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Financial Derivatives
 6 Months Ended
Jun. 30, 2016
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, primarily 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.

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, which are primarily fixed rate AgVantage securities, related to the risk being hedged are also reported in "(Losses)/gains on financial derivatives and hedging activities" in the consolidated statements of operations. Interest accruals on derivatives designated in fair value hedging relationships are recorded in "Net interest income" in the consolidated statements of operations. For the three and six months ended June 30, 2016, the amount of interest expense recognized on those derivatives was $4.1 million and $8.9 million, respectively. For the three and six months ended June 30, 2015, the amount of interest expense recognized on those derivatives was $5.6 million and $11.1 million, respectively. For financial derivatives designated in cash flow hedging relationships, the effective portion of the derivative gain/loss is recorded in other comprehensive income and any ineffective portion is recognized immediately in"(Losses)/gains on financial derivatives and hedging activities" in the consolidated statements of operations. Because the hedging instrument is an interest rate swap and the hedged forecasted transactions are future interest payments on variable-rate debt, amounts recorded in other comprehensive income are reclassified to "Total interest expense" in conjunction with the recognition of interest expense on the debt. During the three and six months ended June 30, 2016, $0.5 million and $1.0 million, respectively, was reclassified out of other comprehensive income into interest expense. For for the three and six months ended June 30, 2015, $0.2 million and $0.4 million, respectively, was reclassified out of other comprehensive income into interest expense. As of June 30, 2016, Farmer Mac expects to reclassify $2.1 million pretax, or $1.3 million after-tax, from accumulated other comprehensive income, net of tax, to earnings over the next twelve months. This amount could differ from amounts actually recognized due to changes in interest rates, hedge de-designations, and the addition of other hedges subsequent to June 30, 2016. During the three and six months ended June 30, 2016 and 2015, there were no gains or losses from interest rate swaps designated as cash flow hedges reclassified to earnings because it became probable the original forecasted transaction would not occur.

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 June 30, 2016 and December 31, 2015 and the effects of financial derivatives on the consolidated statements of operations for the three and six months ended June 30, 2016 and 2015:

Table 4.1
  
As of June 30, 2016
  
 
 
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
$
1,391,816

 
$
6

 
$
(67,960
)
 
1.83%
 
0.64%
 
 
 
5.24
Receive fixed non-callable
30,000

 
862

 
—

 
0.78%
 
1.75%
 
 
 
3.96
Cash flow hedges:
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps:
 
 
 
 
 
 
 
 
 
 
 
 
 
Pay fixed non-callable
157,000

 
—

 
(9,360
)
 
2.26%
 
0.86%
 
 
 
7.21
No hedge designation:
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps:
 
 
 
 
 
 
 
 
 
 
 
 
 
Pay fixed non-callable
442,611

 
—

 
(61,957
)
 
4.08%
 
0.64%
 
 
 
6.31
Receive fixed non-callable
6,035,677

 
7,367

 
(1,007
)
 
0.51%
 
0.60%
 
 
 
0.53
Receive fixed callable
30,000

 
—

 
(17
)
 
0.57%
 
0.58%
 
 
 
0.83
Basis swaps
400,000

 
7

 
(219
)
 
0.61%
 
0.58%
 
 
 
0.95
Agency forwards
17,586

 
—

 
(94
)
 
 
 
 
 
101.03

 
 
Treasury futures
28,100

 
—

 
(309
)
 
 
 
 
 
131.89

 
 
Credit valuation adjustment
 
 
—

 
165

 
 
 
 
 
 
 
 
Total financial derivatives
$
8,532,790

 
$
8,242

 
$
(140,758
)
 
  
 
  
 
 
 
  
Collateral pledged
 
 
—

 
95,144

 
 
 
 
 
 
 
 
Net amount
 
 
$
8,242

 
$
(45,614
)
 
 
 
 
 
 
 
 
  
As of December 31, 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
$
1,276,285

 
$
949

 
$
(26,703
)
 
2.35%
 
0.37%
 
 
 
4.16
Cash flow hedges:
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps:
 
 
 
 
 
 
 
 
 
 
 
 
 
Pay fixed non-callable
119,000

 
8

 
(1,381
)
 
2.25%
 
0.64%
 
 
 
7.03
No hedge designation:
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps:
 
 
 
 
 
 
 
 
 
 
 
 
 
Pay fixed non-callable
454,041

 
229

 
(44,528
)
 
3.73%
 
0.33%
 
 
 
6.02
Receive fixed non-callable
5,590,638

 
2,384

 
(4,205
)
 
