s 7 34 = Impact of +/- 7 Day Practical kPine) ‘Application of FAS 133 nea e (Client Period-end Fannie Mae 12/31/03, Prepared by Date WP reference Marissa Wheeler February, 2004 K34 Purpose: ‘The purpose of this memo is to document KPMG’s testwork over the analysis that Fannie Mae performed to assess the income statement impact of applying the “Plus or Minus 7 Day” practical application of FAS 133. Background: As deseribed in the memo at w/p K-34-1, Fannie Mae considers repricing dates of derivatives and repricing dates of the hedged item to “match” if they are within +/- 7 calendar days (5 business days) of each other. This enables Fannie Mae to assume that the hedges are perfectly effective and thereby there is no ineffectiveness recorded in the income statement. Under FAS 133, the repricing dates are considered to “match” if they are on the same day. Management performs an analysis to illustrate that the ineffectiveness that would result under strict compliance with FAS 133 is clearly inconsequential as a result ofthis practical application and thus the income statement is materially accurate. Procedures/Results: e@ KPMG obtained managements analysis to assess the income statement impact of the applying the +/- 7 ay policy. See management's analysis at w/p K-34-1. (KPMG also obtained the electronic version of. the calculation spreadshect attached to the memo) ‘There were two calculations performed, an “Average” approach and an “Absolute Value” approach. See management's memo at w/p K-34-I for further description of these two approaches. ‘The calculation for both approaches uses the following hard-coded information: 1) 3-month LIBOR rates each day from January 5, 1993 through December 9, 2003. 2) Monthly Average PF Swap Notional for 2001, 2002, 2003 3) PF Swap Funding Needs over a 90-day period (1/26/03 through 2/23/04) To test the accuracy of the 3-month LIBOR rates used, KPMG performed a query in Bloomberg and extracted the 3 month LIBOR rate each day from January 5, 1993 through December 9, 2003 and downloaded the amounts into Excel. The LIBOR rates used by Fannie Mae were on the electronic version of the calculation in a column that is not included in the print area of w/p K-34-1 pg 3. KPMG compared the Bloomberg rates to the rates Fannie Mae used and noted that each one agreed w/a/x. To test the accuracy of the average PF swap notional for 2001, 2002, 2003, KPMG obtained the supporting documentation which was obtained by a query from the FAS 133 system. See wip K-34-2. KPMG noted that the average PF swap notional being used for 2003 only included January through May. However, KPMG calculated the average PF swap balance including January through December 2003 and input this amount into the calculation. It did not significantly change the results; therefore, pass further audit work, Confidential treatment requested by KPMG LLP KPMG-SEC-0003289 CONFIDENTIAL KPMG-CIV-00003282} Plat Impact of +/- 7 Day Practical Application of FAS 133, e ‘The PF Swap funding needs were obtained directly from the Portfolio Group and KPMG did not consider it necessary to perform additional testwork over these amounts. Average Approach Using a 90 period from 11/26/03 (Wednesday) through 2/23/04 (Monday), Fannie Mae assigned a “day number” to each business day, as follows (Column labeled as “A” on spreadsheet): ‘Wednesday 11/26/03 (day of Benchmark Bill issuance) 4 = Thursday 11/27/03 -3= Friday 11/28/03, ‘Monday 12/01/03 ‘Tuesday 12/02/03 Wednesday 12/3/03 (day of Benchmark Bill issuance) 1 = Thursday 12/4/03, Friday 12/5/03 3 = Monday 12/8/03 4= Tuesday 12/9/03, 0 = Wednesday 12/10/03 (day of Benchmark Bill issuance) -4 = Thursday 12/11/03, ete. ‘This pattern of negative and positve day numbers is used to support the theory that there is offet between ‘movements in LIBOR associated asseeieted with pay fixed swap funding needs (labeled as column “B” on the spreadsheet) which occur before and after a Benchmark Bill