Financial Derivatives

12 Months Ended

Dec. 31, 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.

Farmer Mac manages the interest rate risk related to loans it has committed to acquire, but has not yet permanently funded, through the use of forward sale contracts on the debt of other GSEs and futures contracts involving U.S. Treasury securities. Farmer Mac uses forward sale contracts on GSE securities to reduce its interest rate exposure to changes in both U.S. 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 not designated as cash flow hedges are reported in "(Losses)/gains 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 "(Losses)/gains on financial derivatives and hedging activities" in the consolidated statements of operations. For financial derivatives designated in cash flow hedging relationships, the effective portion of the derivative gain/loss is recorded in other comprehensive income; amounts are disclosed as a reclassification out of other comprehensive income when the hedged transaction affects earnings. Any ineffective portion of designated hedge transactions is recognized immediately in"(Losses)/gains on financial derivatives and hedging activities" in the consolidated statements of operations.

Market Risk:

Market risk is the risk of an adverse effect resulting from changes in interest rates or spreads on the value of a financial instrument.  Farmer Mac manages market risk associated with financial derivatives by establishing and monitoring limits as to the degree of risk that may be undertaken.  This risk is periodically measured as part of Farmer Mac's overall risk monitoring processes, which include market value of equity measurements, net interest income modeling, and other measures.

As of December 31, 2014 and 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 $6.1 million and $25.1 million, respectively; however, including netting arrangements and accrued interest, Farmer Mac's credit exposure was $0.4 million and $3.3 million as of December 31, 2014 and 2013, respectively. As of December 31, 2014 and 2013, Farmer Mac held no cash as collateral for its derivatives in net asset positions, resulting in uncollateralized net asset positions of $0.4 million and $3.0 million, respectively.

As of December 31, 2014 and 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 $99.4 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 $93.4 million and $74.8 million as of December 31, 2014 and 2013, respectively.  Farmer Mac posted cash of $46.6 million and no investment securities as of December 31, 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 December 31, 2014 and 2013, it could have been required to settle its obligations under the agreements or post additional collateral of $46.8 millionand $63.5 million, respectively. As of December 31, 2014 and 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 certain interest rate swaps through a clearinghouse. 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 $6.8 billion notional amount of interest rate swaps outstanding as of December 31, 2014, $4.0 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 December 31, 2014 and 2013 and the effects of financial derivatives on the consolidated statements of operations for the year ended December 31, 2014, 2013, and 2012:

Table 6.1

	As of December 31, 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	$	—		$	(31,718	)	2.47%	0.23%		3.98
Cash flow hedges:
Interest rate swaps:
Pay fixed non-callable	15,000		—			(289		)	2.43%	0.51%		6.23
No hedge designation:
Interest rate swaps:
Pay fixed non-callable	490,183		537			(51,224		)	4.23%	0.23%		7.05
Receive fixed non-callable	3,829,355		3,414			(461		)	0.14%	0.27%		0.55
Receive fixed callable	383,565		1			(877		)	0.12%	1.34%		3.47
Basis swaps	1,105,000		247			(406		)	0.11%	0.31%		2.42
Agency forwards	12,768		—			(53		)			101.00
Treasury futures	1,700		—			(3		)			126.60
Credit valuation adjustment			(22		)	187
Total financial derivatives	$	6,837,571	$	4,177		$	(84,844	)
Collateral pledged			—			46,627
Net amount			$	4,177		$	(38,217	)

	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 6.2

	(Losses)/gains on financial derivatives and hedging activities
	For the Year Ended December 31,
	2014			2013			2012
	(in thousands)
Fair value hedges:
Interest rate swaps (1)	$	(2,729	)	$	29,538		$	(404	)
Hedged items	14,520			(18,230		)	6,388
Gains on hedging activities	11,791			11,308			5,984
No hedge designation:
Interest rate swaps	(31,111		)	21,355			(24,763		)
Agency forwards	(1,842		)	(1,002		)	(828		)
Treasury futures	(484		)	103			(129		)
Credit default swaps	—			—			(93		)
(Losses)/gains on financial derivatives not designated in hedging relationships	(33,437		)	20,456			(25,813		)
(Losses)/gains on financial derivatives and hedging activities	$	(21,646	)	$	31,764		$	(19,829	)

(1) Included in the assessment of hedge effectiveness as of December 31, 2014, but excluded from the amounts in the table, were losses of $11.6 million for the year ended December 31, 2014, attributable to the fair value of the swaps at the inception of the hedging relationship. Accordingly, the amounts recognized as hedge ineffectiveness for the year ended December 31, 2014 were losses of $0.2 million. The comparable amounts as of December 31, 2013 were losses of $11.8 million for the year ended December 31, 2013, attributable to the fair value of the swaps at the inception of the hedging relationship and, accordingly, gains of $0.5 million for the year ended December 31, 2013, attributable to hedge ineffectiveness. The comparable amounts as of December 31, 2012 were losses of $6.1 million for the year ended December 31, 2012, attributable to the fair value of the swaps at the inception of the hedging relationship and, accordingly, gains of $0.1 million for the year ended December 31, 2012, attributable to hedge ineffectiveness.