0.31%
 
0.47%
 
 
 
0.57
Receive fixed callable
230,000

 
—

 
(421
)
 
0.41%
 
0.91%
 
 
 
2.26
Basis swaps
725,000

 
232

 
(131
)
 
0.22%
 
0.38%
 
 
 
2.33
Treasury futures
35,000

 
19

 
—

 
 
 
 
 
125.96

 
 
Credit valuation adjustment
 
 
(5
)
 
170

 
 
 
 
 
 
 
 
Total financial derivatives
$
8,429,964

 
$
3,816

 
$
(77,199
)
 
  
 
  
 
 
 
  
Collateral pledged
 
 
—

 
37,986

 
 
 
 
 
 
 
 
Net amount
 
 
$
3,816

 
$
(39,213
)
 
 
 
 
 
 
 
 

Table 4.2

 
(Losses)/gains on financial derivatives and hedging activities
  
For the Three Months Ended
 
For the Six Months Ended
  
June 30, 2016
 
June 30, 2015
 
June 30, 2016
 
June 30, 2015
 
(in thousands)
Fair value hedges:
 
 
 
 
 
 
 
Interest rate swaps(1)
$
(14,440
)
 
$
14,075

 
$
(41,339
)
 
$
8,316

Hedged items
16,541

 
(11,354
)
 
46,329

 
(2,478
)
Gains on fair value hedges
2,101

 
2,721

 
4,990

 
5,838

Cash flow hedges:
 
 
 
 
 
 
 
Loss recognized (ineffective portion)
(105
)
 
(150
)
 
(254
)
 
(366
)
Losses on cash flow hedges
(105
)
 
(150
)
 
(254
)
 
(366
)
No hedge designation:
 
 
 
 
 
 
 
Interest rate swaps
(6,345
)
 
11,948

 
(14,487
)
 
6,207

Agency forwards
10

 
(356
)
 
(868
)
 
(1,142
)
Treasury futures
(357
)
 
226

 
(859
)
 
(30
)
(Losses)/gains on financial derivatives not designated in hedging relationships
(6,692
)
 
11,818

 
(16,214
)
 
5,035

(Losses)/gains on financial derivatives and hedging activities
$
(4,696
)
 
$
14,389

 
$
(11,478
)
 
$
10,507

(1) 
Included in the assessment of hedge effectiveness as of June 30, 2016, but excluded from the amounts in the table, were losses of $1.8 million and $3.3 million for the three and six months ended June 30, 2016, 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 six months ended June 30, 2016 were gains of $0.3 million and $1.7 million, respectively. The comparable amounts as of June 30, 2015 were losses of $2.9 million and $5.8 million for the three and six months ended June 30, 2015, attributable to the fair value of the swaps at the inception of the hedging relationship and, accordingly, losses of $0.2 million and gains of $0.1 million for the three and six months ended June 30, 2015, attributable to hedge ineffectiveness.


As of June 30, 2016 and December 31, 2015, Farmer Mac's credit exposure to interest rate swap counterparties, excluding netting arrangements and any adjustment for nonperformance risk, but including accrued interest, was $15.6 million and $6.4 million, respectively; however, including netting arrangements and accrued interest, Farmer Mac's credit exposure was zero and $47,000 as of June 30, 2016 and December 31, 2015, respectively. As of June 30, 2016, Farmer Mac held no cash as collateral for its derivatives in net asset positions and had no uncollateralized net asset positions. As of December 31, 2015, Farmer Mac held no cash collateral for its derivatives in net asset positions, resulting in uncollateralized net asset positions of $47,000.

As of June 30, 2016 and December 31, 2015, 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 $152.3 million and $90.1 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 $135.1 million and $83.2 million as of June 30, 2016 and December 31, 2015, respectively.  Farmer Mac posted cash of $95.1 million and no investment securities as of June 30, 2016 and posted cash of $38.0 million and no investment securities as of December 31, 2015.  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 June 30, 2016 and December 31, 2015, it could have been required to settle its obligations under the agreements or post additional collateral of $40.0 million and $45.2 million, respectively. As of June 30, 2016 and December 31, 2015, 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.

For certain derivatives, Farmer Mac clears 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 $8.5 billion notional amount of interest rate swaps outstanding as of June 30, 2016, $7.5 billion were cleared through swap clearinghouses. Of Farmer Mac's $8.4 billion notional amount of interest rate swaps outstanding as of December 31, 2015, $6.2 billion were cleared through swap clearinghouses.