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Derivative Instruments
 6 Months Ended
Jun. 30, 2013
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivative Instruments
Derivative Instruments
Derivative instruments are an integral part of our strategy in managing interest rate risk. Derivative instruments may be privately-negotiated, bilateral contracts, or they may be listed and traded on an exchange. We refer to our derivative transactions made pursuant to bilateral contracts as our over-the-counter (“OTC”) derivative transactions and our derivative transactions accepted for clearing by a derivatives clearing organization as our OTC-cleared derivative transactions. We typically do not settle the notional amount of our risk management derivatives; rather, notional amounts provide the basis for calculating actual payments or settlement amounts. The derivatives we use for interest rate risk management purposes consist primarily of interest rate swaps and interest rate options.
We enter into forward purchase and sale commitments that lock in the future delivery of mortgage loans and mortgage-related securities at a fixed price or yield. Certain commitments to purchase mortgage loans and purchase or sell mortgage-related securities meet the criteria of a derivative. We typically settle the notional amount of our mortgage commitments that are accounted for as derivatives.
We recognize all derivatives as either assets or liabilities in our condensed consolidated balance sheets at their fair value on a trade date basis. Fair value amounts, which are netted to the extent a legal right of offset exists and is enforceable by law at the counterparty level and are inclusive of the right or obligation associated with the cash collateral posted or received, are recorded in “Other assets” or “Other liabilities” in our condensed consolidated balance sheets. We present cash flows from derivatives as operating activities in our condensed consolidated statements of cash flows.
Notional and Fair Value Position of our Derivatives
The following table displays the notional amount and estimated fair value of our asset and liability derivative instruments as of June 30, 2013 and December 31, 2012.

As of June 30, 2013
 
As of December 31, 2012

Asset Derivatives
 
Liability Derivatives
 
Asset Derivatives
 
Liability Derivatives

Notional Amount
 
Estimated Fair Value
 
Notional Amount
 
Estimated Fair Value
 
Notional Amount
 
Estimated Fair Value
 
Notional Amount
 
Estimated Fair Value

(Dollars in millions)
Risk management derivatives:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Swaps:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pay-fixed
$
87,427

 
$
4,306

 
$
159,686

 
$
(9,109
)
 
$
19,450

 
$
270

 
$
239,017

 
$
(18,237
)
Receive-fixed
82,617

 
5,907

 
213,892

 
(4,554
)
 
231,346

 
10,514

 
57,190

 
(200
)
Basis
19,700

 
79

 
7,200

 
(1
)
 
23,199

 
151

 
1,700

 
—

Foreign currency
408

 
111

 
580

 
(71
)
 
686

 
193

 
509

 
(45
)
Swaptions:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pay-fixed
33,750

 
335

 
62,325

 
(933
)
 
33,050

 
102

 
36,225

 
(184
)
Receive-fixed
15,020

 
1,451

 
61,325

 
(1,082
)
 
15,970

 
3,572

 
36,225

 
(2,279
)
Other(1)
5,094

 
27

 
12

 
—

 
7,374

 
26

 
13

 
(1
)
Total gross risk management derivatives
244,016

 
12,216

 
505,020

 
(15,750
)
 
331,075

 
14,828

 
370,879

 
(20,946
)
Accrued interest receivable (payable)
—

 
1,116

 
—

 
(1,268
)
 
—

 
1,242

 
—

 
(1,508
)
Netting adjustment(2)
—

 
(12,073
)
 
—

 
15,785

 
—

 
(15,791
)
 
—

 
22,046

Total net risk management derivatives
$
244,016

 
$
1,259

 
$
505,020

 
$
(1,233
)
 
$
331,075

 
$
279

 
$
370,879

 
$
(408
)
Mortgage commitment derivatives:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage commitments to purchase whole loans
$
3,292

 
$
23

 
$
9,719

 
$
(298
)
 
$
12,360

 
$
27

 
$
5,232

 
$
(8
)
Forward contracts to purchase mortgage-related securities
13,779

 
116

 
41,496

 
(1,212
)
 
34,545

 
103

 
12,557

 
(23
)
Forward contracts to sell mortgage-related securities
71,885

 
2,051

 
19,614

 
(161
)
 
18,886

 
26

 
75,477

 
(266
)
Total mortgage commitment derivatives
$
88,956

 
$
2,190

 
$
70,829

 
$
(1,671
)
 
