XML 64 R13.htm IDEA: XBRL DOCUMENT v2.4.0.6
Financial Derivatives
 9 Months Ended
Sep. 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.  Certain financial derivatives are designated as fair value hedges of fixed rate assets classified as available-for-sale to protect against fair value changes in the assets related to a benchmark interest rate (i.e., LIBOR).

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. Changes in the fair values of financial derivatives are reported in gains/(losses) on financial derivatives and hedging activities in the consolidated statements of operations. For financial derivatives designated in fair value hedging relationships, changes in the fair values of the hedged items related to the risk being hedged are also reported in gains/(losses) on financial derivatives and hedging activities in the consolidated statements of operations. Farmer Mac currently has no financial derivatives designated in cash flow hedging relationships.

The following tables summarize information related to Farmer Mac's financial derivatives as of September 30, 2012 and December 31, 2011 and the effects of financial derivatives on the consolidated statements of operations for the three and nine months ended September 30, 2012 and 2011:

  
September 30, 2012
  

 
Fair Value
 
Weighted-
Average
Pay Rate
 
Weighted-
Average Receive Rate
 
Weighted-
Average
Forward
Price
 
Weighted-
Average
Remaining
Life (in years)
  
Notional Amount
 
Asset
 
(Liability)
 
 
 
 
  
(dollars in thousands)
Fair value hedges:
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps:
 
 
 
 
 
 
 
 
 
 
 
 
 
Pay fixed non-callable
$
950,000

 
$
—

 
$
(63,496
)
 
2.20%
 
0.44%
 
 
 
4.33

No hedge designation:
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps:
 
 
 
 
 
 
 
 
 
 
 
 
 
Pay fixed non-callable
807,606

 
47

 
(100,814
)
 
4.85%
 
0.41%
 
 
 
4.31

Receive fixed non-callable
3,668,717

 
35,632

 
—

 
0.36%
 
0.95%
 
 
 
0.77

Receive fixed callable
90,000

 
7

 
(21
)
 
0.17%
 
0.60%
 
 
 
3.99

Basis swaps
564,262

 
508

 
(945
)
 
0.53%
 
0.38%
 
 
 
1.19

Agency forwards
20,048

 
—

 
(58
)
 
 
 
 
 
101.17

 
 
Treasury futures
6,400

 
—

 
(3
)
 
 
 
 
 
133.44

 
 
Credit valuation adjustment
 
 
(4
)
 
388

 
 
 
 
 
 
 
 

Total financial derivatives
$
6,107,033

 
$
36,190

 
$
(164,949
)
 
  
 
  
 
 
 
  


  
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)
No hedge designation:
 
 
 
 
 
 
 
 
 
 
 
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
)
 
  

 
  

 
  



 
Gains/(Losses) on Financial Derivatives and Hedging Activities
  
For the Three Months Ended
 
For the Nine Months Ended
  
September 30, 2012
 
September 30, 2011
 
September 30, 2012
 
September 30, 2011
  
(in thousands)
Fair value hedges:
 
 
 
 
 
 
 
Interest rate swaps
$
(5,142
)
 
$
—

 
$
(5,142
)
 
$
—

Hedged items
8,378

 
—

 
8,378

 
—

Gains on hedging activities (1)
3,236

 
—

 
3,236

 
—

No hedge designation:
 
 
 
 
 
 
 
Interest rate swaps
(1,970
)
 
(65,136
)
 
(25,853
)
 
(76,857
)
Agency forwards
452

 
(3,052
)
 
(153
)
 
(5,053
)
Treasury futures
(142
)
 
(512
)
 
(471
)
 
(538
)
Credit default swaps
(18
)
 
133

 
(93
)
 
80

Losses on financial derivatives not designated in hedging relationships
(1,678
)
 
(68,567
)
 
(26,570
)
 
(82,368
)
Gains/(losses) on financial derivatives and hedging activities
$
1,558

 
$
(68,567
)
 
$
(23,334
)
 
$
(82,368
)
 
(1) Includes gains of $3.0 million that are excluded from the assessment of hedge effectiveness and gains of $0.2 million due to hedge ineffectiveness for the three and nine months ended September 30, 2012.

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 September 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 $130.6 million.  As of September 30, 2012, Farmer Mac posted cash of $55.2 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 September 30, 2012, it could have been required to settle its obligations under the agreements or post additional collateral of $75.4 million.

As of September 30, 2012, Farmer Mac had outstanding basis swaps with Zions First National Bank, a related party, with a total notional amount of $49.3 million and a fair value of $(0.9) 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 nine months ended September 30, 2012 of $0.1 million and $0.5 million, respectively, compared to unrealized losses of $0.2 million and unrealized gains of $1.4 million, respectively, for the same periods in 2011.