UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, ~~2015~~2016

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File No. 000-51401

Federal Home Loan Bank of Chicago

(Exact name of registrant as specified in its charter)



	Federally chartered corporation		36-6001019
	(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
	200 East Randolph Drive Chicago, IL		60601
	(Address of principal executive offices)		(Zip Code)

Registrant's telephone number, including area code: (312) 565-5700

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one)



	Large accelerated filer o				Accelerated filer o
	Non-accelerated filer x (Do not check if a smaller reporting company)				Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

As of ~~October 31, 2015,~~September 30, 2016, including mandatorily redeemable capital stock, registrant had ~~18,956,348~~19,376,924 total outstanding shares of Class B Capital Stock.

~~Federal Home Loan Bank of Chicago~~

TABLE OF CONTENTS



PART I - FINANCIAL INFORMATION		3
Item 1.	Financial Statements (unaudited).	3
	Statements of Condition	3
	Statements of Income	4
	Statements of Comprehensive Income	5
	Statements of Capital	6
	Condensed Statements of Cash Flows	7
	Note 1 - Background and Basis of Presentation	8
	Note 2 - Summary of Significant Accounting Policies	9
	Note 3 - Recently Issued but Not Yet Adopted Accounting Standards	119
	Note 4 - Interest Income and Interest Expense	12
	Note 5 - Investment Securities	13
	Note 6 - Advances	19
	Note 7 - MPF Loans Held in Portfolio	20
	Note 8 - Allowance for Credit Losses	21
	Note 9 - Derivatives and Hedging Activities	2423
	Note 10 - Consolidated Obligations	3028
	Note 11 - Capital and Mandatorily Redeemable Capital Stock (MRCS)	3129
	Note 12 - Accumulated Other Comprehensive Income (Loss)	3230
	Note 13 - Fair Value ~~Accounting~~	3331
	Note 14 - Commitments and Contingencies	3734
	Note 15 – Transactions with Related Parties and Other FHLBs	3734
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations.	3835
Item 3.	Quantitative and Qualitative Disclosures about Market Risk.	6257
Item 4.	Controls and Procedures.	6459

PART II - OTHER INFORMATION		65
Item 1.	Legal Proceedings.	6560
Item 1A.	Risk Factors.	6560
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	6660
Item 3.	Defaults upon Senior Securities.	6660
Item 4.	Mine Safety Disclosures.	6660
Item 5.	Other Information.	6661
Item 6.	Exhibits.	6662

Glossary of Terms		6763
Signatures		S-1

Table of Contents

~~Federal Home Loan Bank of Chicago~~

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.

Statements of Condition (unaudited)

(Dollars in millions, except capital stock par value)


	September 30, 2015		December 31, 2014		September 30, 2016			December 31, 2015
Assets
Cash and due from banks	$	606	$	342	$	31		$	499
Interest bearing deposits	560		560		650			650
Federal Funds sold	720		1,525		3,807			1,702
Securities purchased under agreements to resell	3,400		3,400		1,000			1,375
Investment securities -
Trading, $58 and $71 pledged	155		167
Trading, $90 and $62 pledged					1,047			1,160
Available-for-sale	18,308		19,975		15,561			17,470
Held-to-maturity, $6,375 and $7,824 fair value	5,740		7,118
Total investment securities	24,203		27,260
Advances, $95 and $83 carried at fair value	35,044		32,485
MPF Loans held in portfolio, net of allowance for credit losses of $(3) and $(15)	5,079		6,057
Held-to-maturity, $5,308 and $6,513 fair value					4,788			5,967
Investment securities					21,396			24,597
Advances, $703 and $511 carried at fair value					43,117			36,778
MPF Loans held in portfolio, net of allowance for credit losses of $(3) and $(3)					4,720			4,828
Derivative assets	2		29		21			2
Other assets	210		183
Total assets	$	69,824	$	71,841
Other assets, $58 and $54 carried at fair value					241			240
Assets					$	74,983		$	70,671

Liabilities
Deposits -
Noninterest bearing	$	41	$	49	$	59		$	41
Interest bearing, $15 and $13 from other FHLBs	469		617
Total Deposits	510		666
Interest bearing, $15 and $12 from other FHLBs					453			497
Deposits					512			538
Consolidated obligations, net -
Discount notes, $6,472 and $1,799 carried at fair value	37,290		31,054
Bonds, $980 and $2,785 carried at fair value	26,062		34,251
Total consolidated obligations, net	63,352		65,305
Discount notes, $12,537 and $9,006 carried at fair value					39,144			41,564
Bonds, $7,058 and $952 carried at fair value					30,139			22,582
Consolidated obligations, net					69,283			64,146
Derivative liabilities	44		55		48			55
Affordable Housing Program assessment payable	92		90		90			89
Mandatorily redeemable capital stock					302			8
Other liabilities	309		256		233			239
Subordinated notes	944		944		—			944
Total liabilities	65,251		67,316
Liabilities					70,468			66,019
Commitments and contingencies - see notes to the financial statements
Capital
Class B1 activity stock - putable $100 par value - 10 million and 8 million shares issued and outstanding	966		827
Class B2 membership stock - putable $100 par value - 9 million and 11 million shares issued and outstanding	926		1,075
Total capital stock	1,892		1,902
Class B1 activity stock - putable $100 par value - 11 million and 13 million shares issued and outstanding					1,063			1,313
Class B2 membership stock - putable $100 par value - 6 million and 6 million shares issued and outstanding					573			637
Capital stock					1,636			1,950
Retained earnings - unrestricted	2,336		2,152		2,577			2,407
Retained earnings - restricted	304		254		374			323
Total retained earnings	2,640		2,406
Retained earnings					2,951			2,730
Accumulated other comprehensive income (loss) (AOCI)	41		217		(72		)	(28		)
Total capital	4,573		4,525
Total liabilities and capital	$	69,824	$	71,841
Capital					4,515			4,652
Liabilities and capital					$	74,983		$	70,671

The accompanying notes are an integral part of these financial statements (unaudited).

Table of Contents

~~Federal Home Loan Bank of Chicago~~

Statements of Income (unaudited)

(Dollars in millions)


	Three months ended September 30,						Nine months ended September 30,							Three months ended September 30,					Nine months ended September 30,
	2015			2014			2015			2014				2016		2015			2016			2015
Interest income	$	304		$	333		$	934		$	1,033			$	309	$	304		$	944		$	934
Interest expense	182			195			561			649				196		182			600			561
Net interest income before provision for (reversal of) credit losses	122			138			373			384
Net interest income														113		122			344			373
Provision for (reversal of) credit losses	1			(2		)	5			(8		)		—		1			—			5
Net interest income	121			140			368			392
Net interest income after provision for (reversal of) credit losses														113		121			344			368

Noninterest gain (loss) on -
Trading securities	(1		)	(6		)	(2		)	(18		)		—		(1		)	—			(2		)
Derivatives and hedging activities	(15		)	1			(17		)	(11		)		7		(15		)	(7		)	(17		)
Instruments held under fair value option	1			10			4			11				—		1			6			4
Litigation settlement awards	2			1			13			18				—		2			38			13
Other, net	7			5			15			14
Other gain (loss), net													��	7		7			24			15
Noninterest gain (loss)	(6		)	11			13			14				14		(6		)	61			13

Noninterest expense -
Compensation and benefits	20			17			57			49				26		20			71			57
Other operating expenses	13			12			38			34
Operating expenses														15		13			44			38
Other	2			(1		)	6			6				1		2			13			6
Noninterest expense	35			28			101			89				42		35			128			101

Income before assessments	80			123			280			317				85		80			277			280

Affordable Housing Program assessment	8			13			28			32				9		8			28			28

Net income	$	72		$	110		$	252		$	285			$	76	$	72		$	249		$	252

The accompanying notes are an integral part of these financial statements (unaudited).

Table of Contents

~~Federal Home Loan Bank of Chicago~~

Statements of Comprehensive Income (unaudited)

(Dollars in millions)


	Three months ended September 30,						Nine months ended September 30,					Three months ended September 30,						Nine months ended September 30,
	2015			2014			2015			2014		2016			2015			2016			2015
Net income	$	72		$	110		$	252		$	285	$	76		$	72		$	249		$	252

Other comprehensive income (loss) -
Net unrealized gain (loss) on available-for-sale securities	(79		)	(99		)	(214		)	37
Non-credit OTTI on held-to-maturity securities	11			15			37			43
Net unrealized gain (loss) on cash flow hedges	(31		)	85			8			91
Net unrealized gain (loss) available-for-sale securities												(13		)	(79		)	(113		)	(214		)
Non-credit OTTI held-to-maturity securities												9			11			30			37
Net unrealized gain (loss) cash flow hedges												83			(31		)	38			8
Post-retirement plans	1			(2		)	(7		)	1		—			1			1			(7		)
Other comprehensive income (loss)	(98		)	(1		)	(176		)	172		79			(98		)	(44		)	(176		)

Comprehensive income	$	(26	)	$	109		$	76		$	457	$	155		$	(26	)	$	205		$	76

The accompanying notes are an integral part of these financial statements (unaudited).

Table of Contents

~~Federal Home Loan Bank of Chicago~~

Statements of Capital (unaudited)

(Dollars and shares in millions)


	Capital Stock - Putable - B1 Activity					Capital Stock - Putable - B2 Membership					Total Capital Stock					Retained Earnings														Capital Stock - Putable - B1 Activity					Capital Stock - Putable - B2 Membership					Capital Stock					Retained Earnings											Total Capital
																														Shares		Value			Shares		Value			Shares		Value			Unrestricted			Restricted		Total			AOCI			Total Capital
December 31, 2015																														13		$	1,313		6		$	637		19		$	1,950		$	2,407		$	323	$	2,730		$	(28	)	$	4,652
Comprehensive income																																													198			51		249			(44		)	205
Proceeds from issuance of capital stock																														10		952			—		12			10		964														964
Repurchases of capital stock																														(6	)	(586		)	(3	)	(392		)	(9	)	(978		)												(978		)
Capital stock reclassified to mandatorily redeemable capital stock (other liabilities)																														(3	)	(295		)	—		(5		)	(3	)	(300		)												(300		)
Transfers between classes of capital stock																														(3	)	(321		)	3		321
Cash dividends - class B1																																													(25		)			(25		)				(25		)
Class B1 annualized rate																																																								2.73		%
Cash dividends - class B2																																													(3		)			(3		)				(3		)
Class B2 annualized rate																																																								0.60		%
Total change in period																														(2	)	(250		)	—		(64		)	(2	)	(314		)	170			51		221			(44		)	(137		)
September 30, 2016																														11		$	1,063		6		$	573		17		$	1,636		$	2,577		$	374	$	2,951		$	(72	)	$	4,515
	Shares		Value			Shares		Value			Shares		Value			Unrestricted			Restricted		Total			AOCI			Total
December 31, 2014	8		$	827		11		$	1,075		19		$	1,902		$	2,152		$	254	$	2,406		$	217		$	4,525		8		$	827		11		$	1,075		19		$	1,902		$	2,152		$	254	$	2,406		$	217		$	4,525
Comprehensive income																202			50		252			(176		)	76																		202			50		252			(176		)	76
Proceeds from issuance of capital stock	3		228			—		15			3		243														243			3		228			—		15			3		243														243
Repurchases of capital stock	—		(29		)	(3	)	(223		)	(3	)	(252		)												(252		)	—		(29		)	(3	)	(223		)	(3	)	(252		)												(252		)
Capital stock reclassified to mandatorily redeemable capital stock	—		—			—		(1		)	—		(1		)												(1		)
Capital stock reclassified to mandatorily redeemable capital stock (other liabilities)																														—		—			—		(1		)	—		(1		)												(1		)
Transfers between classes of capital stock	(1	)	(60		)	1		60																						(1	)	(60		)	1		60
Cash dividends - class B1(2.25% annualized rate)																(14		)			(14		)				(14		)
Cash dividends - class B2(0.50% annualized rate)																(4		)			(4		)				(4		)
Cash dividends - class B1																																													(14		)			(14		)				(14		)
Class B1 annualized rate																																																								2.25		%
Cash dividends - class B2																																													(4		)			(4		)				(4		)
Class B2 annualized rate																																																								0.50		%
Total change in period																														2		139			(2	)	(149		)	—		(10		)	184			50		234			(176		)	48
September 30, 2015	10		$	966		9		$	926		19		$	1,892		$	2,336		$	304	$	2,640		$	41		$	4,573		10		$	966		9		$	926		19		$	1,892		$	2,336		$	304	$	2,640		$	41		$	4,573

December 31, 2013	7		$	629		10		$	1,041		17		$	1,670		$	1,853		$	175	$	2,028		$	67		$	3,765
Comprehensive income																228			57		285			172			457
Proceeds from issuance of capital stock	2		234			1		43			3		277														277
Repurchases of capital stock	(1	)	(45		)	(1	)	(101		)	(2	)	(146		)												(146		)
Transfers between classes of capital stock	(1	)	(115		)	1		115
Cash dividends - class B1(1.43% annualized rate)																(5		)			(5		)				(5		)
Cash dividends - class B2(0.43% annualized rate)																(4		)			(4		)				(4		)
September 30, 2014	7		$	703		11		$	1,098		18		$	1,801		$	2,072		$	232	$	2,304		$	239		$	4,344

The accompanying notes are an integral part of these financial statements (unaudited).

Table of Contents

~~Federal Home Loan Bank of Chicago~~

Condensed Statements of Cash Flows (unaudited)

(Dollars in millions)


	Nine months ended September 30,	2015				2014				Nine months ended September 30,	2016				2015
Operating	Net cash provided by (used in) operating activities	$	375			$	592			Net cash provided by (used in) operating activities	$	184			$	375
Investing	Net change interest bearing deposits	—				(560		)		Net change Federal Funds sold	(2,105		)		805
	Net change Federal Funds sold	805				(1,283		)
	Net change securities purchased under agreements to resell	—				4,550
	Advances -									Net change securities purchased under agreements to resell	375				—
	Principal collected	251,066				188,332				Trading securities -
	Issued	(253,574		)		(191,556		)		Sales	2,158				—
	MPF Loans held in portfolio -									Proceeds from maturities and paydowns	108				109
	Principal collected	1,085				1,353				Purchases	(2,156		)		(101		)
	Purchases	(117		)		(64		)		Available-for-sale securities -
	Trading securities -									Proceeds from maturities and paydowns	1,777				1,452
	Sales	—				2,002				Purchases	(2		)		(12		)
	Proceeds from maturities and paydowns	109				867				Held-to-maturity securities -
	Purchases	(101		)		(1,812		)		Short-term held-to-maturity securities, net	543			^a	675			^a
	Held-to-maturity securities -									Proceeds from maturities and paydowns	740				793
	Short-term held-to-maturity securities, net	675			^a	503			^a	Purchases	(30		)		(16		)
	Proceeds from maturities and paydowns	793				833				Advances -
	Purchases	(16		)		(22		)		Principal collected	548,381				251,066
	Available-for-sale securities -									Issued	(554,570		)		(253,574		)
	Proceeds from maturities and paydowns	1,452				1,157				MPF Loans held in portfolio -
	Purchases	(12		)		—				Principal collected	867				1,085
	Proceeds from sale of foreclosed assets	47				76				Purchases	(759		)		(117		)
	Capital expenditures for software and equipment	(8		)		(8		)		Other investing activities	27				39
	Net cash provided by (used in) investing activities	2,204				4,368				Net cash provided by (used in) investing activities	(4,646		)		2,204
Financing	Net change deposits	(156		)		(14		)		Net change deposits	(26		)		(156		)
	Net proceeds from issuance of consolidated obligations -									Discount notes -
	Discount notes	210,023				924,591				Net proceeds from issuance	438,057				210,023
	Bonds	8,503				16,891				Payments for maturing and retiring	(440,500		)		(203,798		)
	Payments for maturing and retiring consolidated obligations -									Consolidated obligation bonds -
	Discount notes	(203,798		)		(925,174		)		Net proceeds from issuance	24,439				8,503
	Bonds	(16,777		)		(13,888		)		Payments for maturing and retiring	(16,943		)		(16,777		)
	Net proceeds (payments) on derivative contracts with financing element	(47		)		(46		)		Net proceeds (payments) on derivative contracts with financing element	(38		)		(47		)
	Net proceeds (payments) on bond transfers to other FHLBs	(35		)		—				Net proceeds (payments) on bond transfers with other FHLBs	—				(35		)
	Proceeds from issuance of capital stock	243				277				Payments for retiring of subordinated debt	(944		)		—
	Repurchase or redemption of capital stock	(252		)		(146		)		Capital stock -
	Redemptions of mandatorily redeemable capital stock	(1		)		—				Proceeds from issuance of capital stock	964				243
	Cash dividends paid	(18		)		(9		)		Repurchase of capital stock	(978		)		(252		)
	Net cash provided by (used in) financing activities	(2,315		)		2,482				Cash dividends paid	(28		)		(18		)
	Net increase (decrease) in cash and due from banks	264				7,442				Other financing activities	(9		)		(1		)
	Cash and due from banks at beginning of period	342				971				Net cash provided by (used in) financing activities	3,994				(2,315		)
	Cash and due from banks at end of period	$	606			$	8,413			Net increase (decrease) in cash and due from banks	(468		)		264
										Cash and due from banks at beginning of period	499				342
										Cash and due from banks at end of period	$	31			$	606
Noncash										Capital stock reclassified to mandatorily redeemable capital stock (other liabilities)	$	300			$	1


^a	Short-term held-to-maturity securities, net, consists of investment securities with a maturity of less than 90 days when purchased.

The accompanying notes are an integral part of these financial statements (unaudited).

Table of Contents

~~Federal Home Loan Bank of Chicago~~

Notes to Financial Statements - (Unaudited)

(Dollars in tables in millions except per share amounts unless otherwise indicated)

Note 1 – Background and Basis of Presentation

The Federal Home Loan Bank of Chicago^a is a federally chartered corporation and one of 11 Federal Home Loan Banks (the FHLBs) that, with the Office of Finance, comprise the Federal Home Loan Bank System (the System). The FHLBs are government-sponsored enterprises (GSE) of the United States of America and were organized under the Federal Home Loan Bank Act of 1932, as amended (FHLB Act), in order to improve the availability of funds to support home ownership. ~~The FHLBs~~We are supervised and regulated by the Federal Housing Finance Agency (FHFA), an independent federal ~~agency. We~~agency in the executive branch of the United States (U.S.) government.

Each FHLB is a member-owned cooperative with members from a specifically defined geographic district. Our defined geographic district is Illinois and Wisconsin. All federally-insured depository institutions, insurance companies engaged in residential housing finance, credit unions and community development financial institutions located in our district are eligible to apply for membership with us. All our members are required to purchase our capital stock as a condition of membership. Our capital stock is not publicly traded, and is issued, repurchased or redeemed at par value, $100 per share, subject to certain statutory and regulatory limits. As a cooperative, we do business with our members, and former members (under limited circumstances). Specifically, we provide credit ~~to members~~ principally in the form of secured loans called advances. We also provide liquidity for home mortgage loans to members approved as Participating Financial Institutions (PFIs) through the Mortgage Partnership Finance^®(MPF^®) ~~Program~~ ^b.Program.

Our accounting and financial reporting policies conform to generally accepted accounting principles in the United States of America (GAAP). Amounts in prior periods may be reclassified to conform to the current presentation and if material are disclosed in the following notes.

In the opinion of management, all normal recurring adjustments have been included for a fair statement of this interim financial information. These unaudited financial statements and the following footnotes should be read in conjunction with the audited financial statements and footnotes for the year ended December 31, ~~2014,~~2015, included in our Annual Report on Form 10-K ~~(2014~~(2015 Form 10-K) starting on page F-1, as filed with the ~~SEC.~~Securities and Exchange Commission (SEC).

Unless otherwise specified, references to we, us, our, and the Bank are to the Federal Home Loan Bank of Chicago.

“Mortgage Partnership Finance”, “MPF”, “MPF Xtra”, and "Community First" are registered trademarks of the Federal Home Loan Bank of Chicago.

Refer to the Glossary of Terms starting on page 63 for the definitions of certain terms used herein.

Use of Estimates

The preparation of financial statements in accordance with GAAP requires us to make assumptions and estimates that may affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported amounts of income and expense. The most significant of these assumptions and estimates applies to fair value measurements and allowance for credit losses. Actual results could differ from these assumptions and estimates.

Consolidation of Variable Interest Entities

We dowould consolidate a variable interest entity if we determine that we are its primary beneficiary, which occurs when both conditions shown below are met.

We have the power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance.

We have the obligation to absorb losses of the entity that could potentially be significant to the variable interest entity or the right to receive benefits from the entity that could potentially be significant to the variable interest entity.

We did not consolidate any of our investments in variable interest entities since we are not the primary beneficiary. We classify variable interest entities as investment securities in our statements of condition. Such investment securities include, but are not limited to, senior interests in ~~private label~~private-label mortgage backed securities (MBS) and Federal Family Education Loan Program asset backed securities (FFELP ABS). Our maximum loss exposure for these investment securities is limited to their carrying amounts. We have no liabilities related to these investments in variable interest entities. We have not provided financial or other support (explicitly or implicitly) to these investment securities that we were not previously contractually required to provide, nor do we intend to provide such support in the future.

Table of Contents

Notes to Financial Statements - (Unaudited)

(Dollars in tables in millions except per share amounts unless otherwise indicated)

Gross versus Net Presentation of Financial Instruments

We present ~~our~~ derivative assets and liabilities on a net basis in our statements of ~~condition. GAAP requires disclosure~~condition on the basis that our right to net amounts due to our clearing agents and/or our counterparties is enforceable at law upon early termination. We include accrued interest receivable/payable and cash collateral, including initial and variation margin, in the carrying amount of ~~both gross information~~a derivative. Derivatives are netted by contract (e.g., master netting agreement), to discharge all or a portion of the amounts that would be owed to our counterparty by applying them against the amounts that our counterparty owes to us. Additionally, we clear certain derivatives transactions with clearinghouses classified as a Derivatives Clearing Organization (DCO), through Futures Commission Merchants (FCM). If these netted amounts are positive, they are classified as a derivative asset and if negative, they are classified as a derivative liability.

The net ~~information related~~exposure for these financial instruments can change on a daily basis; therefore, there may be a delay between the time this exposure change is identified and additional collateral is requested, and the time when this collateral is received or pledged. Likewise, there may be a delay for excess collateral to ~~derivatives,~~be returned. For derivative instruments that meet the netting requirements, any excess cash collateral received or pledged is recognized as a derivative liability or asset.

Refer to Note 9 - Derivatives and Hedging Activities for further details.

Our policy is to report securities purchased under agreements to resell and securities sold under agreements to repurchase, ~~agreements and reverse repurchase agreements,~~if any, and securities borrowing ~~or lending~~ transactions, ~~regardless of whether we offset these transactions in our statements of condition. For the periods presented to date, these rights of offset only apply to our derivatives.~~if any, on a gross basis.


^a	~~Unless otherwise specified, references to we, us, our, and the Bank are to the Federal Home Loan Bank of Chicago.~~


^b	~~“Mortgage Partnership Finance”, “MPF”, “MPF Xtra”, and "Community First" are registered trademarks of the Federal Home Loan Bank of Chicago.~~

~~Table of Contents~~

~~Federal Home Loan Bank of Chicago~~

~~Notes to Financial Statements - (Unaudited)~~

~~(Dollars in millions except per share amounts unless otherwise indicated)~~

Note 2 – Summary of Significant Accounting Policies

Our Summary of Significant Accounting Policies through December 31, ~~2014,~~2015, can be found in Note 2 – Summary of Significant Accounting Policies to the financial statements in our ~~2014~~2015 Form ~~10-K starting on page F-10.~~10-K. We adopted the following policies in ~~2015:~~2016:

~~Asset Classification and Charge-off Provisions~~Simplifying the Presentation of Debt Issuance Cost (i.e., Concession Fees)

OnIn April ~~9, 2012,~~of 2015, the ~~FHFA~~FASB issued ~~Advisory Bulletin 2012-02, Framework for Adversely Classifying Loans,~~new guidance requiring any concession fee to be presented as a direct deduction from the debt it relates to rather than separately presented as a deferred cost in Other ~~Real Estate Owned, and~~Assets. We retrospectively adopted the new guidance January 1, 2016 by reclassifying deferred concession fees from Other Assets to its related debt, which at the time of adoption included our Consolidated obligation discount notes, Consolidated obligation bonds and Listing Assets for Special Mention (AB 2012-02). The guidance in AB 2012-02 is generally consistent with the Uniform Retail Credit Classification and Account Management Policy issued by the federal banking regulators in June 2000. AB 2012-02 establishes a standard and uniform methodology for classifying assets, prescribes the timing of asset charge-offs (excluding investment securities), and provides measurement guidance with respect to determining our allowance for credit losses, and fair value measurement guidance for conventional MPF Loans that are classified as Substandard, Doubtful, or Loss, and Real Estate Owned (REO) related to conventional MPF Loans. Subsequent to the issuance of AB 2012-02, the FHFA issued interpretative guidance clarifying that implementation of the asset classification framework may occur in two phases. We implemented the asset classification provisions effective January 1, 2014. We prospectively adopted the remaining provisions of AB 2012-02 on January 1, 2015. The effect of implementing the remaining provisions was as follows:

~~The AB 2012-02 allowance for credit losses measurement guidance~~Subordinated notes. This reclassification did not have a material effect on our financial condition, results of operations, cash flows, or percentage net interest yield on our consolidated obligations at the time of adoption.

Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships

In March of 2016, the FASB issued new guidance clarifying that a change in counterparty (novation) to a derivative instrument that has been designated as the hedging instrument in an existing hedging relationship would not, in and of itself, be considered a termination of the derivative instrument or be considered a change in the critical term of the hedging relationship. We early adopted this new guidance on a prospective basis effective January 1, 2016. The new guidance had no effect on our financial condition, results of operations, or cash flows at the time of adoption.