$
65,791

 
$
156

 
$
93,266

 
$
(297
)
Derivatives at fair value
$
332,972

 
$
3,449

 
$
575,849

 
$
(2,904
)
 
$
396,866

 
$
435

 
$
464,145

 
$
(705
)
__________
(1) 
Includes interest rate caps, futures, swap credit enhancements and mortgage insurance contracts that we account for as derivatives. The mortgage insurance contracts have payment provisions that are not based on a notional amount.
(2) 
The netting adjustment represents the effect of the legal right to offset under legally enforceable master netting agreements to settle with the same counterparty on a net basis, including cash collateral posted and received. Cash collateral posted was $4.4 billion and $6.3 billion as of June 30, 2013 and December 31, 2012, respectively. Since the agreements related to clearing contracts through derivatives clearing organizations do not provide us with a legal right of offset, no netting adjustments have been made for those contracts. Cash collateral received was $672 million as of June 30, 2013. No cash collateral was received as of December 31, 2012.
A majority of our OTC derivative contracts contain provisions that require our senior unsecured debt to maintain a minimum credit rating from S&P and Moody’s. If our senior unsecured debt credit ratings were downgraded to established thresholds in these derivative contracts, which range from A+ to BBB+, we could be required to provide additional collateral to or terminate transactions with certain counterparties. The aggregate fair value of all OTC derivatives with credit-risk-related contingent features that were in a net liability position were $4.5 billion and $6.4 billion, for which we posted collateral of $4.4 billion and $6.3 billion in the normal course of business as of June 30, 2013 and December 31, 2012, respectively. Had all of the credit-risk-related contingency features underlying these agreements been triggered, an additional $120 million and $159 million would have been required to be posted as collateral or to immediately settle our positions based on the individual agreements and our fair value position as of June 30, 2013 and December 31, 2012, respectively. A reduction in our credit ratings may also cause derivatives clearing organizations or their members to demand that we post additional collateral for our OTC-cleared derivatives contracts.
We record all derivative gains and losses, including accrued interest, in “Fair value gains (losses), net” in our condensed consolidated statements of operations and comprehensive income. The following table displays, by type of derivative instrument, the fair value gains and losses, net on our derivatives for the three and six months ended June 30, 2013 and 2012.
 
For the
 
For the
 
Three Months
 
Six Months
 
Ended June 30,
 
Ended June 30,
 
2013
 
2012
 
2013
 
2012
 
(Dollars in millions)
Risk management derivatives:
 
 
 
 
 
 
 
Swaps:
 
 
 
 
 
 
 
Pay-fixed
$
7,102

 
$
(5,858
)
 
$
8,494

 
$
(4,683
)
Receive-fixed
(6,111
)
 
3,592

 
(7,039
)
 
2,674

Basis
(33
)
 
18

 
(50
)
 
56

Foreign currency
(59
)
 
8

 
(125
)
 
9

Swaptions:
 
 
 
 
 
 
 
Pay-fixed
(468
)
 
79

 
(451
)
 
57

Receive-fixed
247

 
345

 
268

 
251

Other(1)
13

 
(5
)
 
25

 
(6
)
Total risk management derivatives fair value gains (losses), net
691

 
(1,821
)
 
1,122

 
(1,642
)
Mortgage commitment derivatives fair value gains (losses), net
497

 
(562
)
 
628

 
(767
)
Total derivatives fair value gains (losses), net
$
1,188

 
$
(2,383
)
 
$
1,750

 
$
(2,409
)
__________
(1) 
Includes interest rate caps, futures, swap credit enhancements and mortgage insurance contracts.
Derivative Counterparty Credit Exposure
Our derivative counterparty credit exposure relates principally to interest rate derivative contracts. We are exposed to the risk that a counterparty in a derivative transaction will default on payments due to us, which may require us to seek a replacement derivative from a different counterparty. This replacement may be at a higher cost, or we may be unable to find a suitable replacement. We manage our derivative counterparty credit exposure relating to our OTC derivative transactions mainly through master netting arrangements, which allow us to net derivative assets and liabilities with the same counterparty, and by requiring counterparties to post collateral, which includes cash, U.S. Treasury securities, agency debt and agency mortgage-related securities. However, for derivative contracts cleared through a derivatives clearing organization, the related agreements are not master netting agreements.
See “Note 15, Netting Arrangements” for information on our rights to offset assets and liabilities as of June 30, 2013 and December 31, 2012.