Financial Derivatives

12 Months Ended

Dec. 31, 2021

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Farmer Mac enters into financial derivative transactions 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 changes in a benchmark interest rate (e.g., LIBOR or SOFR). Certain other financial derivatives are designated as cash flow hedges to mitigate the volatility of future interest rate payments on floating rate debt. Certain financial derivatives are not designated in hedge accounting relationships.

Farmer Mac manages the interest rate risk related to loans it has committed to acquire, but has not yet

permanently funded, primarily 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. Farmer Mac aims to achieve 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.

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, 2021 and December 31, 2020:

Table 6.1


	As of December 31, 2021
			Fair Value				Weighted- Average Pay Rate	Weighted- Average Receive Rate	Weighted- Average Forward Price	Weighted- Average Remaining Term (in years)
	Notional Amount		Asset		(Liability)
	(dollars in thousands)
Fair value hedges:
Interest rate swaps:
Pay fixed non-callable	$	6,238,438	$	11,554	$	(583)	2.06%	0.13%		11.64
Receive fixed non-callable	5,884,529		15		(8,383)		0.17%	0.88%		2.27
Receive fixed callable	1,571,577		103		(17,612)		0.01%	0.80%		4.17
Cash flow hedges:
Interest rate swaps:
Pay fixed non-callable	570,000		6,905		(2,763)		1.93%	0.49%		5.72
No hedge designation:
Interest rate swaps:
Pay fixed non-callable	229,062		—		(4,641)		3.22%	0.16%		4.95
Receive fixed non-callable	1,377,250		—		—		0.13%	0.43%		0.97

Basis swaps	1,608,911		489		(280)		0.17%	0.20%		3.31
Treasury futures	67,600		73		—				130.58
Credit valuation adjustment			—		14
Total financial derivatives	$	17,547,367	$	19,139	$	(34,248)
Collateral (held)/pledged			—		194,519
Net amount			$	19,139	$	160,271


	As of December 31, 2020
			Fair Value				Weighted- Average Pay Rate	Weighted- Average Receive Rate	Weighted- Average Forward Price	Weighted- Average Remaining Term (in years)
	Notional Amount		Asset		(Liability)
	(dollars in thousands)
Fair value hedges:
Interest rate swaps:
Pay fixed non-callable	$	5,463,303	$	10,157	$	(2,585)	2.26%	0.21%		11.95
Receive fixed non-callable	2,611,029		2		(8,755)		0.32%	1.61%		2.10
Receive fixed callable	343,500		3,108		(4)		0.16%	1.78%		3.16
Cash flow hedges:
Interest rate swaps:
Pay fixed non-callable	472,000		2,584		(8,771)		2.04%	0.57%		6.04
No hedge designation:
Interest rate swaps:
Pay fixed non-callable	339,090		—		(9,675)		2.38%	0.19%		4.23
Receive fixed non-callable	2,359,220		—		—		0.16%	0.87%		1.07
Receive fixed callable	200,000		1		(12)		0.13%	0.15%		0.72
Basis swaps	3,628,911		1,617		(43)		0.18%	0.23%		2.03
Treasury futures	30,500		—		(82)				137.81
Credit valuation adjustment			(1)		35
Total financial derivatives	$	15,447,553	$	17,468	$	(29,892)
Collateral (held)/pledged			(1,345)		212,263
Net amount			$	16,123	$	182,371

As of December 31, 2021, Farmer Mac expects to reclassify $4.6 million after-tax from accumulated other comprehensive income to earnings over the next twelve months related to cash flow hedges. This amount could differ from amounts actually recognized due to changes in interest rates, hedge de-designations, and the addition of other hedges after December 31, 2021. During the years ended December 31, 2021 and 2020, there were no gains or losses from interest rate swaps designated as cash flow hedges reclassified to earnings because it was probable that the originally forecasted transactions would occur.

The following tables summarize the net income/(expense) recognized in the consolidated statements of operations related to derivatives for the years ended December 31, 2021, 2020, and 2019:

Table 6.2


	For the Year Ended December 31, 2021
	Net Income/(Expense) Recognized in Consolidated Statement of Operations on Derivatives
	Net Interest Income								Non-Interest Income		Total
	Interest Income Investments and Cash Equivalents		Interest Income Farmer Mac Guaranteed Securities and USDA Securities		Interest Income Loans		Total Interest Expense		Losses on financial derivatives
	(in thousands)
Total amounts presented in the consolidated statement of operations	$	18,660	$	163,547	$	242,582	$	(204,014)	$	(3,348)	$	217,427
Income/(expense) related to interest settlements on fair value hedging relationships:
Recognized on derivatives	(1,002)		(85,302)		(27,167)		42,591		—		(70,880)
Recognized on hedged items	1,792		119,896		46,842		(51,484)		—		117,046
Discount amortization recognized on hedged items	—		—		—		(1,118)		—		(1,118)
Income/(expense) related to interest settlements on fair value hedging relationships	$	790	$	34,594	$	19,675	$	(10,011)	$	—	$	45,048