We recorded a $10 million charge-off in the first quarter of 2015 to our allowance for credit losses on MPF Loans to conform our charge-off policies to AB 2012-02. In particular, we now write-down a conventional MPF Loan to its fair value less estimated selling costs when such a loan is classified as "Loss" and when a conventional MPF Loan is transferred to REO. Our prior practice was to record a charge-off when a conventional MPF Loan was transferred to REO. Exposures classified "Loss"are considered uncollectible and of such little value that the exposures continuance as a balance sheet asset is not warranted. This classification does not mean that the exposure has absolutely no recovery or salvage value; rather, it is not practical or desirable to defer charging off this asset, even though partial recovery may occur in the future. Examples of confirming events indicating that a "Loss" exists include, but are not limited to, the following:


▪	A current assessment of value is made before a single family residential loan is more than 180 days past due. Any outstanding loan balance in excess of the fair value of the property, less cost to sell, is classified as "Loss" when the loan is no more than 180 days delinquent.

When a borrower is in bankruptcy, loans are written down to the fair value of the collateral, less costs to sell, within 60 days of receipt of the notification of filing from the bankruptcy court or within the delinquency time frames specified in the guidance, whichever is shorter. A loan is not written down if the loan is performing, the borrower continues making payments on the loan, and repayment in full is expected.

Fraudulent loans, not covered by any existing representations and warranties in the loan purchase agreement, are charged off within 90 days of discovery of the fraud, or within the delinquency time frames specified in the adverse classification guidance, whichever is shorter.

We began using an Automated Valuation Methodology (AVM) to determine the fair value of our impaired conventional MPF Loans held in portfolio and REO. Our prior practice was to determine fair value using broker price opinions, if available, to measure impaired conventional MPF Loans held in portfolio and REO. If a current broker price opinion was not available, we estimated fair value based on our current actual loss severity rates we experienced on sales, excluding any estimated selling costs. The use of AVM's to determine fair value may result in increased volatility with respect to our provision for credit losses.

We now place a conventional MPF Loan held in portfolio on nonaccrual when it is adversely classified as either "Substandard," "Doubtful", or "Loss". An adverse classification means that such a loan is not considered well secured and in the process of collection. Exposures classified "Substandard" are inadequately protected by the current worth and paying capacity of the obligor or by the collateral pledged, if any. Exposure so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the exposure. These weaknesses are characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected. Exposures classified "Doubtful"~~have all the weaknesses inherent in those exposures classified "Substandard"~~with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions and values, highly questionable and improbable. Our prior practice was to place conventional MPF Loans held in portfolio on nonaccrual when the loan was 90 or more days past due (or 60 days past due in the case of a bankruptcy) and the loan was not well-secured and in the process of collection. This change in nonaccrual practice did not have a material effect on our nonaccrual loans outstanding at the time of adoption.

~~Table of Contents~~

~~Federal Home Loan Bank of Chicago~~

~~Notes to Financial Statements - (Unaudited)~~

~~(Dollars in millions except per share amounts unless otherwise indicated)~~

~~Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure~~

In August of 2014, the FASB issued new guidance that requires certain government-guaranteed mortgage loans to be derecognized upon foreclosure and established as a separate receivable. Our foreclosed government MPF Loans meet the conditions specified by the new guidance and will be classified as a receivable rather than REO. Our foreclosed government MPF Loans were previously classified in REO in Other Assets. We prospectively adopted this new guidance on January 1, 2015, for our government MPF Loans. The new guidance did not have a material effect on our operating activities or our financial statements since our credit risk on government MPF Loans is limited to whether or not the servicing PFI fails to pay for losses not covered by Federal Housing Administration (FHA) insurance, or Department of Veteran Affairs (VA), Department of Housing and Urban Development (HUD) or Department of Agriculture Rural Housing Service (RHS) guarantees.

~~Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure~~

In January of 2014, the FASB issued new accounting guidance clarifying when consumer mortgage loans collateralized by real estate should be reclassified to REO. The new guidance became effective on January 1, 2015. The new guidance is consistent with our previous accounting and did not have an effect on our operating activities or our financial statements.

~~Held for Sale Mortgage Loans~~

We classify MPF Xtra, MPF Direct, and government mortgage loans obtained for a Ginnie Mae securitization transaction as mortgage loans held for sale (HFS), as we sell such loans in an outright sale or in a securitization transaction. If material, HFS mortgage loans are classified as a separate line item in our statements of condition; otherwise, we classify HFS mortgage loans in Other Assets. We have elected the fair value option for HFS mortgage loans. Since these HFS mortgage loans are carried at fair value, the loans do not require an allowance for credit losses. We measure the fair value of HFS mortgage loans based on to-be-announced (TBA) securities, which represent quoted market prices for new mortgage-backed securities issued by U.S. government sponsored enterprises. Any initial premium or discount is recognized as part of the fair value measurement process rather than amortized as a yield adjustment. Any transaction fees, such as extension fees, or costs are immediately recognized into other noninterest income. HFS mortgage loans are classified as an operating activity within our statements of cash flows.

~~Table of Contents~~

~~Federal Home Loan Bank of Chicago~~

~~Notes to Financial Statements - (Unaudited)~~

~~(Dollars in millions except per share amounts unless otherwise indicated)~~

Note 3 – Recently Issued but Not Yet Adopted Accounting Standards

Classification of Certain Cash Receipts and Cash Payments in the Statement of Cash Flows

~~Simplifying~~In August of 2016, the ~~Presentation~~FASB issued statement of ~~Debt Issuance Cost (i.e., Concession Fees)~~cash flows classification guidance governing certain cash receipts and cash payments. The new guidance becomes effective January 1, 2018, with earlier adoption permitted. The new guidance must be applied retrospectively to each period our statements of cash flows are presented at the time of adoption. Key provisions relevant to us are outlined below. Our existing practice is consistent with the provisions of the guidance outlined below pertaining to debt prepayment or extinguishment costs and the classification of accreted interest expense. We are in the process of reviewing the expected effect of the remaining provisions of the guidance on our financial condition, results of operations, and cash flows.

Cash payments for debt prepayment or extinguishment costs are classified as cash outflows for financing activities.

Table of Contents

Notes to Financial Statements - (Unaudited)

(Dollars in tables in millions except per share amounts unless otherwise indicated)

At settlement, the portion of the cash payment attributable to accreted interest expense is classified as cash outflows for operating activities, and the portion of the cash payment attributable to the principal would be classified as cash outflows for financing activities. The cash paid attributable to accreted interest expense also needs to be included in the supplemental disclosure of the amount of interest expense paid.

A transferor’s beneficial interest obtained in a securitization of financial assets is disclosed as a noncash activity.

Additional guidance is provided to clarify when an entity should separate cash receipts and cash payments and classify them into more than one class of cash flows and when an entity should classify the aggregate of those cash receipts and payments into one class of cash flows on the basis of predominance.

Measurement of Credit Losses on Financial Instruments

In ~~April~~June of ~~2015,~~2016, the FASB amended existing GAAP guidance applicable to measuring credit losses on financial instruments. The amendments are expected to result in recognizing credit losses in the financial statements on a timelier basis by utilizing forward looking information. Key provisions of the amendments relevant to us are outlined below.

Replaces the “incurred loss” impairment methodology applied under current GAAP with an “expected credit losses” methodology.

The expected credit losses methodology requires us to estimate all credit losses on financial instruments carried on an amortized cost basis and off-balance-sheet credit exposures over their contractual term. On balance sheet financial instruments include, but are not limited to, advances, MPF Loans held in portfolio, and Held-to-maturity (HTM) securities. Off-balance-sheet credit exposure refers to unfunded credit exposures, such as standby letters of credit.

The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the financial instrument’s reported amount.

Aligns the income statement recognition of credit losses for securities with the reporting period in which changes in collectability occur by recording credit losses (and subsequent reversals) through an allowance rather than a write-down as currently required under GAAP.

Requires recognition of a credit loss on available-for-sale (AFS) securities into the income statement if the present value of cash flows expected to be collected on the security is less than its amortized cost basis. Additionally, the allowance on AFS debt securities will be limited to the amount by which fair value is less than the amortized cost.

Expands upon the current credit quality disclosures by requiring further disaggregation of financial instruments by their year of origination. This disclosure is expected to help financial statement users better understand credit quality trends of asset portfolios.

The amendments become effective January 1, 2020, with early adoption permitted effective January 1, 2019. We plan to implement the expected credit loss methodology through a cumulative-effect adjustment to our beginning retained earnings as of the first reporting period in which the new guidance becomes effective for us. The cumulative effect adjustment will equal the amount required to adjust our existing allowance for credit losses for our on balance-sheet financial instruments and other liabilities for our off-balance sheet financial instruments to the amounts determined under the expected credit losses methodology. A prospective transition approach is required for debt securities for which an other-than-temporary impairment had been recognized before our effective date. This means write-downs recognized prior to our effective date on securities may not be reversed at the time of our adoption. Instead, improvements in expected cash flows that exist at the time we adopt will continue to be accreted into income over the remaining life of the security. Additionally, recoveries of amounts previously written off prior to the date of adoption will be recorded in earnings when received. We are in the process of reviewing the expected effect of this guidance on our financial condition, results of operations, and cash flows.

Contingent Put and Call Options in Debt Instruments

In March of 2016, the FASB issued new guidance ~~requiring concession fees~~clarifying the requirements for assessing whether a contingent call (put) option embedded in a debt instrument is clearly and closely related to that debt instrument, which is referred to as the "host contract". Specifically, entities no longer will be ~~presented as~~required to assess whether the event triggering the acceleration of an embedded contingent call (put) option within a ~~direct deduction from the~~ debt ~~it relates~~instrument is clearly and closely related to ~~rather than separately presented as a deferred cost in Other Assets. As required, we expect~~its host contract. We plan to adopt the new guidance using the modified retrospective approach on January 1, ~~2016 on a retrospective basis for all periods presented in our financial statements.~~2017. The new guidance is not expected to have a material effect on our financial ~~statements.~~condition, results of operations, or cash flows at the time of adoption.

Table of Contents

Notes to Financial Statements - (Unaudited)

(Dollars in tables in millions except per share amounts unless otherwise indicated)

~~Amendments to Consolidation Analysis~~Leases

In February of ~~2015,~~2016, the FASB issued ~~amended~~new guidance ~~concerning consolidation analysis.~~ pertaining to lease accounting. Key lessee accounting provisions relevant to us are outlined below. Our existing practice is to record our operating leases off-balance sheet.

Recognize operating leases and right-to-use assets in our statements of condition; however, we would be permitted to elect off-balance sheet recognition of such leases having a term of 12 months or less.

Recognize a single lease cost over the lease term on a straight-line basis.

Classify all cash payments within operating activities in our statement of cash flows.

The new guidance becomes effective January 1, 2019. A modified retrospective transition approach is ~~intended~~required to enhance consolidation guidance for legal entities such as limited partnerships, limited liability corporations, and securitization structures (collateralized debt obligations, collateralized loan obligations, and mortgage-backed security transactions). The new guidance will be ~~effective for periods~~applied to leases existing at, or entered into after, the beginning ~~after December 15, 2015. Early adoption is permitted, including adoption~~of the earliest comparative period presented in ~~an interim period.~~the financial statements. We do not expect the new guidance to ~~affect~~have a significant effect on our financial condition, results of operations, and cash flows since our existing off-balance sheet operating leases are not material.

Recognition and Measurement of Financial Assets and Financial Liabilities

In January of 2016, the FASB issued new guidance governing recognition and measurement of financial assets and financial liabilities. The key provisions applicable to us include, but are not limited to, the following:

The ability to elect the fair value option will continue to be permitted.

Requires recognizing the portion of the total change in fair value of a liability resulting from a change in the instrument-specific credit risk in other comprehensive income when we elect to carry that liability at fair value under the fair value option.

Requires separate presentation of financial assets and financial liabilities by measurement category, such as amortized cost, and form, such as securities or ~~cash flows.~~loans, on our statements of condition or the accompanying notes to the financial statements.

~~Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern~~

In August of 2014, the FASB issued guidance that requires an entity's management to assess the entity's ability to continue as a going concern. Specifically, for each annual and interim reporting period, an entity’s management should evaluate whether there are conditions or events, considered in the aggregate, that raise “substantial doubt” about the entity’s ability to continue as a going concern. Substantial doubt about an entity’s ability to continue as a going concern exists when relevant conditions and events, considered in the aggregate, indicate that it is probable that the entity is unable to meet its obligations as they become due within one year after the date that the financial statements are issued. The new guidance becomes effective ~~for~~January 1, 2018. We are in the ~~interim and annual periods ending after December 15, 2016, and early application is permitted. This guidance is not~~process of reviewing its expected ~~to have any~~ effect on our financial condition, or results of operations, ~~at the time of adoption.~~

and cash flows.

Revenue from Contracts with Customers

In May of 2014, the FASB issued new guidance governing revenue recognition from contracts with customers. In August of 2015, the FASB deferred the effective date of this new guidance until January 1, 2018. Subsequently, the FASB has issued several pronouncements that provide additional guidance and clarifications to the revenue recognition guidance issued in May of 2014. The new ~~guidance focuses on the timing and amount of~~ revenue recognition ~~that best depicts~~guidance is not expected to have a material effect on our financial condition, results of operations, or cash flows at the ~~transfer by an entity~~time of ~~promised goods or services to its customers. Financial~~adoption because the majority of our financial instruments and other contractual rights are within the scope of other GAAP ~~guidance~~guidance; and accordingly, are excluded from the scope of this new revenue recognition guidance. As a result, we anticipate that a majority of our contracts with members would be excluded from the scope of this new guidance. In August of 2015, the FASB deferred the effective date for the new revenue recognition guidance until January 1, 2018. We are in the process of reviewing our contracts with members to determine the effect, if any, on our operating activities and financial statements.

Table of Contents

~~Federal Home Loan Bank of Chicago~~

Notes to Financial Statements - (Unaudited)

(Dollars in tables in millions except per share amounts unless otherwise indicated)

Note 4 – Interest Income and Interest Expense

The following table presents interest income and interest expense for the periods indicated:


	Three months ended September 30,					Nine months ended September 30,					Three months ended September 30,				Nine months ended September 30,
	2015		2014			2015		2014			2016		2015		2016		2015
Interest income -

Interest bearing deposits, Federal Funds sold and securities purchased under agreements to resell	$	2	$	2		$	6	$	6

Investment securities -
Trading	—		6			2		21			$	2	$	—	$	7	$	2
Available-for-sale	132		136			396		415			116		132		367		396
Held-to-maturity	63		72			201		223			56		63		171		201
Total investment securities	195		214			599		659
Investment securities											174		195		545		599

Advances -
Advance interest income	44		35			125		108			73		44		203		125
Advance prepayment fees, including related hedge adjustment gains (losses) of $0, $0, $1, and $0	1		4			7		8
Total Advances	45		39			132		116
Advance prepayment fees											1		1		8		7
Advances											74		45		211		132

MPF Loans held in portfolio	62		78			197		252			53		62		165		197
Other interest bearing assets											8		2		23		6

Total interest income	304		333			934		1,033

Interest income											309		304		944		934

Interest expense -

Consolidated obligations -
Discount notes	72		68			216		201			95		72		272		216
Bonds	96		114			304		408			99		96		299		304
Total consolidated obligations	168		182			520		609
Consolidated obligations											194		168		571		520

Subordinated notes	14		13			41		40			—		14		24		41
Other interest bearing liabilities											2		—		5		—

Total interest expense	182		195			561		649
Interest expense											196		182		600		561

Net interest income before provision for (reversal of) credit losses	122		138			373		384
Net interest income											113		122		344		373

Provision for (reversal of) credit losses	1		(2		)	5		(8		)	—		1		—		5
Net interest income	$	121	$	140		$	368	$	392

Net interest income after provision for (reversal of) credit losses											$	113	$	121	$	344	$	368

Table of Contents

~~Federal Home Loan Bank of Chicago~~

Notes to Financial Statements - (Unaudited)

(Dollars in tables in millions except per share amounts unless otherwise indicated)

Note 5 – Investment Securities

We classify securities as either trading, held-to-maturity (HTM), or available-for-sale (AFS). Our security disclosures within these classifications are disaggregated by major security types as shown below. Our major security types ~~presented in~~are based on the ~~tables below are defined as follows:~~nature and risks of the security.

U.S. Government & other government related may consist of the sovereign debt of the United States; debt issued by ~~Fannie Mae, Freddie Mac, and the Federal Farm Credit Banks Funding Corporation;~~government sponsored enterprises (GSE); and non-mortgage-backed securities of the Small Business Administration and Tennessee Valley Authority.

Federal Family Education Loan Program - asset backed securities (FFELP ABS).

~~Government Sponsored Enterprises (GSE)~~GSE residential mortgage-backed securities (MBS) issued by Fannie Mae and Freddie Mac.

Government-guaranteed ~~residential, multifamily, and reverse mortgage~~ MBS.

Private-label residential MBS.

State or local housing agency obligations.

Pledged Collateral

We ~~transact most~~disclose the amount of investment securities pledged as collateral pertaining to our derivatives with large banks and major broker-dealers. Derivative transactions may be entered into either through an over-the-counter bilateral agreement with an individual counterparty or through a Futures Commission Merchant (FCM or clearing member) with a derivatives clearing organization (clearinghouse). We may pledge investment securities as collateral under these agreements, and in such cases, the amounts pledged are parenthetically disclosedactivity on our statements of condition. Also see Note 9 - Derivatives and Hedging Activities for further details.

Trading Securities

The following table presents the fair value of our trading securities. We did not hold a material amount of securities we issued through our MPF Government MBS product as of the dates presented. We had no material unrealized gains or losses ~~realized from the sales of~~on trading securities.


As of	September 30, 2015		December 31, 2014		September 30, 2016		December 31, 2015
U.S. Government & other government related	$	101	$	102	$	1,003	$	1,108
Residential MBS:
GSE	52		63		42		50
Government-guaranteed	2		2		2		2
Total Residential MBS	54		65
Residential MBS					44		52
Trading securities	$	155	$	167	$	1,047	$	1,160

Table of Contents

~~Federal Home Loan Bank of Chicago~~

Notes to Financial Statements - (Unaudited)

(Dollars in tables in millions except per share amounts unless otherwise indicated)

Amortized Cost Basis and Fair Value – Available-for-Sale Securities (AFS)


	Amortized Cost Basis		Gross Unrealized Gains in AOCI		Gross Unrealized (Losses) in AOCI			Carrying Amount and Fair Value		Amortized Cost Basis		Gross Unrealized Gains in AOCI		Gross Unrealized (Losses) in AOCI			Carrying Amount and Fair Value
As of September 30, 2015
As of September 30, 2016
U.S. Government & other government related	$	416	$	26	$	(3	)	$	439	$	350	$	20	$	(3	)	$	367
State or local housing agency	15		—		—			15		19		1		—			20
FFELP ABS	5,269		274		(23		)	5,520		4,561		158		(25		)	4,694

Residential MBS:
GSE	9,769		501		(13		)	10,257		8,578		353		(9		)	8,922
Government-guaranteed	1,931		79		—			2,010		1,457		43		—			1,500
Private-label	62		5		—			67		51		7		—			58
Total Residential MBS	11,762		585		(13		)	12,334
Total	$	17,462	$	885	$	(39	)	$	18,308
Residential MBS										10,086		403		(9		)	10,480
Available-for-sale securities										$	15,016	$	582	$	(37	)	$	15,561

As of December 31, 2014
As of December 31, 2015
U.S. Government & other government related	$	479	$	29	$	—		$	508	$	405	$	21	$	(4	)	$	422
State or local housing agency	3		—		—			3		18		—		—			18
FFELP ABS	5,824		408		(11		)	6,221		5,090		233		(24		)	5,299

Residential MBS:
GSE	10,285		550		(8		)	10,827		9,427		383		(12		)	9,798
Government-guaranteed	2,258		87		—			2,345		1,811		57		—			1,868
Private-label	66		5		—			71		61		4		—			65
Total Residential MBS	12,609		642		(8		)	13,243
Total	$	18,915	$	1,079	$	(19	)	$	19,975
Residential MBS										11,299		444		(12		)	11,731
Available-for-sale securities										$	16,812	$	698	$	(40	)	$	17,470

~~We had no sales of AFS securities for the periods presented.~~

Table of Contents

~~Federal Home Loan Bank of Chicago~~

Notes to Financial Statements - (Unaudited)

(Dollars in tables in millions except per share amounts unless otherwise indicated)

Amortized Cost Basis, Carrying Amount, and Fair Value - Held-to-Maturity Securities (HTM)


	Amortized Cost Basis		Non-credit OTTI Recognized in AOCI (Loss)			Carrying Amount		Gross Unrecognized Holding Gains		Gross Unrecognized Holding (Losses)			Fair Value		Amortized Cost Basis		Non-credit OTTI Recognized in AOCI (Loss)			Carrying Amount		Gross Unrecognized Holding Gains		Gross Unrecognized Holding (Losses)			Fair Value
As of September 30, 2015
As of September 30, 2016
U.S. Government & other government related	$	1,414	$	—		$	1,414	$	78	$	—		$	1,492	$	1,271	$	—		$	1,271	$	74	$	—		$	1,345
State or local housing agency	16		—			16		—		—			16		13		—			13		—		—			13

Residential MBS:
GSE	2,373		—			2,373		173		—			2,546		1,928		—			1,928		133		—			2,061
Government-guaranteed	1,009		—			1,009		26		—			1,035		834		—			834		13		—			847
Private-label	1,155		(227		)	928		359		(1		)	1,286		929		(187		)	742		301		(1		)	1,042
Total Residential MBS	4,537		(227		)	4,310		558		(1		)	4,867
Total	$	5,967	$	(227	)	$	5,740	$	636	$	(1	)	$	6,375
Residential MBS															3,691		(187		)	3,504		447		(1		)	3,950
Held-to-maturity securities															$	4,975	$	(187	)	$	4,788	$	521	$	(1	)	$	5,308

As of December 31, 2014
As of December 31, 2015
U.S. Government & other government related	$	2,222	$	—		$	2,222	$	76	$	(1	)	$	2,297	$	1,932	$	—		$	1,932	$	64	$	(1	)	$	1,995
State or local housing agency	18		—			18		—		—			18		16		—			16		—		—			16

Residential MBS:
GSE	2,695		—			2,695		189		—			2,884		2,163		—			2,163		134		—			2,297
Government-guaranteed	1,129		—			1,129		28		—			1,157		969		—			969		16		—			985
Private-label	1,318		(264		)	1,054		415		(1		)	1,468		1,104		(217		)	887		334		(1		)	1,220
Total Residential MBS	5,142		(264		)	4,878		632		(1		)	5,509
Total	$	7,382	$	(264	)	$	7,118	$	708	$	(2	)	$	7,824
Residential MBS															4,236		(217		)	4,019		484		(1		)	4,502
Held-to-maturity securities															$	6,184	$	(217	)	$	5,967	$	548	$	(2	)	$	6,513

~~We had no sales of HTM securities for the periods presented.~~

Table of Contents

~~Federal Home Loan Bank of Chicago~~

Notes to Financial Statements - (Unaudited)

(Dollars in tables in millions except per share amounts unless otherwise indicated)

Aging of Unrealized Temporary Losses

The following tables present unrealized temporary losses on our AFS and HTM portfolio for periods less than 12 months and for 12 months or more. We recognized no OTTI charges on these unrealized loss positions because we expect to recover the entire amortized cost basis, we do not intend to sell these securities, and we believe it is more likely than not that we will not be required to sell them prior to recovering their amortized cost basis. In the tables below, in cases where the gross unrealized losses for an investment category are less than $1 million, the losses are not reported.

Available-for-Sale Securities


	Less than 12 Months					12 Months or More					Total					Less than 12 Months					12 Months or More					Total
	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized (Losses)			Fair Value		Gross Unrealized (Losses)			Fair Value		Gross Unrealized (Losses)
As of September 30, 2015
As of September 30, 2016
U.S. Government & other government related	$	77	$	(3	)	$	—	$	—		$	77	$	(3	)	$	—	$	—		$	86	$	(3	)	$	86	$	(3	)
State or local housing agency	2		—			—		—			2		—			1		—			—		—			1		—
FFELP ABS	90		—			799		(23		)	889		(23		)	—		—			774		(25		)	774		(25		)

Residential MBS:
GSE	759		(1		)	1,796		(12		)	2,555		(13		)	658		—			1,217		(9		)	1,875		(9		)
Government-guaranteed																24		—			—		—			24		—
Private-label	—		—			1		—			1		—			—		—			1		—			1		—
Total Residential MBS	759		(1		)	1,797		(12		)	2,556		(13		)
Total	$	928	$	(4	)	$	2,596	$	(35	)	$	3,524	$	(39	)
Residential MBS																682		—			1,218		(9		)	1,900		(9		)
Available-for-sale securities																$	683	$	—		$	2,078	$	(37	)	$	2,761	$	(37	)

As of December 31, 2014
As of December 31, 2015
U.S. Government & other government related	$	48	$	—		$	—	$	—		$	48	$	—		$	30	$	(1	)	$	45	$	(3	)	$	75	$	(4	)
State or local housing agency	3		—			—		—			3		—			4		—			—		—			4		—
FFELP ABS	14		—			877		(11		)	891		(11		)	64		(1		)	787		(23		)	851		(24		)

Residential MBS:
GSE	—		—			1,996		(8		)	1,996		(8		)	1,081		(3		)	1,006		(9		)	2,087		(12		)
Government-guaranteed																90		—			—		—			90		—
Private-label	—		—			16		—			16		—			—		—			8		—			8		—
Total Residential MBS	—		—			2,012		(8		)	2,012		(8		)
Total	$	65	$	—		$	2,889	$	(19	)	$	2,954	$	(19	)
Residential MBS																1,171		(3		)	1,014		(9		)	2,185		(12		)
Available-for-sale securities																$	1,269	$	(5	)	$	1,846	$	(35	)	$	3,115	$	(40	)

Table of Contents

~~Federal Home Loan Bank of Chicago~~

Notes to Financial Statements - (Unaudited)

(Dollars in tables in millions except per share amounts unless otherwise indicated)

Held-to-Maturity Securities


	Less than 12 Months				12 Months or More					Total					Less than 12 Months				12 Months or More					Total
	Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized (Losses)		Fair Value		Gross Unrealized (Losses)			Fair Value		Gross Unrealized (Losses)
As of September 30, 2015
U.S. Government & other government related	$	—	$	—	$	16	$	—		$	16	$	—
State or local housing agency	1		—		10		—			11		—

Residential MBS:
Private-label	2		—		1,228		(228		)	1,230		(228		)
Total Residential MBS	2		—		1,228		(228		)	1,230		(228		)
Total	$	3	$	—	$	1,254	$	(228	)	$	1,257	$	(228	)

As of December 31, 2014
As of September 30, 2016
U.S. Government & other government related	$	13	$	—	$	5	$	(1	)	$	18	$	(1	)	$	—	$	—	$	16	$	—		$	16	$	—
State or local housing agency	10		—		—		—			10		—			9		—		1		—			10		—

Residential MBS:
GSE	—		—		5		—			5		—			4		—		—		—			4		—
Private-label	12		—		1,384		(265		)	1,396		(265		)	—		—		1,000		(188		)	1,000		(188		)
Total Residential MBS	12		—		1,389		(265		)	1,401		(265		)
Total	$	35	$	—	$	1,394	$	(266	)	$	1,429	$	(266	)
Residential MBS															4		—		1,000		(188		)	1,004		(188		)
Held-to-maturity securities															$	13	$	—	$	1,017	$	(188	)	$	1,030	$	(188	)

As of December 31, 2015
U.S. Government & other government related															$	606	$	—	$	16	$	(1	)	$	622	$	(1	)
State or local housing agency															1		—		10		—			11		—

Residential MBS:
GSE															4		—		—		—			4		—
Private-label															—		—		1,167		(218		)	1,167		(218		)
Residential MBS															4		—		1,167		(218		)	1,171		(218		)
Held-to-maturity securities															$	611	$	—	$	1,193	$	(219	)	$	1,804	$	(219	)

Contractual Maturity Terms

The following table ~~below~~primarily presents the amortized cost basis and fair value of U.S. Government & other government related AFS and HTM securities by contractual ~~maturity, excluding~~maturity. ABS and MBS ~~securities. These~~ securities are excluded ~~because~~since their expected maturities may differ from their contractual maturities if borrowers of the underlying loans elect to prepay their loans.