issuance. ‘The day number assigned is then multiplied by the pay fixed swap funding needs for each day (A * B) in 0... ‘The sum of column B and column C is then calculated over the 90 day period. The sum of column C is then divided by the sum of column B. This result for the “Average Approach” is -0.15907. This amount is used to calculate the income statement impact, as described in the formula calculations for Rx4, Rx5, and Rx6 described below. ‘al ‘h ‘Using a 90 period from 11/26/03 (Wednesday) through 2/23/04 (Monday), Fannie Mae assigned a “day number” to each business day, as follows (Column labeled as “A” on spreadsheet): Wednesday 11/26/03 (day of Benchmark Bill issuance) Thursday 11/27/03 3 Friday 11/28/03 2= Monday 12/01/03 ‘uesday 12/02/03 Wednesday 12/3/03 (day of Benchmark Bill issuance) ‘Thursday 12/4/03 2= Friday 12/5/03, Monday 12/8/03, ‘uesday 12/9/03 Wednesday 12/10/03 (day of Benchmark Bi 4 = Thursday 12/11/03, etc. issuance) This pattern of only positve day numbers is used to support the theory that there is no offset between e ‘movements in LIBOR associated associated with pay fixed swap funding needs (labeled as column “B” on the spreadsheet) which occur hefore and after a Benchmark Bill issuance and that LIBOR always Page 2 Confidential treatment requested by KPMG LLP KPMG-SEC-0003290 CONFIDENTIAL KPMG-CIV-00003283. ible! Impact of +/- 7 Day Practical Application of FAS 133, @ moves against Fannie Mae. Management considers this situation to be highly unlikely and a worst ease scenario. The day number assigned is then multiplied by the pay fixed swap funding needs for each day (AB) inthe 90 day period (labeled as column “Cin the spreadsheet) ‘The sum of column B and column C is then calculated over the 90 day period. The sum of column C is then divided by the sum of column B. This result for the “Absolute Value Approach” is 2.07568. This amount is used to determine the income statement impact, as described in the formula calculations in Rxd, Rx5, and Rx6 described below. Calculation of Income Statement Impact: To then determine the total income statement impact, Fannie Mac used the change in 3 month LIBOR calculations and the average PF Swap Notional. See formulas described below: (tickmarks from w/p K-34-1 pg 3) Changes in 3 Month Libor calculations: “Absolute Value Approach” Rxl__ =Average of (Current Day 3M LIBOR — Two Days Prior 3M LIBOR) from 1/5/93 ~ 12/31/01 Rx2__ Average of (Current Day 3M LIBOR ~ Two Days Prior 3M LIBOR) from 1/5/93 ~ 12/31/02 Rx3__=Average of (Current Day 3M LIBOR ~ Two Days Prior 3M LIBOR) from 1/5/93 — 12/09/03 e (does not go to 12/31/03 because this analysis was performed at the beginning of December) “Aversige Approach” Rxd = Rxl # (0.15907 /2.07568) RxS = Rx2 # (0.15907 /2.07568) Rx6 = Rx3 # (-0.15907 /2.07568) Income Statement Impact Calculations “Absolute Value Approach” RxS = Rxl/Avg PF Swap Notional 2001 Rx6 = Rx2/Avg PF Swap Notional 2002 Rx7 = Rx3/Avg PF Swap Notional 2003 [This is the relavent amount for 2003 audit purposes} “Average Approach” Rx8__ = Red/Avg PF Swap Notional 2001 x9 =RxS/Avg PF Swap Notional 2002 e Rx10_ = Rx6/Avg PF Swap Notional 2003 [This is the relavent amount for 2003 audit purposes] Page 3 Confidential treatment requested by KPMG LLP KPMG-SEC-0003291 CONFIDENTIAL. KPMG-CIV-00003284} keh) Impact of +/- 7 Day Practical Application of FAS 133 e ‘The amount calculated for FYO3 income statement impact under the average approach was $247,792 and the amount calculatd under the absolute value approach was ($3,233,316). Both of these amounts are clearly inconsequential to Fannie Mae's income statement for YTD 2003, which was $7.9 billion. ‘Conclusion KPMG concludes that the FY 2003 income statement is not materially misstated as a result of Fannie ‘Mae’s use of the +/- 7 day policy which is a practical application of FAS 133 Page 4 Confidential treatment requested by KPMG LLP KPMG-SEC-0003292 CONFIDENTIAL. KPMG-CIV-00003285