We are exposed to interest-rate risk primarily from the effects of interest-rate changes on interest-earning assets and interest-bearing liabilities that finance these assets. The goal of our interest-rate risk-management strategy is to manage interest-rate risk within appropriate limits. As part of our effort to mitigate the risk of loss, we have established policies and procedures, which include guidelines on the amount of exposure to interest-rate changes we will accept. In addition, we monitor the risk to our interest income, net interest margin, and average maturity of interest-earning assets and interest-bearing liabilities.

Consistent with FHFA regulations, we enter into derivatives to manage the interest-rate-risk exposures inherent in otherwise unhedged assets and liabilities and achieve our risk-management objectives. FHFA regulation prohibits us from the speculative use of these derivative instruments. The use of derivatives is an integral part of our financial and risk management strategy. We may enter into derivatives that do not necessarily qualify for hedge accounting.

We formally document at inception all relationships between derivatives designated as hedging instruments and hedged items, as well as our risk-management objectives and strategies for undertaking various hedge transactions and our method of assessing hedge effectiveness. This process includes linking all derivatives that are designated as fair-value or cash-flow hedges to specific assets or liabilities on the statement of condition, firm commitments, or forecasted transactions.

We may use derivatives to adjust the effective maturity, repricing frequency, or option characteristics of our financial instruments, including our advances products, investments, and COs to achieve risk-management objectives. Derivative instruments are designated by us as:

We transact all of our derivatives with counterparties who are major banks or, in a few instances, with their affiliates with unconditional guarantees provided by the respective major banks. Some of these derivative counterparties and their affiliates buy, sell, and distribute COs, and may be affiliates of members of the Bank. Derivative transactions may be either over-the-counter with a counterparty (uncleared derivatives) or cleared through a futures commission merchant (clearing member) with a DCO as the counterparty (cleared derivatives).

We may also manage the risk arising from changing market prices or cash flows of certain investment securities classified as trading by entering into economic hedges that offset the changes in fair value or cash flows of the securities. These economic hedges are not specifically designated as hedges of individual assets, but rather are collectively managed to provide an offset to the changes in the fair values of the assets. The market-value changes of trading securities are included in net unrealized gains (losses) on trading securities in the statement of operations, while the changes in fair value of the associated derivatives are included in other income as net gains on derivatives and hedging activities.

Advances. We offer a wide range of fixed- and variable-rate advance products with different maturities, interest rates, payment characteristics and optionality. We may use interest-rate swaps to manage the repricing and/or options characteristics of advances to more closely match the characteristics of our funding liabilities. Typically, we hedge the fair value of fixed-rate advances with interest-rate swaps where we pay a fixed-rate coupon and receive a variable-rate coupon, effectively converting the advance to a floating-rate advance. We also hedge the fair value of certain floating-rate advances that contain either an interest-rate cap or floor, or both a cap and a floor with a derivative containing an offsetting cap and/or floor.

With each issuance of a putable advance, we effectively purchase from the borrower an embedded put option that enables us to terminate a fixed-rate advance on predetermined put dates, and offer, subject to certain conditions, replacement funding at then-current advances rates. We may hedge a putable advance by entering into a derivative that is cancelable by the derivative counterparty, where we pay a fixed-rate coupon and receive a variable-rate coupon. This type of hedge is treated as a fair-value hedge. The swap counterparty would normally exercise its option to cancel the derivative at par on any defined exercise date if interest rates had risen, and at that time, we could, at our option, require immediate repayment of the advance.

Additionally, the borrower's ability to prepay an advance can create interest-rate risk. When a borrower prepays an advance, we could suffer lower future income if the principal portion of the prepaid advance were invested in lower-yielding assets that continue to be funded by higher-cost debt. To protect against this risk, we generally charge a prepayment fee that makes us financially indifferent to a borrower's decision to prepay an advance. If the advance is hedged with a derivative instrument, the prepayment fee will generally offset the cost of terminating the designated hedge. When we offer advances (other than short-term advances) that a borrower may prepay without a prepayment fee, we usually finance such advances with callable debt with an interest-rate swap cancellable by us.

COs. We may enter into derivatives to hedge (or partially hedge, depending on the risk strategy) the interest-rate risk associated with our specific debt issuances, including using derivatives to change the effective interest-rate sensitivity of debt to better match the characteristics of funded assets. We endeavor to manage the risk arising from changing market prices and volatility of a CO by matching the cash inflow on the derivative with the cash outflow on the CO.

