XML 38 R17.htm IDEA: XBRL DOCUMENT v3.6.0.2
Derivative Instruments
 12 Months Ended
Dec. 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 derivative contracts we use for interest rate risk management purposes fall into these broad categories:
•
Interest rate swap contracts. An interest rate swap is a transaction between two parties in which each party agrees to exchange payments tied to different interest rates or indices for a specified period of time, generally based on a notional amount of principal. The types of interest rate swaps we use include pay-fixed swaps, receive-fixed swaps and basis swaps.
•
Interest rate option contracts. These contracts primarily include pay-fixed swaptions, receive-fixed swaptions, cancelable swaps and interest rate caps. A swaption is an option contract that allows us or a counterparty to enter into a pay-fixed or receive-fixed swap at some point in the future.
•
Foreign currency swaps. These swaps convert debt that we issue in foreign denominated currencies into U.S. dollars. We enter into foreign currency swaps only to the extent that we hold foreign currency debt.
•
Futures. These are standardized exchange-traded contracts that either obligate a buyer to buy an asset at a predetermined date and price or a seller to sell an asset at a predetermined date and price. The types of futures contracts we enter into include Eurodollar, U.S. Treasury and swaps.
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 consolidated balance sheets at their fair value. See “Note 17, Fair Value” for additional information on derivatives recorded at fair value.
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 December 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
$
29,540

 
$
660

 
$
94,584

 
$
(4,396
)
 
$
33,154

 
$
267

 
$
123,106

 
$
(6,920
)
Receive-fixed
30,207

 
2,696

 
135,470

 
(1,552
)
 
59,796

 
3,436

 
143,209

 
(753
)
Basis
1,624

 
115

 
15,600

 
(11
)
 
1,864

 
141

 
17,100

 
(15
)
Foreign currency
214

 
40

 
216

 
(85
)
 
295

 
95

 
258

 
(52
)
Swaptions:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pay-fixed
9,600

 
241

 
4,850

 
(82
)
 
7,050

 
45

 
14,950

 
(26
)
Receive-fixed
—

 
—

 
10,100

 
(257
)
 
2,000

 
8

 
13,950

 
(171
)
Other(1)
15,087

 
33

 
655

 
(2
)
 
9,196

 
28

 
—

 
(2
)
Total gross risk management derivatives
86,272

 
3,785

 
261,475

 
(6,385
)
 
113,355

 
4,020

 
312,573

 
(7,939
)
Accrued interest receivable (payable)
—

 
785

 
—

 
(937
)
 
—

 
758

 
—

 
(977
)
Netting adjustment(2)
—

 
(4,514
)
 
—

 
6,844

 
—

 
(4,024
)
 
—

 
8,650

Total net risk management derivatives
$
86,272

 
$
56

 
$
261,475

 
$
(478
)
 
$
113,355

 
$
754

 
$
312,573

 
$
(266
)
Mortgage commitment derivatives:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage commitments to purchase whole loans
$
4,753

 
$
28

 
$
3,039

 
$
(49
)
 
$
4,815

 
$
9

 
$
2,960

 
$
(9
)
Forward contracts to purchase mortgage-related securities
31,635

 
198

 
27,297

 
(388
)
 
31,273

 
66

 
19,418

 
(57
)
Forward contracts to sell mortgage-related securities
34,103

 
405

 
47,645

 
(300
)
 
26,224

 
65

 
40,753

 
(92
)
Total mortgage commitment derivatives
70,491

 
631

 
77,981

 
(737
)
 
62,312

 
140

 
63,131

 
(158
)
Derivatives at fair value
$
156,763

 
$
687

 
$
339,456

 
$
(1,215
)
 
$
175,667

 
$
894

 
$
375,704

 
$
(424
)
__________
(1) 
Includes futures and swap credit enhancements, 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 $2.9 billion and $4.9 billion as of December 31, 2016 and 2015, respectively. Cash collateral received was $535 million and $314 million as of December 31, 2016 and 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 as of December 31, 2016 and 2015, respectively, was $1.6 billion and $2.4 billion, for which we posted collateral of $1.4 billion and $2.2 billion in the normal course of business. Had all of the credit-risk-related contingency features underlying these agreements been triggered, an additional $258 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 December 31, 2016 and 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 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 Year Ended December 31,
 
2016
 
2015
 
2014
 
(Dollars in millions)
Risk management derivatives:
 
 
 
 
 
Swaps:
 
 
 
 
 
Pay-fixed
$
757

 
$
(746
)
 
$
(7,703
)
Receive-fixed
(751
)
 
625

 
4,229

Basis
(21
)
 
4

 
85

Foreign currency
(76
)
 
(60
)
 
27

Swaptions:
 
 
 
 
 
Pay-fixed
163

 
135

 
(4
)
Receive-fixed
(230
)
 
(93
)
 
(197
)
Other
160

 
(25
)
 
1

Net accrual of periodic settlements
(1,125
)
 
(960
)
 
(1,062
)
Total risk management derivatives fair value losses, net
(1,123
)
 
(1,120
)
 
(4,624
)
Mortgage commitment derivatives fair value gains (losses), net
288

 
(393
)
 
(1,140
)
Total derivatives fair value losses, net
$
(835
)
 
$
(1,513
)
 
$
(5,764
)
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 16, Netting Arrangements” for information on our rights to offset assets and liabilities as of December 31, 2016 and 2015.