Derivatives and Hedging Activities

9 Months Ended

Sep. 30, 2012

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Instruments and Hedging Activities Disclosure [Text Block]

Derivatives and Hedging Activities

Nature of Business Activity. The Bank is exposed to interest rate risk primarily from the effect of interest rate changes on its interest-earning assets and funding sources that finance these assets. The goal of the Bank's interest rate risk management strategies 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. In addition, the Bank monitors the risk to its interest income, net interest margin and average maturity of interest-earning assets and funding sources. For additional information on the Bank's interest rate exchange agreements and the use of these agreements, see Note 11 to the audited financial statements in the Bank's 2011 Form 10-K.

Financial Statement Effect and Additional Financial Information. The following tables summarize the notional and fair value of derivative instruments as of September 30, 2012 and December 31, 2011.

	September 30, 2012
(in thousands)	Notional Amount of Derivatives		Derivative Assets			Derivative Liabilities
Derivatives in hedge accounting relationships:
Interest rate swaps	$	30,871,645	$	349,277		$	1,137,686
Derivatives not in hedge accounting relationships:
Interest rate swaps	$	3,232,597	$	15,135		$	8,812
Interest rate caps	1,466,750		1,858			—
Mortgage delivery commitments	28,813		677			4
Total derivatives not in hedge accounting relationships	$	4,728,160	$	17,670		$	8,816
Total derivatives before netting and collateral adjustments	$	35,599,805	$	366,947		$	1,146,502
Netting adjustments			(313,495		)	(313,495		)
Cash collateral and related accrued interest			(28,058		)	(430,652		)
Total collateral and netting adjustments(1)			(341,553		)	(744,147		)
Derivative assets and derivative liabilities as reported on the Statement of   Condition			$	25,394		$	402,355

	December 31, 2011
(in thousands)	Notional Amount of Derivatives		Derivative Assets			Derivative Liabilities
Derivatives in hedge accounting relationships:
Interest rate swaps	$	27,389,135	$	368,159		$	1,306,235
Derivatives not in hedge accounting relationships:
Interest rate swaps	$	2,241,681	$	1,378		$	7,029
Interest rate caps	1,466,750		4,146			15
Mortgage delivery commitments	13,984		158			8
Total derivatives not in hedge accounting relationships	$	3,722,415	$	5,682		$	7,052
Total derivatives before netting and collateral adjustments	$	31,111,550	$	373,841		$	1,313,287
Netting adjustments			(329,297		)	(329,297		)
Cash collateral and related accrued interest			(8,288		)	(542,015		)
Total collateral and netting adjustments(1)			(337,585		)	(871,312		)
Derivative assets and derivative liabilities as reported on the Statement of   Condition			$	36,256		$	441,975

Note:

⁽¹⁾Amounts represent the effect of legally enforceable master netting agreements that allow the Bank to settle positive and negative positions and also cash collateral held or placed with the same counterparties.

The following table presents the components of net gains (losses) on derivatives and hedging activities as presented in the Statement of Income.

	Three months ended September 30,						Nine months ended September 30,
(in thousands)	2012			2011			2012			2011
Derivatives and hedged items in fair value hedging   relationships:
Interest rate swaps - fair value hedge ineffectiveness	$	1,329		$	(3,885	)	$	3,291		$	(3,133	)
Derivatives not designated as hedging instruments:
Economic hedges:
Interest rate swaps	$	(575	)	$	300		$	(2,000	)	$	473
Interest rate caps or floors	(231		)	(2,813		)	(2,272		)	(4,972		)
Net interest settlements	268			(337		)	(1,122		)	(10		)
Mortgage delivery commitments	2,687			1,445			4,732			2,236
Other	4			5			12			228
Total net gains (losses) related to derivatives not designated   as hedging instruments	$	2,153		$	(1,400	)	$	(650	)	$	(2,045	)
Net gains (losses) on derivatives and hedging activities	$	3,482		$	(5,285	)	$	2,641		$	(5,178	)

The following tables present, by type of hedged item, the gains (losses) on derivatives and the related hedged items in fair value hedging relationships and the impact of those derivatives on the Bank’s net interest income for the third quarter and nine months endedSeptember 30, 2012 and 2011.