As an example of such a hedging strategy, when fixed-rate COs are issued, we may simultaneously enter into a matching derivative in which we receive a fixed-interest cash flows designed to mirror in timing and amount the interest cash outflows we pay on the CO. At the same time, we may pay variable cash flows that closely match the interest payments we receive on short-term or variable-rate assets. In some cases, the hedged CO may have a nonstatic coupon that is subject to fair-value risk and that is matched by the receivable coupon on the hedging interest-rate swap. These transactions are treated as fair-value hedges.

In a typical cash-flow hedge of anticipated CO issuance, we may enter into interest-rate swaps for the anticipated issuance of fixed-rate CO bonds to lock in a spread between an earning asset and the cost of funding. The interest-rate swap is terminated upon issuance of the fixed-rate CO bond. Changes in fair value of the hedging derivative, to the extent that the hedge is effective, will be recorded in accumulated other comprehensive loss and reclassified into earnings in the period or periods during which the cash flows of the fixed-rate CO bond affects earnings (beginning upon issuance and continuing over the life of the CO bond).

Firm Commitments. Mortgage loan purchase commitments are considered derivatives. When the mortgage loan purchase commitment derivative settles, the current market value of the commitment is included with the basis of the mortgage loan. The basis adjustments on the resulting performing loans are then amortized into net interest income over the life of the loans.

We may also hedge a firm commitment for a forward-starting advance through the use of an interest-rate swap. In this case, the interest-rate swap functions as the hedging instrument for both the firm commitment and the subsequent advance and is treated as a fair value hedge. The fair-value change associated with the firm commitment is recorded as a basis adjustment of the advance at the time the commitment is terminated and the advance is issued. The basis adjustment is then amortized into interest income over the life of the advance.

Financial Statement Impact and Additional Financial Information. The notional amount of derivatives is a factor in determining periodic interest payments or cash flows received and paid. However, the notional amount of derivatives reflects our involvement in the various classes of financial instruments and represents neither the actual amounts exchanged nor our overall exposure to credit and market risk; the overall risk is much smaller. The risks of derivatives can be measured meaningfully on a portfolio basis that takes into account the counterparties, the types of derivatives, the tenor of the derivatives, the items being hedged, and any offsets between the derivatives and the items being hedged.

Table 12.1 - Fair Value of Derivative Instruments (dollars in thousands)

	December 31, 2019							December 31, 2018
	Notional Amount of Derivatives		Derivative Assets		Derivative Liabilities			Notional Amount of Derivatives		Derivative Assets		Derivative Liabilities
Derivatives designated as hedging instruments
Interest-rate swaps	$	12,128,105	$	14,734	$	(12,805	)	$	11,980,699	$	12,811	$	(296,324	)
Forward-start interest-rate swaps	17,000		19		—			282,000		—		(753		)
Total derivatives designated as hedging instruments	12,145,105		14,753		(12,805		)	12,262,699		12,811		(297,077		)

Derivatives not designated as hedging instruments
Economic hedges:
Interest-rate swaps	2,902,300		349		(31,000		)	927,800		682		(12,475		)
Mortgage-delivery commitments⁽¹⁾	49,911		227		—			50,773		339		—
Total derivatives not designated as hedging instruments	2,952,211		576		(31,000		)	978,573		1,021		(12,475		)
Total notional amount of derivatives	$	15,097,316						$	13,241,272
Total derivatives before netting and collateral adjustments			15,329		(43,805		)			13,832		(309,552		)
Netting adjustments and cash collateral, including related accrued interest ⁽²⁾			144,402		33,534					8,571		53,752
Derivative assets and derivative liabilities			$	159,731	$	(10,271	)			$	22,403	$	(255,800	)

Beginning on January 1, 2019, changes in fair value of the derivative hedging instrument and the hedged item attributable to the hedged risk for designated fair-value hedges are recorded in net interest income in the same line as the earnings effect of the hedged item. For designated cash-flow hedges, the entire change in the fair value of the hedging instrument (assuming it is included in the assessment of hedge effectiveness) is reported in other comprehensive income until the hedged transaction affects earnings. At that time, this amount is reclassified from other comprehensive income and recorded in net interest income in the same line as the earnings effect of the hedged item. Prior to January 1, 2019, for both fair value and cash-flow hedges, any hedge ineffectiveness (which represented the amount by which the change in the fair value of the derivative differed from the change in the fair value of the hedged item or the variability in the cash flows of the forecasted transaction attributable to the hedged risk) was recorded in noninterest income as net gains on derivatives and hedging activities.

