We are an end user of derivative financial instruments and do not engage in derivative trading. Derivatives may be privately negotiated contracts, which are often referred to as over-the-counter (“OTC”) derivatives, or they may be listed and traded on an exchange. We generally engage in OTC derivative transactions. Our derivative instruments are an integral part of our interest rate risk-management strategy. Our principal purpose in using derivatives is to manage our aggregate interest rate risk profile within prescribed risk parameters. The derivative instruments we use primarily include interest rate swaps, which we typically hold to maturity. In addition, we may on occasion use treasury locks to manage the interest rate risk associated with future debt issuance or debt that is scheduled to reprice in the future.

In accordance with the accounting standards for derivatives and hedging activities, we record derivative instruments at fair value as either a derivative asset or derivative liability on our consolidated balance sheets. We report derivative asset and liability amounts on a gross basis based on individual contracts, which does not take into consideration the effects of master netting agreements or collateral netting. Derivatives in a gain position are reported as derivative assets on our consolidated balance sheets, while derivatives in a loss position are reported as derivative liabilities. Accrued interest related to derivatives is reported on our consolidated balance sheets as a component of either accrued interest receivable or accrued interest payable.

If we do not elect hedge accounting treatment, changes in the fair value of derivative instruments, which consist of net accrued periodic derivative cash settlements expense and derivative forward value amounts, are recognized in our consolidated statements of operations under derivative gains (losses). If we elect hedge accounting treatment for derivatives, we formally document, designate and assess the effectiveness of the hedge relationship. Changes in the fair value of derivatives designated as qualifying fair value hedges are recorded in earnings together with offsetting changes in the fair value of the hedged item and any related ineffectiveness. Changes in the fair value of derivatives designated as qualifying cash flow hedges are recorded as a component of other comprehensive income (“OCI”), to the extent that the hedge relationships are effective, and reclassified from accumulated other comprehensive income (“AOCI”) to earnings using the

effective interest method over the term of the forecasted transaction. Any ineffectiveness in the hedging relationship is recognized as a component of derivative gains (losses) in our consolidated statement of operations.

We generally do not designate interest rate swaps, which represent the substantial majority of our derivatives, for hedge accounting. Accordingly, changes in the fair value of interest rate swaps are reported in our consolidated statements of operations under derivative gains (losses). Net periodic cash settlements expense related to interest rate swaps are classified as an operating activity in our consolidated statements of cash flows.

We typically designate Treasury rate locks as cash flow hedges of forecasted debt issuances or repricings. Changes in the fair value of treasury locks designated as cash flow hedges are recorded as a component of OCI and reclassified from AOCI into interest expense when the forecasted transaction occurs using the effective interest method. Any ineffectiveness is recognized as a component of derivative gains (losses) in our consolidated statements of operations.

The notional amount is used only as the basis on which interest payments are determined and is not the amount exchanged, nor recorded on our consolidated balance sheets. The following table shows, by derivative instrument type, the notional amount, the weighted-average rate paid and the weighted-average interest rate received for our interest rate swaps as of November 30, 2021 and May 31, 2021. For the substantial majority of interest rate swap agreements, a LIBOR index is currently used as the basis for determining variable interest payment amounts each period.


	November 30, 2021						May 31, 2021
(Dollars in thousands)	Notional Amount		Weighted- Average Rate Paid		Weighted- Average Rate Received		Notional Amount		Weighted- Average Rate Paid		Weighted- Average Rate Received
Pay-fixed swaps	$	6,118,204	2.61	%	0.15	%	$	6,579,516	2.65	%	0.20	%
Receive-fixed swaps	2,399,000		0.88		2.80		2,399,000		0.92		2.80
Total interest rate swaps	$	8,517,204	2.12		0.90		$	8,978,516	2.19		0.89

On July 20, 2021, we executed two treasury lock agreements with an aggregate notional amount of $250 million to lock in the underlying U.S. Treasury interest rate component of interest rate payments on anticipated debt issuances and repricings. The treasury locks, which were scheduled to mature on October 29, 2021, were designated and qualified as cash flow hedges. In October 2021, we borrowed $250 million under our Farmer Mac revolving purchase note agreement and terminated the treasury locks. Prior to this anticipated borrowing and the termination of the treasury locks, we recorded changes in the fair value of the treasury locks in AOCI. At termination, the treasury locks were in a gain position of $5 million, of which $4 million is being accreted from AOCI to interest expense over the term of the related Farmer Mac borrowings and the remainder was recognized in earnings. We did not have any derivatives designated as accounting hedges as of November 30, 2021 or May 31, 2021.

The following table displays the fair value of the derivative assets and derivative liabilities, by derivatives type, recorded on our consolidated balance sheets and the related outstanding notional amount as of November 30, 2021 and May 31, 2021.


	November 30, 2021				May 31, 2021
(Dollars in thousands)	Fair Value		Notional Amount		Fair Value		Notional Amount
Derivative assets:

Interest rate swaps	$	78,610	$	2,816,570	$	121,259	$	2,560,618
Total derivative assets	$	78,610	$	2,816,570	$	121,259	$	2,560,618

Derivative liabilities:

Interest rate swaps	$	615,097	$	5,700,634	$	584,989	$	6,417,898
Total derivative liabilities	$	615,097	$	5,700,634	$	584,989	$	6,417,898

While all of our master swap agreements include netting provisions that allow for offsetting of all contracts with a given counterparty in the event of default by one of the two parties, we report derivative asset and liability amounts on a gross basis by individual contract. The following table presents the gross fair value of derivative assets and liabilities reported on our consolidated balance sheets as of November 30, 2021 and May 31, 2021, and provides information on the impact of netting provisions under our master swap agreements and collateral pledged, if any.

