Financial Derivatives

6 Months Ended

Jun. 30, 2012

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Financial Derivatives

FINANCIAL DERIVATIVES

Farmer Mac enters into financial derivative transactions principally to protect against risk from the effects of market price or interest rate movements on the value of certain assets, future cash flows or debt issuance, not for trading or speculative purposes.  Farmer Mac enters into interest rate swap contracts to adjust the characteristics of its short-term debt to match more closely the cash flow and duration characteristics of its longer-term loans and other assets, and also to adjust the characteristics of its long-term debt to match more closely the cash flow and duration characteristics of its short-term assets, thereby reducing interest rate risk and often times deriving an overall lower effective cost of borrowing than would otherwise be available to Farmer Mac in the conventional debt market.  

Farmer Mac manages the interest rate risk related to loans it has committed to acquire, but has not yet purchased and permanently funded, through the use of forward sale contracts on the debt of other GSEs, futures contracts involving U.S. Treasury securities and interest rate swaps.  Farmer Mac uses forward sale contracts on GSE securities to reduce its interest rate exposure to changes in both Treasury rates and spreads on Farmer Mac debt.  The notional amounts of these contracts are determined based on a duration-matched hedge ratio between the hedged item and the hedge instrument.  Gains or losses generated by these hedge transactions are expected to offset changes in funding costs.

All financial derivatives are recorded on the balance sheet at fair value as a freestanding asset or liability. Through second quarter 2012, Farmer Mac did not designate its financial derivatives as fair value hedges or cash flow hedges; therefore, the changes in the fair values of financial derivatives were reported as losses on financial derivatives in the consolidated statements of operations without any corresponding changes in the fair values of the hedged items.

The following tables summarize information related to Farmer Mac's financial derivatives as of June 30, 2012 and December 31, 2011:

	June 30, 2012
			Fair Value					Weighted- Average Pay Rate		Weighted- Average Receive Rate		Weighted- Average Remaining Life (in years)
	Notional Amount		Asset		(Liability)
	(dollars in thousands)
Interest rate swaps:
Pay fixed non-callable	$	1,789,433	$	4	$	(162,126	)	3.47	%	0.47	%	4.40
Receive fixed non-callable	3,915,717		36,732		(57		)	0.36	%	0.90	%	0.84
Basis swaps	595,119		158		(1,073		)	0.60	%	0.38	%	1.29
Credit default swaps	10,000		—		(8		)	1.00	%	—		0.22
Credit valuation adjustment			—		673
Total financial derivatives	$	6,310,269	$	36,894	$	(162,591	)

	December 31, 2011
			Fair Value						Weighted- Average Pay Rate		Weighted- Average Receive Rate		Weighted- Average Remaining Life (in years)
	Notional Amount		Asset			(Liability)
	(dollars in thousands)
Interest rate swaps:
Pay fixed non-callable	$	1,906,123	$	—		$	(157,520	)	3.65	%	0.46	%	4.48
Receive fixed non-callable	4,212,713		41,006			(1,302		)	0.41	%	0.96	%	0.97
Basis swaps	457,694		—			(2,137		)	0.80	%	0.38	%	1.30
Credit default swaps	10,000		17			—			1.00	%	—		0.72
Credit valuation adjustment			(773		)	935
Total financial derivatives	$	6,586,530	$	40,250		$	(160,024	)

In the normal course of business, collateral requirements contained in Farmer Mac's derivative contracts are enforced by Farmer Mac and its counterparties.  Upon enforcement of the collateral requirements, the amount of collateral posted is typically based on the net fair value of all derivative contracts with the counterparty, i.e., derivative assets net of derivative liabilities at the counterparty level.  If Farmer Mac were to be in violation of certain provisions of the derivative contracts, the related counterparty could request payment or full collateralization on the derivative contracts.  As of June 30, 2012, the fair value of Farmer Mac's derivatives in a net liability position at the counterparty level, which includes accrued interest but excludes any adjustment for nonperformance risk, was $142.6 million.  As of June 30, 2012, Farmer Mac posted cash of $68.6 million as collateral for its derivatives in net liability positions.  Farmer Mac records posted cash as a reduction in the outstanding balance of cash and cash equivalents and an increase in the balance of prepaid expenses and other assets.  If Farmer Mac had breached certain provisions of the derivative contracts as of June 30, 2012, it could have been required to settle its obligations under the agreements or post additional collateral of $74.0 million.

As of June 30, 2012, Farmer Mac had outstanding basis swaps with Zions First National Bank, a related party, with a total notional amount of $60.1 million and a fair value of $(1.0) million, compared to $72.7 million and $(1.3) million, respectively, as of December 31, 2011.  Under the terms of those basis swaps, Farmer Mac pays Constant Maturity Treasury-based rates and receives LIBOR.  Those swaps hedge most of the interest rate basis risk related to loans Farmer Mac purchases that pay a Constant Maturity Treasury based-rate and the discount notes Farmer Mac issues to fund the loan purchases.  The pricing of discount notes is closely correlated to LIBOR rates.  Farmer Mac recorded unrealized gains on those outstanding basis swaps for the three and six months ended June 30, 2012 of $0.3 million and $0.4 million, respectively, compared to unrealized losses of $0.1 million and unrealized gains of $1.6 million, respectively, for the same periods in 2011.

The following tables summarize the effects of Farmer Mac's financial derivatives on the consolidated statements of operations for the three and six months ended June 30, 2012 and 2011:

	Losses on Financial Derivatives
	For the Three Months Ended						For the Six Months Ended
	June 30, 2012			June 30, 2011			June 30, 2012			June 30, 2011
	(in thousands)
Interest rate swaps	$	(30,187	)	$	(16,451	)	$	(23,882	)	$	(11,721	)
Agency forwards	(809		)	(1,153		)	(605		)	(2,001		)
Treasury futures	(295		)	(211		)	(329		)	(26		)
Credit default swaps	(1		)	9			(76		)	(53		)
Total	$	(31,292	)	$	(17,806	)	$	(24,892	)	$	(13,801	)