Financial Derivatives

9 Months Ended

Sep. 30, 2015

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.

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, 2015 and December 31, 2014 and the effects of financial derivatives on the consolidated statements of operations for the three and nine months ended September 30, 2015 and 2014:

Table 4.1

	As of September 30, 2015
			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	$	1,226,075	$	—		$	(36,048	)	2.24%	0.30%		3.31
Cash flow hedges:
Interest rate swaps:
Pay fixed non-callable	102,000		—			(2,720		)	2.23%	0.50%		6.99
No hedge designation:
Interest rate swaps:
Pay fixed non-callable	514,969		16			(55,941		)	4.02%	0.30%		8.69
Receive fixed non-callable	5,081,396		6,652			(46		)	0.19%	0.40%		0.59
Receive fixed callable	287,565		108			(3		)	0.17%	0.88%		2.76
Basis swaps	800,000		252			(60		)	0.15%	0.28%		2.53
Agency forwards	28,528		—			(312		)			100.50
Treasury futures	11,600		—			(52		)			128.28
Credit valuation adjustment			(1		)	302
Total financial derivatives	$	8,052,133	$	7,027		$	(94,880	)
Collateral pledged			—			48,111
Net amount			$	7,027		$	(46,769	)

	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	)

Table 4.2

	(Losses)/gains on financial derivatives and hedging activities
	For the Three Months Ended						For the Nine Months Ended
	September 30, 2015			September 30, 2014			September 30, 2015			September 30, 2014
	(in thousands)
Fair value hedges:
Interest rate swaps(1)	$	(12,646	)	$	5,610		$	(4,330	)	$	5,010
Hedged items	15,834			(2,549		)	13,356			4,019
Gains on hedging activities	3,188			3,061			9,026			9,029
No hedge designation:
Interest rate swaps	(11,478		)	(2,074		)	(5,637		)	(19,748		)
Agency forwards	(966		)	(210		)	(2,108		)	(1,297		)
Treasury futures	(312		)	31			(342		)	(452		)
(Losses)/gains on financial derivatives not designated in hedging relationships	(12,756		)	(2,253		)	(8,087		)	(21,497		)
(Losses)/gains on financial derivatives and hedging activities	$	(9,568	)	$	808		$	939		$	(12,468	)

⁽¹⁾  Included in the assessment of hedge effectiveness as of September 30, 2015, but excluded from the amounts in the table, were losses of $2.9 million and $8.6 million, respectively, for the three and nine months ended September 30, 2015, 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, 2015 were gains of $0.3 million and gains of $0.4 million, respectively. The comparable amounts as of September 30, 2014 were losses of $2.9 million and $8.7 million, respectively, for the three and nine months ended September 30, 2014, attributable to the fair value of the swaps at the inception of the hedging relationship and, accordingly, gains of $0.2 million and $0.3 million, respectively, for the three and nine months ended September 30, 2014, attributable to hedge ineffectiveness.

As of September 30, 2015 and December 31, 2014, Farmer Mac's credit exposure to interest rate swap counterparties, excluding netting arrangements and any adjustment for nonperformance risk, but including accrued interest, was $12.4 million and $6.1 million, respectively; however, including netting arrangements and accrued interest, Farmer Mac's credit exposure was $0.2 million as of September 30, 2015 and $0.4 million as of December 31, 2014. Farmer Mac held no cash as collateral for its derivatives in net asset positions, resulting in uncollateralized net asset positions of $0.2 million as of September 30, 2015 and $0.4 million as of December 31, 2014.

As of September 30, 2015 and December 31, 2014, 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 $105.7 million and $99.4 million, respectively. Including netting arrangements and accrued interest, the fair value of Farmer Mac's derivatives in a net liability position at the counterparty level, was $93.0 million and $93.4 million as of September 30, 2015 and December 31, 2014, respectively.  Farmer Mac posted cash of $48.1 million and no investment securities as of September 30, 2015 and posted cash of $46.6 million and no investment securities as of December 31, 2014.  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. Any 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, 2015 and December 31, 2014, it could have been required to settle its obligations under the agreements or post additional collateral of $44.9 millionand $46.8 million, respectively. As of September 30, 2015 and December 31, 2014, 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.

Of Farmer Mac's $8.0 billion notional amount of interest rate swaps outstanding as of September 30, 2015, $5.7 billion were cleared through swap clearinghouses. 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.