Financial Derivatives

9 Months Ended

Sep. 30, 2014

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Instruments and Hedging Activities Disclosure

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, and not for trading or speculative purposes.  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). Other financial derivatives are designated as cash flow hedges to mitigate the volatility of future interest rate payments on floating rate debt.

As of September 30, 2014 and December 31, 2013, Farmer Mac's credit exposure to interest rate swap counterparties, excluding netting arrangements and any adjustment for nonperformance risk, but including accrued interest, was $8.1 million and $25.1 million, respectively; however, including netting arrangements and accrued interest, Farmer Mac's credit exposure was $1.3 million and $3.3 million as of September 30, 2014 and December 31, 2013, respectively. As of September 30, 2014 and December 31, 2013, Farmer Mac held no cash as collateral for its derivatives in net asset positions, resulting in uncollateralized net asset positions of $1.3 million and $3.0 million, respectively. Farmer Mac records cash held as collateral as an increase in the balance of cash and cash equivalents and an increase in the balance of accounts payable and accrued expenses.

As of September 30, 2014 and December 31, 2013, the fair value of Farmer Mac's derivatives in a net liability position including accrued interest but excluding netting arrangements and any adjustment for nonperformance risk, was $79.1 million and $92.0 million, respectively; however, including netting arrangements and accrued interest, the fair value of Farmer Mac's derivatives in a net liability position at the counterparty level, was $81.7 million and $74.8 million as of September 30, 2014 and December 31, 2013, respectively.  Farmer Mac posted cash of $29.8 million and no investment securities as of September 30, 2014 and posted cash of $9.8 million and investment securities with a fair value of $1.5 million as of December 31, 2013 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. The investment securities posted as collateral are included in the investment securities balances on the consolidated balance sheets.  If Farmer Mac had breached certain provisions of the derivative contracts as of September 30, 2014 and December 31, 2013, it could have been required to settle its obligations under the agreements or post additional collateral of $51.9 millionand $63.5 million, respectively. As of September 30, 2014 and December 31, 2013, there were no financial derivatives in a net payable position where Farmer Mac was required to pledge collateral which the counterparty had the right to sell or repledge.

Effective in second quarter 2013, Farmer Mac expanded its use of centrally-cleared derivatives by clearing through a clearinghouse certain interest rate swaps. Farmer Mac posts initial and variation margin to the clearinghouses through which centrally-cleared derivatives and futures contracts are traded. These collateral postings expose Farmer Mac to institutional credit risk in the event that either the clearinghouse or the futures commission merchant that Farmer Mac uses to post collateral to the clearinghouse fails to meet its obligations. Conversely, the use of centrally-cleared derivatives mitigates Farmer Mac's credit risk to individual counterparties because clearinghouses assume the credit risk among counterparties in centrally-cleared derivatives transactions. Of Farmer Mac's $6.6 billion notional amount of interest rate swaps outstanding as of September 30, 2014, $3.8 billion were cleared through swap clearinghouses. Of Farmer Mac's $6.6 billion notional amount of interest rate swaps outstanding as of December 31, 2013, $2.3 billion were cleared through swap clearinghouses.

The following tables summarize information related to Farmer Mac's financial derivatives on a gross basis without giving consideration to master netting arrangements as of September 30, 2014 and December 31, 2013 and the effects of financial derivatives on the consolidated statements of operations for the three and nine months ended September 30, 2014 and 2013:

Table 4.1

	As of September 30, 2014
			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	$	1,000,000	$	—		$	(23,979	)	2.47%	0.24%		4.23
Cash flow hedges:
Interest rate swaps:
Pay fixed non-callable	10,000		—			(81		)	2.50%	0.48%		6.20
No hedge designation:
Interest rate swaps:
Pay fixed non-callable	492,496		1,775			(43,694		)	4.23%	0.23%		7.27
Receive fixed non-callable	3,818,832		3,806			(564		)	0.14%	0.24%		0.48
Receive fixed callable	296,000		—			(1,152		)	0.09%	0.86%		3.05
Basis swaps	1,030,000		238			(758		)	0.12%	0.29%		2.27
Agency forwards	17,352		—			(10		)			98.01
Treasury futures	6,700		—			(21		)			124.33
Credit valuation adjustment			(76		)	264
Total financial derivatives	$	6,671,380	$	5,743		$	(69,995	)
Collateral pledged			—			29,788
Net amount			$	5,743		$	(40,207	)

	As of December 31, 2013
			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	$	900,000	$	—		$	(28,989	)	2.25%	0.24%		3.25
Cash flow hedges:
Interest rate swaps:
Pay fixed non-callable	10,000		68			—			2.50%	0.48%		6.95
No hedge designation:
Interest rate swaps:
Pay fixed non-callable	806,596		7,570			(45,360		)	4.63%	0.24%		4.86
Receive fixed non-callable	4,324,663		11,836			(262		)	0.27%	0.70%		0.53
Receive fixed callable	175,000		83			(934		)	0.10%	0.65%		3.30
Basis swaps	404,288		276			(318		)	0.32%	0.29%		1.52
Agency forwards	65,704		86			—					98.91
Treasury futures	5,600		—			(1		)			123.02
Credit valuation adjustment			(201		)	156
Total financial derivatives	$	6,691,851	$	19,718		$	(75,708	)
Collateral pledged			—			11,320
Net amount			$	19,718		$	(64,388	)

Table 4.2

	Gains/(losses) on financial derivatives and hedging activities
	For the Three Months Ended						For the Nine Months Ended
	September 30, 2014			September 30, 2013			September 30, 2014			September 30, 2013
	(in thousands)
Fair value hedges:
Interest rate swaps (1)	$	5,610		$	4		$	5,010		$	23,329
Hedged items	(2,549		)	2,996			4,019			(14,871		)
Gains on hedging activities	3,061			3,000			9,029			8,458
No hedge designation:
Interest rate swaps	(2,074		)	1,192			(19,748		)	14,950
Agency forwards	(210		)	(861		)	(1,297		)	(768		)
Treasury futures	31			(307		)	(452		)	(139		)
(Losses)/gains on financial derivatives not designated in hedging relationships	(2,253		)	24			(21,497		)	14,043
Gains/(losses) on financial derivatives and hedging activities	$	808		$	3,024		$	(12,468	)	$	22,501

(1) Included in the assessment of hedge effectiveness at September 30, 2014, but excluded from the amounts in the table, were losses of $2.9 million and $8.7 million for the three and nine months ended September 30, 2014, respectively, attributable to the fair value of the swaps at the inception of the hedging relationship. Accordingly, the amounts recognized as hedge ineffectiveness for the three and nine months ended September 30, 2014 were gains of $0.2 million and $0.3 million, respectively. The comparable amounts at September 30, 2013 were losses of $3.1 million and $8.0 million for the three and nine months ended September 30, 2013, respectively, attributable to the fair value of the swaps at the inception of the hedging relationship and, accordingly, losses of $0.1 million and gains of $0.5 million for the three and nine months ended September 30, 2013, respectively, attributable to hedge ineffectiveness.