Around $661 billion of Freddie’s derivatives notional was traded OTC. Its counterparty default risk exposure was only $69 million, while Fannie’s figure was around $110 million.
Increased issuance of short-term debt by Freddie and Fannie precipitated greater use of swaps and swaptions to manage duration, and better match assets and liabilities on the back of a steepened US yield curve.
For example, when issuing short-term debt, Fannie would typically enter into 10-year swaps where it receives floating rate. Alternatively, if Fannie wanted to synthetically replicate 10-year callable note issuance, it could instead issue a three-year note and simultaneously enter into a swaption.