XML 129 R16.htm IDEA: XBRL DOCUMENT v3.19.3.a.u2
Derivative Instruments
 12 Months Ended
Dec. 31, 2019
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 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 SOFR and U.S. Treasury.
We account for certain forms of credit risk transfer transactions as derivatives. In our credit risk transfer transactions, 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 derivative transactions that are associated with some of our credit risk transfer transactions, whereby we manage investment risk to guarantee that certain unconsolidated VIEs have sufficient cash flows to pay their contractual obligations.
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 on a trade-date basis. Fair value amounts, which are (1) netted to the extent a legal right of offset exists and is enforceable by law at the counterparty level and (2) inclusive of the right or obligation associated with the cash collateral posted or received, are recorded in “Other assets” or “Other liabilities” in our 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 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 December 31, 2019
 
As of December 31, 2018
 
 
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
 
$
41,052

 
$
—

 
$
29,178

 
$
(970
)
 
$
71,416

 
$
438

 
$
21,253

 
$
(740
)
Receive-fixed
 
73,579

 
816

 
26,382

 
(62
)
 
88,799

 
1,113

 
58,399

 
(860
)
Basis
 
273

 
149

 
—

 
—

 
250

 
104

 
624

 
—

Foreign currency
 
229

 
39

 
232

 
(65
)
 
221

 
22

 
223

 
(72
)
Swaptions:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pay-fixed
 
4,600

 
18

 
6,375

 
(219
)
 
10,375

 
191

 
1,000

 
(4
)
Receive-fixed
 
2,875

 
106

 
4,600

 
(232
)
 
500

 
20

 
7,375

 
(338
)
Futures(1)
 
 
20,507

 
—

 
—

 
—

 
16,631

 
—

 
—

 
—

Total gross risk management derivatives
 
143,115

 
1,128

 
66,767

 
(1,548
)
 
188,192

 
1,888

 
88,874

 
(2,014
)
Accrued interest receivable (payable)
 
—

 
226

 
—

 
(250
)
 
—

 
400

 
—

 
(419
)
Netting adjustment(2)
 
—

 
(1,288
)
 
—

 
1,694

 
—

 
(2,266
)
 
—

 
2,315

Total net risk management derivatives
 
$
143,115

 
$
66

 
$
66,767

 
$
(104
)
 
$
188,192

 
$
22

 
$
88,874

 
$
(118
)
Mortgage commitment derivatives:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage commitments to purchase whole loans
 
$
7,115

 
$
15

 
$
1,787

 
$
(1
)
 
$
4,370

 
$
29

 
$
57

 
$
—

Forward contracts to purchase mortgage-related securities
 
55,531

 
137

 
9,560

 
(28
)
 
40,650

 
349

 
1,045

 
(3
)
Forward contracts to sell mortgage-related securities
 
9,282

 
13

 
109,066

 
(277
)
 
292

 
1

 
70,593

 
(645
)
Total mortgage commitment derivatives
 
71,928

 
165

 
120,413

 
(306
)
 
45,312

 
379

 
71,695

 
(648
)
Credit enhancement derivatives
 
28,432

 
40

 
9,486

 
(25
)
 
33,431

 
57

 
919

 
(11
)
Derivatives at fair value
 
$
243,475

 
$
271

 
$
196,666

 
$
(435
)
 
$
266,935

 
$
458

 
$
161,488

 
$
(777
)

(1) 
Futures have no ascribable fair value since the positions are settled daily.
(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 $1.0 billion and $713 million as of December 31, 2019 and 2018, respectively. Cash collateral received was $635 million and $664 million as of December 31, 2019 and 2018, respectively.
We record all derivative gains and losses, including accrued interest, in “Fair value gains (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,
 
 
2019
 
2018
 
2017
 
 
(Dollars in millions)
Risk management derivatives:
 
 
 
 
 
 
Swaps:
 
 
 
 
 
 
Pay-fixed
 
$
(3,964
)
 
$
2,940

 
$
1,296

Receive-fixed
 
3,685

 
(1,834
)
 
(851
)
Basis
 
46

 
(21
)
 
21

Foreign currency
 
24

 
(51
)
 
49

Swaptions:
 
 
 
 
 
 
Pay-fixed
 
(380
)
 
100

 
(161
)
Receive-fixed
 
117

 
(39
)
 
(60
)
Futures
 
273

 
38

 
22

Net contractual interest expense on interest-rate swaps
 
(833
)
 
(1,061
)
 
(889
)
Total risk management derivatives fair value gains (losses), net
 
(1,032
)
 
72

 
(573
)
Mortgage commitment derivatives fair value gains (losses), net
 
(1,043
)
 
324

 
(603
)
Credit enhancement derivatives fair value gains (losses), net
 
(35
)
 
26

 
(9
)
Total derivatives fair value gains (losses), net
 
$
(2,110
)
 
$
422

 
$
(1,185
)

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 as of December 31, 2019 and 2018.