Table 12.2 - Net Gains (Losses) on Fair Value Hedging Relationships (dollars in thousands)

	For the Year Ended December 31, 2019
	Advances			Available-for-sale Securities			CO Bonds
Total interest income (expense) in the statements of operations	$	854,599		$	115,942		$	(598,585	)

Gains (losses) on fair value hedging relationships
Changes in fair value:
Derivatives	$	(72,488	)	$	(24,274	)	$	55,777
Hedged items	73,530			21,329			(56,091		)
Net changes in fair value before price alignment interest	1,042			(2,945		)	(314		)
Price alignment interest⁽¹⁾	1,316			3,769			(786		)
Net interest settlements on derivatives⁽²⁾⁽³⁾	39,085			(22,249		)	(17,482		)
Net gains (losses) on qualifying fair-value hedging relationships	41,443			(21,425		)	(18,582		)
Amortization/accretion of discontinued fair-value hedging relationships	(1,934		)	—			(2,567		)
Net gains (losses) on derivatives and hedging activities recorded in net interest income	$	39,509		$	(21,425	)	$	(21,149	)



	For the Year Ended December 31, 2018
	Advances			Available-for-sale Securities			CO Bonds
Total income (expense) in the statements of operations	$	867,215		$	143,952		$	(545,228	)

Gains (losses) on fair value hedging relationships
Changes in fair value:
Derivatives	$	447		$	43,771		$	(5,680	)
Hedged items	257			(42,022		)	5,254
Net changes in fair value	704			1,749			(426		)
Net interest settlements on derivatives⁽²⁾⁽³⁾	51,522			(26,040		)	(27,895		)
Net gains (losses) on qualifying fair-value hedging relationships	52,226			(24,291		)	(28,321		)
Amortization/accretion of discontinued fair-value hedging relationships	(1,475		)	—			945
Less: net changes in fair value⁽⁴⁾	(704		)	(1,749		)	426
Net gains (losses) on derivatives and hedging activities recorded in net interest income	$	50,047		$	(26,040	)	$	(26,950	)



	For the Year Ended December 31, 2017
	Advances			Available-for-sale Securities			CO Bonds
Total income (expense) in the statements of operations	$	514,176		$	118,270		$	(421,622	)

Gains (losses) on fair value hedging relationships
Changes in fair value:
Derivatives	$	52,055		$	20,747		$	4,611
Hedged items	(52,633		)	(19,011		)	(8,077		)
Net changes in fair value	(578		)	1,736			(3,466		)
Net interest settlements on derivatives⁽²⁾⁽³⁾	(24,663		)	(32,053		)	6,694
Net (losses) gains on qualifying fair-value hedging relationships	(25,241		)	(30,317		)	3,228
Amortization/accretion of discontinued fair-value hedging relationships	(2,176		)	—			1,903
Less: net changes in fair value⁽⁴⁾	578			(1,736		)	3,466
Net (losses) gains on derivatives and hedging activities recorded in net interest income	$	(26,839	)	$	(32,053	)	$	8,597

Table 12.3 - Net Gains (Losses) on Cash Flow Hedging Relationships (dollars in thousands)

	For the Year Ended December 31,
	2019			2018			2017
Forward-start interest rate swaps - CO Bonds
Losses reclassified from accumulated other comprehensive loss into interest expense	$	(5,218	)	$	(3,171	)	$	(10,575	)
(Losses) gains recognized in other comprehensive income	(6,131		)	7,907			(2,838		)
Gains recognized in net gains on derivatives and hedging activities				227			280

For the years ended December 31, 2019, 2018, and 2017, there were no reclassifications from accumulated other comprehensive loss into earnings as a result of the discontinuance of cash-flow hedges because the original forecasted transactions were not expected to occur by the end of the originally specified time period or within a two-month period thereafter. As of December 31, 2019, the maximum length of time over which we are hedging our exposure to the variability in future cash flows for forecasted transactions is two years.

