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Financial Derivatives
 9 Months Ended
Sep. 30, 2017
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 "Gains/(losses) on financial derivatives and hedging activities" in the consolidated statements of operations. For financial derivatives designated in fair value hedge accounting relationships, changes in the fair values of the hedged items, which are primarily fixed rate AgVantage securities and fixed rate medium-term notes, related to the risk being hedged are also reported in "Gains/(losses) on financial derivatives and hedging activities" in the consolidated statements of operations. Interest accruals on derivatives designated in fair value hedge accounting relationships are recorded in "Net interest income" in the consolidated statements of operations. For the three and nine months ended September 30, 2017 the amount of interest expense recognized on those derivatives was $1.9 million and $6.9 million, respectively. For the three and nine months ended September 30, 2016, the amount of interest expense recognized on those derivatives was $4.0 million and $12.9 million, respectively. For financial derivatives designated in cash flow hedge accounting relationships, the effective portion of the derivative gain/loss is recorded in other comprehensive income and any ineffective portion is recognized immediately in "Gains/(losses) 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 accumulated other comprehensive income are reclassified to "Total interest expense" in conjunction with the recognition of interest expense on the debt. For the three and nine months ended September 30, 2017, $0.4 million and $1.4 million, respectively, was reclassified out of accumulated other comprehensive income into interest expense. For the three and nine months ended September 30, 2016, $0.5 million and $1.5 million, respectively, was reclassified out of accumulated other comprehensive income into interest expense. As of September 30, 2017, Farmer Mac expects to reclassify $1.2 million pretax, or $0.8 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 September 30, 2017. During the three and nine months ended September 30, 2017 and 2016, 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.

Fees that Farmer Mac receives upon the inception of swaps are also reported in "Gains/(losses) on financial derivatives and hedging activities" in the consolidated statements of operations. These fees are offset dollar-for-dollar by the discount on the associated hedged debt. However, the swap fees are recognized immediately in Gains/(losses) on financial derivatives and hedging activities, whereas the offsetting discount on the hedged debt is amortized over the term of the debt as an adjustment to its yield. Thus, there is a timing difference between the recognition of the swap fees in Gains/(losses) on financial derivatives and hedging activities and the recognition of the discount in interest expense. There is also a presentation difference because the swap fees are included in Gains/(losses) on financial derivatives and hedging activities, whereas the amortization of the discount is included in interest expense. Additionally, the amount of swap fees varies depending upon the number of swaps initiated during a quarter.

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, 2017 and December 31, 2016 and the effects of financial derivatives on the consolidated statements of operations for the three and nine months ended September 30, 2017 and 2016:

Table 4.1
  
As of September 30, 2017
  
 
 
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
$
2,040,854

 
$
744

 
$
(8,768
)
 
1.83%
 
1.31%
 
 
 
5.42
Receive fixed non-callable
1,431,700

 
64

 
(1,985
)
 
1.23%
 
1.42%
 
 
 
1.74
Cash flow hedges:
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps:
 
 
 
 
 
 
 
 
 
 
 
 
 
Pay fixed non-callable
349,000

 
960

 
(555
)
 
2.19%
 
1.55%
 
 
 
6.32
No hedge designation:
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps:
 
 
 
 
 
 
 
 
 
 
 
 
 
Pay fixed non-callable
348,040

 
166

 
(19,318
)
 
3.80%
 
1.31%
 
 
 
6.88
Receive fixed non-callable
3,389,116

 
—

 
—

 
1.12%
 
1.10%
 
 
 
0.85
Basis swaps
1,225,000

 
42

 
(63
)
 
1.20%
 
1.22%
 
 
 
0.95
Treasury futures
7,400

 
50

 
—

 
 
 
 
 
125.99

 
 
Credit valuation adjustment
 
 
(6
)
 
94

 
 
 
 
 
 
 
 
Total financial derivatives
$
8,791,110

 
$
2,020

 
$
(30,595
)
 
  
 
  
 
 
 
  
Collateral pledged
 
 
—

 
25,079

 
 
 
 
 
 
 
 
Net amount
 
 
$
2,020

 
$
(5,516
)
 
 
 
 
 
 
 
 
  
As of December 31, 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
$
1,642,609

 
$
18,508

 
$
(18,909
)
 
1.73%
 
0.90%
 
 
 
4.70
Cash flow hedges:
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps:
 
 
 
 
 
 
 
 
 
 
 
 
 
Pay fixed non-callable
207,000

 
3,706

 
(955
)
 
2.18%
 
1.11%
 
 
 
7.28
No hedge designation:
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps:
 
 
 
 
 
 
 
 
 
 
 
 
 
Pay fixed non-callable
435,827

 
339

 
(32,951
)
 
4.06%
 
0.89%
 
 
 
5.90
Receive fixed non-callable
4,991,821

 
607

 
(5,064
)
 
0.74%
 
0.75%
 
 
 
0.60
Receive fixed callable
30,000

 
—

 
(33
)
 
0.82%
 
0.58%
 
 
 
0.33
Basis swaps
765,000

 
36

 
(243
)
 
0.78%
 
0.78%
 
 
 
0.87
Treasury futures
28,000

 
—

 
(155
)
 