	Available-for-Sale				Held-to-Maturity				Available-for-Sale				Held-to-Maturity
As of September 30, 2015	Amortized Cost Basis		Carrying Amount and Fair Value		Carrying Amount		Fair Value
As of September 30, 2016									Amortized Cost Basis		Carrying Amount and Fair Value		Carrying Amount		Fair Value
Year of Maturity -
Due in one year or less	$	—	$	—	$	139	$	139	$	17	$	17	$	176	$	177
Due after one year through five years	75		78		199		205		44		46		285		298
Due after five years through ten years	28		29		203		214		30		32		86		88
Due after ten years	328		347		889		950		278		292		737		795
ABS and MBS without a single maturity date	17,031		17,854		4,310		4,867		14,647		15,174		3,504		3,950
Total securities	$	17,462	$	18,308	$	5,740	$	6,375	$	15,016	$	15,561	$	4,788	$	5,308

Table of Contents

~~Federal Home Loan Bank of Chicago~~

Notes to Financial Statements - (Unaudited)

(Dollars in tables in millions except per share amounts unless otherwise indicated)

Other-Than-Temporary Impairment Analysis

~~Significant Inputs Used to Determine OTTI~~

~~Our analysis~~We had no OTTI for ~~OTTI~~the periods presented based on ~~our private-label MBS includes~~the significant inputs, key modeling assumptions, and methodologies outlined below.

We assess an HTM or AFS private-label MBS security for OTTI whenever its fair value is less than its amortized cost basis as of the reporting date. Specifically, we determine OTTI, if any, by performing a cash flow analysis for substantially all of these private-label MBS securities utilizing two independent third party models, which are described further below. Our analysis generates cash flow projections utilizing significant inputs, key modeling assumptions, and methodologies provided by anthe FHLB System OTTI ~~Committee. We use the information provided~~Committee, which was established to ~~generate cash flow projections used in analyzing credit losses and determining~~achieve consistent OTTI analyses for private-label ~~MBS. The OTTI Committee was formed by the FHLBs to achieve consistency~~MBS among ~~the FHLBs in their analyses of the OTTI of private-label MBS.~~FHLBs. We are still responsible, however, for making our own OTTI determination, ~~of impairment,~~ which ~~includes~~involves determining the reasonableness of these significant inputs, assumptions, ~~inputs,~~ and methodologies, ~~used, and~~as well as performing the required present value calculations using appropriate historical cost bases and yields. We then utilize these cash flow projections to determine if OTTI exists on our private-label MBS.

First model. This model considers borrower characteristics and the particular attributes of the loans underlying the securities, in conjunction with assumptions about future changes in home prices and interest rates, prepayment rates, default rates, and loss severities. A significant input to the first model is the forecast of future housing price changes for the relevant states and core based statistical areas (CBSAs), which are based upon an assessment of the individual housing markets. Outputs from this first model are then used as inputs by the second model as follows.

Second model. This model uses the month-by-month projections of future loan performance derived from the first model and allocates the projected loan level cash flows and losses to the various security classes in the securitization structure in accordance with its prescribed cash flow and loss allocation rules.

As of September 30, ~~2015,~~2016, we had a short-term housing price forecast over all markets with projected changes ranging from ~~-3.0%~~-1.0% to ~~+8.0%~~+10.0% over the twelve month period beginning July 1, ~~2015, for all markets.~~2016. For the vast majority of markets, the short-term forecast has changes ranging from ~~+2.0%~~+3.0% to ~~+5.0%~~+6.0%. ~~For periods beginning after June 30, 2016, a unique path is projected for each geographic area based on an internally developed framework derived from historical data.~~

~~Based on these inputs and assumptions, we had no OTTI charges for the three or nine months ended September 30, 2015, and 2014.~~

The following table presents the changes in the cumulative amount of previously recorded OTTI credit losses (recognized into earnings) on ~~OTTI~~ investment securities for the reporting periods ~~stated.~~indicated.


	Three months ended September 30,						Nine months ended September 30,						Three months ended September 30,						Nine months ended September 30,
	2015			2014			2015			2014			2016			2015			2016			2015
Beginning Balance	$	591		$	649		$	620		$	677		$	542		$	591		$	568		$	620
Reductions:
Increases in expected future cash flows recorded as credit-related accretion into interest income	(12		)	(15		)	(41		)	(43		)
Increases in expected future cash flows recorded as accretion into interest income													(11		)	(12		)	(37		)	(41		)
Ending Balance	$	579		$	634		$	579		$	634		$	531		$	579		$	531		$	579

Ongoing Litigation

On October 15, 2010, we instituted litigation relating to 64 private-label MBS bonds we purchased in an aggregate original principal amount of $4.29 billion. In April 2016, we received a payment of $37.5 million (partially offset by $5.0 million of related legal fees and other expenses) resulting from a settlement with some of the defendants. As of September 30, 2016, the remaining litigation covers four private-label MBS bonds in the aggregate original principal amount of $77.5 million.

Table of Contents

~~Federal Home Loan Bank of Chicago~~

Notes to Financial Statements - (Unaudited)

(Dollars in tables in millions except per share amounts unless otherwise indicated)

Note 6 – Advances

We offer a wide range of fixed- and variable-rate advance products with different maturities, interest rates, payment characteristics and optionality. ~~The following table presents our advances by callable/putable features:~~

As of September 30, 2015 December 31, 2014
Noncallable/nonputable $ 32,165
$ 29,666
Callable 961
964
Putable 1,685
1,673
Par value advances 34,811
32,303
Hedging adjustments 214
166
Other adjustments 19
16
Total advances $ 35,044
$ 32,485

The following table presents our advances by ~~redemption terms:~~terms of maturity. Actual maturities may differ from contractual maturities because some borrowers have the right to call or prepay advances with or without penalties.


As of September 30, 2015	Amount		Weighted Average Interest Rate			Next Maturity or Call Date		Next Maturity or Put Date
As of September 30, 2016										Weighted Average Contractual Interest Rate			Amount
Due in one year or less	$	8,908	0.65	%		$	9,819	$	9,826	0.60	%		$	12,719
One to two years	3,750		1.15	%		3,693		3,375		0.77	%		8,966
Two to three years	4,641		1.05	%		4,164		4,133		0.56	%	^a	7,283
Three to four years	6,988		0.37	%	^a	6,816		6,983		0.58	%	^a	8,120
Four to five years	7,985		0.35	%	^a	7,785		8,042		1.34	%		1,536
More than five years	2,539		2.13	%		2,534		2,452		1.67	%		4,168
Total par value	$	34,811	0.74	%		$	34,811	$	34,811
Par value										0.76	%		$	42,792


^a	The weighted average interest rate is relatively lower when compared to other categories due to a majority of advances in this category consisting of variable rate advances which reset periodically at current interest rates.

See Note 8 - Allowance for Credit Losses for information related to our credit risk on advances and allowance methodology for credit losses.

The following table reconciles the par value of our advances to the carrying amount on our statements of condition as of the dates indicated.



As of	September 30, 2016		December 31, 2015
Par value	$	42,792	$	36,605
Fair value hedging adjustments	300		159
Other adjustments	25		14
Advances	$	43,117	$	36,778

The following advance borrowers exceeded 10% of our total advances outstanding:

As of September 30, 2015 Par Value Outstanding % of Total Outstanding
One Mortgage Partners Corp $ 11,000
^a
32 %
The Northern Trust Company 4,000
12 %



As of September 30, 2016	Par Value			% of Total Outstanding
One Mortgage Partners Corp.	$	11,000	^a	26	%
BMO Harris Bank, N.A.	4,875			11	%


^a	One Mortgage Partners Corp. is a subsidiary of JPMorgan Chase Bank NA.

Table of Contents

~~Federal Home Loan Bank of Chicago~~

Notes to Financial Statements - (Unaudited)

(Dollars in tables in millions except per share amounts unless otherwise indicated)

Note 7 – MPF Loans Held in Portfolio

We acquire MPF Loans from PFIs to hold in our portfolio, and in some cases we purchased participations in pools of eligible mortgage loans from other FHLBs (MPF Banks). MPF Loans that are held in portfolio are fixed-rate conventional and government mortgage loans secured by one-to-four family residential properties with maturities ranging from 5 years to 30 years or participations in pools of similar eligible mortgage loans from other MPF Banks.

The following table presents information on MPF Loans held in ~~our~~ portfolio by contractual maturity at the time of purchase. ~~All are fixed-rate. Government is comprised of loans insured by the FHA and loans guaranteed by the VA, HUD or RHS.~~


As of	September 30, 2015			December 31, 2014			September 30, 2016			December 31, 2015
Medium term (15 years or less)	$	752		$	1,094		$	448		$	662
Long term (greater than 15 years)	4,270			4,905			4,209			4,112
Total unpaid principal balance	5,022			5,999
Unpaid principal balance							4,657			4,774
Net premiums, credit enhancement and deferred loan fees	20			23			36			20
Hedging adjustments	40			50
Total before allowance for credit losses	5,082			6,072
Fair value hedging adjustments							30			37
MPF Loans held in portfolio, before allowance for credit losses							4,723			4,831
Allowance for credit losses on MPF Loans	(3		)	(15		)	(3		)	(3		)
Total MPF Loans held in portfolio, net	$	5,079		$	6,057
MPF Loans held in portfolio, net							$	4,720		$	4,828

Conventional mortgage loans	$	3,759		$	4,619		$	3,543		$	3,568
Government insured mortgage loans	1,263			1,380
Total unpaid principal balance	$	5,022		$	5,999
Government Loans							1,114			1,206
Unpaid principal balance							$	4,657		$	4,774

See Note 8 - Allowance for Credit Losses to the financial statements for information related to our credit ~~risk~~losses on MPF Loans ~~and allowance for credit losses methodology~~.held in portfolio.

In addition to our portfolio MPF ~~products,~~Products, PFIs sell eligible MPF Loans to us through the MPF Program infrastructure and we concurrently sell them to ~~Fannie Mae under the MPF Xtra product and to~~ third party investors ~~under the~~or hold MPF ~~Direct product. Under our MPF Government MBS product, PFIs sell us Government~~ Loans ~~that we intend to hold~~ in our held for sale portfolio in other assets for a short period of timeuntil such loans are pooled into ~~Ginnie Mae~~ MBS. Other MPF Banks that offer these products allow their PFIs to sell MPF Loans directly to us. As of September 30, 2015, we held an immaterial amount of MPF Loans held for sale, recorded in Other Assets in our statements of condition. See ~~Note 2 - Summary of Significant Accounting Policies~~ ~~for information related to our accounting for MPF Loans that are held for sale.~~

Table of Contents

~~Federal Home Loan Bank of Chicago~~

Notes to Financial Statements - (Unaudited)

(Dollars in tables in millions except per share amounts unless otherwise indicated)

Note 8 – Allowance for Credit Losses

See Note 2 - Summary of Significant Accounting Policies to the financial statements in our 2015 Form 10-K for further details pertaining to the methodologies and factors we consider when determining the amount to recognize as an allowance for credit losses, if any, for each portfolio segment identified below.

We have ~~established an allowance methodology for each of~~identified our portfolio ~~segments:~~segments as shown below:

•~~member~~Member credit products (advances, letters of credit and other extensions of credit to borrowers);

•~~conventional~~Conventional MPF Loans held ~~for~~in portfolio;

•~~government MPF~~Government Loans held ~~for~~in portfolio; and

•~~term~~ Federal Funds ~~sold~~Sold and ~~term securities purchased under agreements~~Securities Purchased Under Agreements to ~~resell.~~

~~For detailed information on these methodologies and our accounting policies please see~~ ~~Note 8 - Allowance for Credit Losses~~ ~~to the financial statements in our 2014 Form 10-K. Any updates to these accounting policies are noted below.~~Resell.

Member Credit Products

We lend to members within our district according to federal statutes, including the FHLB Act, and FHFA regulations. The FHLB Act requires us to obtain sufficient collateral to fully secure our credit products, and we do not expect to incur any credit losses on advances. We perfect our security interest in pledged collateral and enter into control agreements for securities collateral. We take a risk-based approach in requiring delivery of pledged collateral. We have policies and procedures in place that are designed to manage our credit risk, including requirements for restrictions on borrowing, verifications of collateral and monitoring of borrowings and the borrower's financial condition. Based upon the collateral we held as security, our credit extension and collateral policies, our credit analysis and the repayment history on credit products, we do not believe that any credit losses have been incurred on our credit products. Accordingly, we have not recorded any allowance for credit losses for our ~~on-balance sheet~~member credit products ~~nor have we recorded a liability for~~portfolio segment based upon our credit ~~products with off-balance sheet credit exposure. Further, we expect to collect all amounts due according to contractual terms of our~~analysis and the repayment history on member credit products. ~~Accordingly, for the periods presented, we~~We had no member credit products that were past due, on nonaccrual status, ~~considered impaired, or considered~~involved in a troubled debt ~~restructuring.~~restructuring or otherwise considered impaired. We have not recorded a separate liability to reflect credit losses on our member credit products with off-balance sheet credit exposure.

Conventional MPF Loans

~~MPF Risk Sharing Structure~~ Held in Portfolio

We share the risk of credit losses on conventional MPF Loan products held in portfolio with our PFIs by structuring potential losses on conventional MPF Loans into layers with respect to each master commitment (MC). The credit risk analysis determines the degree to which layers of the MPF Risk Sharing Structure are available to recover losses on MPF Loans. PFIs deliver MPF Loans into pools designated by product specific MCs. The credit risk analysis is performed at an individual MC level as loss recovery is MC-specific and no risk layer can be applied across a PFI's MCs. With respect to participation interests in MPF Loans, losses are allocated amongst the participating MPF Banks pro-ratably based upon their respective percentage participation interest in the related MC. For further detail of our MPF Risk Sharing Structure see page ~~F-31~~F-14 in our ~~2014~~2015 Form 10-K.

There has been no material activity in our allowance for credit losses since December 31, 2015. The following table presents the ~~changes in~~recorded investment and the allowance for credit losses onin conventional MPF ~~Loans.~~Loans by impairment methodology. Recorded investment in a conventional MPF Loan is its amortized cost basis plus related accrued interest receivable, if any. Recorded investment is not net of its allowance for credit losses but is net of any direct charge-off on the conventional MPF Loan.

Three months ended September 30, Nine months ended September 30,
2015 2014 2015 2014
Balance, beginning of period $ 3
$ 19
$ 15
$ 29

Losses charged to the allowance (1 ) (1 ) (17 ) (5 )
Provision for (reversal of) credit losses 1
(2 ) 5
(8 )
Balance, end of period $ 3
$ 16
$ 3
$ 16



As of	September 30, 2016		December 31, 2015
Recorded investment in conventional MPF Loans -
Individually evaluated for impairment	$	78	$	107
Collectively evaluated for impairment	3,533		3,519
Recorded investment	$	3,611	$	3,626

Allowance for credit losses on conventional MPF Loans -
Homogeneous pools of loans collectively evaluated for impairment	$	3	$	3

Government Loans Held in Portfolio

Servicing PFIs are responsible for absorbing any losses incurred on Government Loans held in portfolio that are not recovered from the government insurer or guarantor. We did not establish an allowance for credit losses on our Government Loans held in portfolio for the reporting periods presented based on our assessment that our servicing PFIs have the ability to absorb such losses. Further, Government Loans were not placed on nonaccrual status or disclosed as troubled debt restructurings for the same reason.

Table of Contents

~~Federal Home Loan Bank of Chicago~~

Notes to Financial Statements - (Unaudited)

(Dollars in tables in millions except per share amounts unless otherwise indicated)

The table below presents the recorded investment by impairment methodology on conventional MPF Loans. There is no allowance for credit losses attributable to MPF Loans that are specifically identified and individually evaluated for impairment as of September 30, 2015, since such credit losses have been charged off in accordance to AB 2012-02. Refer to ~~Note 2 – Summary of Significant Accounting Policies~~ ~~for further details.~~

As of September 30, 2015 December 31, 2014
Specifically identified and individually evaluated for impairment $ —
$ 12
Homogeneous pools of loans collectively evaluated for impairment 3
3
Allowance for credit losses on conventional MPF Loans $ 3
$ 15

Individually evaluated for impairment $ 114
$ 160
Collectively evaluated for impairment 3,707
4,538
Total recorded investment $ 3,821
$ 4,698

~~Government~~Credit Quality Indicators - MPF Loans Held in Portfolio

The PFI provides and maintains insurance or a guaranty from governmental agencies, which includes ensuring compliance with all of their requirements, and obtaining the benefit of the applicable insurance or guaranty with respect to defaulted government MPF Loans. Any losses incurred on government MPF Loans that are not recovered from the government insurer or guarantor are absorbed by the servicing PFI. Accordingly, our credit risk on government MPF Loans is limited to whether or not the servicing PFI fails to pay for losses not covered by FHA insurance, or VA, HUD or RHS guarantees. In this regard, based on our assessment of the servicing PFIs, we did not establish an allowance for credit losses for our government MPF Loan portfolio as of the periods presented. Further, due to the government guarantee or insurance and the servicing PFIs ability to absorb losses, government MPF Loans are not placed on nonaccrual status or disclosed as troubled debt restructurings.

~~Credit Quality Indicators - MPF Loans~~

~~The~~following table ~~below~~ summarizes our recorded investment in MPF Loans by our key credit quality ~~indicators.~~ indicators, which include:

"Serious delinquency ~~rate is defined as~~rate" consists of MPF Loans that are 90 days or more past due or in the process of foreclosure, as a percentage of the total recorded investment. MPF Loans that are both 90 days or more past due and in the process of foreclosure are only included once in our serious delinquency rate calculation.

"Past due 90 days or more still accruing ~~interest is defined as~~interest" consists of MPF Loans that are either insured or guaranteed by the government ~~guaranteed~~ or conventional mortgage loans that are well secured (by collateral that have a realizable value sufficient to discharge the debt or by the guarantee or insurance, such as ~~PMI,~~Primary Mortgage Insurance, of a financially responsible party) and in the process of collection.

September 30, 2015 December 31, 2014
As of Conventional Government Total Conventional Government Total
Past due 30-59 days $ 100
$ 62
$ 162
$ 138
$ 92
$ 230

Past due 60-89 days 33
21
54
43
23
66

Past due 90 days or more 104
36
140
153
44
197

Total past due 237
119
356
334
159
493

Total current 3,584
1,169
4,753
4,364
1,246
5,610

Total recorded investment $ 3,821
$ 1,288
$ 5,109
$ 4,698
$ 1,405
$ 6,103

Also in process of foreclosure $ 53
$ 12
$ 65
$ 77
$ 11
$ 88

Serious delinquency rate 2.75 % 2.82 % 2.77 % 3.28 % 3.15 % 3.25 %
Past due 90 days or more still accruing interest $ 9
$ 36
$ 45
$ 25
$ 44
$ 69

On nonaccrual status $ 114
$ —
$ 114
$ 163
$ —
$ 163

~~Table of Contents~~

~~Federal Home Loan Bank of Chicago~~

~~Notes to Financial Statements - (Unaudited)~~

~~(Dollars in millions except per share amounts unless otherwise indicated)~~

~~Troubled Debt Restructurings~~

As of September 30, 2015, and December 31, 2014, our recorded investment balances of mortgage loans classified as troubled debt restructurings were $69 million and $73 million, respectively. The financial amounts related to troubled debt restructurings are not material to our financial condition, results of operations, or cash flows.



	September 30, 2016									December 31, 2015
As of	Conventional			Government			Total			Conventional			Government			Total
Past due 30-59 days	$	81		$	53		$	134		$	99		$	63		$	162
Past due 60-89 days	26			17			43			32			21			53
Past due 90 days or more	71			21			92			100			15			115
Past due	178			91			269			231			99			330
Current	3,433			1,044			4,477			3,395			1,130			4,525
Recorded investment	$	3,611		$	1,135		$	4,746		$	3,626		$	1,229		$	4,855
In process of foreclosure	$	36		$	5		$	41		$	51		$	3		$	54
Serious delinquency rate	2.02		%	1.87		%	1.98		%	2.77		%	1.23		%	2.38		%
Past due 90 days or more still accruing interest	$	7		$	21		$	28		$	10		$	15		$	25
On nonaccrual status	$	78		$	—		$	78		$	107		$	—		$	107

Individually Evaluated Impaired MPF Loans

The following table summarizes the recorded investment, unpaid principal balance, and related allowance for credit losses attributable to individually evaluated impaired conventional MPF Loans. ~~Such impaired~~Conventional MPF Loans ~~include MPF Loans that~~ are ~~considered collateral dependent and MPF Loans involved in a troubled debt restructuring.~~individually evaluated for impairment when they are adversely classified. There is no allowance for credit losses attributable to conventional MPF Loans that are individually evaluated for impairment, ~~as of September 30, 2015,~~ since ~~such~~the related allowance for credit losses have been charged ~~off in accordance to AB 2012-02. For further details see~~ ~~Note 2 - Summary of Significant Accounting Policies~~ ~~to the financial statements.~~off.


As of	September 30, 2015		December 31, 2014		September 30, 2016		December 31, 2015
Recorded investment with an allowance for credit losses	$	—	$	160
Recorded investment without an allowance for credit losses	114		—		$	78	$	107
Unpaid principal balance with an allowance for credit losses	—		158
Unpaid principal balance without an allowance for credit losses	125		—		84		117
Related allowance for credit losses	—		12

The following table summarizes the average recorded investment of impaired conventional MPF Loans. We do not recognize interest income on impaired loans.

Three months ended September 30, Nine months ended September 30,
2015 2014 2015 2014
Average recorded investment with an allowance for credit losses $ —
$ 176
$ —
$ 190
Average recorded investment without an allowance for credit losses 118
—
132
—



	Three months ended September 30,				Nine months ended September 30,
	2016		2015		2016		2015
Average recorded investment without allowance for credit losses	$	81	$	118	$	89	$	132

Term Federal Funds Sold and Term Securities Purchased Under Agreements to Resell

We only had credit risk exposure to overnight Federal Funds sold ~~are only evaluated for purposes~~and Securities Purchased Under Agreements to Resell as of September 30, 2016, and December 31, 2015. We did not have any term Federal Funds sold and Securities Purchased Under Agreements to Resell arrangements. We did not establish an allowance for credit losses ~~if payment is not made when due. In this regard,~~for our overnight Federal Funds sold since all Federal Funds sold were repaid according to their contractual terms. We also did not establish an allowance for credit losses for overnight Securities Purchased Under Agreements to Resell since all payments due under the contractual terms have been received and ~~because~~ we hold sufficient underlying collateral.

2322

Table of Contents

~~Federal Home Loan Bank of Chicago~~

Notes to Financial Statements - (Unaudited)

(Dollars in tables in millions except per share amounts unless otherwise indicated)

Note 9 – Derivatives and Hedging Activities

Refer toNote 2 - Summary of Significant Accounting ~~Polices~~Policies ~~to the financial statements~~ in our ~~2014~~2015 Form 10-K for our accounting policies for derivatives.

We transact most of our derivatives with large banks and major broker-dealers. Some of these banks and broker-dealers or their affiliates buy, sell, and distribute consolidated obligations. Derivative transactions may be entered into through an over-the-counter bilateral agreement with an individual counterparty. Additionally, we clear some derivatives transactions with clearinghouses classified as a Derivatives Clearing Organization (DCO) through ~~an FCM with~~ a ~~derivatives~~Futures Commission Merchant (FCM), a clearing ~~organization (clearinghouse).~~member of the DCO. We are not a derivatives dealer and do not trade derivatives for speculative purposes.

Managing Credit Risk on Derivative Agreements

We are subject to credit risk due to the risk of nonperformance by counterparties to our derivative agreements. For bilateral derivative agreements, the degree of counterparty risk depends on the extent to which master netting arrangements, collateral requirements and other credit enhancements are included in such contracts to mitigate the risk. We manage counterparty credit risk through credit analysis, collateral requirements and adherence to the requirements set forth in our policies and FHFA regulations. We require collateral agreements on all derivatives that establish collateral delivery thresholds. Additionally, collateral related to derivatives with member institutions includes collateral assigned to us, as evidenced by a written security agreement, and held by the member institution for our benefit. Based on credit analyses and collateral requirements, we do not anticipate any credit losses on our derivative agreements. See Note 16 - Fair Value ~~Accounting~~ to the financial statements in our ~~2014~~2015 Form 10-K for discussion regarding our fair value methodology for derivative assets and liabilities, including an evaluation of the potential for the fair value of these instruments to be affected by counterparty credit risk.

Our over-the-counter bilateral derivative agreements may contain provisions that require us to post additional collateral with our counterparties if there is deterioration in our credit rating, except for those derivative agreements with a zero unsecured collateral threshold for both parties, in which case positions are required to be fully collateralized regardless of credit rating. If our credit rating is lowered by a major credit rating agency, such as Standard and Poor's or Moody’s, we would be required to deliver additional collateral on derivatives in net liability positions. If our credit rating had been lowered from its current rating to the next lower rating, we would have been required to deliver up to an additional ~~$39~~$43 million of collateral at fair value to our derivatives counterparties at September 30, ~~2015.~~2016.

