Derivative Transactions

Derivative transactions are interest rate swaps, caps and floors; or equity options used by members and housing associates to manage interest rate risk.

Definitions
An interest rate swap is a contractual agreement between two counterparties to exchange interest payments, calculated on a notional principal, over a specified period of time. Because the notional principal is not exchanged as part of the transaction, credit risk is limited to the present value of the expected payment differentials. Interest rate swaps can be efficient and cost-effective for managing interest rate risk. For example, in order to match the term of a fixed rate loan, institutions could enter into an interest rate swap that pays a fixed rate and receives a variable rate to convert core deposits from a floating rate to a fixed rate liability.

An interest rate cap is an option to receive contingent periodic cash flows over a specified period of time when the index rate exceeds the designated strike rate on specified determination dates. These cash flows are calculated on a notional principal based on an actual/360-day basis and determined by the differential between the strike rate and the index rate. Interest rate caps can be used to offset the effects of rate caps on assets or limit the interest cost on a floating rate liability. The price paid is called the cap premium.

An interest rate floor is an option to receive contingent periodic cash flows over a specified period of time when the index rate falls below a designated strike rate on specified determination dates. These cash flows are calculated on a notional principal based on an actual/360-day basis and determined by the differential between the strike rate and the index rate. Interest rate floors can be used to limit the impact to earnings from significant declines in interest rates. The price paid is called the floor premium.

An equity call option is the purchase of an option to receive a specified percentage of the performance of an equity index at the end of or over a specific time period (i.e., receive 90% of the average of the Standard & Poor's (S&P) 500 Index on specified measurement dates). FHLBank currently offers equity call options on a limited basis with established minimums.

Terms and Conditions
Limitations
Derivative transactions, including interest rate swaps, caps, floors and equity options are subject to FHLBank's ability to obtain offsetting positions with approved counterparties.

Credit exposure arising from derivative transactions is incorporated into the maximum amount of credit available. Please refer to the Credit Guidelines section of the Member Products and Services Guide.

Term
12 to 120 months

Collateral
The dollar amount of collateral required during the life of these transactions would be no less than the market value of the transaction plus net accrued interest due FHLBank.

Required Documents
International Swaps and Derivatives Association
(ISDA) Master Agreement
Derivatives Transactions Resolution and Incumbency
Certificate

Institutions must execute the above documents with FHLBank and provide supporting documentation that sets forth the terms, conditions and procedures governing these types of transactions.

The ISDA agreement is subject to, and part of, the Advance, Pledge and Security Agreement. These documents are available in Members Only.

Fees
Fees and/or interest rate spreads will be charged to cover costs and risks associated with derivative transactions.

Availability
Derivative transactions may be requested until 3 p.m. CT.

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