Freddie Opts Out of Hedge Accounting.(Federal Home Loan Mortgage Corporation)

Freddie Mac may be recovering from the biggest controversy in its history, an accounting mess that cost most of its top officers their jobs, but you'd still expect the secondary market giant to have more accounting expertise than just about anyone else in the business. So when Freddie Mac decides to voluntarily end hedge accounting treatment for some of its derivatives, it may say more about the complexity of those accounting rules than it does about Freddie Mac.

During a conference call to update investors about third-quarter business developments, Freddie Mac announced changes to its hedge accounting practices. The company said that it has determined that pay-fixed interest rate swaps and other derivatives that had previously been reported in cash-flow hedge accounting relationships no longer meet the hedge accounting requirements under Financial Accounting Standard 133.

As a result, Freddie Mac expects to discontinue hedge accounting for these relationships effective with the second quarter of 2004. A spokesperson for Freddie Mac said that changing interest rate conditions were a factor in the determination that the derivatives no longer qualify for hedge accounting.

Freddie Mac also said it is voluntarily discontinuing hedge accounting treatment for the majority of its receive-fixed interest rate swaps, saying that this step will help the company address period-to-period volatility in the total portfolio of no hedge designation derivatives. A receive-fixed swap results in the corporation's receipt of a fixed interest-rate payment from its counterparty in exchange for a variable rate payment to the counterparty. Conversely, a pay-fixed swap requires Freddie Mac to make a fixed interest-rate payment in exchange for a variable rate payment.

Generally, receive-fixed swaps increase in value increase in value and pay-fixed swaps decrease in value when interest rates decline, Freddie Mac ...