Derivative Instruments

6 Months Ended

Jun. 30, 2020

Derivative Instruments and Hedging Activities Disclosure [Abstract]

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 consist primarily of interest-rate swaps and interest-rate options. See “Note 8, Derivative Instruments” in our 2019 Form 10-K for additional information on interest-rate risk management.

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 condensed 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 condensed consolidated balance sheets. See “Note 12, 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 June 30, 2020														As of December 31, 2019
	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	$	98,953	$	—	$	28,553	$	(1,747)	$	41,052	$	—	$	29,178	$	(970)
Receive-fixed	131,314		1,143		4,851		(3)		73,579		816		26,382		(62)
Basis	250		222		—		—		273		149		—		—
Foreign currency	215		32		217		(91)		229		39		232		(65)
Swaptions:
Pay-fixed	4,600		6		5,875		(340)		4,600		18		6,375		(219)
Receive-fixed	6,625		648		350		(134)		2,875		106		4,600		(232)
Futures⁽¹⁾	15,982		—		—		—		20,507		—		—		—
Total gross risk management derivatives	257,939		2,051		39,846		(2,315)		143,115		1,128		66,767		(1,548)
Accrued interest receivable (payable)	—		109		—		(193)		—		226		—		(250)
Netting adjustment⁽²⁾	—		(2,108)		—		2,396		—		(1,288)		—		1,694
Total net risk management derivatives	$	257,939	$	52	$	39,846	$	(112)	$	143,115	$	66	$	66,767	$	(104)
Mortgage commitment derivatives:
Mortgage commitments to purchase whole loans	$	41,032	$	175	$	1,141	$	(1)	$	7,115	$	15	$	1,787	$	(1)
Forward contracts to purchase mortgage-related securities	106,225		571		13,080		(21)		55,531		137		9,560		(28)
Forward contracts to sell mortgage-related securities	12,131		21		212,592		(1,202)		9,282		13		109,066		(277)
Total mortgage commitment derivatives	159,388		767		226,813		(1,224)		71,928		165		120,413		(306)
Credit enhancement derivatives	24,334		85		11,159		(44)		28,432		40		9,486		(25)
Derivatives at fair value	$	441,661	$	904	$	277,818	$	(1,380)	$	243,475	$	271	$	196,666	$	(435)

⁽¹⁾Futures have no ascribable fair value because 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 $1.2 billion and $1.0 billion as of June 30, 2020 and December 31, 2019, respectively. Cash collateral received was $906 million and $635 million as of June 30, 2020 and December 31, 2019, respectively.

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 June 30,						For the Six Months Ended June 30,

	2020		2019		2020		2019
	(Dollars in millions)
Risk management derivatives:
Swaps:
Pay-fixed	$	(94)	$	(2,164)	$	(4,123)	$	(3,499)
Receive-fixed	191		1,884		3,534		3,165
Basis	17		27		73		51
Foreign currency	4		(17)		(34)		2
Swaptions:
Pay-fixed	(13)		(143)		(161)		(320)
Receive-fixed	25		93		657		100
Futures	(4)		195		(75)		254
Net contractual interest expense on interest-rate swaps	(64)		(242)		(170)		(508)
Total risk management derivatives fair value gains (losses), net	62		(367)		(299)		(755)
Mortgage commitment derivatives fair value losses, net	(662)		(469)		(1,655)		(769)
Credit enhancement derivatives fair value gains (losses), net	31		(17)		20		(24)
Total derivatives fair value losses, net	$	(569)	$	(853)	$	(1,934)	$	(1,548)

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 11, Netting Arrangements” for information on our rights to offset assets and liabilities as of June 30, 2020 and December 31, 2019.