Derivative Instruments

3 Months Ended

Mar. 31, 2015

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 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. See “Note 15, Fair Value” for additional information on derivatives recorded at fair value. 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, 2015 and December 31, 2014.

	As of March 31, 2015										As of December 31, 2014
	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	$	17,739	$	114		$	144,469	$	(9,424	)	$	41,965	$	733		$	123,557	$	(7,125	)
Receive-fixed	141,195		5,508			97,104		(516		)	67,629		4,486			157,272		(1,302		)
Basis	1,769		156			9,100		(3		)	5,769		123			7,100		(2		)
Foreign currency	328		132			260		(48		)	344		144			273		(30		)
Swaptions:
Pay-fixed	7,625		52			21,700		(79		)	11,100		57			26,525		(175		)
Receive-fixed	—		—			23,275		(968		)	750		96			29,525		(816		)
Other(1)	1,060		27			12		(1		)	1,071		28			12		(1		)
Total gross risk management derivatives	169,716		5,989			295,920		(11,039		)	128,628		5,667			344,264		(9,451		)
Accrued interest receivable (payable)	—		917			—		(1,232		)	—		749			—		(1,013		)
Netting adjustment(2)	—		(5,626		)	—		12,036			—		(5,186		)	—		10,194
Total net risk management derivatives	$	169,716	$	1,280		$	295,920	$	(235	)	$	128,628	$	1,230		$	344,264	$	(270	)

Mortgage commitment derivatives:
Mortgage commitments to purchase whole loans	$	10,387	$	51	$	1,493	$	(4	)	$	6,157	$	28	$	428	$	—
Forward contracts to purchase mortgage-related securities	59,334		341		6,748		(14		)	43,533		223		6,112		(8		)
Forward contracts to sell mortgage-related securities	8,548		20		91,558		(549		)	4,886		4		57,910		(336		)
Total mortgage commitment derivatives	$	78,269	$	412	$	99,799	$	(567	)	$	54,576	$	255	$	64,450	$	(344	)
Derivatives at fair value	$	247,985	$	1,692	$	395,719	$	(802	)	$	183,204	$	1,485	$	408,714	$	(614	)

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⁽¹⁾  Includes 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 arrangements to settle with the same counterparty on a net basis, including cash collateral posted and received. Cash collateral posted was $6.6 billion and $5.3 billion as of March 31, 2015 and December 31, 2014, respectively. Cash collateral received was $161 million and $245 million as of March 31, 2015 and December 31, 2014, 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 $3.1 billion and $2.6 billion as of March 31, 2015 and December 31, 2014, respectively, for which we posted collateral of $2.9 billion and $2.4 billion in the normal course of business as of March 31, 2015 and December 31, 2014, respectively. Had all of the credit-risk-related contingency features underlying these agreements been triggered, an additional $230 million and $269 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, 2015 and December 31, 2014, 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 cleared derivative contracts.

We record all derivative gains and losses, including accrued interest, in “Fair value 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 months ended March 31, 2015 and 2014.

	For the Three Months
	Ended March 31,
	2015			2014
	(Dollars in millions)
Risk management derivatives:
Swaps:
Pay-fixed	$	(3,069	)	$	(2,118	)
Receive-fixed	1,847			1,465
Basis	32			35
Foreign currency	(29		)	21
Swaptions:
Pay-fixed	91			(99		)
Receive-fixed	(159		)	(42		)
Other	2			(3		)
Accrual of periodic settlements:
Pay-fixed interest-rate swaps	(931		)	(903		)
Receive-fixed interest-rate swaps	692			691
Other	10			13
Total risk management derivatives fair value losses, net	$	(1,514	)	$	(940	)
Mortgage commitment derivatives fair value losses, net	(239		)	(345		)
Total derivatives fair value losses, net	$	(1,753	)	$	(1,285	)

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 and clearing member. 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 14, Netting Arrangements” for information on our rights to offset assets and liabilities.