flow hedges		—			—			—			(1,394	)		—			—			—			—
Derivatives not designated as hedging instruments Interest rate swaps
Advances		(514	)		—			(514	)		—			(1,121	)		—			(1,121	)		—
Consolidated obligations-bonds		1,442			—			1,442			—			(23,205	)		—			(23,205	)		—
Consolidated obligations-discount notes		—			—			—			—			(1,768	)		—			(1,768	)		—
Member intermediation		(41	)		—			(41	)		—			158			—			158			—
Balance sheet-macro hedges swaps		—			—			—						—			—			—			—
Accrued interest-swaps		2,424			—			2,424			—			15,050			—			15,050			—
Accrued interest-intermediation		47			—			47			—			26			—			26			—
Caps and floors
Advances		(19	)		—			(19	)		—			(111	)		—			(111	)		—
Balance sheet		(9,511	)		—			(9,511	)		—			(2,856	)		—			(2,856	)		—
Accrued interest-options		—			—			—			—			(609	)		—			(609	)		—
Mortgage delivery commitments		370			—			370			—			405			—			405			—
Swaps economically hedging instruments designated under FVO
Consolidated obligations-bonds		4,571			—			4,571			—			(4,281	)		—			(4,281	)		—
Consolidated obligations-discount notes		(196	)		—			(196	)		—			774			—			774			—
Accrued interest on swaps		6,333			—			6,333			—			7,697			—			7,697			—
Net gain (loss) related to derivatives not designated as hedging instruments		4,906			—			4,906			—			(9,841	)		—			(9,841	)		—
Total	$	(330,909	)	$	337,553		$	6,644		$	(278,582	)	$	(764,586	)	$	753,161		$	(11,425	)	$	(338,147	)

	Six months ended June 30,
	2011												2010
										Effect of												Effect of
										Derivatives on												Derivatives on
	Gain (Loss) on			Gain (Loss) on			Earnings			Net Interest			Gain (Loss) on			Gain (Loss) on						Net Interest
	Derivative			Hedged Item			Impact			Income 1			Derivative			Hedged Item			Earnings Impact			Income 1
Derivatives designated as hedging instruments Interest rate swaps
Advances	$	16,144		$	40,426		$	56,570		$	(850,698	)	$	(1,140,100	)	$	1,139,324		$	(776	)	$	(1,040,971	)
Consolidated obligations		52,996			(49,694	)		3,302			267,686			285,503			(281,688	)		3,815			345,224
Net gain (loss) related to fair value hedge		69,140			(9,268	)		59,872			(583,012	)		(854,597	)		857,636			3,039			(695,747	)
Cash flow hedges		—			—			—			(1,394	)		—			—			—			—
Derivatives not designated as hedging instruments Interest rate swaps
Advances		169			—			169			—			(1,961	)		—			(1,961	)		—
Consolidated obligations-bonds		1,230			—			1,230			—			(36,514	)		—			(36,514	)		—
Consolidated obligations-discount notes		—			—			—			—			(4,100	)		—			(4,100	)		—
Member intermediation		(86	)		—			(86	)		—			154			—			154			—
Balance sheet-macro hedges swaps		—			—			—			—			173			—			173			—
Accrued interest-swaps		5,127			—			5,127			—			44,519			—			44,519			—
Accrued interest-intermediation		92			—			92			—			49			—			49			—
Caps and floors
Advances		(37	)		—			(37	)		—			(399	)		—			(399	)		—
Balance sheet		(13,100	)		—			(13,100	)		—			(33,283	)		—			(33,283	)		—
Accrued interest-options		—			—			—			—			(2,598	)		—			(2,598	)		—
Mortgage delivery commitments		540			—			540			—			554			—			554			—
Swaps economically hedging instruments designated under FVO
Consolidated obligations-bonds		1,977			—			1,977			—			2,357			—			2,357			—
Consolidated obligations-discount notes		(1,057	)		—			(1,057	)		—			774			—			774			—
Accrued interest on swaps		16,487			—			16,487			—			15,448			—			15,448			—
Net gain (loss) related to derivatives not designated as hedging instruments		11,342			—			11,342			—			(14,827	)		—			(14,827	)		—
Total	$	80,482		$	(9,268	)	$	71,214		$	(584,406	)	$	(869,424	)	$	857,636		$	(11,788	)	$	(695,747	)

¹ Represents interest expense and income generated from hedge qualifying interest-rate swaps that were recorded with interest income and expense of the hedged — bonds, discount notes, and advances.