Cleared swaps are subject to ~~initial~~variation and ~~variation~~initial margin requirements established by the ~~clearinghouse~~DCO and its clearing members. We post ~~initial~~variation and ~~variation~~initial margin through the ~~clearing member,~~FCM, on behalf of the ~~clearinghouse,~~DCO, which could expose us to institutional credit risk in the event that ~~a clearing member~~an FCM or the ~~clearinghouse~~DCO fail to meet their obligations. Clearing derivatives through a ~~clearinghouse~~DCO mitigates counterparty credit risk exposure because ~~a central clearinghouse counterparty~~the DCO is substituted for individual counterparties and collateral is posted daily for changes in the value of cleared derivatives through an FCM. The ~~clearinghouse~~DCO determines initial margin requirements for cleared derivatives. In this regard, ~~clearing agents~~an FCM may require additional initial margin to be posted based on credit considerations, including but not limited to, credit rating downgrades. We ~~were not required~~had no requirement to post additional initial margin by our ~~clearing agents~~FCMs at September 30, ~~2015.~~2016.

~~Table of Contents~~

~~Federal Home Loan Bank of Chicago~~

~~Notes to Financial Statements - (Unaudited)~~

~~(Dollars in millions except per share amounts unless otherwise indicated)~~

We present our derivative assets and liabilities on a net basis in our statements of condition. Refer to Note 1 - Background and Basis of Presentation ~~and~~ ~~Note 2 - Summary of Significant Accounting Policies~~ ~~to the financial statements in our 2014 Form 10-K~~ for further discussion. In addition to the cash collateral as noted in the following table, we also ~~pledge~~pledged $90 million of investment securities ~~(as parenthetically disclosed on our statements of condition)~~that can be sold or repledged, as part of our initial margin related to cleared derivative ~~transactions.~~transactions at September 30, 2016.

Table of Contents

Notes to Financial Statements - (Unaudited)

(Dollars in tables in millions except per share amounts unless otherwise indicated)

The following table presents our gross and net derivative assets and liabilities by contract type and amount for our derivative agreements.


	September 30, 2015										December 31, 2014										September 30, 2016										December 31, 2015
As of	Notional Amount		Derivative Assets				Derivative Liabilities				Notional Amount		Derivative Assets				Derivative Liabilities				Notional Amount		Derivative Assets				Derivative Liabilities				Notional Amount		Derivative Assets				Derivative Liabilities
Derivatives in hedge accounting relationships-
Interest rate swaps	$	27,240	$	94			$	1,305			$	30,940	$	53			$	1,348			$	24,256	$	40			$	1,156			$	25,140	$	30			$	1,082
Derivatives not in hedge accounting relationships-
Interest rate swaps	22,767		565				442				19,159		487				329				36,692		514				414				28,866		456				341
Interest rate swaptions	1,270		43				—				1,850		56				—				550		56				—				1,270		40				—
Interest rate caps or floors	1,131		93				—				1,164		105				—				1,129		51				—				1,131		76				—
Interest rate futures	3		—				—				3		—				—
Mortgage delivery commitments	651		1				—				284		3				3				1,178		1				1				479		1				1
Other	118		—				1				—		—				—				127		1				—				121		—				—
Derivatives not in hedge accounting relationships	25,940		702				443				22,460		651				332				39,676		623				415				31,867		573				342
Gross derivative amount before adjustments	$	53,180	796				1,748				$	53,400	704				1,680				$	63,932	663				1,571				$	57,007	603				1,424
Netting adjustments and cash collateral			(794		)	^a	(1,704		)	^a			(675		)	^a	(1,625		)	^a			(642		)	^a	(1,523		)	^a			(601		)	^a	(1,369		)	^a
Derivatives on statements of condition			$	2			$	44					$	29			$	55					$	21			$	48					$	2			$	55

Amounts represent the application of the netting requirements that allow us to settle positive and negative positions and also cash collateral and related accrued interest held or placed by us with the same ~~clearing agent~~FCM and/or counterparty. Cash collateral posted was ~~$946~~$910 million and $793 million at ~~June~~September 30, 2016, and December 31, 2015, and ~~$978 million at December 31, 2014. Cash~~cash collateral received was ~~$36 million at June 30, 2015, and~~ $29 million ~~at December 31, 2014.~~and $25 million.

~~Table of Contents~~

~~Federal Home Loan Bank of Chicago~~

~~Notes to Financial Statements - (Unaudited)~~

~~(Dollars in millions except per share amounts unless otherwise indicated)~~

The following table presents our gross recognized amount of offsetting derivative assets and liabilities for derivatives with legal right of offset as well as derivatives without the legal right of offset. Any over-collateralization received by or paid from us to an individual clearing member and/or at a counterparty arrangement level is not included in the determination of the net amount. Specifically, any such over-collateralization amount received by us is not offset against another derivative asset counterparty exposure for which there is no legal right of offset, while any over-collateralization delivered by us is not offset against another derivative liability counterparty exposure for which there is no legal right of offset.


	Derivative Assets									Derivative Liabilities									Derivative Assets										Derivative Liabilities
As of September 30, 2015	Bilateral			Cleared			Total			Bilateral			Cleared			Total
As of September 30, 2016																			Bilateral			Cleared				Total			Bilateral			Cleared			Total
Derivatives with legal right of offset -
Gross recognized amount																			$	485		$	177			$	662		$	998		$	572		$	1,570
Netting adjustments and cash collateral																			(483		)	(159		)		(642		)	(951		)	(572		)	(1,523		)
Derivatives with legal right of offset - net																			2			18				20			47			—			47
Derivatives without legal right of offset																			1			—				1			1			—			1
Derivatives on statements of condition																			3			18				21			48			—			48
Cash collateral for initial margin																						(1		)		(1		)
Noncash collateral received (pledged) and cannot be sold or repledged																			1			(71		)	^a	(70		)	—			—			—
Net amount																			$	2		$	90			$	92		$	48		$	—		$	48

As of December 31, 2015
Derivatives with legal right of offset -
Gross recognized amount	$	652		$	143		$	795		$	1,420		$	328		$	1,748		$	509		$	93			$	602		$	1,182		$	241		$	1,423
Netting adjustments and cash collateral	(651		)	(143		)	(794		)	(1,378		)	(326		)	(1,704		)	(508		)	(93		)		(601		)	(1,140		)	(229		)	(1,369		)
Derivatives with legal right of offset - net	1			—			1			42			2			44			1			—				1			42			12			54
Derivatives without legal right of offset	1			—			1			—			—			—			1			—				1			1			—			1
Derivatives on statements of condition	2			—			2			42			2			44			2			—				2			43			12			55
Noncash collateral received (pledged) and cannot be sold or repledged	1			—			1			—			1			1			—			—				—			—			12			12
Net amount	$	1		$	—		$	1		$	42		$	1		$	43		$	2		$	—			$	2		$	43		$	—		$	43

As of December 31, 2014
Derivatives with legal right of offset -
Gross recognized amount	$	656		$	45		$	701		$	1,466		$	211		$	1,677
Netting adjustments and cash collateral	(632		)	(43		)	(675		)	(1,414		)	(211		)	(1,625		)
Derivatives with legal right of offset - net	24			2			26			52			—			52
Derivatives without legal right of offset	3			—			3			3			—			3
Derivatives on statements of condition	27			2			29			55			—			55
Noncash collateral received (pledged) and cannot be sold or repledged	23			—			23			—			—			—
Net amount	$	4		$	2		$	6		$	55		$	—		$	55


^a	Represents noncash collateral pledged for initial margin for cleared derivatives.

At September 30, ~~2015,~~2016, we had ~~$56~~$19 million of additional net credit exposure on cleared derivatives due to our pledging of non-cash collateral to a ~~clearinghouse~~DCO for initial margin, which exceeded our net derivative liability position. We had $4$50 million comparable exposure at December 31, ~~2014.~~2015.

2624

Table of Contents

~~Federal Home Loan Bank of Chicago~~

Notes to Financial Statements - (Unaudited)

(Dollars in tables in millions except per share amounts unless otherwise indicated)

The following table ~~below~~ presents the gains (losses) of derivatives and hedging activities as presented in the statements of income.


	Three months ended September 30,						Nine months ended September 30,						Three months ended September 30,						Nine months ended September 30,
For the periods ending	2015			2014			2015			2014			2016			2015			2016			2015
Fair value hedges -
Interest rate swaps	$	(17	)	$	(3	)	$	(30	)	$	(15	)	$	5		$	(17	)	$	(7	)	$	(30	)

Fair value hedges													5			(17		)	(7		)	(30		)
Cash flow hedges	1			—			2			1			—			1			4			2

Economic hedges -
Interest rate swaps	(14		)	1			(43		)	(2		)	(1		)	(14		)	(40		)	(43		)
Interest rate swaptions	4			(4		)	7			(20		)	(2		)	4			16			7
Interest rate caps or floors	(4		)	(17		)	(12		)	(32		)	(14		)	(4		)	(25		)	(12		)
Net interest settlements	16			23			60			55			16			16			44			60
Mortgage delivery commitments	1			1			1			2
Other	(2		)	—			(2		)	—			3			(1		)	1			(1		)
Economic hedges	1			4			11			3			2			1			(4		)	11

Gains (losses) on derivatives and hedging activities	$	(15	)	$	1		$	(17	)	$	(11	)	$	7		$	(15	)	$	(7	)	$	(17	)

2725

Table of Contents

~~Federal Home Loan Bank of Chicago~~

Notes to Financial Statements - (Unaudited)

(Dollars in tables in millions except per share amounts unless otherwise indicated)

Fair Value Hedges

The following table presents our fair value hedging results by the type of hedged ~~item,~~item. We had no gain (loss) for hedges that no longer qualified as a fair value hedge. Additionally, the ~~gains (losses) on derivatives and the related hedged items in~~table indicates where fair value hedging ~~relationships and~~results are classified in our statements of income. In this regard, the ~~effect of those derivatives on our net interest income.~~ ~~Net Interest Settlements~~ Amount Recorded in Net Interest Income r~~epresents~~column includes the ~~effect~~following:

The amortization of ~~net interest settlements attributable to open derivative~~closed fair value hedging ~~instruments on net interest income. The effect of derivatives on net interest income is~~adjustments, which are included in the interest income/expense line item of the respective hedged item type.~~Closed Hedge Adjustments Amortized into Net Interest Income~~ ~~represents the amortization~~

The effect of ~~hedge adjustments included in~~net interest settlements attributable to open derivative hedging instruments, which are recorded directly to the interest income/expense line item of the respective hedged item type.~~We had no gain (loss) for hedged firm commitments on forward-starting advances that no longer qualified as a fair value hedge.~~


	Gain (loss)									Net Interest Settlements Recorded in Net Interest Income			Closed Hedge Adjustments Amortized into Net Interest Income			On Derivative			On Hedged Item			Total Ineffectiveness Recognized in Derivatives and Hedging Activities			Amount Recorded in Net Interest Income
Three months ended September 30, 2016													Closed Hedge Adjustments Amortized into Net Interest Income
Available-for-sale securities																$	51		$	(50	)	$	1		$	(31	)
Advances																35			(34		)	1			(17		)
MPF Loans held for portfolio																—			—			—			(2		)
Consolidated obligation bonds																(34		)	37			3			12
Total																$	52		$	(47	)	$	5		$	(38	)
	On Derivative			On Hedged Item			Total Ineffectiveness Recognized in Derivatives and Hedging Activities			Net Interest Settlements Recorded in Net Interest Income		Net Interest Settlements Recorded in Net Interest Income			Closed Hedge Adjustments Amortized into Net Interest Income
Three months ended September 30, 2015												Net Interest Settlements Recorded in Net Interest Income			Closed Hedge Adjustments Amortized into Net Interest Income
Available-for-sale securities	$	(40	)	$	29		$	(11	)	$	(33	)	$	—		$	(40	)	$	29		$	(11	)	$	(33	)
Advances	(77		)	78			1			(21		)	(1		)	(77		)	78			1			(22		)
MPF Loans held for portfolio	—			—			—			—			(4		)	—			—			—			(4		)
Consolidated obligation bonds	87			(94		)	(7		)	54			—			87			(94		)	(7		)	54
Total	$	(30	)	$	13		$	(17	)	$	—		$	(5	)	$	(30	)	$	13		$	(17	)	$	(5	)
Three months ended September 30, 2014

Nine months ended September 30, 2016
Available-for-sale securities	$	50		$	(50	)	$	—		$	(35	)	$	—		$	(4	)	$	—		$	(4	)	$	(93	)
Advances	7			(5		)	2			(20		)	(1		)	(143		)	143			—			(57		)
MPF Loans held for portfolio	—			—			—			—			(4		)	—			—			—			(7		)
Consolidated obligation bonds	(57		)	52			(5		)	63			(1		)	42			(45		)	(3		)	51
Total	$	—		$	(3	)	$	(3	)	$	8		$	(6	)	$	(105	)	$	98		$	(7	)	$	(106	)

Nine months ended September 30, 2015
Available-for-sale securities	$	(28	)	$	15		$	(13	)	$	(101	)	$	(10	)	$	(28	)	$	15		$	(13	)	$	(111	)
Advances	(49		)	49			—			(62		)	(1		)	(49		)	49			—			(63		)
MPF Loans held for portfolio	—			—			—			—			(11		)	—			—			—			(11		)
Consolidated obligation bonds	117			(134		)	(17		)	172			(3		)	117			(134		)	(17		)	169
Total	$	40		$	(70	)	$	(30	)	$	9		$	(25	)	$	40		$	(70	)	$	(30	)	$	(16	)
Nine months ended September 30, 2014
Available-for-sale securities	$	20		$	(23	)	$	(3	)	$	(105	)	$	—
Advances	(56		)	62			6			(60		)	(3		)
MPF Loans held for portfolio	—			—			—			—			(13		)
Consolidated obligation bonds	225			(243		)	(18		)	189			(11		)
Total	$	189		$	(204	)	$	(15	)	$	24		$	(27	)

2826

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~~Federal Home Loan Bank of Chicago~~

Notes to Financial Statements - (Unaudited)

(Dollars in tables in millions except per share amounts unless otherwise indicated)

Cash Flow Hedges

~~The following table presents~~We reclassify amounts in AOCI into our ~~gains (losses) on our cash-flow hedging relationships recorded in~~statements of income ~~and other comprehensive income (loss). In cases where amounts are insignificant~~ in the ~~aggregate, we do not report a balance.~~ ~~Net Interest Settlements Recorded in Net Interest Income~~ ~~represents~~same periods during which the effect of net interest settlements attributable to open derivative hedging instruments on net interest income. The effect of derivatives on net interest income is included in the interest income/expense line item of the respective hedged ~~item type.~~

Amortization of Effective Portion Reclassified From AOCI to Interest Ineffective Portion Reclassified From AOCI to Derivatives and Hedging Activities Total Reclassified From AOCI to Statements of Income Net Change in Other Comprehensive Income Effective Portion Recorded in AOCI Net Interest Settlements Recorded in Net Interest Income
Three months ended
September 30, 2015
Advances - interest rate floors $ 2
$ —
$ 2
$ (2 ) $ —
$ —

Discount notes - interest rate swaps (1 ) 1
—
(29 ) (29 ) (61 )
Total $ 1
$ 1
$ 2
$ (31 ) $ (29 ) $ (61 )
Three months ended
September 30, 2014
Advances - interest rate floors $ 4
$ —
$ 4
$ (4 ) $ —
$ —

Discount notes - interest rate swaps (1 ) —
(1 ) 88
87
(62 )
Bonds - interest rate swaps (1 ) —
(1 ) 1
—
—

Total $ 2

$ —

$ 2

$ 85

$ 87

$ (62 )
Nine months ended
September 30, 2015
Advances - interest rate floors $ 8
$ —

$ 8
$ (8 ) $ —
$ —

Discount notes - interest rate swaps (2 ) 2
—
14
14
(185 )
Bonds - interest rate swaps (2 ) —
(2 ) 2
—
—

Total $ 4
$ 2
$ 6
$ 8
$ 14
$ (185 )
Nine months ended
September 30, 2014
Advances - interest rate floors $ 9
$ —
$ 9
$ (9 ) $ —
$ —

Discount notes - interest rate swaps (2 ) 1
(1 ) 98
97
(184 )
Bonds - interest rate swaps (2 ) —
(2 ) 2
—
—

Total $ 5
$ 1
$ 6
$ 91
$ 97
$ (184 )

~~There were~~forecasted transaction affects our earnings. We had no amounts reclassified from AOCI into earnings for the periods presented as a result of the discontinuance of cash-flow hedges because the original forecasted transactions failed to occur by the end of the originally specified time period or within a two-month period thereafter.discontinued hedges. The deferred net gains (losses) on derivative instruments in AOCI that are expected to be reclassified to earnings during the next twelve months were ~~$(2)~~$(8) million as of September 30, ~~2015.~~2016. The maximum length of time over which we are hedging our exposure to the variability in future cash flows for forecasted transactions is 54 years.

The following table presents our cash flow hedging results by type of hedged item. Additionally, the table indicates where cash flow hedging results are classified in our statements of income. In this regard, the Amount Recorded in Net Interest Income column includes the following:

The amortization of closed cash flow hedging adjustments, which are reclassified from AOCI into the interest income/expense line item of the respective hedged item type.

The effect of net interest settlements attributable to open derivative hedging instruments, which are recorded directly to the interest income/expense line item of the respective hedged item type.



		Ineffective Portion Recorded in Derivatives and Hedging Activities		Effective Portion Recorded in AOCI			Amount Recorded in Net Interest Income
Three months ended September 30, 2016
Advances	Interest rate floors	$	—	$	—		$	1
Discount notes	Interest rate swaps	—		84			(49		)
Total		$	—	$	84		$	(48	)

Three months ended September 30, 2015
Advances	Interest rate floors	$	—	$	—		$	2
Discount notes	Interest rate swaps	1		(29		)	(62		)
Total		$	1	$	(29	)	$	(60	)

Nine months ended September 30, 2016
Advances	Interest rate floors	$	—	$	—		$	7
Discount notes	Interest rate swaps	4		46			(147		)
Bonds	Interest rate swaps	—		—			(2		)
Total		$	4	$	46		$	(142	)

Nine months ended September 30, 2015
Advances	Interest rate floors	$	—	$	—		$	8
Discount notes	Interest rate swaps	2		14			(187		)
Bonds	Interest rate swaps	—		—			(2		)
Total		$	2	$	14		$	(181	)

Table of Contents

~~Federal Home Loan Bank of Chicago~~

Notes to Financial Statements - (Unaudited)

(Dollars in tables in millions except per share amounts unless otherwise indicated)

Note 10 – Consolidated Obligations

The FHLBs issue consolidated obligations through the Office of Finance as their agent. Consolidated obligations consist of discount notes and consolidated obligation bonds. Consolidated discount notes are issued ~~primarily~~ to raise short-term ~~funds. Discount notes~~funds, are issued at less than their face amount and redeemed at par value when they mature. The maturity of consolidated bonds may range from less than one year to over 20 years, but they are not subject to any statutory or regulatory limits on maturity.

The following table presents our consolidated obligation bonds, for which we are the primary obligor, including callable bonds that are redeemable in whole, or in part, at our discretion on predetermined call dates.


As of September 30, 2015	Contractual Maturity		Weighted Average Interest Rate		By Next Maturity or Call Date
As of September 30, 2016							Contractual Maturity		Weighted Average Interest Rate		By Maturity or Next Call Date
Due in one year or less	$	3,095	3.53	%	$	17,714	$	9,756	1.16	%	$	20,922
One to two years	4,111		2.18	%	2,991		7,686		1.31	%	4,460
Two to three years	5,309		1.61	%	2,177		4,591		1.26	%	3,105
Three to four years	3,627		1.41	%	1,853		979		1.28	%	474
Four to five years	3,343		1.51	%	141		2,808		1.99	%	363
Thereafter	6,603		2.75	%	1,212		4,354		2.85	%	850
Total par value	$	26,088	2.17	%	$	26,088
Par value							$	30,174	1.54	%	$	30,174

The following table presents our consolidated obligation discount notes for which we are the primary obligor. All are due in one year or less.


As of	September 30, 2015			December 31, 2014			September 30, 2016			December 31, 2015
Carrying Amount	$	37,290		$	31,054		$	39,144		$	41,564
Par Value	37,301			31,060			39,164			41,584
Weighted Average Interest Rate	0.17		%	0.09		%	0.39		%	0.22		%

The following table presents consolidated obligation bonds outstanding by call feature:


As of	September 30, 2015			December 31, 2014			September 30, 2016			December 31, 2015
Noncallable	$	10,845		$	11,046		$	18,288		$	10,148
Callable	15,243			23,355			11,886			12,536
Par value	26,088			34,401			30,174			22,684
Bond premiums (discounts), net	7			17
Hedging adjustments	(39		)	(177		)
Fair value option adjustments	6			10
Total consolidated obligation bonds	$	26,062		$	34,251
Fair value hedging adjustments							(49		)	(101		)
Other adjustments							14			(1		)
Consolidated obligation bonds							$	30,139		$	22,582

~~Joint~~The following table summarizes the consolidated obligations of the FHLBs and ~~Several Liability~~

those for which we are the primary obligor. We ~~do not expect to pay any additional amounts on behalf of other FHLBs under our joint and several liability as of September 30, 2015. As a result, we~~ did not accrue a liability for our joint and several liability related to the other FHLBs’ share of the consolidated obligations as of September 30, ~~2015,~~2016, and December 31, ~~2014.~~2015. Refer to Note 17 - Commitments and Contingencies to the financial statements in our 2015 Form 10-K for further details.

~~The following table summarizes the consolidated obligations of the FHLBs and those for which we are the primary obligor:~~


	September 30, 2015									December 31, 2014									September 30, 2016									December 31, 2015
Par values as of	Bonds			Discount Notes			Total			Bonds			Discount Notes			Total			Bonds			Discount Notes			Total			Bonds			Discount Notes			Total
FHLB System total consolidated obligations	$	447,000		$	409,511		$	856,511		$	484,812		$	362,363		$	847,175		$	532,920		$	434,808		$	967,728		$	410,859		$	494,343		$	905,202
FHLB Chicago as primary obligor	26,088			37,301			63,389			34,401			31,060			65,461			30,174			39,164			69,338			22,684			41,584			64,268
As a percent of the FHLB System	6		%	9		%	7		%	7		%	9		%	8		%	6		%	9		%	7		%	6		%	8		%	7		%

3028

Table of Contents

~~Federal Home Loan Bank of Chicago~~

Notes to Financial Statements - (Unaudited)

(Dollars in tables in millions except per share amounts unless otherwise indicated)

Note 11 – Capital

and Mandatorily Redeemable Capital Stock (MRCS)

Under our Capital Plan our stock consists of two sub-classes of stock, Class B1 activity stock and Class B2 membership stock (together, Class B stock), both with a par value of $100 and redeemable on five years' written notice, subject to certain conditions. Under the Capital Plan, each member is required to own capital stock in an amount equal to the greater of a membership stock requirement or an activity stock requirement. Class B1 activity stock is available for purchase only to support a member's activity stock requirement. Class B2 membership stock is available to be purchased to support a member's membership stock requirement and any activity stock requirement.

Minimum Capital Requirements

For details on our minimum capital requirements, including how the ratios below were calculated, see Minimum Capital Requirementson page ~~F-44~~F-42 of our ~~2014~~2015 Form 10-K. We complied with our minimum regulatory capital requirements as shown ~~below:~~below.


	September 30, 2015						December 31, 2014						September 30, 2016						December 31, 2015
	Requirement			Actual			Requirement			Actual			Requirement			Actual			Requirement			Actual
Risk-based capital	$	1,040		$	4,541		$	1,127		$	4,317		$	971		$	4,889		$	1,027		$	4,688
Total regulatory capital	$	2,793		$	4,541		$	2,874		$	4,317		$	2,999		$	4,889		$	2,827		$	4,688
Total regulatory capital ratio	4.00		%	6.50		%	4.00		%	6.01		%	4.00		%	6.52		%	4.00		%	6.63		%
Leverage capital	$	3,491		$	6,813		$	3,592		$	6,475		$	3,749		$	7,332		$	3,534		$	7,032
Leverage capital ratio	5.00		%	9.76		%	5.00		%	9.01		%	5.00		%	9.78		%	5.00		%	9.95		%

Total regulatory capital and leverage capital doincludes mandatorily redeemable capital stock (MRCS) but does not include ~~accumulated other comprehensive income (loss).~~AOCI. Under the FHFA regulation on capital classifications and critical capital levels for the FHLBs, we are adequately capitalized.

The following members' regulatory capital stock exceeded 10% of our total regulatory capital stock outstanding:

As of September 30, 2015 Capital Stock Outstanding % of Total Outstanding
One Mortgage Partners Corp $ 250
^a
13 %
Northern Trust Company 200
11 %



As of September 30, 2016	Regulatory Capital Stock Outstanding			% of Total Outstanding
One Mortgage Partners Corp.	$	245	^a	13	%
BMO Harris Bank, N.A.	$	219		11	%


^a	One Mortgage Partners Corp. is a subsidiary of JPMorgan Chase Bank NA.

Transfer of Capital Stock to Mandatorily Redeemable Capital Stock (MRCS)

During the first quarter of 2016, we transferred $294 million of our captive insurance company members' capital stock from equity to MRCS in liabilities on our statement of condition. The transfer was triggered by the issuance of the final FHFA rule on FHLB membership making captive insurance companies ineligible for FHLB membership, which was issued on January 20, 2016 and became effective February 19, 2016. Under this rule, our three captive insurance company members will have their memberships terminated by February 2021. The transfer from equity to MRCS in liabilities was required because the new rule creates an unconditional obligation requiring us to redeem our capital stock from our captive insurance company members after their membership terminates. We reclassify our capital stock from equity to MRCS in liabilities at fair value, which is its par value plus any dividends related to the capital stock. Par value represents fair value since our capital stock can only be acquired and redeemed or repurchased at par value. Further, our capital stock is not traded and no market mechanism exists for the exchange of stock outside our cooperative structure. Upon reclassification to MRCS, subsequent dividends are accrued at the expected dividend rate and reported as a component of interest expense in our statements of income.