Gains/(losses) on fair value hedging relationships:
Recognized on derivatives	$	1,688	$	177,077	$	97,459	$	(98,332)	$	—	$	177,892
Recognized on hedged items	(1,218)		(176,304)		(97,502)		95,617		—		(179,407)
Gains/(losses) on fair value hedging relationships	$	470	$	773	$	(43)	$	(2,715)	$	—	$	(1,515)

Expense related to interest settlements on cash flow hedging relationships:
Interest settlements reclassified from AOCI into net income on derivatives	$	—	$	—	$	—	$	(7,399)	$	—	$	(7,399)
Recognized on hedged items	—		—		—		(2,657)		—		(2,657)
Discount amortization recognized on hedged items	—		—		—		(37)		—		(37)
Expense recognized on cash flow hedges	$	—	$	—	$	—	$	(10,093)	$	—	$	(10,093)

Losses on financial derivatives not designated in hedging relationships:
Losses on interest rate swaps	$	—	$	—	$	—	$	—	$	(5,816)	$	(5,816)
Interest expense on interest rate swaps	—		—		—		—		3,259		3,259

Treasury futures	—		—		—		—		(791)		(791)
Losses on financial derivatives not designated in hedge relationships	$	—	$	—	$	—	$	—	$	(3,348)	$	(3,348)


	For The Year Ended December 31, 2020
	Net Income/(Expense) Recognized in Consolidated Statement of Operations on Derivatives
	Net Interest Income						Non-Interest Income		Total
	Interest Income Farmer Mac Guaranteed Securities and USDA Securities		Interest Income Loans		Total Interest Expense		Losses on financial derivatives
	(in thousands)
Total amounts presented in the consolidated statement of operations:	$	227,691	$	233,699	$	(312,946)	$	(246)	$	148,198
Income/(expense) related to interest settlements on fair value hedging relationships:
Recognized on derivatives	(60,056)		(19,135)		26,386		—		(52,805)
Recognized on hedged items	126,170		40,793		(51,230)		—		115,733
Discount amortization recognized on hedged items	—		—		(745)		—		(745)
Income/(expense) related to interest settlements on fair value hedging relationships	$	66,114	$	21,658	$	(25,589)	$	—	$	62,183

(Losses)/gains on fair value hedging relationships:
Recognized on derivatives	$	(206,281)	$	(76,565)	$	43,332	$	—	$	(239,514)
Recognized on hedged items	202,624		73,426		(45,720)		—		230,330
(Losses)/gains on fair value hedging relationships	$	(3,657)	$	(3,139)	$	(2,388)	$	—	$	(9,184)

Expense related to interest settlements on cash flow hedging relationships:
Interest settlements reclassified from AOCI into net income on derivatives	$	—	$	—	$	(5,570)	$	—	$	(5,570)
Recognized on hedged items	—		—		(4,553)		—		(4,553)
Discount amortization recognized on hedged items	—		—		(13)		—		(13)
Expense recognized on cash flow hedges	$	—	$	—	$	(10,136)	$	—	$	(10,136)

(Losses)/gains on financial derivatives not designated in hedge relationships:
Losses on interest rate swaps	$	—	$	—	$	—	$	(4,204)	$	(4,204)
Interest expense on interest rate swaps	—		—		—		5,808		5,808

Treasury futures	—		—		—		(1,850)		(1,850)
(Losses)/gains on financial derivatives not designated in hedge relationships	$	—	$	—	$	—	$	(246)	$	(246)


	For The Year Ended December 31, 2019
	Net Income/(Expense) Recognized in Consolidated Statement of Operations on Derivatives
	Net Interest Income						Non-Interest Income		Total
	Interest Income Farmer Mac Guaranteed Securities and USDA Securities		Interest Income Loans		Total Interest Expense		Gains/(losses) on financial derivatives
	(in thousands)
Total amounts presented in the consolidated statement of operations	$	333,896	$	229,675	$	(471,958)	$	5,282	$	96,895
Income/(expense) related to interest settlements on fair value hedging relationships:
Recognized on derivatives	(2,177)		(2,053)		(6,227)		—		(10,457)
Recognized on hedged items	118,609		26,352		(45,309)		—		99,652
Discount amortization recognized on hedged items	—		—		(631)		—		(631)
Income/(expense) related to interest settlements on fair value hedging relationships	$	116,432	$	24,299	$	(52,167)	$	—	$	88,564

