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Derivative Instruments
3 Months Ended
Mar. 31, 2014
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 annual 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 March 31, 2014 and December 31, 2013.
 
As of March 31, 2014
 
As of December 31, 2013
 
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
$
68,984

 
$
3,746

 
$
94,488

 
$
(5,083
)
 
$
68,637

 
$
5,378

 
$
93,428

 
$
(4,759
)
Receive-fixed
67,408

 
3,842

 
144,897

 
(2,833
)
 
67,527

 
3,320

 
156,250

 
(3,813
)
Basis
23,414

 
70

 
600

 

 
27,014

 
36

 
600

 

Foreign currency
368

 
126

 
492

 
(26
)
 
389

 
120

 
653

 
(38
)
Swaptions:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pay-fixed
34,450

 
259

 
46,025

 
(475
)
 
33,400

 
445

 
48,025

 
(600
)
Receive-fixed
8,000

 
154

 
49,025

 
(572
)
 
8,000

 
117

 
48,025

 
(484
)
Other(1)
769

 
29

 
12

 
(1
)
 
769

 
28

 
13

 
(1
)
Total gross risk management derivatives
203,393

 
8,226

 
335,539

 
(8,990
)
 
205,736

 
9,444

 
346,994

 
(9,695
)
Accrued interest receivable (payable)

 
927

 

 
(1,143
)
 

 
786

 

 
(930
)
Netting adjustment(2)

 
(8,422
)
 

 
10,042

 

 
(8,422
)
 

 
9,370

Total net risk management derivatives
$
203,393

 
$
731

 
$
335,539

 
$
(91
)
 
$
205,736

 
$
1,808

 
$
346,994

 
$
(1,255
)
Mortgage commitment derivatives:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage commitments to purchase whole loans
$
2,205

 
$
3

 
$
3,665

 
$
(11
)
 
$
1,138

 
$
1

 
$
4,353

 
$
(31
)
Forward contracts to purchase mortgage-related securities
11,553

 
24

 
21,370

 
(62
)
 
3,276

 
4

 
20,861

 
(168
)
Forward contracts to sell mortgage-related securities
27,810

 
78

 
18,301

 
(45
)
 
35,423

 
260

 
7,886

 
(15
)
Total mortgage commitment derivatives
$
41,568

 
$
105

 
$
43,336

 
$
(118
)
 
$
39,837

 
$
265

 
$
33,100

 
$
(214
)
Derivatives at fair value
$
244,961

 
$
836

 
$
378,875

 
$
(209
)
 
$
245,573

 
$
2,073

 
$
380,094

 
$
(1,469
)
__________
(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 for our risk management derivatives transactions represents the effect of the legal right to offset under legally enforceable master netting arrangements to settle with the same counterparty on a net basis, including cash collateral posted and received. Cash collateral posted was $2.8 billion and $2.0 billion as of March 31, 2014 and December 31, 2013, respectively. Cash collateral received was $1.2 billion and $1.0 billion as of March 31, 2014 and December 31, 2013, respectively.
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 was $2.3 billion and $2.1 billion, for which we posted collateral of $2.2 billion and $2.0 billion in the normal course of business as of March 31, 2014 and December 31, 2013, respectively. Had all of the credit-risk-related contingency features underlying these agreements been triggered, an additional $90 million and $130 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 March 31, 2014 and December 31, 2013, 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 derivative contracts.
We record all derivative gains and losses, including accrued interest, in “Fair value (losses) gains, 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 months ended March 31, 2014 and 2013.
 
For the
 
Three Months
 
Ended March 31,
 
2014
 
2013
 
(Dollars in millions)
Risk management derivatives:
 
 
 
Swaps:
 
 
 
Pay-fixed
$
(2,118
)
 
$
2,590

Receive-fixed
1,465

 
(1,910
)
Basis
35

 
(27
)
Foreign currency
21

 
(70
)
Swaptions:
 
 
 
Pay-fixed
(99
)
 
17

Receive-fixed
(42
)
 
21

Other(1)
(3
)
 
10

Accrual of periodic settlements:
 
 
 
Pay-fixed interest-rate swaps
(903
)
 
(1,198
)
Receive-fixed interest-rate swaps
691

 
982

Basis
9

 
10

Foreign-currency swaps
4

 
4

Other(1)

 
2

Total risk management derivatives fair value (losses) gains, net
$
(940
)
 
$
431

Mortgage commitment derivatives fair value (losses) gains, net
(345
)
 
131

Total derivatives fair value (losses) gains, net
$
(1,285
)
 
$
562

__________
(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 risk management derivative transactions mainly through enforceable master netting arrangements, which allow us to net derivative assets and liabilities with the same counterparty or clearing organization. For our risk management derivative transactions, we require counterparties to post collateral, which may include cash, U.S. Treasury securities, agency debt and agency mortgage-related securities.
See “Note 15, Netting Arrangements” for information on our rights to offset assets and liabilities.