Excess Capital Stock

In February 2016, we announced significant reductions in our membership stock and activity stock requirements, which went into effect on April 1, 2016. As a result of these changes, we held $593 million of excess capital stock on April 1, 2016. As of September 30, 2016, we held excess capital stock of $419 million. The reduction was a result of members requesting repurchase of their excess stock and members utilizing excess stock to support new advance borrowing activities.

3129

Table of Contents

~~Federal Home Loan Bank of Chicago~~

Notes to Financial Statements - (Unaudited)

(Dollars in tables in millions except per share amounts unless otherwise indicated)

Note 12 - Accumulated Other Comprehensive Income (Loss)

The following table summarizes the ~~income (loss)~~gains (losses) in AOCI for the reporting periods ~~indicated:~~indicated.


	Net Unrealized Gain (Loss)			Non-credit OTTI			Net Unrealized on Cash Flow Hedges												Net Unrealized -			Non-credit OTTI -				Net Unrealized - Cash Flow Hedges
																Available-for-sale Securities				Held-to-maturity Securities				Post-Retirement Plans						AOCI
Three months ended September 30, 2016																										Net Unrealized - Cash Flow Hedges
Beginning balance																			$	558		$	(196	)		$	(508	)		$	(5	)		$	(151	)
Change in the period recorded to the statements of condition, before reclassifications to statements of income																			(13		)	9				84				—				80
Amounts reclassified in period to statements of income:
Net interest income																			—			—				(1		)						(1		)
Other comprehensive income in the period																			(13		)	9				83				—				79
Ending balance																			$	545		$	(187	)		$	(425	)		$	(5	)		$	(72	)
	Available-for-sale Securities			Held-to-maturity Securities			Net Unrealized on Cash Flow Hedges			Net Unrealized on Cash Flow Hedges				Post-Retirement Plans				Total AOCI
Three months ended September 30, 2015
Beginning balance	$	925		$	(238	)	$	(541	)	Net Unrealized on Cash Flow Hedges		$	(7	)		$	139			$	925		$	(238	)		$	(541	)		$	(7	)		$	139
Change in the period recorded to the statements of condition, before reclassifications to statements of income	(79		)	11			(29		)		1				(96		)		(79		)	11				(29		)		1				(96		)
Amounts reclassified in period to statements of income:
Net interest income	—			—			(1		)		—				(1		)		—			—				(1		)						(1		)
Non-interest gain (loss)	—			—			(1		)		—				(1		)		—			—				(1		)						(1		)
Total other comprehensive income in the period	(79		)	11			(31		)		1				(98		)
Other comprehensive income in the period																			(79		)	11				(31		)		1				(98		)
Ending balance	$	846		$	(227	)	$	(572	)		$	(6	)		$	41			$	846		$	(227	)		$	(572	)		$	(6	)		$	41

Three months ended September 30, 2014
Nine months ended September 30, 2016
Beginning balance	$	1,188		$	(293	)	$	(659	)		$	4			$	240			$	658		$	(217	)		$	(463	)		$	(6	)		$	(28	)
Change in the period recorded to the statements of condition, before reclassifications to statements of income	(99		)	15			87				(2		)		1				(113		)	30				46				1				(36		)
Amounts reclassified in period to statements of income:
Net interest income	—			—			(2		)		—				(2		)		—			—				(4		)						(4		)
Total other comprehensive income in the period	(99		)	15			85				(2		)		(1		)
Non-interest gain (loss)																			—			—				(4		)						(4		)
Other comprehensive income in the period																			(113		)	30				38				1				(44		)
Ending balance	$	1,089		$	(278	)	$	(574	)		$	2			$	239			$	545		$	(187	)		$	(425	)		$	(5	)		$	(72	)

Nine months ended September 30, 2015
Beginning balance	$	1,060		$	(264	)	$	(580	)		$	1			$	217			$	1,060		$	(264	)		$	(580	)		$	1			$	217
Change in the period recorded to the statements of condition, before reclassifications to statements of income	(214		)	37			14				(7		)		(170		)		(214		)	37				14				(7		)		(170		)
Amounts reclassified in period to statements of income:
Net interest income	—			—			(4		)		—				(4		)		—			—				(4		)						(4		)
Non-interest gain (loss)	—			—			(2		)		—				(2		)		—			—				(2		)						(2		)
Total other comprehensive income in the period	(214		)	37			8				(7		)		(176		)
Other comprehensive income in the period																			(214		)	37				8				(7		)		(176		)
Ending balance	$	846		$	(227	)	$	(572	)		$	(6	)		$	41			$	846		$	(227	)		$	(572	)		$	(6	)		$	41

Nine months ended September 30, 2014
Beginning balance	$	1,052		$	(321	)	$	(665	)		$	1			$	67
Change in the period recorded to the statements of condition, before reclassifications to statements of income	37			43			97				—				177
Amounts reclassified in period to statements of income:
Net interest income	—			—			(5		)		—				(5		)
Non-interest gain (loss)	—			—			(1		)		—				(1		)
Non-interest expense	—			—			—				1				1
Total other comprehensive income in the period	37			43			91				1				172
Ending balance	$	1,089		$	(278	)	$	(574	)		$	2			$	239

3230

Table of Contents

~~Federal Home Loan Bank of Chicago~~

Notes to Financial Statements - (Unaudited)

(Dollars in tables in millions except per share amounts unless otherwise indicated)

Note 13 - Fair Value ~~Accounting~~

~~For accounting policies regarding fair values see~~Fair value represents the exit price that we would receive to sell an asset or pay to transfer a liability in an orderly transaction with a market participant at the measurement date. Refer to Note 2 - Summary of Significant Accounting Policies to the financial statements in our ~~2014~~2015 Form ~~10-K.~~10-K for our fair value measurement policies. For a description of the valuation techniques and significant inputs see Note 16 - Fair Value ~~Accounting~~to the financial statements in our ~~2014~~2015 Form 10-K. ~~There has been one change in our valuation inputs for interest rate derivative agreements since then as discussed below.~~

The fair values of all interest rate derivative agreements are netted by clearing member and/or by counterparty, including cash collateral received from or delivered to the counterparty. If these netted amounts are positive, they are classified as an asset, and if negative, they are classified as a liability. We use a midmarket pricing convention based on the bid-ask spread for fair-value measurements. Because these estimates are made at a specific point in time, they are susceptible to material near-term changes. We evaluated the potential for the fair value of the instruments to be affected by changes in our counterparty credit risk and our own credit risk, and we made no adjustments as they were insignificant to the overall fair-value measurements. When midmarket pricing inputs are unavailable, we use a discounted cash-flow model which uses market-observable inputs (inputs that are actively quoted and can be validated to external sources), including the following:

~~Discount rate assumption. At September 30, 2015, we used the overnight-index swap (OIS) curve and at December 31, 2014, we used the LIBOR swap curve.~~

We implemented using the OIS curve to determine the fair value of derivative contracts in the first quarter of 2015. The initial effect of using the OIS curve did not have a material effect on our operating activities or financial statements.

~~Table of Contents~~

~~Federal Home Loan Bank of Chicago~~

~~Notes to Financial Statements - (Unaudited)~~

~~(Dollars in millions except per share amounts unless otherwise indicated)~~

~~The~~following tables ~~below~~ are a summary of the fair value estimates and related levels in the fair value hierarchy. The carrying amounts are as recorded in the statements of condition. These tables do not represent an estimate of our overall market value as a going concern; as they do not take into account future business opportunities and future net profitability of assets and liabilities. ~~The tables below are presented~~We had no transfers between levels in the ~~following order:~~fair value hierarchy for the periods shown.

~~Fair~~The following table shows the fair values of financial ~~instruments.~~instruments that are measured at amortized cost on our statements of condition, unless we elect the fair value option for such instruments, in which case, such instruments are measured at fair value on our statements of condition. Financial instruments for which we elected the fair value option are measured at fair value on a recurring basis and are shown on our statements of condition and are also included in the table on the following page, which details instruments carried at fair value on a recurring basis.



	Carrying Amount						Fair Value Hierarchy
	Carrying Amount			Fair Value			Level 1			Level 2			Level 3
September 30, 2016
Financial Assets -
Cash and due from banks	$	31		$	31		$	31		$	—		$	—
Interest bearing deposits	650			650			650			—			—
Federal Funds sold	3,807			3,807			—			3,807			—
Securities purchased under agreements to resell	1,000			1,000			—			1,000			—
Held-to-maturity securities	4,788			5,308			—			4,266			1,042
Advances	43,117			43,149			—			43,149			—
MPF Loans held in portfolio, net	4,720			5,032			—			5,007			25
Financial Liabilities -
Deposits	(512		)	(512		)	—			(512		)	—
Consolidated obligation discount notes	(39,144		)	(39,146		)	—			(39,146		)	—
Consolidated obligation bonds	(30,139		)	(30,594		)	—			(30,594		)	—
Mandatorily redeemable capital stock	(302		)	(302		)	(302		)	—			—

December 31, 2015
Financial Assets -
Cash and due from banks	$	499		$	499		$	499		$	—		$	—
Interest bearing deposits	650			650			650			—			—
Federal Funds sold	1,702			1,702			—			1,702			—
Securities purchased under agreements to resell	1,375			1,375			—			1,375			—
Held-to-maturity securities	5,967			6,513			—			5,293			1,220
Advances	36,778			36,736			—			36,736			—
MPF Loans held in portfolio, net	4,828			5,190			—			5,155			35
Financial Liabilities -
Deposits	(538		)	(538		)	—			(538		)	—
Consolidated obligation discount notes	(41,564		)	(41,563		)	—			(41,563		)	—
Consolidated obligation bonds	(22,582		)	(22,986		)	—			(22,931		)	(55		)	^a
Mandatorily redeemable capital stock	(8		)	(8		)	(8		)	—			—
Subordinated notes	(944		)	(966		)	—			(966		)	—


^a	Amount represents debt carried at fair value under a full fair value hedge strategy, not at fair value under the fair value option.

Table of Contents

Notes to Financial Statements - (Unaudited)

(Dollars in tables in millions except per share amounts unless otherwise indicated)

The following table presents financial instruments measured at fair value on a recurring basis on our statements of condition.

~~Assets measured at fair value~~ The Netting adjustment shown in the table reflects our policy of presenting derivative assets and liabilities on a ~~nonrecurring~~net basis onin our statements of condition.

~~We had no transfers between Levels~~ See Note 1 ~~2, and/or 3~~ - Background and Basis of Presentation and Note 9 - Derivatives and Hedging Activities for further details. Advances, consolidated obligation discount notes and bonds, and mortgage loans held for sale resulted from our electing the ~~periods presented.~~

~~Fair values of financial instruments~~

fair value option.

Carrying Amount Fair Value Hierarchy
Fair Value Level 1 Level 2 Level 3
September 30, 2015
Financial Assets -
Cash and due from banks $ 606
$ 606
$ 606
$ —
$ —

Interest bearing deposits 560
560
560
—
—

Federal Funds sold 720
720
—
720
—

Securities purchased under agreements to resell 3,400
3,400
—
3,400
—

Held-to-maturity securities 5,740
6,375
—
5,089
1,286

Advances 35,044
35,020
—
35,020
—

MPF Loans held in portfolio, net 5,079
5,442

5,406
36

Financial Liabilities -

Deposits (510 ) (510 ) —
(510 ) —

Consolidated obligation discount notes (37,290 ) (37,292 ) —
(37,292 ) —

Consolidated obligation bonds (26,062 ) (26,586 ) —
(26,532 ) (54 )
^a
Subordinated notes (944 ) (980 ) —
(980 ) —

December 31, 2014
Financial Assets -
Cash and due from banks $ 342
$ 342
$ 342
$ —
$ —

Interest bearing deposits 560
560
560
—
—

Federal Funds sold 1,525
1,525
—
1,525
—

Securities purchased under agreements to resell 3,400
3,400
—
3,400
—

Held-to-maturity securities 7,118
7,824
—
6,356
1,468

Advances 32,485
32,546
—
32,546
—

MPF Loans held in portfolio, net 6,057
6,585
—
6,435
150

Financial Liabilities -
Deposits (666 ) (666 ) —
(666 ) —

Consolidated obligation discount notes (31,054 ) (31,055 ) —
(31,055 ) —

Consolidated obligation bonds (34,251 ) (34,831 ) —
(34,768 ) (63 )
^a
Subordinated notes (944 ) (1,013 ) —
(1,013 ) —



September 30, 2016	Level 2			Level 3				Netting			Fair Value
Financial assets -
U.S. Government & other government related non-MBS	$	1,003		$	—						$	1,003
GSE residential MBS	42			—							42
U.S. Governmental-guaranteed residential MBS	2			—							2
Trading securities	1,047			—							1,047
U.S. Government & other government related non-MBS	367			—							367
State or local housing agency non-MBS	20			—							20
FFELP ABS	4,694			—							4,694
GSE residential MBS	8,922			—							8,922
U.S. Government-guaranteed residential MBS	1,500			—							1,500
Private-label residential MBS	—			58							58
Available-for-sale securities	15,503			58							15,561
Advances	703			—							703
Derivative assets	663			—				$	(642	)	21
Other assets - Mortgage loans held for sale	58			—							58
Financial assets at fair value	$	17,974		$	58			$	(642	)	$	17,390
Financial liabilities -
Consolidated obligation discount notes	$	(12,537	)	$	—						$	(12,537	)
Consolidated obligation bonds	(7,058		)	—							(7,058		)
Derivative liabilities	(1,571		)	—				$	1,523		(48		)
Financial liabilities at fair value	$	(21,166	)	$	—			$	1,523		$	(19,643	)
December 31, 2015
Financial assets -
U.S. Government & other government related non-MBS	$	1,108		$	—						$	1,108
GSE residential MBS	50			—							50
U.S. Governmental-guaranteed residential MBS	2			—							2
Trading securities	1,160			—							1,160
U.S. Government & other government related non-MBS	422			—							422
State or local housing agency non-MBS	18			—							18
FFELP ABS	5,299			—							5,299
GSE residential MBS	9,798			—							9,798
U.S. Government-guaranteed residential MBS	1,868			—							1,868
Private-label residential MBS	—			65							65
Available-for-sale securities	17,405			65							17,470
Advances	511			—							511
Derivative assets	598			5				$	(601	)	2
Other assets - Mortgage loans held for sale	54			—							54
Financial assets at fair value	$	19,728		$	70			$	(601	)	$	19,197
Financial liabilities -
Consolidated obligation discount notes	$	(9,006	)	$	—						$	(9,006	)
Consolidated obligation bonds	(952		)	(55		)	^a				(1,007		)
Derivative liabilities	(1,424		)	—				$	1,369		(55		)
Financial liabilities at fair value	$	(11,382	)	$	(55	)		$	1,369		$	(10,068	)


^a	Amount represents debt carried at fair value under a full fair value hedge strategy, not at fair value under the fair value option.

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~~Federal Home Loan Bank of Chicago~~

Notes to Financial Statements - (Unaudited)

(Dollars in ~~millions except per share amounts unless otherwise indicated)~~

~~Financial instruments measured at fair value on a recurring basis on our statements of condition~~

As of September 30, 2015 Level 2 Level 3 Netting Fair Value
Financial assets -
U.S. Government & other government related non-MBS $ 101
$ —
$ 101
GSE residential MBS 52
—
52
U.S. Governmental-guaranteed residential MBS 2
—
2
Trading securities 155
—
155
U.S. Government & other government related non-MBS 439
—
439
State or local housing agency non-MBS 15
—
15
FFELP ABS 5,520
—
5,520
GSE residential MBS 10,257
—
10,257
U.S. Government-guaranteed residential MBS 2,010
—
2,010
Private-label residential MBS —
67
67
Available-for-sale securities 18,241
67
18,308
Advances 95
—
95
Derivative assets 791
5
$ (794 )
^a
2
Other assets - Mortgage loans held for sale 21
—
21
Total financial assets at fair value $ 19,303
$ 72
$ (794 )
^a
$ 18,581
Level 3 as a percent of total assets at fair value 0.4 %
Financial liabilities -
Consolidated obligation discount notes $ (6,472 ) $ —
$ (6,472 )
Consolidated obligation bonds (980 ) (54 )
^b
(1,034 )
Derivative liabilities (1,748 ) —
$ 1,704
^a
(44 )
Total financial liabilities at fair value $ (9,200 ) $ (54 ) $ 1,704
^a
$ (7,550 )
Level 3 as a percent of total liabilities at fair value 0.7 %
As of December 31, 2014
Financial assets -
U.S. Government & other government related non-MBS $ 102
$ —
$ 102
GSE residential MBS 63
—
63
U.S. Governmental-guaranteed residential MBS 2
—
2
Trading securities 167
—
167
U.S. Government & other government related non-MBS 508
—
508
State or local housing agency non-MBS 3
—
3
FFELP ABS 6,221
—
6,221
GSE residential MBS 10,827
—
10,827
U.S. Government-guaranteed residential MBS 2,345
—
2,345
Private-label residential MBS —
71
71
Available-for-sale securities 19,904
71
19,975
Advances 83
—
83
Derivative assets 691
13
$ (675 )
^a
29
Total financial assets at fair value $ 20,845
$ 84
$ (675 )
^a
$ 20,254
Level 3 as a percent of total assets at fair value 0.4 %
Financial liabilities -
Consolidated obligation discount notes $ (1,799 ) $ —
$ (1,799 )
Consolidated obligation bonds (2,785 ) (63 )
^b
(2,848 )
Derivative liabilities (1,680 ) —
$ 1,625
^a
(55 )
Total financial liabilities at fair value $ (6,264 ) $ (63 ) $ 1,625
^a
$ (4,702 )
Level 3 as a percent of total liabilities at fair value 1.3 %

The netting adjustment amount includes cash collateral (either received or paid by us) and related accrued interest in cases where we have a legal right of setoff, by contract (e.g., master netting agreement) or otherwise, to discharge all or a portion of the debt owed to our counterparty by applying against the debt an amount that our counterparty owes to us. See ~~Note 9 - Derivatives and Hedging Activities~~.


^b	~~Amount represents debt carried at fair value under a full fair value hedge strategy, not at fair value under the fair value option.~~

Financial instruments carried at fair value on a recurring basis using Level 3 inputs were immaterial and there were no significant changes in balances in unobservable inputs (Level 3) in the nine months ended September 30, 2015, or 2014.

~~Table of Contents~~

~~Federal Home Loan Bank of Chicago~~

~~Notes to Financial Statements - (Unaudited)~~

~~(Dollars~~tables in millions except per share amounts unless otherwise indicated)

~~Assets measured at fair value on a nonrecurring basis on our statements of condition~~

Assets that are not carried at fair value in our statements of condition may be required to be measured at fair value under certain circumstances. Examples include, but are not limited to, conventional MPF Loans held in portfolio that become impaired or REO that have declined in fair value during the reporting period. We measure such assets at fair value on a nonrecurring basis. Effective January 1, 2015, we began using an Automated Valuation Methodology (AVM) to determine the fair value of our impaired conventional MPF Loans and REO pursuant to the guidance provided by AB 2012-02. Refer to ~~Note 2 - Summary of Significant Accounting Policies~~ ~~for further details.~~

The table below presents assets that typically are not carried at fair value that were measured at fair value in our statements of condition as of the dates shown. The fair value information presented is not as of the period-end, rather it was as of the date the fair value adjustment was recorded during the nine months ended September 30, 2015, and excludes nonrecurring fair value measurements of assets no longer on the balance sheet.

Level 3
As of September��30, 2015 December 31, 2014
Impaired conventional MPF Loans held in portfolio $ 36
$ 150
REO (recorded in Other Assets) 12
9

Fair Value Option

We ~~elected~~elect the fair value option for financial instruments, such as advances, MPF Loans held for sale, discount notes, and consolidated obligation bonds, ~~for which~~in cases where hedge accounting treatment may not be achieved. Specifically, hedge accounting may not be achieved in cases where it may be difficult to pass prospective or retrospective effectiveness testing under derivative hedge accounting guidance even though the ~~interest rate swaps~~derivatives used to hedge these financial instruments have matching terms. Accordingly, electing the fair value option allows us to better match the change in fair value of ~~the advance, MPF Loans held for sale, discount note, and short-term consolidated obligation bonds~~these financial instruments with the ~~interest rate swap~~derivative economically hedging ~~it. We made no adjustments to the fair values of our instruments under the fair value option for credit risk as of the dates presented.~~

~~The table below summarizes the net gain (loss) related to financial assets and liabilities for which we elected the fair value option, except for MPF Loans held for sale which are not material.~~

Three months ended September 30, Nine months ended September 30,
2015 2014 2015 2014
Advances $ 1
$ 3
$ 2
$ 3
Bonds —
7
4
8
Discount Notes —
—
(2 ) —
Total $ 1
$ 10
$ 4
$ 11
them.

The following table reflects the difference between the aggregate unpaid principal balance (UPB) outstanding and the aggregate fair value for ~~advances and consolidated obligation bonds~~our long term financial instruments for which the fair value option has been elected. None of the advances were 90 days or more past due and none were on nonaccrual status.

September 30, 2015 December 31, 2014
As of Advances Consolidated Obligation Bonds Advances Consolidated Obligation Bonds
Unpaid Principal Balance $ 90

$ 974

$ 80

$ 2,775
Fair Value Over (Under) UPB 5
6
3
10
Fair Value $ 95
$ 980
$ 83
$ 2,785



	September 30, 2016				December 31, 2015
As of	Advances		Consolidated Obligation Bonds		Advances		Consolidated Obligation Bonds
Unpaid principal balance	$	689	$	7,047	$	509	$	953
Fair value over (under) UPB	14		11		2		(1		)
Fair value	$	703	$	7,058	$	511	$	952

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~~Federal Home Loan Bank of Chicago~~

Notes to Financial Statements - (Unaudited)

(Dollars in tables in millions except per share amounts unless otherwise indicated)

Note 14 – Commitments and Contingencies

The following table ~~below~~ shows our commitments outstanding, which represent off-balance sheet ~~obligations, for the periods presented.~~obligations.


	September 30, 2015							December 31, 2014							September 30, 2016							December 31, 2015
As of	Expire within one year		Expire after one year			Total		Expire within one year		Expire after one year			Total		Expire within one year		Expire after one year			Total		Expire within one year		Expire after one year			Total
Unsettled consolidated obligation bonds	$	93	$	—		$	93	$	91	$	—		$	91	$	748	$	—		$	748	$	105	$	—		$	105
Unsettled consolidated obligation discount notes															500		—			500		—		—			—
Member standby letters of credit	4,754		1,597		^a	6,351		2,410		1,207		^a	3,617		8,283		2,140		^a	10,423		5,063		1,615		^a	6,678
Housing authority standby bond purchase agreements	—		433			433		155		262			417		46		262			308		49		362			411
Committed unused member lines of credit	—		—			—		4,000		—			4,000
Advance commitments	185		20			205		158		104			262		45		1			46		163		5			168
MPF Program mortgage purchase commitments	383		—			383		143		—			143
MPF delivery commitments															632		—			632		279		—			279
Other commitments	52		—			52		68		—			68		28		—			28		48		3			51
Commitments	$	5,467	$	2,050		$	7,517	$	7,025	$	1,573		$	8,598	$	10,282	$	2,403		$	12,685	$	5,707	$	1,985		$	7,692


^a	Contains ~~$1,032~~$372 million and ~~$974~~$637 million of member standby letters of credit at September 30, ~~2015,~~2016, and December 31, ~~2014,~~2015, which were renewable annually.

For a description of previously defined terms see Note 17 - Commitments and Contingencies to the financial statements in our ~~2014~~2015 Form 10-K.

Note 15 – Transactions with Related Parties and Other FHLBs

We define related parties as members that own 10% or more of our capital stock or members whose officers or directors also serve on our Board of Directors. Capital stock ownership is a prerequisite to transacting any member business with us. Members and former members own all of our capital stock.

In the normal course of business, we extend credit to or enter into other transactions with these related parties. All transactions are done at market terms that are no more favorable than the terms of comparable transactions with other members who are not considered related parties.

Members

The following table ~~below~~ summarizes balances we had with our members who are related parties as defined above ~~as related parties~~ (including their affiliates). Members represented in these tables may change between periods presented, to the extent that our related parties change, based on changes in the composition of our Board ~~membership.~~membership or percentage of capital stock ownership over 10% as noted in Note 11 - Capital and Mandatorily Redeemable Capital Stock (MRCS).


As of	September 30, 2015		December 31, 2014		September 30, 2016		December 31, 2015
Assets - Interest bearing deposits	$	560	$	560	$	650	$	650
Assets - Advances	15,156		11,159		16,016		15,168
Assets - Advance Interest Receivable	4		2
Liabilities - Deposits	18		26		33		20
Equity - Capital Stock	466		267		483		467

Other FHLBs

From time to time, we may loan to, or borrow from, other FHLBs. All transactions are done at market terms that are no more favorable than the terms of comparable transactions with other counterparties. These transactions are overnight, maturing the following business day. These ~~and other material~~ transactions with other FHLBs, if any, are identified on the face of our Financial Statements.