Table 9.3: Derivative Gross and Net Amounts


	November 30, 2021
	Gross Amount of Recognized Assets/ Liabilities		Gross Amount Offset in the Balance Sheet		Net Amount of Assets/ Liabilities Presented in the Balance Sheet		Gross Amount Not Offset in the Balance Sheet
(Dollars in thousands)							Financial Instruments		Cash Collateral Pledged		Net Amount
Derivative assets:

Interest rate swaps	$	78,610	$	—	$	78,610	$	78,610	$	—	$	—

Derivative liabilities:

Interest rate swaps	615,097		—		615,097		78,610		—		536,487


	May 31, 2021
	Gross Amount of Recognized Assets/ Liabilities		Gross Amount Offset in the Balance Sheet		Net Amount of Assets/ Liabilities Presented in the Balance Sheet		Gross Amount Not Offset in the Balance Sheet
(Dollars in thousands)							Financial Instruments		Cash Collateral Pledged		Net Amount
Derivative assets:
Interest rate swaps	$	121,259	$	—	$	121,259	$	121,259	$	—	$	—

Derivative liabilities:

Interest rate swaps	584,989		—		584,989		121,259		—		463,730

The primary factors affecting the fair value of our derivatives and the derivative gains (losses) recorded in our consolidated statements of operations include changes in interest rates, the shape of the swap curve and the composition of our derivative portfolio. We generally record derivative losses when interest rates decline and derivative gains when interest rates rise, as our derivative portfolio consists of a higher proportion of pay-fixed swaps than receive-fixed swaps.

The following table presents the components of the derivative gains (losses) reported in our consolidated statements of operations for the three and six months ended November 30, 2021 and 2020. Derivative cash settlements interest expense represents the net periodic contractual interest amount for our interest-rate swaps during the reporting period. Derivative forward value gains (losses) represent the change in fair value of our interest rate swaps during the reporting period due to changes in expected future interest rates over the remaining life of our derivative contracts. We classify the derivative cash settlement amounts for the net periodic contractual interest expense on our interest rate swaps as an operating activity in our consolidated statements of cash flows.


	Three Months Ended November 30,				Six Months Ended November 30,
(Dollars in thousands)	2021		2020		2021		2020
Derivative gains (losses) attributable to:
Derivative cash settlements interest expense	$	(25,952)	$	(29,800)	$	(53,515)	$	(56,772)
Derivative forward value gains (losses)	72,038		111,087		(72,562)		198,335
Derivative gains (losses)	$	46,086	$	81,287	$	(126,077)	$	141,563

Our derivative contracts typically contain mutual early-termination provisions, generally in the form of a credit rating trigger. Under the mutual credit rating trigger provisions, either counterparty may, but is not obligated to, terminate and settle the agreement if the credit rating of the other counterparty falls below a level specified in the agreement. If a derivative contract is terminated, the amount to be received or paid by us would be equal to the prevailing fair value, as defined in the agreement, as of the termination date.

On September 13, 2021, Fitch affirmed CFC’s credit ratings and stable outlook. In the prior fiscal quarter, S&P revised its outlook on CFC to stable from negative, stating that the outlook revision mainly reflected its view that the risk of CFC experiencing substantial further losses stemming from the February 2021 polar vortex had diminished. On November 9, 2021, S&P issued a credit ratings report review of CFC in which S&P affirmed CFC’s credit ratings and stable outlook. On December 13, 2021, S&P affirmed CFC’s credit ratings and stable outlook under its revised criteria and updated methodology for rating financial institutions published on December 9, 2021. On December 16, 2021, Moody’s affirmed CFC’s credit ratings and stable outlook. Our senior unsecured credit ratings from Moody’s, S&P and Fitch were A2, A- and A, respectively, as of November 30, 2021. Moody’s, S&P and Fitch had our ratings on stable outlook as of November 30, 2021. Our credit ratings and outlook remain unchanged as of the date of this Report.

The following table displays the notional amounts of our derivative contracts with rating triggers as of November 30, 2021, and the payments that would be required if the contracts were terminated as of that date because of a downgrade of our unsecured credit ratings or the counterparty’s unsecured credit ratings below A3/A-, below Baa1/BBB+, to or below Baa2/BBB, or to or below Ba2/BB+ by Moody’s or S&P, respectively. In calculating the payment amounts that would be required upon termination of the derivative contracts, we assume that amounts for each counterparty would be netted in accordance with the provisions of the master netting agreements with the counterparty. The net payment amounts are based on the fair value of the underlying derivative instrument, excluding the credit risk valuation adjustment, plus any unpaid accrued interest amounts.


(Dollars in thousands)	Notional Amount		Payable Due from CFC		Receivable Due to CFC		Net Payable
Impact of rating downgrade trigger:
Falls below A3/A-(1)	$	38,205	$	(6,748)	$	—	$	(6,748)
Falls below Baa1/BBB+	5,636,404		(357,913)		—		(357,913)
Falls to or below Baa2/BBB (2)	398,870		(16,802)		—		(16,802)

Total	$	6,073,479	$	(381,463)	$	—	$	(381,463)

We have interest rate swaps with one counterparty that are subject to a ratings trigger and early termination provision in the event of a downgrade of CFC’s senior unsecured credit ratings below Baa3, BBB- or BBB- by Moody’s, S&P or Fitch, respectively. The outstanding notional amount of these swaps, which is not included in the above table, totaled $223 million as of November 30, 2021. These swaps were in an unrealized loss position of $28 million as of November 30, 2021.

Our largest counterparty exposure, based on the outstanding notional amount, accounted for approximately 24% the total outstanding notional amount of derivatives as of both November 30, 2021 and May 31, 2021. The aggregate fair value amount, including the credit valuation adjustment, of all interest rate swaps with rating triggers that were in a net liability position was $400 million as of November 30, 2021.