Table 12.4 - Cumulative Basis Adjustments for Fair-Value Hedges (dollars in thousands)

	December 31, 2019
Line Item in Statement of Condition of Hedged Item	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	$	5,115,016	$	38,988		$	10,835	$	49,823
Available-for-sale securities	4,053,138		226,346			—		226,346
Consolidated bonds	3,359,616		(4,840		)	36,906		32,066

Table 12.5 - Net Gains and Losses on Derivatives and Hedging Activities (dollars in thousands)

	For the Year Ended December 31,
	2019			2018			2017
Derivatives designated as hedging instruments:
Total net gains (losses) related to fair-value hedges⁽¹⁾				$	2,027		$	(2,308	)
Total net gains related to cash-flow hedges⁽²⁾				227			280
Total net gains (losses) related to derivatives designated as hedging instruments				2,254			(2,028		)

Derivatives not designated as hedging instruments:
Economic hedges:
Interest-rate swaps	$	(614	)	682			434
Mortgage-delivery commitments	1,945			421			1,768
Total net gains related to derivatives not designated as hedging instruments	1,331			1,103			2,202

Other⁽³⁾	88			(1,021		)	377

Net gains on derivatives and hedging activities	$	1,419		$	2,336		$	551

Termination of Derivatives and Impact on Statement of Cash Flows. During the year ended December 31, 2019, we terminated certain uncleared interest-rate exchange agreements with a total notional amount of $611.9 million which were indexed to three-month LIBOR on the floating leg of the swaps. The net fair value of these derivative transactions, from our perspective, was $(251.5) million, which was transferred to the bilateral counterparty upon termination, and securities collateral that we had pledged against this obligation was returned to us. This cash payment is included in net change in derivatives and hedging activities, within the operating activities section of the statement of cash flows for the year ended December 31, 2019.

Simultaneously with the termination of these derivatives, we entered into replacement interest-rate exchange agreements (the replacement derivatives) having the same notional amount of $611.9 million and which are indexed to the OIS rate based on the federal funds effective rate on the floating leg of the swaps. Upon settlement of the replacement derivatives, the Bank received an initial upfront payment of $251.5 million. The replacement derivatives are cleared through a derivatives clearing organization (DCO), which called for variation margin to be delivered. Because the replacement derivatives include off-market terms and this large initial upfront payment, all payments for the replacement derivatives are classified as net payments on derivative contracts with a financing element, within the financing activities section of the statement of cash flows.

Managing Credit Risk on Derivatives. We are subject to credit risk on our hedging activities due to the risk of nonperformance by nonmember counterparties (including DCOs and their clearing members acting as agent to the DCOs as well as uncleared counterparties) to the derivative agreements. We manage credit risk through credit analysis, collateral requirements and adherence to the requirements set forth in our policies, U.S. Commodity Futures Trading Commission (the CFTC) regulations, and FHFA regulations.

Uncleared Derivatives. All counterparties must execute master-netting agreements prior to entering into any uncleared derivative with us. Our master-netting agreements for uncleared derivatives contain bilateral-collateral exchange agreements that require that credit exposure beyond a defined threshold amount (which may be zero) be secured by readily marketable, U.S. Treasury, U.S. Government-guaranteed, or GSE securities, or cash. The level of these collateral threshold amounts (when applicable) varies according to the counterparty's Standard & Poor's Rating Service (S&P) or Moody's Investors Services (Moody's) long-term credit ratings. Credit exposures are then measured daily and adjustments to collateral positions are made in accordance with the terms of the master-netting agreements. These master-netting agreements also contain bilateral ratings-tied termination events permitting us to terminate all outstanding derivatives transactions with a counterparty in the event of a

We execute uncleared derivatives with nonmember counterparties with long-term ratings of single-A (or equivalent) or better by the major NRSROs at the time of the transaction, although risk-reducing trades may be permitted for counterparties whose ratings have fallen below these ratings. Some of these counterparties or their affiliates buy, sell, and distribute COs. See Note 14 — Consolidated Obligations for additional information.

Certain of our uncleared derivatives master-netting agreements contain provisions that require us to post additional collateral with our uncleared derivatives counterparties if our credit ratings are lowered. Under the terms that govern such agreements, if our credit rating is lowered by Moody's or S&P to a certain level, we are required to deliver additional collateral on uncleared derivatives in a net liability position, unless the collateral delivery threshold is set to zero. In the event of a split between such credit ratings, the lower rating governs. The aggregate fair value of all uncleared derivatives with these provisions that were in a net-liability position (before cash collateral and related accrued interest) at December 31, 2019, was $38.7 million for which we had delivered collateral with a post-haircut value of $38.6 million in accordance with the terms of the master-netting agreements. Securities collateral is subject to valuation haircuts in accordance with the terms of the master-netting arrangements. Table 12.6 sets forth the post-haircut value of incremental collateral that certain uncleared derivatives counterparties could have required us to deliver based on incremental credit rating downgrades at December 31, 2019.