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(Dollars in tables in millions except per share amounts unless otherwise indicated)

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

Selected Financial Data


As of or for the three months ended	September 30, 2015			June 30, 2015			March 31, 2015			December 31, 2014			September 30, 2014			September 30, 2016			June 30, 2016			March 31, 2016			December 31, 2015			September 30, 2015
Selected statements of condition data
Total investments ^a	$	28,883		$	28,080		$	30,816		$	32,745		$	30,229		$	26,853		$	28,964		$	27,597		$	28,324		$	28,883
Advances	35,044			34,553			31,941			32,485			26,766			43,117			46,424			38,353			36,778			35,044
MPF Loans held in portfolio, gross	5,082			5,377			5,732			6,072			6,438			4,723			4,670			4,681			4,831			5,082
Less: allowance for credit losses	(3		)	(3		)	(4		)	(15		)	(16		)	(3		)	(3		)	(2		)	(3		)	(3		)
Total assets	69,824			69,760			70,147			71,841			72,031			74,983			80,662			70,913			70,671			69,824
Consolidated obligations, net -
Discount notes	37,290			34,552			30,474			31,054			30,507
Bonds	26,062			28,672			33,043			34,251			35,239
Consolidated obligation discount notes, net																39,144			45,876			40,293			41,564			37,290
Consolidated obligation bonds, net																30,139			29,091			24,021			22,582			26,062
Total capital stock	1,892			1,835			1,923			1,902			1,801			1,636			1,774			1,733			1,950			1,892
Total retained earnings	2,640			2,575			2,484			2,406			2,304			2,951			2,884			2,790			2,730			2,640
Mandatorily redeemable capital stock (MRCS)																302			302			302			8			9
Total capital	4,573			4,549			4,579			4,525			4,344			4,515			4,507			4,413			4,652			4,573
Other selected data at period end
MPF off-balance sheet loans outstanding ^b	$	15,083		14,840			$	14,662		$	14,474		$	14,298
MPF off-balance sheet loans outstanding FHLB System ^b																$	16,594		$	16,061		$	15,664		$	15,399		$	15,083
MPF off-balance sheet loans outstanding FHLB Chicago PFIs ^b																8,100			7,892			7,827			7,785			7,765
FHLB systemwide consolidated obligations (par)	856,511			852,783			812,196			847,175			816,950			967,728			963,810			896,828			905,202			856,511
Number of members	742			748			745			751			757			730			732			737			740			742
Total employees (full and part time)	410			413			408			405			391			443			432			425			422			410
Selected statements of income data
Net interest income after provision for credit losses	$	121		$	117		$	130		$	136		$	140		$	113		$	111		$	120		$	135		$	121
Non-interest gain (loss)	(6		)	24			(5		)	18			11			14			50			(3		)	10			(6		)
Non-interest expense	35			33			33			35			28			42			46			40			37			35
Net income	72			97			83			107			110			76			104			69			97			72
Other selected data during the periods
MPF off-balance sheet loan volume funded system ^b	$	807		$	800		$	698		$	604		$	591
MPF off-balance sheet loan volume funded FHLBC ^b	363			388			357			315			281
MPF off-balance sheet loan volume funded FHLB System ^b																$	1,298		$	960		$	703		$	849		$	807
MPF off-balance sheet loan volume funded FHLB Chicago PFIs ^b																609			395			277			329			363
Selected ratios (rates annualized)
Total regulatory capital to assets ratio	6.50		%	6.33		%	6.29		%	6.01		%	5.71		%	6.52		%	6.15		%	6.81		%	6.63		%	6.50		%
Market value of equity to book value of equity	108		%	110		%	112		%	114		%	116		%	108		%	107		%	107		%	108		%	108		%
Total investments - % of total assets	41		%	40		%	44		%	46		%	42		%	36		%	36		%	39		%	40		%	41		%
Advances - % of total assets	50		%	50		%	46		%	45		%	37		%	58		%	58		%	54		%	52		%	50		%
MPF Loans held in portfolio, net - % of total assets	7		%	8		%	8		%	8		%	9		%	6		%	6		%	7		%	7		%	7		%
Dividend rate class B1 activity stock-period paid	2.25		%	2.25		%	2.25		%	2.00		%	1.50		%	2.80		%	2.80		%	2.60		%	2.50		%	2.25		%
Dividend rate class B2 membership stock-period paid	0.50		%	0.50		%	0.50		%	0.50		%	0.50		%	0.60		%	0.60		%	0.60		%	0.50		%	0.50		%
Return on average assets	0.42		%	0.56		%	0.44		%	0.58		%	0.62		%	0.38		%	0.53		%	0.38		%	0.53		%	0.42		%
Return on average equity	6.31		%	8.51		%	7.34		%	9.60		%	10.16		%	6.70		%	9.38		%	5.87		%	8.44		%	6.31		%
Average equity to average assets	6.66		%	6.58		%	5.99		%	6.03		%	6.07		%	5.67		%	5.65		%	6.47		%	6.28		%	6.66		%
Net yield on average interest-earning assets	0.72		%	0.71		%	0.70		%	0.75		%	0.79		%	0.57		%	0.57		%	0.66		%	0.75		%	0.72		%
Return on average Regulatory Capital spread to three month LIBOR index	6.15		%	8.59		%	7.51		%	9.84		%	10.53		%	5.34		%	7.97		%	5.17		%	7.94		%	6.15		%
Cash dividends	$	7		$	6		$	5		$	5		$	4		$	9		$	10		$	9		$	7		$	7
Dividend payout ratio	10		%	6		%	6		%	5		%	4		%	12		%	10		%	13		%	7		%	10		%


^a	Total investments includes investment securities, interest bearing deposits, Federal Funds sold, and securities purchased under agreements to resell.

MPF off-balance sheet ~~outstanding~~ loans are MPF ~~Program loans~~Loans purchased from ~~our~~ PFIs ~~or the PFIs of systemwide FHLBs~~ and ~~are~~ concurrently resold to Fannie Mae or other third party investors under the MPF Xtra and MPF Direct products or pooled and securitized in Ginnie Mae MBS under the MPF Government MBS product. See Mortgage Partnership Finance Program beginning on page 7 in our ~~2014~~2015 Form 10-K.

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~~Federal Home Loan Bank of Chicago~~

(Dollars in tables in millions except per share amounts unless otherwise indicated)

Forward-Looking Information

Statements contained in this report, including statements describing the objectives, projections, estimates, or future predictions of management, may be “forward-looking statements.” These statements may use forward-looking terminology, such as “anticipates,” “believes,” “expects,” “could,” “estimates,” “may,” “should,” “will,” their negatives, or other variations of these terms. We caution that, by their nature, forward-looking statements involve risks and uncertainties related to our operations and business environment, all of which are difficult to predict and many of which are beyond our control. These risks and uncertainties could cause actual results to differ materially from those expressed or implied in these forward-looking statements and could affect the extent to which a particular objective, projection, estimate, or prediction is realized. As a result, undue reliance should not be placed on such statements.

These forward-looking statements involve risks and uncertainties including, but not limited to, the following:

changes in the demand by our members for advances, including the impact of the availability of other sources of funding for our members, such as deposits;

limits on our investments in long-term assets;

the impact of new business strategies, including our ability to develop and implement business strategies focused on maintaining net interest income; the impact of our efforts to simplify our balance sheet on our market risk profile and future hedging costs; our ability to ~~successfully transition to a new~~execute our business model, implement business process improvements and scale our size to our members' borrowing needs; the extent to which our members use our advances as part of their core financing rather than just as a back-up source of liquidity; and our ability to implement product enhancements and new products and generate enough volume in new products to cover our costs related to developing such products;

the extent to which amendments to our Capital Plan, including our ability to reduce capital stock requirements for certain future advance borrowings, and our ability to continue to pay enhanced dividends on our ~~activity-based~~activity stock, impact borrowing by our members;

our ability to meet required conditions to repurchase and redeem capital stock from our members (including maintaining compliance with our minimum regulatory capital requirements and determining that our financial condition is sound enough to support such repurchases), and the amount and timing of such repurchases or redemptions;

general economic and market conditions, including the timing and volume of market activity, inflation/deflation, unemployment rates, housing prices, the condition of the mortgage and housing markets, increased delinquencies and/or loss rates on mortgages, prolonged or delayed foreclosure processes, and the effects on, among other things, mortgage-backed securities; volatility resulting from the effects of, and changes in, various monetary or fiscal policies and regulations, such as those determined by the Federal Reserve Board and Federal Deposit Insurance Corporation; impacts from various measures to stimulate the economy and help borrowers refinance home mortgages and student loans; disruptions in the credit and debt markets and the effect on future funding costs, sources, and availability;

volatility of market prices, rates, and indices, or other factors, such as natural disasters, that could affect the value of our investments or collateral; changes in the value or liquidity of collateral securing advances to our members;

changes in the value of and risks associated with our investments in mortgage loans, mortgage-backed securities, and FFELP ABS and the related credit enhancement protections;

changes in our ability or intent to hold mortgage-backed securities to maturity;

changes in mortgage interest rates and prepayment speeds on mortgage assets;

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~~Federal Home Loan Bank of Chicago~~

(Dollars in tables in millions except per share amounts unless otherwise indicated)

membership changes, including the withdrawal of members due to restrictions on our dividends or the loss of members through mergers and ~~consolidations;~~consolidations or through regulatory requirements; changes in the financial health of our members, including the resolution of some members; risks related to expanding our membership to include more institutions with regulators and resolution processes with which we have less experience;

increased reliance on short-term funding and changes in investor demand and capacity for consolidated obligations and/or the terms of interest rate derivatives and similar agreements, including changes in the relative attractiveness of consolidated obligations as compared to other investment opportunities; changes in our cost of funds due to concerns over U.S. fiscal policy, and any related rating agency actions impacting FHLB consolidated obligations;

political events, including legislative, regulatory, judicial, or other developments that affect us, our members, our counterparties and/or investors in consolidated obligations, including, among other things, the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) and related regulations and proposals and legislation related to housing finance and GSE reform; changes by our regulator and changes in the FHLB Act or applicable regulations as a result of the Housing and Economic Recovery Act of 2008 ~~(Housing Act)~~ or as may otherwise be issued by our regulator, including regulatory changes to FHLB membership requirements proposed by the FHFA; the potential designation of us as a nonbank financial company for supervision by the Federal Reserve;

the ability of each of the other FHLBs to repay the principal and interest on consolidated obligations for which it is the primary obligor and with respect to which we have joint and several liability;

the pace of technological change and our ability to develop and support technology and information systems, including our ability to protect the security of our information systems and manage any failures, interruptions or breaches in our information systems or technology services provided to us through third-party vendors;

our ability to attract and retain skilled employees;

the impact of new accounting standards and the application of accounting rules, including the impact of regulatory guidance on our application of such standards and rules;

the impact of the application of auditor independence rules to our independent auditor;

the volatility of reported results due to changes in the fair value of certain assets and liabilities; and

our ability to identify, manage, mitigate, and/or remedy internal control weaknesses and other operational risks.

For a more detailed discussion of the risk factors applicable to us, see Risk Factors in our ~~2014~~2015 Form 10-K on page 19.

These forward-looking statements are representative only as of the date they are made, and we undertake no obligation to update any forward-looking statement as a result of new information, future events, changed circumstances, or any other reason.

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~~Federal Home Loan Bank of Chicago~~

(Dollars in tables in millions except per share amounts unless otherwise indicated)

Executive Summary

Third Quarter ~~2015~~2016 Financial Highlights

We recorded net incomeof ~~$72~~$76 million for the third quarter of ~~2015, down~~2016, up from ~~$110~~$72 million in the third quarter of ~~2014.~~

2015.

Net interest incomefor the third quarter of ~~2015~~2016 was ~~$121~~$113 million, ~~down~~which included $9 million of income from ~~$140 million for~~investment security prepayments during the period. For the third quarter of ~~2014 as~~2015, net interest income was $122 million, which included $11 million of income from investment security prepayments during the period. While our legacy investment ~~and MPF Loan portfolios continued~~portfolio continues to pay ~~down.~~

down, investments that were indexed to three-month LIBOR benefited from the increase in three-month LIBOR rates. Separately, debt hedged with three-month LIBOR swaps was negatively impacted by higher three-month LIBOR rates. In addition, we have issued more long term debt at higher rates.

Noninterest gain (loss) for the third quarter of ~~2015~~2016 was ~~($6 million), down~~$14 million, up from a ~~gain~~loss of ~~$11~~$6 million for the third quarter of ~~2014~~2015 as we experienced increased gains on our balance sheet hedging ~~costs returned~~activities.

Noninterest expense increased to ~~more historically normalized levels.~~$42 million for the third quarter of 2016, compared to $35 million for the third quarter of 2015, with the increase driven mainly by an increase in compensation and benefits.

Total investment securities~~declined $3.1~~ decreased $3.2 billion to $21.4 billion at September 30, 2016, down 13% from ~~$27.3~~$24.6 billion at December 31, ~~2014,~~2015, as our investment portfolio continued to ~~$24.2~~pay down during the period.

Advances outstanding increased $6.3 billion to $43.1 billion at September 30, ~~2015, as the investments portfolio continued to pay down.~~

~~Advancesoutstanding increased $2.5 billion to $35.0 billion at September 30, 2015,~~2016, up 17% from ~~$32.5~~$36.8 billion at December 31, ~~2014.~~

2015, as members continue to support investment activities and high loan growth in their communities.

MPF Loans held in portfolio remained relatively flat from December 31, 2015, to September 30, 2016, as new MPF Loan volume helped offset paydown and maturity activity during the period.

Total assets~~decreased $2.0~~ increased $4.3 billion to ~~$69.8~~$75.0 billion as of September 30, 2016, up 6% compared to $70.7 billion as of December 31, 2015.

We reached $2.95 billion in retained earnings at September 30, ~~2015, down from $71.8 billion at December 31, 2014.~~

~~We reached over $2.6 billion in retained earningsat September 30, 2015.~~

2016.

We remained in compliance with all of our regulatory capital requirements as of September 30, ~~2015.~~2016.

Summary and Outlook

Third Quarter ~~2015~~2016 Dividend

~~For~~

On October 27, 2016, the ~~second time this year, the Bank’s~~Bank's Board of Directors ~~has increased~~maintained the dividend ~~declared per share on~~levels for the third quarter of 2016. The Board again recognized our members that borrow from the Bank by declaring a dividend of 2.80% (annualized) for Class B1 activity capital stock, ~~by 25 basis points to an annualized rate of 2.50%~~ based on the Bank’s preliminary financial results for the third quarter of ~~2015. With this action, the Board continues and enhances the practice of rewarding members that use the Bank’s advances and support the financial health of the entire cooperative.~~2016. The Board ~~has~~ also ~~implemented changes, as described below, that provide access to the higher~~declared a 0.60% dividend ~~to most borrowing members. The Board maintained the dividend level declared in previous quarters this year~~(annualized) for Class B2 membership ~~stock at an annualized rate of 0.50%.~~capital stock.

~~Enhancing Members’ Return on Membership~~Member Owned and Member Focused

~~Also~~At September 30, 2016, advances were $43.1 billion, up 17% from December 31, 2015, and letters of credit were $10.4 billion, up 56% from December 31, 2015. As the Bank’s members seek ways to increase their non-interest income, the volume in the ~~third quarter, the Board implemented the Second Amended and Restated Capital Plan, which increases members’ return~~traditional MPF products has continued to grow as well.

The Bank continues to focus on ~~activity with the Bank. This Capital Plan became effective October 1, 2015. It significantly reduced the threshold for the automatic conversion of membership stock~~its members by striving to activity stock. Instead of $5 million, the threshold is now $10,000. Using this lower threshold, a member that borrows more than $200,000 at a 5% activity stock requirement has a lower net cost of borrowing due to the higher dividend paid on activity stock. As a result of this change, more than 99% of the Bank’s borrowingunderstand what members ~~held more activity stock on October 1. Members are expected to see the benefit when~~need from the Bank ~~pays the fourth quarter 2015 dividend, which is planned to be in February 2016. See~~ ~~Capital Rules~~ ~~on page 52 for further details.~~

~~More Mortgage Partnership Finance Solutions~~

~~Providing members with access to the secondary mortgage market remains one of our top priorities~~beyond serving as well. We are working on a servicing released enhancement to the new MPF Government MBS product, which is designed to provide members with additional flexibility to enhance their competitiveness and support homeownership in their communities. Whether members choose servicing released or servicing retained, the MPF Government MBS offers attractive pricing, which members can pass on to their borrowers.

This summer we rolled out MPF Direct, which has a single-family loan limit of $1.5 million. We also reintroduced three MPF products-MPF Original, MPF 125, and MPF 35-that allow members to earn higher fee income for sharing the credit risk of conventional, conforming loans while we manage the liquidity, interest rate, and prepayment risks. With all of these products, we are striving to help members meet the different mortgage needs of the borrowers in their communities.

~~Providing a Reliable Source of Liquidity~~

We continue to monitor the political uncertainty in Washington, D.C. At the beginning of the fourth quarter we started building our liquidity position and extending the terms of our borrowings so that we are better able to meet members’ funding requests during all political and economic scenarios. For more than 82 years, we have been a reliable source of ~~liquidity~~liquidity. The Bank continues to ~~our~~evaluate its performance by measuring how well it is enhancing the value of membership in the Bank.

The Bank’s Community First^® Disaster Relief Program is one way in which the Bank is supporting its members and ~~we remain committed~~their needs. In late September, the Bank funded the program with $500,000 to help northern Wisconsin communities hit by the severe storms and flooding that ~~standard.~~occurred on July 11-12, 2016.

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~~Federal Home Loan Bank of Chicago~~

(Dollars in tables in millions except per share amounts unless otherwise indicated)

Results of Operations

Our financial condition and results of operations are influenced by the interest rate environment, global and national economies, local economies within our districts of Illinois and Wisconsin, and the conditions in the financial, housing and credit markets. In particular, our net interest income is affected by several external factors, including market interest rate levels and volatility, credit spreads and the general state of the economy. We manage our interest rate risk by entering into fair value hedge relationships utilizing derivative agreements in which 1-month, 3-month or 6-month LIBOR is received or paid to hedge a portion of our advances, available for sale securities and debt. We also enter into cash flow hedge relationships utilizing derivative agreements to hedge the cash flow risk attributable to the rolling nature of our short-term consolidated discount notes. Additionally, we enter into economic hedges using derivative agreements to hedge our mortgage-related assets, which are sensitive to changes in mortgage rates.

Our profitability is significantly affected by the interest rate environment. We earn relatively narrow spreads between yields on assets and the rates paid on corresponding liabilities. We also expect our ability to generate significant earnings on capital and short-term investments will be affected in light of the Federal Reserve’s policy of setting the short-term Federal Funds rate. Short-term interest rates also directly affect our earnings on invested capital.

Our operating results are affected not only by rising or falling interest rates but also by the particular path and volatility of changes in market interest rates and the prevailing shape of the yield curve. A flattening of the yield curve tends to compress our net interest margin, while steepening of the curve offers better opportunities to purchase assets with wider net interest spreads. The performance of our MPF Loans held for investment portfolio is particularly affected by shifts in the 10-year maturity range of the yield curve, which is the point that heavily influences mortgage rates and potential refinancings. Yield curve shape can also influence the pace at which borrowers refinance or prepay their existing loans, as borrowers may select shorter-duration mortgage products. In addition, our higher yielding private label MBS portfolio continues its expected runoff. As higher coupon MPF Loans mature along with higher yielding private label MBS, the return of principal cannot be invested in assets with a comparable yield, resulting in a decline in the aggregate yield on the remaining MPF Loans held for investment portfolio and investment securities and a possible decrease in our net interest margin.

Lastly, the volume related to our MPF Xtra and MPF Direct programs as well as our Ginnie Mae MBS issuances also are influenced by the interest rate environment, global and national economies, local economies within our districts of Illinois and Wisconsin, and the conditions in the financial, housing and credit markets.

Net Interest Income

Net interest income ~~before~~is the ~~provision for (reversal of) credit losses includes~~difference between the ~~following~~amount we recognize into interest income on our interest earning assets and the amount we recognize into interest expense on our interest bearing liabilities. These amounts were determined in accordance with ~~GAAP:~~GAAP and were based on the underlying contractual interest rate terms of our interest earning assets and interest bearing liabilities as well as the following items:

Net interest paid or received on interest rate swaps that are accounted for as fair value or cash flow hedges;

Amortization of premiums;

Accretion of ~~discounts;~~discounts and OTTI reversals;

Amortization of hedge adjustments;

Advance and investment prepayment fees; and

MPF credit enhancement fees.

~~Table of Contents~~

~~Federal Home Loan Bank of Chicago~~

~~(Dollars in millions except per share amounts unless otherwise indicated)~~

The tables ~~below~~on the following page present the increase or decrease in interest income and expense ~~before the provision for (reversal of) credit losses~~ due to volume or rate variances. The calculation of these components includes the following considerations:

~~Average~~

Amortized cost basis is used to compute average daily balances ~~are computed using historical amortized cost~~for most of our financial instruments, including available for sale securities. Fair value is used to compute average daily balances ~~except~~ for ~~items~~our trading securities and financial instruments carried at fair value under the fair value ~~option which include changes in fair value.~~option.

MPF Loans held in portfolio that are on nonaccrual status are included in average daily balances used to determine the effective yield/rate. Amounts included in interest income on MPF Loans held in portfolio are presented as detailed in MPF Loans Held in Portfolio, Net of Allowance for Credit Losses on page 46.

Interest and effective yield/rate includes all components of net interest income as discussed above. Yields/rates are calculated on an annualized basis.

Any ~~change~~changes due to the combined volume/rate variance ~~has~~have been allocated ratably to volume and rate.

September 30, 2015 September 30, 2014 Increase (decrease) due to
For the three months ended Average Balance Total Interest Yield/ Rate Average Balance Total Interest Yield/ Rate Volume Rate Net Change
Federal Funds sold, securities purchased under agreements to resell, and interest bearing deposits $ 5,506
$ 2
0.15 % $ 10,538
$ 2
0.08 % $ (1 ) $ 1
$ —
Investment securities 24,188
195
3.22 % 28,210
214
3.03 % (30 ) 11
(19 )
Advances 33,318
45
0.54 % 24,934
39
0.63 % 13
(7 ) 6
MPF Loans held in portfolio 5,140
62
4.82 % 6,537
78
4.77 % (17 ) 1
(16 )
Total Interest Income on Assets 68,152
304
1.78 % 70,219
333
1.90 % (35 ) 6
(29 )
Consolidated obligation discount notes 34,080
72
0.85 % 28,971
68
0.94 % 12
(8 ) 4
Consolidated obligation bonds 28,565
96
1.34 % 36,279
114
1.26 % (24 ) 6
(18 )
Subordinated notes 944
14
5.93 % 944
13
5.51 % —
1
1
Total Interest Expense on Liabilities 63,589
182
1.14 % 66,194
195
1.18 % (12 ) (1 ) (13 )
Net yield on interest-earning assets $ 68,152
$ 122
0.72 % $ 70,219
$ 138
0.79 % $ (23 ) $ 7
$ (16 )

September 30, 2015 September 30, 2014 Increase (decrease) due to
For the nine months ended Average Balance Total Interest Yield/ Rate Average Balance Total Interest Yield/ Rate Volume Rate Net Change
Federal Funds sold, securities purchased under agreements to resell, and interest bearing deposits $ 7,297
$ 6
0.11 % $ 10,294
$ 6
0.08 % $ (2 ) $ 2
$ —
Investment securities 24,754
599
3.23 % 29,363
659
2.99 % (103 ) 43
(60 )
Advances 32,633
132
0.54 % 23,611
116
0.66 % 45
(29 ) 16
MPF Loans held in portfolio 5,455
197
4.82 % 6,973
252
4.82 % (55 ) —
(55 )
Total Interest Income on Assets 70,139
934
1.78 % 70,241
1,033
1.96 % (115 ) 16
(99 )
Consolidated obligation discount notes 33,890
216
0.85 % 27,773
201
0.96 % 44
(29 ) 15
Consolidated obligation bonds 30,769
304
1.32 % 37,626
408
1.45 % (75 ) (29 ) (104 )
Subordinated notes 944
41
5.79 % 944
40
5.65 % —
1
1
Total Interest Expense on Liabilities 65,603
561
1.14 % 66,343
649
1.30 % (31 ) (57 ) (88 )
Net yield on interest-earning assets $ 70,139
$ 373
0.71 % $ 70,241
$ 384
0.73 % $ (84 ) $ 73
$ (11 )

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~~Federal Home Loan Bank of Chicago~~

(Dollars in tables in millions except per share amounts unless otherwise indicated)



	September 30, 2016						September 30, 2015						Increase (decrease) due to
For the three months ended	Average Balance		Total Interest		Yield/ Rate		Average Balance		Total Interest		Yield/ Rate		Volume			Rate			Net Change
Investment securities	$	21,547	$	174	3.23	%	$	24,188	$	195	3.22	%	$	(22	)	$	1		$	(21	)
Advances	44,300		74		0.67	%	33,318		45		0.54	%	18			11			29
MPF Loans held in portfolio	4,657		53		4.55	%	5,140		62		4.82	%	(6		)	(3		)	(9		)
Other interest bearing assets	8,443		8		0.38	%	5,506		2		0.15	%	3			3			6
Interest income on assets	78,947		309		1.57	%	68,152		304		1.78	%	41			(36		)	5
Consolidated obligation discount notes	44,417		95		0.86	%	34,080		72		0.85	%	22			1			23
Consolidated obligation bonds	29,461		99		1.34	%	28,565		96		1.34	%	3			—			3
Subordinated notes	—		—		—	%	944		14		5.93	%	(14		)	—			(14		)
Other interest bearing liabilities	845		2		0.95	%							2			—			2
Interest expense on liabilities	74,723		196		1.05	%	63,589		182		1.14	%	28			(14		)	14
Net yield on interest-earning assets	$	78,947	$	113	0.57	%	$	68,152	$	122	0.72	%	$	17		$	(26	)	$	(9	)

For the nine months ended
Investment securities	$	22,342	$	545	3.25	%	$	24,754	$	599	3.23	%	$	(58	)	$	4		$	(54	)
Advances	42,141		211		0.67	%	32,633		132		0.54	%	47			32			79
MPF Loans held in portfolio	4,684		165		4.70	%	5,455		197		4.82	%	(27		)	(5		)	(32		)
Other interest bearing assets	7,346		23		0.42	%	7,297		6		0.11	%	—			17			17
Interest income on assets	76,513		944		1.65	%	70,139		934		1.78	%	78			(68		)	10
Consolidated obligation discount notes	44,647		272		0.81	%	33,890		216		0.85	%	66			(10		)	56
Consolidated obligation bonds	26,184		299		1.52	%	30,769		304		1.32	%	(51		)	46			(5		)
Subordinated notes	565		24		5.66	%	944		41		5.79	%	(16		)	(1		)	(17		)
Other interest bearing liabilities	825		5		0.81	%							5			—			5
Interest expense on liabilities	72,221		600		1.11	%	65,603		561		1.14	%	54			(15		)	39
Net yield on interest-earning assets	$	76,513	$	344	0.60	%	$	70,139	$	373	0.71	%	$	29		$	(58	)	$	(29	)

Net interest income changed mainly due to the following:

~~Investment interest~~Interest income from investment securities declined primarily due to the decline in average investment balances as securities matured or paid down during the periods. Although we ~~continue to reduce our MBS portfolio to less than three times our total regulatory capital. This ratio is one of the conditions that needs to be met to remove the restriction on us~~are no longer required to obtain FHFA approval for any new investments that have a term to maturity in excess of 270 ~~days. For further information, see~~days, we are currently unable to make additional investments in MBS/ABS under FHFA regulatory limits as discussed in ~~Investment Securities~~ Investmentson page ~~49.~~12 in our 2015 Form 10-K. This decline in interest income was ~~partially offset~~also negatively impacted by declines in accretion into interest income of expected improvements in ~~the present value of~~future cash flows on securities that were previously charged with credit related OTTI. For the ~~three and nine months~~quarter ended September 30, ~~2015,~~2016, we recorded ~~credit-related~~ accretion of $11 million compared to ~~interest income of~~ $12 million for the same period in 2015; and $37 million and $41 ~~million. For~~million for the comparable ~~period in 2014, accretion was $15 million and $43 million. Future accretion~~year to date periods ended September 30. Accretion is dependent upon how estimated market conditions ~~may~~ impact ~~the projected~~future cash flows, and may vary from past experience.