(Losses)/gains on fair value hedging relationships:
Recognized on derivatives	$	(184,478)	$	(50,141)	$	18,401	$	—	$	(216,218)
Recognized on hedged items	181,144		43,194		(16,027)		—		208,311
(Losses)/gains on fair value hedging relationships	$	(3,334)	$	(6,947)	$	2,374	$	—	$	(7,907)

Expense related to interest settlements on cash flow hedging relationships:
Interest settlements reclassified from AOCI into net income on derivatives	$	—	$	—	$	1,166	$	—	$	1,166
Recognized on hedged items	—		—		(10,569)		—		(10,569)
Discount amortization recognized on hedged items	—		—		(4)		—		(4)
Expense recognized on cash flow hedges	$	—	$	—	$	(9,407)	$	—	$	(9,407)

Gains on financial derivatives not designated in hedging relationships:
Gains on interest rate swaps	$	—	$	—	$	—	$	10,321	$	10,321
Interest expense on interest rate swaps	—		—		—		(4,213)		(4,213)

Treasury futures	—		—		—		(826)		(826)
Gains on financial derivatives not designated in hedge relationships	$	—	$	—	$	—	$	5,282	$	5,282

The following table shows the carrying amount and associated cumulative basis adjustment related to the application of hedge accounting that is included in the carrying amount of hedged assets and liabilities in fair value hedging relationships as of December 31, 2021 and December 31, 2020:

Table 6.3


	Hedged Items in Fair Value Relationship
	Carrying Amount of Hedged Assets/(Liabilities)				Cumulative Amount of Fair Value Hedging Adjustments included in the Carrying Amount of the Hedged Assets/(Liabilities)
	December 31, 2021		December 31, 2020		December 31, 2021		December 31, 2020
	(in thousands)
Investment securities, Available-for-Sale, at fair value	$	458,653	$	—	$	(1,218)	$	—
Farmer Mac Guaranteed Securities, Available-for-Sale, at fair value(1)	4,276,002		4,244,027		206,520		382,825
Loans held for investment, at amortized cost(2)	1,668,142		1,692,609		13,832		111,333

Notes Payable(3)	(7,083,535)		(3,006,140)		42,377		(53,240)

(1)Includes $1.3 million and $1.6 million of hedging adjustments on discontinued hedging relationships as of December 31, 2021 and December 31, 2020, respectively.

(2)Includes $1.2 million and $1.4 million of hedging adjustments on a discontinued hedging relationship as of December 31, 2021 and December 31, 2020, respectively.

(3)Carrying amount represents amortized cost.

The following table shows Farmer Mac's credit exposure to interest rate swap counterparties as of December 31, 2021 and December 31, 2020:

Table 6.4


	December 31, 2021
	Gross Amount Recognized(1)		Counterparty Netting		Net Amount Presented in the Consolidated Balance Sheet
	(in thousands)
Assets:
Derivatives
Interest rate swap	$	91,130	$	91,130	$	—
Liabilities:
Derivatives
Interest rate swap	$	404,063	$	386,249	$	17,814

(1)Gross amount excludes netting arrangements and any adjustment for nonperformance risk, but includes accrued interest.


	December 31, 2020
	Gross Amount Recognized(1)		Counterparty Netting		Net Amount Presented in the Consolidated Balance Sheet
	(in thousands)
Assets:
Derivatives
Interest rate swaps	$	112,287	$	111,761	$	526
Liabilities:
Derivatives
Interest rate swaps	$	620,236	$	595,867	$	24,369

(1)Gross amount excludes netting arrangements and any adjustment for nonperformance risk, but includes accrued interest.

As of December 31, 2021, Farmer Mac held no cash or investment securities as collateral for its derivatives in net asset positions, compared to $1.3 million of cash and no investment securities as collateral for its derivatives in net asset positions as of December 31, 2020.

Farmer Mac posted $16.6 million cash and $177.9 million of investment securities as of December 31, 2021 and posted $11.2 million cash and $201.1 million investment securities as of December 31, 2020. 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 December 31, 2021 or December 31, 2020, it could have been required to settle its obligations under the agreements, but would not have been required to post additional collateral. As of December 31, 2021 and December 31, 2020, 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 $17.5 billion notional amount of interest rate swaps outstanding as of December 31, 2021, $14.9 billion were cleared through the swap clearinghouse, the Chicago Mercantile Exchange ("CME"). Of Farmer Mac's $15.4 billion notional amount of interest rate swaps outstanding as of December 31, 2020, $12.8 billion were cleared through the CME. During 2021 and throughout 2020, Farmer Mac continued the use of non-cleared basis swaps to prepare for the transition away from the use of LIBOR as a reference rate.