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Derivative Instruments
3 Months Ended
Mar. 31, 2016
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 various forms of credit risk sharing agreements, including credit risk transfer transactions, swap credit enhancements and mortgage insurance contracts, that we account for as derivatives. The majority of our credit-related derivatives are credit risk transfer transactions, whereby a portion of the credit risk associated with losses on a reference pool of mortgage loans is transferred to a third party.
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, 2016
 
As of December 31, 2015
 
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
$
525

 
$

 
$
153,975

 
$
(11,582
)
 
$
33,154

 
$
267

 
$
123,106

 
$
(6,920
)
Receive-fixed
142,656

 
5,651

 
60,286

 
(53
)
 
59,796

 
3,436

 
143,209

 
(753
)
Basis
1,864

 
174

 
17,100

 
(14
)
 
1,864

 
141

 
17,100

 
(15
)
Foreign currency
263

 
98

 
251

 
(61
)
 
295

 
95

 
258

 
(52
)
Swaptions:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pay-fixed
9,800

 
43

 
4,600

 
(7
)
 
7,050

 
45

 
14,950

 
(26
)
Receive-fixed
2,000

 
4

 
6,350

 
(164
)
 
2,000

 
8

 
13,950

 
(171
)
Other(1)
8,323

 
27

 

 
(1
)
 
9,196

 
28

 

 
(2
)
Total gross risk management derivatives
165,431

 
5,997

 
242,562

 
(11,882
)
 
113,355

 
4,020

 
312,573

 
(7,939
)
Accrued interest receivable (payable)

 
917

 

 
(1,227
)
 

 
758

 

 
(977
)
Netting adjustment(2)

 
(6,724
)
 

 
12,598

 

 
(4,024
)
 

 
8,650

Total net risk management derivatives
$
165,431

 
$
190

 
$
242,562

 
$
(511
)
 
$
113,355

 
$
754

 
$
312,573

 
$
(266
)
Mortgage commitment derivatives:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage commitments to purchase whole loans
$
10,507

 
$
48

 
$
211

 
$

 
$
4,815

 
$
9

 
$
2,960

 
$
(9
)
Forward contracts to purchase mortgage-related securities
77,994

 
457

 
1,893

 
(4
)
 
31,273

 
66

 
19,418

 
(57
)
Forward contracts to sell mortgage-related securities
1,525

 
5

 
107,159

 
(601
)
 
26,224

 
65

 
40,753

 
(92
)
Total mortgage commitment derivatives
$
90,026

 
$
510

 
$
109,263

 
$
(605
)
 
$
62,312

 
$
140

 
$
63,131

 
$
(158
)
Derivatives at fair value
$
255,457

 
$
700

 
$
351,825

 
$
(1,116
)
 
$
175,667

 
$
894

 
$
375,704

 
$
(424
)
__________
(1) 
Includes swap credit enhancements and futures, as well as credit risk transfer transactions and mortgage insurance contracts that we account for as derivatives.
(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 $6.2 billion and $4.9 billion as of March 31, 2016 and December 31, 2015, respectively. Cash collateral received was $365 million and $314 million as of March 31, 2016 and December 31, 2015, 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 $3.2 billion and $2.4 billion as of March 31, 2016 and December 31, 2015, respectively, for which we posted collateral of $3.1 billion and $2.2 billion in the normal course of business as of March 31, 2016 and December 31, 2015, respectively. Had all of the credit-risk-related contingency features underlying these agreements been triggered, an additional $244 million and $257 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, 2016 and December 31, 2015, 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 derivatives 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
 
Ended March 31,
 
2016
 
2015
 
(Dollars in millions)
Risk management derivatives:
 
 
 
Swaps:
 
 
 
Pay-fixed
$
(5,173
)
 
$
(3,069
)
Receive-fixed
2,987

 
1,847

Basis
35

 
32

Foreign currency
3

 
(29
)
Swaptions:
 
 
 
Pay-fixed
25

 
91

Receive-fixed
(117
)
 
(159
)
Other
138

 
2

Net accrual of periodic settlements
(269
)
 
(229
)
Total risk management derivatives fair value losses, net
$
(2,371
)
 
$
(1,514
)
Mortgage commitment derivatives fair value losses, net
(362
)
 
(239
)
Total derivatives fair value losses, net
$
(2,733
)
 
$
(1,753
)
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 OTC 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.