Interest income from advances increased ~~primarily~~ due to ~~increases in volume. Member~~higher member demand for advances ~~has continued to increase modestly~~along with increases in ~~2015 after~~interest rates, primarily as a significant increase of $9.0 billion during 2014. We are finding that our members in Illinois and Wisconsin have increased funding needs as the economic activity in our district continues to improve. In addition, members are taking advantageresult of the ~~benefits~~Federal Reserve Bank's actions at year end 2015. The key factor resulting in the increased demand for advances was the result of our continuing the Reduced Capitalization Advance Program (RCAP) ~~to lower their cost of borrowing and our dividend policies are~~, which is designed to make the net cost of borrowing through advances more attractive to ~~our active members. While our~~members by allowing members to borrow new advances ~~increased so far in 2015, it is possible that our advances may decrease to the extent our members elect to utilize alternative funding resources.~~using less activity based capital stock.

Interest income from MPF Loans ~~continued to decline as expected~~held in portfolio declined due to the ~~net~~ decrease in ~~balance of~~our outstanding MPF Loans ~~outstanding.~~held in portfolio. Though we have ~~experienced a net decline in MPF Loans outstanding, we~~recently resumed purchasing MPF Loans, ~~that we held in portfolio during 2015, though the amount has been nominal to date. We do~~our purchases were not ~~expect these new MPF Loans to be material~~large enough to offset ~~older~~our loan ~~paydowns in the near-term, but may become so~~paydown activity year over ~~a longer-term period of time~~.

year.

Interest expense decreased both as a result of a reduction in the average interest rates of our debt portfolio, as well as due to reduced overall debt outstanding. As higher rate debt has matured or been called, the debt was replaced with lower-rate funding. Market rates on our short term discount notes also declined on average and we benefited from these lower rates by increasing the mix of discount notes as compared to bonds.

~~Net interest income is also impacted by fair value and cash flow hedging activity. For details see~~ ~~Trading Securities, Derivatives and Hedging Activities,~~ ~~and~~ ~~Instruments Held at Fair Value Option~~ ~~on pages 45 and 46.~~

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~~Federal Home Loan Bank of Chicago~~

(Dollars in tables in millions except per share amounts unless otherwise indicated)

Interest income from other interest bearing assets comes primarily from interest bearing deposits, Federal Funds sold and securities sold under agreements to repurchase. The increase is primarily due to increases in rates as a result of the Federal Reserve Bank's actions at year end 2015 to raise short term interest rates by 25 bps.

Interest expense increased, primarily due to higher volume outstanding on our consolidated obligations used to fund the growth in our assets. Rates overall on our consolidated obligations did not change materially during the periods presented.

Our hedging activities also contributed a net reduction to net interest income. The low interest rate environment resulted in negative net interest settlements on derivative contracts in active hedge accounting relationships. For further details see Trading Securities, Derivatives and Hedging Activities, and Instruments Held at Fair Value Option in the following table.

Non-Interest Gain (Loss)


	Three months ended September 30,						Nine months ended September 30,						Three months ended September 30,					Nine months ended September 30,
	2015			2014			2015			2014			2016		2015			2016			2015
Trading securities	$	(1	)	$	(6	)	$	(2	)	$	(18	)	$	—	$	(1	)	$	—		$	(2	)
Derivatives and hedging activities	(15		)	1			(17		)	(11		)	7		(15		)	(7		)	(17		)
Instruments held under fair value option	1			10			4			11			—		1			6			4
Subtotal - Trading Securities, Derivatives and Hedging Activities, and Instruments Held Under Fair Value Option	(15		)	5			(15		)	(18		)
Trading Securities, Derivatives and Hedging Activities, and Instruments Held Under Fair Value Option													7		(15		)	(1		)	(15		)
Litigation settlement awards	2			1			13			18			—		2			38			13
Other, net	7			5			15			14
Other gain (loss), net													7		7			24			15
Noninterest gain (loss)	$	(6	)	$	11		$	13		$	14		$	14	$	(6	)	$	61		$	13

Trading Securities, Derivatives and Hedging Activities, and Instruments Held Under Fair Value Option

Gains or (losses) on these activities have generally stabilized in recent ~~quarters~~years primarily as a result of less volatile hedging costs, which is consistent with the hedging strategies offor our more simplified balance sheet, along with a more stable economy. Our loss in the third quarter of 2015 (as compared to the gain in the third quarter of 2014), was primarily due to volatility and uncertainty related to the September Federal Reserve meeting to discuss, among other things, a potential rise in short term rates. The Federal Reserve decided to defer any rate increases at that time.

~~Most~~However, most of our total net effect from hedging activities was recorded as a component of net interest ~~income. This was primarily due to~~income, not in the above non-interest gain (loss) line items. The low interest rate environment ~~resulting~~resulted in significant negative net interest settlements on derivative contracts in active hedge accounting relationships. Net interest income was also reduced by the amortization of negative hedge adjustments from previously active hedges that were closed (de-designated) but where the previously hedged instrument is still outstanding.

contracts. Details ~~of the impact on all of these hedging related items~~ are in the table on the following page.

Litigation settlement awards

On October 15, 2010, we instituted litigation relating to 64 ~~private label~~private-label MBS bonds we purchased in an aggregate original principal amount of $4.29 billion. In ~~both 2015 and 2014,~~April 2016, we received ~~payments for settlements~~a payment of $37.5 million (partially offset by $5.0 million of related legal fees and expenses recorded in Noninterest expense) resulting from a settlement with some of the defendants. We continue to pursue litigation related to these matters. As of September 30, 2016, the remaining litigation covers four private-label MBS bonds in the aggregate original principal amount of $77.5 million. We cannot predict to what extent we will be successful in this remaining litigation. See ~~Item 1.~~ Legal Proceedings on page 6560 for further details.

Other gain (loss), net

Other gain (loss), net, consists primarily of income from the sale of MPF Loans to third party investors and fees other FHLBs pay us to support their participation in the MPF Program, which offsets a portion of the expenses we incur.

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~~Federal Home Loan Bank of Chicago~~

(Dollars in tables in millions except per share amounts unless otherwise indicated)

The following table shows the impact of Trading Securities, Derivatives and Hedging Activities, and Instruments Held Under Fair Value Option on our results of operations. The largest contributor to the total net effect gain (loss) of hedging activities is net interest settlements. Net interest settlements are attributable to open derivative hedging instruments and are included in the interest income/expense line item of the respective fair value or cash flow hedged item type.The amortization/accretion amount pertains to both closed fair value and cash flow hedging adjustments, which are included in the interest income/expense line item of the respective hedged item type. For further details please see Note 9 - Derivatives and Hedging Activities to the Financial Statements in this Form 10-Q.

Advances Investments MPF Loans Discount Notes Bonds Total
Three months ended September 30, 2015
Amortization/accretion $ 1

$ —

$ (4 )
$ (1 )
$ —

$ (4 )
Net interest settlements (21 ) (33 ) —
(61 ) 54
(61 )
Total recorded in net interest income (20 )
(33 )
(4 )
(62 )
54

(65 )
Fair value hedges - ineffectiveness net gain (loss) 1
(11 ) —
—
(7 ) (17 )
Cash flow hedges - ineffectiveness net gain (loss) —
—
—
1
—
1
Economic hedges - net gain (loss) (2 )
—

(2 )
2

3
1
Total recorded derivatives & hedging activities (1 ) (11 ) (2 ) 3
(4 ) (15 )
Instruments held under fair value option 1
—
—
—
—
1
Total net effect gain (loss) of hedging activities $ (20 ) $ (44 ) $ (6 ) $ (59 ) $ 50
$ (79 )

Three months ended September 30, 2014
Amortization/accretion $ 3
$ —
$ (4 ) $ (1 ) $ (2 ) $ (4 )
Net interest settlements (20 ) (35 ) —
(62 ) 63
(54 )
Total recorded in net interest income (17 ) (35 ) (4 ) (63 ) 61
(58 )
Fair value hedges - ineffectiveness net gain (loss) 2
—
—
—
(5 ) (3 )
Economic hedges - net gain (loss) —
—
(4 ) —
8
4
Total recorded derivatives & hedging activities 2
—
(4 ) —
3
1
Instruments held under fair value option 3
—
—
—
7
10
Total net effect gain (loss) of hedging activities $ (12 ) $ (35 ) $ (8 ) $ (63 ) $ 71
$ (47 )

Nine months ended September 30, 2015
Amortization/accretion $ 7

$ (10 )
$ (11 )
$ (2 )
$ (5 )
$ (21 )
Net interest settlements (62 )
(101 )
—

(185 )
172

(176 )
Total recorded in net interest income (55 )
(111 )
(11 )
(187 )
167

(197 )
Fair value hedges - ineffectiveness net gain (loss) —
(13 ) —
—
(17 ) (30 )
Cash flow hedges - ineffectiveness net gain (loss) —
—
—
2
—
2
Economic hedges - net gain (loss) (4 ) —
(3 ) 7
11
11
Total recorded derivatives & hedging activities (4 )
(13 )
(3 )
9

(6 )
(17 )
Instruments held under fair value option 2
—
—
(2 ) 4
4
Total net effect gain (loss) of hedging activities $ (57 )
$ (124 )
$ (14 )
$ (180 )
$ 165

$ (210 )

Nine months ended September 30, 2014
Amortization/accretion $ 6
$ —
$ (13 ) $ (2 ) $ (13 ) $ (22 )
Net interest settlements (60 ) (105 ) —
(184 ) 189
(160 )
Total recorded in net interest income (54 )
(105 )
(13 )
(186 )
176

(182 )
Fair value hedges - ineffectiveness net gain (loss) 6
(3 ) —
—
(18 ) (15 )
Cash flow hedges - ineffectiveness net gain (loss) —
—
—
1
—
1
Economic hedges - net gain (loss) —
—
(5 ) —
8
3
Total recorded derivatives & hedging activities 6

(3 )
(5 )
1

(10 )
(11 )
Instruments held under fair value option 3
—
—
—
8
11
Total net effect gain (loss) of hedging activities $ (45 )
$ (108 )
$ (18 )
$ (185 )
$ 174

$ (182 )



	Advances			Investments			MPF Loans			Discount Notes			Bonds			Total
Three months ended September 30, 2016
Recorded in net interest income	$	(16	)	$	(31	)	$	(2	)	$	(49	)	$	12		$	(86	)
Recorded in derivatives & hedging activities	6			1			6			(3		)	(3		)	7
Recorded on instruments held under fair value option	(4		)	—			(1		)	(2		)	7			—
Total net effect gain (loss) of hedging activities	$	(14	)	$	(30	)	$	3		$	(54	)	$	16		$	(79	)

Three months ended September 30, 2015
Recorded in net interest income	$	(20	)	$	(33	)	$	(4	)	$	(62	)	$	54		$	(65	)
Recorded in derivatives & hedging activities	(1		)	(11		)	(2		)	3			(4		)	(15		)
Recorded on instruments held under fair value option	1			—			—			—			—			1
Total net effect gain (loss) of hedging activities	$	(20	)	$	(44	)	$	(6	)	$	(59	)	$	50		$	(79	)

Nine months ended September 30, 2016
Recorded in net interest income	$	(50	)	$	(93	)	$	(7	)	$	(147	)	$	49		$	(248	)
Recorded in derivatives & hedging activities	(14		)	(5		)	13			2			(3		)	(7		)
Recorded in trading securities - hedged only	—			(1		)	—			—			—			(1		)
Recorded on instruments held under fair value option	12			—			(1		)	(7		)	2			6
Total net effect gain (loss) of hedging activities	$	(52	)	$	(99	)	$	5		$	(152	)	$	48		$	(250	)

Nine months ended September 30, 2015
Recorded in net interest income	$	(55	)	$	(111	)	$	(11	)	$	(187	)	$	167		$	(197	)
Recorded in derivatives & hedging activities	(4		)	(13		)	(3		)	9			(6		)	(17		)
Recorded on instruments held under fair value option	2			—			—			(2		)	4			4
Total net effect gain (loss) of hedging activities	$	(57	)	$	(124	)	$	(14	)	$	(180	)	$	165		$	(210	)

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(Dollars in tables in millions except per share amounts unless otherwise indicated)

Noninterest Expense


	Three months ended September 30,					Nine months ended September 30,				Three months ended September 30,				Nine months ended September 30,
	2015		2014			2015		2014		2016		2015		2016		2015
Compensation and benefits	$	20	$	17		$	57	$	49	$	26	$	20	$	71	$	57
Other operating expenses	13		12			38		34
Operating expenses										15		13		44		38
Other	2		(1		)	6		6		1		2		13		6
Noninterest expense	$	35	$	28		$	101	$	89	$	42	$	35	$	128	$	101

Compensation and benefits increased primarily due to ~~higher salaries~~defined benefit pension costs and ~~wages as well as~~other post retirement benefit related expenses (driven in part by the continued low interest rate environment and a change in the mortality tables used to calculate the estimated pension liability), and increased headcount and incentive compensation expense. In addition, we added employees in order to continue to enhance our member-focused bank capabilities and to continue to build out the MPF Program platform to support new products such as MPF Direct and MPF Government MBS.expenses. We had ~~410~~443 employees as of September 30, ~~2015,~~2016, compared to ~~391~~410 as of September 30, ~~2014.~~2015.

Other consists of legal fees and expenses related to litigation settlements and costs related to our share of funding the Office of Finance and the Federal Housing Finance Agency.

Other operating expenses increased mostly due to information technology, primarily because of general infrastructure maintenance, information technology security, and the investment in systems related to the MPF Program.Assessments

We fund the Affordable Housing Program (AHP) program at a calculated rate of 10% of income before assessments.

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(Dollars in tables in millions except per share amounts unless otherwise indicated)

Other Comprehensive Income (Loss)

Three months ended September 30, Nine months ended September 30,
2015 2014 2015 2014
Net unrealized gain (loss) on available-for-sale securities $ (79 ) $ (99 ) $ (214 ) $ 37
Non-credit OTTI on held-to-maturity securities 11
15
37
43
Net unrealized gain (loss) on cash flow hedges (31 ) 85
8
91
Post-retirement plans 1
(2 ) (7 ) 1
Other comprehensive income (loss) $ (98 ) $ (1 ) $ (176 ) $ 172



	Three months ended September 30,						Nine months ended September 30,
	2016			2015			2016			2015
Net unrealized gain (loss) available-for-sale securities	$	(13	)	$	(79	)	$	(113	)	$	(214	)
Non-credit OTTI held-to-maturity securities	9			11			30			37
Net unrealized gain (loss) cash flow hedges	83			(31		)	38			8
Post-retirement plans	—			1			1			(7		)
Other comprehensive income (loss)	$	79		$	(98	)	$	(44	)	$	(176	)

Net unrealized gain (loss) on available-for-sale securities

WeOur available-for-sale portfolio securities are in a net unrealized gain position (net of any offsetting related fair value hedge losses) as market interest rates have ~~a substantial~~declined since we acquired these securities. As these securities mature, the net unrealized gain position gradually reverses to zero as we will only collect the face value at their maturity. Such reversals result in periodic net unrealized losses as individual securities mature. Our unrealized net gain position related to our ~~AFS~~available-for-sale securities portfolio ~~remaining~~ in ~~our AOCI. These unrealized gains decreased during the first nine months~~AOCI was $545 million as of 2015, primarily in our student loan FFELP ABS, due to market-related declines. If we do not sell these securities, the remaining unrealized gain position will eventually reverse to zero within AOCI as they pay down and mature.September 30, 2016.

Non-credit OTTI on held-to-maturity securities

~~Over~~We accrete the ~~past several years, we have accreted back into~~non-credit related OTTI amount in AOCI to the carrying amount of each related held-to-maturity security over its remaining life. The decrease in the periods presented resulted from a decline in our ~~HTM securities portfolio a portion of the previously incurred~~outstanding non-credit OTTI ~~recorded during~~balance, which drove a reduction in the ~~financial crisis. As these~~accretion amounts. Our remaining non-credit OTTI amount on held-to-maturity securities ~~approach maturity, we~~in AOCI was $(187) million as of September 30, 2016. We expect ~~these unrealized non-credit losses~~this remaining amount to continue to ~~reverse as principal and interest from the securities are received over time unless there is any further impairment. We also expect the rate of accretion to~~ decline as ~~these~~our OTTI held-to-maturity securities approach maturity.

Net unrealized gain (loss) on cash flow hedges

We had net unrealized gains on cash flow hedges in 2014. During 2015, longer-term market interest rates declined in the first quarter before increasing in excess of the first quarter decline during the second quarter of 2015. The market then turned again in the third quarter of 2015 with a decrease in long term interest rates, creating the unrealized loss for the third quarter. Shorter-term market interest rates remained stable throughout 2014 and 2015. Our cash flow hedges are more sensitive to changes in longer-term market interest rates than to changes in shorter-term market interest rates. ~~We have~~The net unrealized gains during 2016 resulted from an increase in interest rates compared to the beginning of the year, especially in the third quarter of 2016, offsetting losses recorded in earlier quarters when rates declined. As of September 30, 2016, we had a ~~substantial~~net unrealized ~~loss position~~(loss) of $(425) million in AOCI related to ~~these~~our cash flow hedges.

Post-retirement plans

~~The~~In the first quarter of 2015, we recorded an unrealized loss in ~~the post-retirement plans for 2015 is~~OCI of $(8) million due to a revision to the mortality tables ~~we use~~used for our post-retirement healthcare and supplemental defined benefit equalization plan. ~~We do not expect this to be a recurring event and, as this effect~~This loss is being amortized into ~~earnings~~compensation and benefits expense over the average ~~employment period~~number of ~~several~~ years of employment remaining before ~~retirement, we expect its impact to our results~~retirement. The annual amount of ~~operations~~amortization is expected to be ~~immaterial.~~no more than $1 million.

For further information on the activity in Other Comprehensive Income (Loss) see Note 12 - Accumulated Other Comprehensive Income (Loss) to the financial statements.

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(Dollars in tables in millions except per share amounts unless otherwise indicated)

Statements of Condition


	September 30, 2015		December 31, 2014		September 30, 2016			December 31, 2015
Cash and due from banks, interest bearing deposits, Federal Funds sold, and securities purchased under agreement to resell	$	5,286	$	5,827	$	5,488		$	4,226
Investment securities	24,203		27,260		21,396			24,597
Advances	35,044		32,485		43,117			36,778
MPF Loans held in portfolio, net	5,079		6,057
MPF Loans held in portfolio, net of allowance for credit losses					4,720			4,828
Other	212		212		262			242
Total assets	$	69,824	$	71,841
Assets					$	74,983		$	70,671

Consolidated obligation discount notes	$	37,290	$	31,054	$	39,144		$	41,564
Consolidated obligation bonds	26,062		34,251		30,139			22,582
Subordinated notes	944		944		—			944
Other	955		1,067		1,185			929
Total liabilities	65,251		67,316
Liabilities					70,468			66,019

Capital stock	1,892		1,902		1,636			1,950
Total retained earnings	2,640		2,406
Retained earnings					2,951			2,730
Accumulated other comprehensive income (loss)	41		217		(72		)	(28		)
Total capital	4,573		4,525
Capital					4,515			4,652
Total liabilities and capital	$	69,824	$	71,841	$	74,983		$	70,671

Cash and due from banks, interest bearing deposits, Federal Funds sold, and securities purchased under agreements to resell

Amounts held in these accounts will vary each day based on the following:

Interest rate spreads between Federal Funds sold and securities purchased under agreements to resell and our debt;

Liquidity requirements;

Counterparties available; and

Collateral availability on securities purchased under agreements to resell.

Our liquidity position was relatively unchanged, as we continue to take advantage of the very low interest rates in the market by issuing debt in the form of short term discount notes and investing it in short term liquid assets.

Investment Securities

WeAlthough we are no longer required to obtain FHFA approval for any new investmentsthat have a term to maturity in excess of 270 days, ~~until such time~~we are currently unable to make additional investments in MBS/ABS under FHFA regulatory limits as discussed in Investments on page 12 in our ~~MBS portfolio is less than three times our total regulatory capital and our advances represent more than 50% of our total assets. At September 30,~~ 2015 our MBS portfolio was 3.55 times our total regulatory capital and our advances represented 50% of our total assets, thus we expect our portfolios to continue to decline over time as a result of this limitation.Form 10-K.

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~~Federal Home Loan Bank of Chicago~~

(Dollars in tables in millions except per share amounts unless otherwise indicated)

Advances

~~Member demand for advances has continued~~Advances increased in 2016 primarily due to ~~increase modestly~~our members' interest in ~~2015 after a significant increase of $9.0 billion during 2014. We are finding that~~the benefits we offer our members ~~in Illinois and Wisconsin have experienced increased funding needs as the economic activity in~~through our ~~district continues to improve. In addition, members are taking advantage of the benefits of our~~continuing Reduced Capitalization Advance Program (RCAP) ~~to lower their cost of borrowing and our dividend policies are~~, which is designed to make the net cost of borrowing through advances more attractive to ~~our active members.~~ members and allows members to borrow new advances using less activity stock.

While our advances increased, ~~so far in 2015,~~ it is possible that member demand for our advances ~~may decrease~~could decline in future periods should their funding needs change, or to the extent ~~our members~~they elect ~~to utilize~~ alternative funding resources. In addition, as our advances with captive insurance companies mature, our total advance levels could decrease as further discussed in Legislative and Regulatory Developments on page 54 in our Form 10-Q for the quarter ended March 31, 2016.

MPF Loans Held in Portfolio, Net of Allowance for Credit Losses

We had a small net decrease in our outstanding MPF Loans ~~continued~~from year end, as we resumed purchasing a higher volume of new loans during 2016 to ~~pay down as expected, a result of our past business strategy to limit the concentration of~~help offset maturities and paydowns experienced in our MPF ~~Loans. However, we have begun adding new MPF Loans to~~Loan portfolio. In the third quarter of 2016, our ~~portfolio but we do not expect these new MPF Loans to be material enough to offset older~~purchases were slightly greater than our current loan paydowns in the ~~near-term, but~~quarter. A portion of our new loans were refinancings, and this activity is dependent upon interest rates. If rates were to rise significantly, our refinancings may ~~become so over a longer-term period of time.~~decline. For the ~~nine months~~year to date period ended September 30, ~~2015,~~2016, we ~~have added $117~~acquired $759 million in new MPF Loans to our ~~portfolio.~~portfolio, compared to $117 million in the same period in 2015.

In addition to our MPF Loans held in portfolio, we have MPF off-balance sheet products, where we buy and concurrently resell MPF Loans to Fannie Mae or other third party investors or pool and securitize them into Ginnie Mae MBS.

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(Dollars in tables in millions except per share amounts unless otherwise indicated)

Liquidity, Funding, & Capital Resources

Liquidity

For the period ending September 30, ~~2015,~~2016, we have maintained a liquidity position in accordance with FHFA regulations and guidance, and policies established by our Board of Directors. Based upon our excess liquidity position described below, we anticipate remaining in compliance with our liquidity requirements. See Liquidity, Funding, & Capital Resources on page 4948 in our ~~2014~~2015 Form 10-K for a detailed description of our liquidity requirements. We use different measures of liquidity as follows:

Overnight Liquidity – Our policy requires us to maintain overnight liquid assets at least equal to 3.5% of total assets. As of September 30, ~~2015,~~2016, our overnight liquidity was ~~$7.2~~$9.0 billion or ~~10%~~12% of total assets, giving us an excess overnight liquidity of ~~$4.7~~$6.3 billion.

Deposit Coverage – To support our member deposits, FHFA regulations require us to have an amount equal to the current deposits invested in obligations of the U.S. Government, deposits in eligible banks or trust companies, or advances with maturities not exceeding five years. As of September 30, ~~2015,~~2016, we had excess liquidity of ~~$37.1~~$43.7 billion to support member deposits.

Contingency Liquidity – The cumulative five business day liquidity measurement assumes there is a localized credit crisis for all FHLBs where the FHLBs do not have the ability to issue new consolidated obligations or borrow unsecured funds from other sources (e.g., purchasing Federal Funds or customer deposits). Our net liquidity in excess of our total uses and reserves over a cumulative five-business-day period was ~~$17.6~~$16.4 billion as of September 30, ~~2015.~~2016.

In addition to the liquidity measures discussed above, FHFA guidance requires us to maintain daily liquidity through short-term investments in an amount at least equal to our anticipated cash outflows under two different scenarios. ~~We may~~One scenario assumes that we cannot access the capital markets for 15 days and that during that time members do not renew any maturing, prepaid, and called advances. The second scenario assumes that we cannot access the capital markets for 5 days and that during that period we will automatically renew maturing and called advances for all members except for very large, highly rated members. These additional requirements are more stringent than the Contingency Liquidity requirement discussed above and are designed to enhance our protection against temporary disruptions in access to the FHLB debt markets in response to a rise in capital markets volatility. As a result of this guidance, we maintain increased balances in short-term investments. In addition, we fund certain overnight or ~~shorter term~~shorter-term investments and advances with ~~discount notes~~debt that ~~have maturities~~has a maturity that ~~extend~~extends beyond the maturities of the related investments or advances. For a discussion of how this may impact our earnings, see page 2322 in the Risk Factors section of our ~~2014~~2015 Form 10-K.

We are sensitive to maintaining an appropriate liquidity and funding balance between our financial assets and liabilities, and we measure and monitor the risk of refunding such assets as liabilities mature (refunding risk). In measuring the level of assets requiring refunding, we take into account their contractual maturities, as further described in the notes to the financial statements. In addition, we make certain assumptions about their expected cash flows. These assumptions include: calls for assets with such features, projected prepayments and scheduled amortizations for our MPF Loans held in portfolio, MBS and ABS investments. The following table presents the unpaid principal balances of (1) MPF Loans held in portfolio, (2) AFS securities, and (3) HTM securities (including ABS and MBS investments), by expected principal cash flows. The table is illustrative of our assumptions about the expected cash flow of our assets, including prepayments made in advance of maturity.



