Freddie Benefits from Rate Risk Success.(Federal National Mortgage Association)(Federal Home Loan Mortgage Corp.)

As government officials prepare to revamp oversight of the government-sponsored enterprises, their big worry is that with huge mortgage portfolios on their balance sheets, Fannie Mae and Freddie Mac could be vulnerable to a shock from unexpected interest rate movements.

And it's easy to see why some people are concerned. In its first half financial report, Freddie Mac reported that the notional amounts of its total derivative portfolio totaled $705 billion, with a fair value of almost $8.5 billion. That derivative portfolio is lower than it was a year ago, but it still presents a financial management challenge.

At the moment, Freddie Mac's interest rate risk management seems both vigilant and successful. But that doesn't mean that hedge accounting rules are clarifying things much, since many of the derivatives do not qualify for hedge accounting relationships.

Just take a look at Freddie Mac's recently released financial results for the first half of this year.

In the company's official announcement, Freddie Mac's chief operating officer, Eugene McQuade, said the company managed to keep both interest rate risk and credit risk "at very low levels" while increasing market share in the first half of this year.

But he said that accounting rules pertaining to interest rate risk management continue to distort Freddie Mac's financial picture, noting that only part of the company's balance sheet is "marked" to fair value each quarter. In fact, Freddie Mac said the decline in net income it reported in the first half of this year, compared to last year, in part, reflects losses in derivative instruments that do not qualify for ...