Cash Flow hedges

The effect of cash flow hedge related derivative instruments were as follows (in thousands):

	Three months ended June 30,
	2011								2010
	AOCI								AOCI
	Gains/(Losses)								Gains/(Losses)
				Location:	Amount		Ineffectiveness					Location:	Amount		Ineffectiveness
	Recognized			Reclassified to	Reclassified to		Recognized in		Recognized			Reclassified to	Reclassified to		Recognized in
	in AOCI 1, 2			Earnings 1	Earnings 1		Earnings		in AOCI 1, 2			Earnings 1	Earnings 1		Earnings
The effect of cash flow hedge related to Interest rate swaps
Advances	$	—		Interest Income	$	—	$	—	$	—		Interest Income	$	—	$	—
Consolidated obligations-bonds (a)		2,932		Interest Expense		960		—		(864	)	Interest Expense		1,801		—
Consolidated obligations-discount notes (b)		(13,247	)	Interest Expense		—		—		—		Interest Expense		—		—
Total	$	(10,315	)		$	960	$	—	$	(864	)		$	1,801	$	—

	Six months ended June 30,
	2011								2010
	AOCI								AOCI
	Gains/(Losses)								Gains/(Losses)
				Location:	Amount		Ineffectiveness					Location:	Amount		Ineffectiveness
	Recognized			Reclassified to	Reclassified to		Recognized in		Recognized			Reclassified to	Reclassified to		Recognized in
	in AOCI 1, 2			Earnings 1	Earnings 1		Earnings		in AOCI 1, 2			Earnings 1	Earnings 1		Earnings
The effect of cash flow hedge related to Interest rate swaps
Advances	$	—		Interest Income	$	—	$	—	$	—		Interest Income	$	—	$	—
Consolidated obligations-bonds (a)		3,705		Interest Expense		1,998		—		(472	)	Interest Expense		3,541		—
Consolidated obligations-discount notes (b)		(11,330	)	Interest Expense		—		—		—		Interest Expense		—		—
Total	$	(7,625	)		$	1,998	$	—	$	(472	)		$	3,541	$	—

1	Effective portion
2	Represents basis adjustments from cash flow hedging transactions recorded in AOCI.

There were no material amounts that were reclassified into earnings as a result of the discontinuance of cash flow hedges because it became probable that the original forecasted transactions would not occur by the end of the originally specified time period or within a two-month period thereafter.

(a) Hedges of anticipated issuance of debt - The maximum period of time that the Bank typically hedges its exposure to the variability in future cash flows for forecasted transactions is between three and six months. At June 30, 2011, the Bank had open contracts of $200.0 million of swaps to hedge the anticipated issuances of debt. The fair values of the open contracts recorded in AOCI was an unrealized gain $2.4 million at June 30, 2011. There were no open contracts at December 31, 2010. The amounts in AOCI from terminated and open cash flow hedges representing net unrecognized losses were $9.5 million and $15.2 million at June 30, 2011 and December 31, 2010. At June 30, 2011, it is expected that over the next 12 months about $3.4 million of net losses recorded in AOCI will be recognized as a yield adjustment to consolidated bond interest expense and a charge to earnings.

(b) Hedges of discount note in rolling issuances - The notional amount of the interest rate swap outstanding under this program was $615.0 million at June 30, 2011 and the fair value recorded in AOCI was an unrealized loss of $11.3 million. The program commenced in the first quarter of 2011. The maximum period of time that the Bank typically hedges its exposure to the variability in future cash flows under this strategy is 10-years.