Cleared Derivatives. For cleared derivatives, the DCO is our counterparty. The DCO notifies the clearing member of the required initial and variation margin and our agent (clearing member) in turn notifies us. We utilize two DCOs, for all cleared derivative transactions, CME Inc. and LCH Ltd. Based upon their rulebooks, we characterize variation margin payments as daily settlement payments, rather than as collateral. At both DCOs, posted initial margin is considered collateral. We post initial margin and exchange variation margin through a clearing member which acts as our agent to the DCO and which guarantees our performance to the DCO, subject to the terms of relevant agreements. These arrangements expose us to credit risk in the event that one of our clearing members or one of the DCOs fails to meet its obligations. The use of cleared derivatives is intended to mitigate credit risk exposure because the DCO, which is fully secured at all times through margin received from its clearing members, is substituted for the credit risk exposure of individual counterparties in uncleared derivatives, and collateral is posted at least once daily for changes in the fair value of cleared derivatives through a clearing member.

For cleared derivatives, the DCO determines initial margin requirements. We clear our trades via clearing members of the DCOs. These clearing members who act as our agent to the DCOs are CFTC-registered futures commission merchants. Our clearing members may require us to post margin in excess of DCO requirements based on our credit or other considerations, including but not limited to, credit rating downgrades. We were not required to post any such excess margin by our clearing members based on credit considerations at December 31, 2019.

We have analyzed the rights, rules, and regulations governing our cleared and non-cleared derivatives and determined that those rights, rules, and regulations should result in a net claim with each of our counterparties (which, in the context of cleared derivatives is through each of our clearing members with the related DCO) upon an event of default (solely in the case of non-

cleared derivatives) or the bankruptcy, insolvency or a similar proceeding involving our counterparty (and/or one of our clearing members, in the case of cleared derivatives). For this purpose, "net claim" generally means a single net amount reflecting the aggregation of all amounts indirectly owed by us to the relevant counterparty and indirectly payable to us from the relevant counterparty.

Table 12.7 presents separately the fair value of derivatives that are subject to netting due to a legal right of offset based on the terms of our master netting arrangements or similar agreements as of December 31, 2019 and 2018, and the fair value of derivatives that are not subject to such netting. Derivatives subject to netting include any related cash collateral received from or pledged to counterparties.

Table 12.7 - Netting of Derivative Assets and Derivative Liabilities (dollars in thousands)

	December 31, 2019
	Derivative Instruments Meeting Netting Requirements											Non-cash Collateral (Received) or Pledged Not Offset⁽²⁾
	Gross Recognized Amount			Gross Amounts of Netting Adjustments ⁽¹⁾			Mortgage Delivery Commitments		Total Derivative Assets and Total Derivative Liabilities			Can Be Sold or Repledged			Cannot Be Sold or Repledged		Net Amount
Derivative Assets
Uncleared	$	4,950		$	(3,519	)	$	227	$	1,658		$	(995	)	$	—	$	663
Cleared	10,152			147,921					158,073			—			—		158,073
Total									$	159,731							$	158,736

Derivative Liabilities
Uncleared	$	(42,199	)	$	31,928		$	—	$	(10,271	)	$	82		$	9,333	$	(856	)
Cleared	(1,606		)	1,606					—			—			—		—
Total									$	(10,271	)						$	(856	)



	December 31, 2018
	Derivative Instruments Meeting Netting Requirements											Non-cash Collateral (Received) or Pledged Not Offset⁽²⁾
	Gross Recognized Amount			Gross Amounts of Netting Adjustments ⁽¹⁾			Mortgage Delivery Commitments		Total Derivative Assets and Total Derivative Liabilities			Can Be Sold or Repledged			Cannot Be Sold or Repledged		Net Amount
Derivative Assets
Uncleared	$	12,862		$	(11,886	)	$	339	$	1,315		$	(396	)	$	—	$	919
Cleared	631			20,457					21,088			—			—		21,088
Total									$	22,403							$	22,007

Derivative Liabilities
Uncleared	$	(306,848	)	$	51,048		$	—	$	(255,800	)	$	6,104		$	237,054	$	(12,642	)
Cleared	(2,704		)	2,704					—			—			—		—
Total									$	(255,800	)						$	(12,642	)

Includes non-cash collateral at fair value. Any overcollateralization with a counterparty is not included in the determination of the net amount. At December 31, 2018, we had additional net credit exposure of $639 thousand due to instances where our collateral pledged to a counterparty exceeded our net derivative liability position.