(in thousands)	Gains/(Losses) on Derivative			Gains/(Losses) on Hedged Item			Net Fair Value Hedge Ineffectiveness		Effect of Derivatives on Net Interest Income(1)
Three months ended September 30, 2012
Hedged item type:
Advances	$	84,204		$	(83,765	)	$	439	$	(93,120	)
Consolidated obligations – bonds	(5,359		)	6,249			890		44,154
Total	$	78,845		$	(77,516	)	$	1,329	$	(48,966	)
Nine months ended September 30, 2012
Hedged item type:
Advances	$	166,564		$	(165,389	)	$	1,175	$	(289,346	)
Consolidated obligations – bonds	(20,450		)	22,566			2,116		130,501
Total	$	146,114		$	(142,823	)	$	3,291	$	(158,845	)

(in thousands)	Gains/(Losses) on Derivative			Gains/(Losses) on Hedged Item			Net Fair Value Hedge Ineffectiveness			Effect of Derivatives on Net Interest Income(1)
Three months ended September 30, 2011
Hedged item type:
Advances	$	(201,954	)	$	197,583		$	(4,371	)	$	(121,460	)
Consolidated obligations – bonds	90,356			(89,870		)	486			52,634
Total	$	(111,598	)	$	107,713		$	(3,885	)	$	(68,826	)
Nine months ended September 30, 2011
Hedged item type:
Advances	$	(157,356	)	$	153,389		$	(3,967	)	$	(374,229	)
Consolidated obligations – bonds	106,167			(105,333		)	834			169,540
Total	$	(51,189	)	$	48,056		$	(3,133	)	$	(204,689	)

Note:

⁽¹⁾Represents the net interest settlements on derivatives in fair value hedge relationships presented in the interest income/expense line item of the respective hedged item.

The Bank had no active cash flow hedging relationships during 2012 or 2011. As of September 30, 2012, the deferred net gains (losses) on derivative instruments in AOCI expected to be reclassified to earnings during the next twelve months, as well as the losses reclassified from AOCI into income, were not material.

Managing Credit Risk on Derivatives. The Bank is subject to credit risk due to nonperformance by counterparties to the derivative agreements. The Bank manages counterparty credit risk through credit analysis, reliance on netting provisions in its International Swaps and Derivatives Association (ISDA) agreements, collateral requirements and adherence to the requirements set forth in its ISDA agreements, policies and regulations. The deterioration in the credit/financial markets has heightened the Bank’s awareness of derivative default risk, including risk of return of the Bank's posted collateral. In response, the Bank has worked toward lessening this risk by (1) verifying that the derivative counterparties are in full compliance with existing ISDA requirements through enhanced monitoring efforts; (2) at times, substituting securities for cash collateral, which would allow a more detailed identification of the Bank’s particular collateral; and (3) attempting to negotiate revised ISDA Master Agreement terms, when necessary, that should help to mitigate losses in the event of a counterparty default. These agreement negotiations may include establishing tri-party collateral agreements where possible to further protect the Bank’s collateral. The Bank’s ISDA Master Agreements typically require segregation of the Bank’s collateral posted with the counterparty and typically do not permit rehypothecation. In view of recent and expected continuing developments in the derivatives market, including over-the-counter (OTC) derivatives, the Bank may manage this risk differently in the future.

The contractual or notional amount of derivatives reflects the involvement of the Bank in the various classes of financial instruments. The notional amount of derivatives does not measure the credit risk exposure of the Bank, and the maximum credit exposure of the Bank is substantially less than the notional amount. The Bank requires collateral agreements that establish collateral delivery thresholds by counterparty. The maximum credit risk is defined as the estimated cost of replacing interest rate swaps, mandatory delivery contracts for mortgage loans, and purchased caps and floors that have a net positive market value, assuming the counterparty defaults and the related collateral, if any, is of no value to the Bank.

The following table presents credit risk exposure on derivative instruments, excluding circumstances where a counterparty's pledged collateral to the Bank exceeds the Bank's net position.

(in thousands)	September 30, 2012		December 31, 2011
Credit risk exposure(1)	$	53,452	$	44,544
Cash collateral held	28,058		8,288
Net exposure after cash collateral	25,394		36,256
Other collateral held	1,341		—
Net exposure after collateral	$	24,053	$	36,256

Note:

⁽¹⁾ Includes net accrued interest receivable of $9.5 million and $3.1 million at September 30, 2012 and December 31, 2011, respectively.

Generally, the Bank’s ISDA agreements contain provisions that require the Bank to post additional collateral with its counterparties if there is deterioration in its credit rating and the net liability position exceeds the relevant threshold. If the Bank’s credit rating is lowered by a major credit rating agency, the Bank would be required to deliver additional collateral on derivative instruments in net liability positions. The aggregate fair value of all derivative instruments with credit-risk related contingent features that were in a net liability position (before cash collateral and related accrued interest) at September 30, 2012 was $833.0 million for which the Bank has posted cash and securities collateral with a fair value of approximately $759.4 million in the normal course of business. If the Bank’s credit rating had been lowered one notch (i.e., from its current rating to the next lower rating), the Bank would have been required to deliver up to an additional $53.4 million of collateral to its derivative counterparties at September 30, 2012.

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. Note 15 discusses assets pledged by the Bank to these counterparties. The Bank is not a derivatives dealer and does not trade derivatives for short-term profit.