 
 
 
 
123.73

 
 
Credit valuation adjustment
 
 
(14
)
 
158

 
 
 
 
 
 
 
 
Total financial derivatives
$
8,100,257

 
$
23,182

 
$
(58,152
)
 
  
 
  
 
 
 
  
Collateral pledged
 
 
—

 
25,643

 
 
 
 
 
 
 
 
Net amount
 
 
$
23,182

 
$
(32,509
)
 
 
 
 
 
 
 
 

Table 4.2

 
Gains/(losses) on financial derivatives and hedging activities
  
For the Three Months Ended
 
For the Nine Months Ended
  
September 30, 2017
 
September 30, 2016
 
September 30, 2017
 
September 30, 2016
 
(in thousands)
Fair value hedges:
 
 
 
 
 
 
 
Interest rate swaps(1)
$
1,576

 
$
11,276

 
$
(5,466
)
 
$
(30,062
)
Hedged items
166

 
(10,550
)
 
4,750

 
35,778

Gains/(losses) on fair value hedges
1,742

 
726

 
(716
)
 
5,716

Cash flow hedges:
 
 
 
 
 
 
 
Loss recognized (ineffective portion)
(191
)
 
(68
)
 
(365
)
 
(322
)
Losses on cash flow hedges
(191
)
 
(68
)
 
(365
)
 
(322
)
No hedge designation:
 
 
 
 
 
 
 
Interest rate swaps
(1,031
)
 
(2,333
)
 
4,006

 
(16,820
)
Agency forwards
—

 
79

 
(588
)
 
(789
)
Treasury futures
141

 
(5
)
 
193

 
(864
)
(Losses)/gains on financial derivatives not designated in hedging relationships
(890
)
 
(2,259
)
 
3,611

 
(18,473
)
Gains/(losses) on financial derivatives and hedging activities
$
661

 
$
(1,601
)
 
$
2,530

 
$
(13,079
)
(1) 
Included in the assessment of hedge effectiveness as of September 30, 2017, but excluded from the amounts in the table, were losses of $1.6 million and gains of $0.7 million, respectively, for the three and nine months ended September 30, 2017, attributable to the fair value of the swaps at the inception of the hedging relationship. Accordingly, the amounts recognized as hedge ineffectiveness for three and nine months ended September 30, 2017 were gains of $0.1 million and zero, respectively. The comparable amounts as of September 30, 2016 were losses of $1.0 million and $4.2 million for the three and nine months ended September 30, 2016, 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 $1.5 million for the three and nine months ended September 30, 2016, attributable to hedge ineffectiveness.


As of September 30, 2017 and December 31, 2016, Farmer Mac's credit exposure to interest rate swap counterparties, excluding netting arrangements and any adjustment for nonperformance risk, but including accrued interest, was $24.6 million and $24.5 million, respectively; however, including netting arrangements and accrued interest, Farmer Mac's credit exposure was $0.1 million and $0.2 million as of September 30, 2017 and December 31, 2016, respectively. As of September 30, 2017, Farmer Mac held no cash as collateral for its derivatives in net asset positions resulting in uncollateralized net asset positions of $0.1 million. As of December 31, 2016, Farmer Mac held no cash collateral for its derivatives in net asset positions, resulting in uncollateralized net asset positions of $0.2 million.

As of September 30, 2017 and December 31, 2016, 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 $61.1 million and $65.7 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 $27.3 million and $41.4 million as of September 30, 2017 and December 31, 2016, respectively.  Farmer Mac posted cash of $0.1 million and $25.0 million of investment securities as of September 30, 2017 and posted cash of $1.0 million and $24.6 million investment securities as of December 31, 2016.  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, 2017 and December 31, 2016, it could have been required to settle its obligations under the agreements or post additional collateral of $2.3 million and $15.8 million, respectively. As of September 30, 2017 and December 31, 2016, 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, the Chicago Mercantile Exchange ("CME"). Farmer Mac posts initial and variation margins to this clearinghouse 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 $8.8 billion notional amount of interest rate swaps outstanding as of September 30, 2017, $7.7 billion were cleared through swap clearinghouses. Of Farmer Mac's $8.1 billion notional amount of interest rate swaps outstanding as of December 31, 2016, $6.9 billion were cleared through swap clearinghouses.

Effective January 3, 2017, the CME implemented a change in its rules related to the exchange of variation margin. Specifically, the exchange of variation margin between derivatives counterparties is now deemed by CME to be a partial settlement of each respective derivative contract rather than as collateral pledged by a counterparty. Accordingly, beginning in first quarter 2017, Farmer Mac presented its cleared derivatives portfolio net of variation margin payments on its consolidated balance sheets and recognized realized gains or losses as a result of these payments within "Gains/(losses) on financial derivatives and hedging activities" on its consolidated statements of operations. Prior to first quarter 2017, Farmer Mac accounted for variation margin as collateral and associated unrealized gains or losses on those centrally cleared derivative contracts. Farmer Mac included those unrealized gains or losses within "Gains/(losses) on financial derivatives and hedging activities" in its consolidated statements of operations prior to first quarter 2017. See Note 9 for information about the effect of this rule change on the calculation of core earnings beginning in 2017.