	MPF Loans Held in Portfolio		Investment Securities
As of September 30, 2016	MPF Loans Held in Portfolio		Available-for Sale		Held-to-Maturity
Year of Expected Principal Cash Flows
One year or less	$	1,329	$	1,347	$	1,707
After one year through five years	2,280		10,783		2,812
After five years through ten years	740		1,742		588
After ten years	308		795		162
Total	$	4,657	$	14,667	$	5,269

We consider our liabilities available to fund assets until their contractual maturity. For further discussion of the liquidity risks related to our access to funding, see page 24 of the Risk Factors section in our 2015 Form 10-K.

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(Dollars in tables in millions except per share amounts unless otherwise indicated)

Funding

Conditions in Financial Markets

During the third quarter of ~~2015, much of~~2016, the ~~focus in the financial markets was on a potential rate increase at the September~~ Federal Open Market Committee (FOMC) ~~meeting.~~delayed further interest rate hikes due to fragile economic growth and tepid inflation. Market indicators suggest a 25 basis point interest rate hike in December 2016 by the FOMC, one year after its last rate increase. The ~~FOMC did not raise rates, and the 10-year~~10 year Treasury ~~fell nearly 40~~Note rose 13 basis points over the ~~course of the~~ quarter ending at ~~2.04%. Many analysts are currently forecasting that the FOMC will not raise rates until 2016 due to lower GDP growth assumptions.~~ 1.60 percent.

We maintained ready access to funding during the ~~third~~ quarter.

In October, the U.S. Treasury projected that the statutory “debt ceiling” limit would be reached in the first half of November. We continue to monitor the political uncertainty in Washington, D.C. At the beginning of the fourth quarter we started building our liquidity position and extending the terms of our borrowings so that we are better able to meet members’ funding requests during all political and economic scenarios.

Cash flows from operating activities with significant changes



Nine months ended September 30,	2016			2015			Change
Net cash provided by (used in) operating activities -
Net income	$	249		$	252		$	(3	)
Non cash (gain) loss on derivatives and hedging activities	(44		)	133			(177		)
Other	(21		)	(10		)	(11		)
Net cash provided by (used in) operating activities	$	184		$	375		$	(191	)

Our operating assets and liabilities support our mission to provide our member shareholders competitively priced funding, a reasonable return on their investment in our capital stock, and support for community investment activities. Operating assets and liabilities can vary significantly in the normal course of business due to the amount and timing of cash flows, which are affected by member-driven activities and market conditions. We believe cash flows from operations, available cash balances and our ability to generate cash through short- and long-term borrowings are sufficient to fund our operating liquidity needs. ~~Net~~The $(191) million change in net cash provided by (used in) operating activities ~~was $375 million for the nine months ended September 30, 2015. This~~primarily resulted from ~~net income adjusted for~~the following:

The non-cash ~~adjustments, which primarily is~~adjustment attributable to ~~a positive~~the unrealized net ~~change~~changes in the fair value of ~~derivatives and hedging activities.~~our derivative instruments.

Cash flows from investing activities with significant changes



Nine months ended September 30,	2016			2015			Change
Net cash provided by (used in) investing activities -
Net change in Federal Funds sold, and securities purchased under agreements to resell	$	(1,730	)	$	805		$	(2,535	)
Net change in available-for-sale securities	1,775			1,440			335
Net change in held-to-maturity securities	1,253			1,452			(199		)
Net change in advances	(6,189		)	(2,508		)	(3,681		)
Net change in MPF Loans held in portfolio	108			968			(860		)
Other	137			47			90
Net cash provided by (used in) investing activities	$	(4,646	)	$	2,204		$	(6,850	)

Our investing activities predominantly include advances, MPF Loans held ~~for investment,~~in portfolio, investment securities, and other

short-term interest-earning assets. ~~Net~~The $(6.9) billion change in net cash provided by (used in) investing activities ~~was $2.2 billion for~~primarily resulted from the ~~nine months ended September 30, 2015. This resulted primarily from a~~following:

The increase in net ~~decrease in federal funds sold, maturities related~~cash (used in) funding advances reflects our objective to ~~held-to-maturity and~~make advances to our members our

primary business;

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~~Federal Home Loan Bank of Chicago~~

(Dollars in tables in millions except per share amounts unless otherwise indicated)

~~available-for-sale investment securities, and principal collected on MPF Loans held in portfolio, partially offset by a net~~The increase in ~~advances funded during the period. The~~ net ~~increase in advances~~cash (used in) acquiring Federal Funds sold and ~~the shift away from investment~~ securities ~~is consistent with~~purchased under agreements to resell reflects our objective to ~~make advances~~invest in liquid assets to meet the needs of our ~~members~~members; and

The decrease in net cash (used in) purchasing MPF Loans Held in Portfolio reflects our ~~primary business.~~decision in mid 2015

to resume these purchases.

Cash flows from financing activities with significant changes



Nine months ended September 30,	2016			2015			Change
Net cash provided by (used in) financing activities -
Net change in discount notes	(2,443		)	6,225			(8,668		)
Net change in consolidated obligation bonds	7,496			(8,274		)	15,770
Payments for retiring of subordinated debt	(944		)	—			(944		)
Other	(115		)	(266		)	151
Net cash provided by (used in) financing activities	$	3,994		$	(2,315	)	$	6,309

Our financing activities primarily reflect cash flows related to issuing and repaying consolidated obligations. ~~Net~~The proceeds from the net increases in our consolidated obligation discount notes and consolidated obligations bonds were primarily utilized to fund the net increases in our investing activities as noted above. The $6.3 billion change in net cash provided by (used in) financing activities ~~was $(2.3) billion for~~primarily resulted from the ~~nine months ended September 30, 2015. This was primarily driven by paydowns in excess of issuances related to our consolidated obligation bonds partially offset by a~~following:

A net increase in our consolidated obligation ~~discount notes. The~~debt outstanding, with a shift ~~to discount note~~in funding ~~was driven by increased demand~~ from our ~~members for short term advances as well as taking advantage of very low short-term interest rates in the market.~~

~~Consolidated Obligation Bonds and Discount Notes~~

~~We fund our assets principally with~~ consolidated obligations (bonds and discount notes) issued through the Office of Finance, and capital stock. Consolidated obligations have GSE status although they are not obligations of the United States and the United States does not guarantee them.

~~During the first nine months of 2015, we relied more on shorter term~~obligation discount notes to fund our assets as longer term bonds matured. The shift to discount note funding was driven by increased demand from our members for short term advances as well as taking advantage of funding opportunities in discount notes (versus bonds). For the comparable period in 2014, shorter term discount notes declined significantly as we issued more attractively-priced, longer-termed consolidated obligation ~~bonds.~~bonds; and

The ~~following shows~~retirement of our ~~net cash flow issuances (redemptions) by type of consolidated obligation:~~

Nine months ended September 30, 2015 2014
Discount notes $ 6,225
$ (583 )
Bonds (8,274 ) 3,003
Total consolidated obligations $ (2,049 ) $ 2,420
subordinated notes.

Capital Resources

Capital Rules

~~For capital rules in effect through the third quarter of 2015, see~~ ~~Capital Rules~~ ~~on page 53 in our 2014 Form 10-K.~~

~~During the third quarter, we announced the approval of~~Under our Second Amended and Restated Capital Plan of the Federal Home Loan Bank of Chicago, ~~which was implemented by our Board in August and~~ effective ~~as of~~ October 1, 2015 (Capital Plan).

~~Under our Capital Plan,~~, our stock consists of two sub-classes of stock, Class B1 activity stock and Class B2 membership stock (together, Class B stock), both with a par value of $100 and redeemable on five years' written notice, subject to certain conditions. Each member is required to own capital stock in an amount equal to the greater of a membership stock requirement or an activity stock requirement. Class B1 activity stock is available for purchase only to support a member's activity stock requirement. Class B2 membership stock is available to be purchased to support a member's membership stock requirement and any activity stock requirement.

~~Our~~Under our Capital Plan, ~~allows~~ our Board of Directors tomay set a threshold of between $10,000 and $75 million on the amount of Class B2 membership stock that would otherwise be held for membership if a member has advances outstanding that have an activity stock requirement in excess of the threshold amount. In that case, the amount of Class B2 membership stock that exceeds such threshold and is necessary to support advance activity is automatically converted into Class B1 activity stock. ~~Effective~~

~~October 1, 2015, this~~That threshold ~~was significantly reduced from $5 million to~~is currently set at $10,000, which means that we will convert to Class B1 activity capital stock any capital stock supporting advances that exceeds the lesser of the member's membership requirement or $10,000. ~~As a result of this change, more than 99% of our borrowing members held more Class B1 activity stock on~~

~~October 1, 2015, than they did on September 30, 2015.~~

The Board of Directors may periodically adjust members' activity stock requirement for certain new advances within a range of 2% and 6% of a member's outstanding advances. Our Board implemented this provision through RCAP as further discussed below. ~~Each~~In addition, our Board reduced each member's activity stock requirement ~~remains at~~from 5% to 4.5% for non-RCAP ~~advances.~~

~~Table of Contents~~

~~Federal Home Loan Bank of Chicago~~

~~(Dollars in millions except per share amounts unless otherwise indicated)~~advances, effective April 1, 2016.

~~In addition, our~~Our Capital Plan ~~now~~ allows for an activity stock requirement for MPF Loans acquired for our portfolio within a range of 0% and 6%, which our Board has set at 0%. Should the Board decide to introduce this capital requirement, we intend to notify members sufficiently in advance of the change and apply that change only to future acquisitions.

~~Our Capital Plan~~

Table of Contents

(Dollars in tables in millions except per share amounts unless otherwise indicated)

The Board may periodically adjust members’ membership stock requirement iswithin a range of 0.20% to 2% of a member’s mortgage assets. In February 2016, our Board reduced the membership stock requirement to the greater of either $10,000 or ~~0.85% of a member's mortgage assets, subject to adjustment by the Board within a range of 0.2% to 2%~~0.40% of a member's mortgage assets. A member’s investment in membership stock is subject to a cap equal to the lesser of (1) a dollar cap set by the Board within a range of $10,000 and $75 million, and (2) 9.9% of our total capital stock outstanding as of the prior December 31. ~~Effective October 1, 2015,~~Also in February 2016 , the Board reduced the dollar cap on membership stock from ~~$75~~$25 million to ~~$25~~$5 million, which is less than 9.9% of the Bank’s total capital stock at December 31, ~~2014,~~2015, and thus the operative cap during the remainder of ~~2015~~2016 unless the Board sets a new cap.

Membership stock requirements will continue to be recalculated annually, whereas the activity stock requirement and any automatic conversion of Class B2 membership stock to Class B1 activity stock related to the threshold will apply on a daily basis. The revised membership stock and activity stock requirements discussed above went into effect on April 1, 2016. As a result of these changes, we held $593 million of excess capital stock on April 1, 2016. As of September 30, 2016, we held excess capital stock of $419 million. The reduction was a result of members requesting repurchase of their excess stock and members utilizing excess stock to support new advance borrowing activities.

We may only redeem or repurchase capital stock from a member if, following the redemption or repurchase, the member continues to meet its minimum investment requirement and we remain in compliance with our regulatory capital requirements discussed below.

Members that withdraw from membership must wait at least five years after their membership was terminated and all of their capital stock was redeemed or repurchased before being readmitted to membership in any FHLB.

Under the terms of our Capital Plan, our Board of Directors is authorized to amend the Capital Plan, and the FHFA must approve all such amendments before they become effective.

Reduced Capitalization Advance Program

~~Since June 2015, we have offered RCAP on a monthly basis.~~ RCAP allows members to borrow one or more advances with an activity stock requirement of only 2% for the life of the advance instead of the 5%4.5% requirement under our ~~capital plan’s~~Capital Plan’s general ~~provisions, if the new advances represent an incremental increase in a member’s overall level of advances and have maturity dates of at least one year.~~

~~Minimum Capital Requirements~~

~~For details on our minimum capital requirements, see~~ ~~Note 11 - Capital~~ ~~to the financial statements. As of the date of this filing,~~provisions. Since June 1, 2016, we have ~~managed our~~offered a more flexible version of RCAP, under which members can borrow both short- and long-term funding, including overnight advances, with the reduced activity stock capital ~~base and assets to remain in compliance with our minimum capital requirements.~~requirement.

Capital Amounts

The following table reconciles our capital reported in our statements of condition to the amount of capital stock reported for regulatory purposes. MRCS is included in the calculation of the regulatory capital and leverage ratios but is recorded in Other liabilities in our statements of condition.


	September 30, 2015		December 31, 2014		Change			September 30, 2016			December 31, 2015			Change
Capital stock	$	1,892	$	1,902	$	(10	)	$	1,636		$	1,950		$	(314	)
Total retained earnings	2,640		2,406		234			2,951			2,730			221
Total permanent capital	4,532		4,308		224
Accumulated other comprehensive income (loss)	41		217		(176		)	(72		)	(28		)	(44		)
Total GAAP capital	$	4,573	$	4,525	$	48		$	4,515		$	4,652		$	(137	)

Capital Stock	$	1,892	$	1,902	$	(10	)	$	1,636		$	1,950		$	(314	)
MRCS	9		9		—			302			8			294
Total retained earnings	2,640		2,406		234			2,951			2,730			221
Regulatory capital	$	4,541	$	4,317	$	224		$	4,889		$	4,688		$	201

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~~Federal Home Loan Bank of Chicago~~

~~(Dollars in millions except per share amounts unless otherwise indicated)~~

Although we have had no OTTI in ~~2015,~~2016, credit deterioration may negatively impact our remaining private-label MBS portfolio. We believe that future impairments of this portfolio are possible if unemployment rates, default, delinquency, or loss rates on mortgages were to increase, or there is a further decline in residential real estate value. We cannot predict if or when such impairments will occur, or the impact such impairments may have on our retained earnings and capital position. See page 28 of the Risk Factors section of our ~~2014~~2015 Form 10-K.

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(Dollars in tables in millions except per share amounts unless otherwise indicated)

We may not pay dividends if we fail to satisfy our minimum capital and liquidity requirements under the FHLB Act and FHFA regulations.

~~For the second time this year,~~On October 27, 2016, our Board of Directors ~~increased~~approved maintaining the dividend ~~declared per share on Class B1 activity stock by 25 basis points. On October 27, 2015, our Board~~levels for the third quarter of ~~Directors~~2016 and declared a ~~cash~~2.80% dividend ~~at an annualized rate of 2.50% per share of~~(annualized) for Class B1 activity stock and ~~0.50% per share of~~a 0.60% dividend (annualized) for Class B2 membership stock based on our preliminary financial results for the third quarter of ~~2015.~~2016. This dividend, including dividends on mandatorily redeemable capital stock, ~~totals $7~~totaled $11 million and will be paid on November ~~12, 2015.~~14, 2016. With this action, the Board continues ~~and enhances~~ the practice of rewarding members that use the Bank’s advances and support the financial health of the entire cooperative. Although we continue to work to maintain our financial strength to support a reasonable dividend, any future dividend determination by our Board will be at our Board's sole discretion and will depend on future operating results, our Retained Earnings and Dividend Policy and any other factors the Board determines to be relevant. For further information about our Retained Earnings and Dividend Policy, see Retained Earnings and Dividend Policy on page 57 in our ~~2014~~2015 Form ~~10-K~~.10-K.

We continue to allocate 20% of our net income each quarter to a restricted retained earnings account in accordance with the Joint Capital Enhancement Agreement that we entered into with the other FHLBs, as further discussed in Joint Capital Enhancement Agreement on page ~~F-45~~F-43 in our ~~2014~~2015 Form 10-K.

~~Table~~The increase in MRCS and decrease in Capital Stock in the above table is mostly due to the transfer in the first quarter of ~~Contents~~

~~Federal Home Loan Bank~~2016 of ~~Chicago~~

~~(Dollars~~$294 million of our captive insurance company members' capital stock from equity to MRCS in ~~millions except per share amounts unless otherwise indicated)~~liabilities on our statement of condition. For further details see Note 11 - Capital and Mandatorily Redeemable Capital Stock (MRCS) to the financial statements.

Critical Accounting Policies

The table below identifies our critical accounting policies and estimates and the page number where a detailed description of each can be found in our ~~2014~~2015 Form 10-K.



~~Overnight Indexed Swaps (OIS)~~Estimating Credit Losses	Page 60
Estimating Fair Value	~~Page 60~~
~~Joint and Several Liability~~	~~Page 61~~Pages 60-61

~~Significant changes in our critical accounting policies from our 2014 Form 10-K are outlined below. Also see~~

SeeNote 2 - Summary of Significant Accounting Policies and Note 3 - Recently Issued but Not Yet Adopted Accounting Standards to the financial statements in this Form 10-Q for the impact of changes in accounting policies and recently issued accounting standards on our financial results.

~~Overnight Indexed Swaps (OIS)~~

We started using the OIS curve to determine the fair value of our derivative contracts in the first quarter of 2015. The initial effect of using the OIS curve did not have a material effect on our operating activities or financial statements.

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~~Federal Home Loan Bank of Chicago~~

(Dollars in tables in millions except per share amounts unless otherwise indicated)

Risk Management - Credit Risk

Managing Our Credit Risk Exposure Related to Member Credit Products

Our credit risk rating system focuses primarily on our member's overall financial health and takes into account the member's asset quality, earnings, and capital position. For further information please see Member Credit Risk Ratings on page 63 in our 2015 Form 10-K.

The following table presents the number of members and related credit outstanding to them by credit risk rating. Credit outstanding consists primarily of outstanding advances and letters of credit. MPF credit enhancement obligations, member derivative exposures, and other obligations make up the rest. Of the total credit outstanding, $42.8 billion were advances (par value) and $10.4 billion were letters of credit at September 30, 2016, compared to $36.6 billion and $6.7 billion at December 31, 2015.



	September 30, 2016									December 31, 2015
Rating	Borrowing Members	% of Total		Credit Outstanding		% of Total		Collateral Loan Value		Borrowing Members	% of Total		Credit Outstanding		% of Total		Collateral Loan Value
1-3	492	97	%	$	53,218	100	%	$	99,480	482	94	%	$	43,090	100	%	$	90,366
4	6	1	%	47		—	%	129		12	2	%	158		—	%	318
5	12	2	%	100		—	%	242		20	4	%	145		—	%	353
Total	510	100	%	$	53,365	100	%	$	99,851	514	100	%	$	43,393	100	%	$	91,037

MPF Loans and Related Exposures

For details on our allowance for credit losses on MPF Loans, please see Note 8 - Allowance for Credit Losses to the financial statements.

Mortgage Repurchase Risk

We are exposed to mortgage repurchase risk in connection with our sale of MPF Loans to third party investors and MPF Loans securitized into MBS when a loan eligibility requirement or other warranty is breached. We may require the PFI from which we purchased the ineligible MPF Loan to repurchase that loan from us or indemnify us for related losses.

For the three and nine months ended September 30, 2016, we have repurchased $2 million and $8 million of unpaid principal balances related to MPF Loans. Due to recoveries from PFIs, we incurred no material losses on these loans. As of September 30, 2016, we have $21 million of unpaid principal with respect to mortgage loans that represent unresolved claims with investors in which a repurchase demand may occur, compared to $38 million at December 31, 2015.

For further details, see Mortgage Repurchase Risk on page 66 in our 2015 Form 10-K.

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(Dollars in tables in millions except per share amounts unless otherwise indicated)

Investment Securities

We hold a variety of investment securities, mostly government backed or insured securities such as GSE debt and FFELP ABS, and we believe these investments are low risk. There was no material change in the credit ratings of these AA or better rated securities since December 31, 2015, and except for private-label MBS as noted below, we have never taken an impairment charge on these securities. For further details see page 69 in our 2015 Form 10-K.

Our private-label MBS are predominantly variable rate securities rated below investment grade (BBB). There was no material change in overall credit quality since December 31, 2015, nor have we acquired any new private-label MBS. We last had an other-than-temporary impairment (OTTI) loss on private-label MBS in 2012. We currently have unrealized gains on these securities as their market values have improved from the impaired values and subsequent to 2012 we have begun recording accretion gains on these securities back into income. For further details see Note 5 - Investments Securities to the financial statements in this Form 10-Q as well as pages F-27 and F-28 in our 2015 Form 10-K.

Unsecured Short-Term Investments Credit Exposure

~~We face credit risk~~For further details on our unsecured short-term ~~investment portfolio that we maintain~~investments as well as policies and procedures to ~~provide funds to meet the credit needs of~~limit and monitor our ~~members and to maintain liquidity. See~~ ~~Liquidity~~ ~~on page 51for a discussion of our liquidity management. Our policy permits~~ unsecured credit ~~investments that can have maturities up to nine months and can consist of commercial paper, certificates of deposit, and Federal Funds sold.~~

~~We actively monitor~~risk exposure, see page 72 in our credit exposure and the credit quality of each counterparty (which can include our members), including an assessment of each counterparty's financial performance, capital adequacy, sovereign support and the current market perceptions of the counterparty. General macro-economic, political and market conditions may also be considered when deciding on unsecured exposure. As a result of this monitoring activity, we may limit or suspend existing unsecured credit limits.

We do not invest in unsecured financial instruments issued by non-U.S. entities (other than those issued by U.S. branches and agency offices of foreign commercial banks) as we are prohibited from doing so by FHFA regulations. Our unsecured credit exposures to U.S. branches or agency offices of foreign commercial banks include the risk that, as a result of political or economic conditions in a country, the counterparty may be unable to meet their contractual repayment obligations. Our unsecured credit exposures to domestic counterparties and U.S. subsidiaries of foreign commercial banks include the risk that these counterparties have extended credit to foreign counterparties.2015 Form 10-K.

The following table presents the credit ratings of our unsecured investment credit exposures by the domicile of the counterparty or the domicile of the counterparty's parent for U.S. branches and agency offices of foreign commercial banks. This table does not reflect the foreign sovereign government's credit rating. The unsecured investment credit exposure presented in the table may not reflect the average or maximum exposure during the period as the table reflects only the balances at period end.

As of September 30, 2015 AA A Unrated Total
Domestic U.S. - Interest-Bearing Deposits $ —
$ 560
$ —
$ 560
Domestic U.S. - Fed Funds Sold —
—
20
20
U.S. branches and agency offices of foreign commercial banks:
Netherlands - Fed Funds Sold —
400
—
400
Finland - Fed Funds Sold 300
—
—
300
Total unsecured credit exposure $ 300
$ 960
$ 20
$ 1,280



As of September 30, 2016	AA		A		BBB		Unrated		Total
Domestic U.S.
Interest-Bearing Deposits	$	—	$	650	$	—	$	—	$	650
Fed Funds Sold	—		—		188		19		207
U.S. branches and agency offices of foreign commercial banks - Federal Funds sold:
Australia	500		—		—		—		500
Canada	—		1,100		—		—		1,100
Finland	500		—		—		—		500
Netherlands	—		500		—		—		500
Norway	—		500		—		—		500
Sweden	—		500		—		—		500
Total unsecured credit exposure	$	1,000	$	3,250	$	188	$	19	$	4,457

All $4.5 billion of the unsecured credit exposure shown in the above table ~~no investments~~ were ~~longer than of~~ overnight ~~duration.~~investments.

~~Investment Securities~~

We hold a variety of investment securities we believe are low risk and mostly government backed or insured such as GSE debt, and FFELP ABS. There was no material change in the credit ratings of these AA or better rated securities since December 31, 2014, and except for private-label MBS as noted below, we have never taken an impairment charge on these securities. For further details see page 66 in our 2014 Form 10-K.

Our private label MBS are predominantly variable rate securities rated below investment grade BBB. There was no material change in overall credit quality since December 31, 2014, nor have we acquired any new private label MBS. We last had an other-than-temporary impairment (OTTI) loss in 2012. For further details see page F-26 and F-27 in our 2014 Form 10-K.

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~~Federal Home Loan Bank of Chicago~~

(Dollars in tables in millions except per share amounts unless otherwise indicated)

The following table presents the components of amortized cost of our private label MBS (whether or not impaired), and where applicable, the life-to-date OTTI credit impairment taken over time on some of these securities. For further details, see ~~Note 5 - Investment Securities - Other-Than-Temporary Impairment Analysis~~ ~~to the financial statements.~~

As of September 30, 2015 Unpaid Principal Balance
Life-To-Date OTTI Credit Impairment ^a

Other Adjustments ^b
Amortized Cost
Private label MBS $ 1,642
$ (742 ) $ 317
$ 1,217


^a	~~Life-to-date OTTI credit impairment excludes certain adjustments, such as increases in cash flows expected to be collected that have been recognized into net income.~~


^b	~~Other Adjustments primarily consists of principal shortfalls and life-to-date accretion of interest related to the discounted present value of previously recognized credit-related impairment losses.~~

~~Member~~Managing Our Credit ~~Outstanding~~Risk Exposure Related to Derivative Agreements

~~The following table presents the number of borrowers and secured credit outstanding~~Refer to our borrowers by rating. Our internal rating reflects our assessment of the default risk associated with a member rather than the risk of loss on the credit outstanding. We manage our credit risk through collateral controls and, based on our risk rating, increase over-collateralization requirements as a member deteriorates. As a result, we have never suffered a credit loss from a member default. Credit outstanding c~~onsists primarily of outstanding advances and letters of credit. MPF credit enhancement obligations, member derivative exposures, and other obligations make up the rest.~~ Collateral loan value describes the borrowing capacity assigned to the types of collateral we accept for advances. Collateral loan value does not imply fair value. Of the total credit outstanding, $34.8 billion were advances (par value) and $6.4 billion were letters of credit at September 30, 2015, compared to $32.3 billion and $3.6 billion at December 31, 2014.

September 30, 2015 December 31, 2014
Rating Number of Borrowers % of Total Credit Outstanding % of Total Collateral Loan Value Number of Borrowers % of Total Credit Outstanding % of Total Collateral Loan Value
1-3 483
95 % $ 41,002
100 % $ 113,752
481
92 % $ 35,651
98 % $ 76,797
4 7
1 % 90
— % 151
15
3 % 183
1 % 331
5 21
4 % 194
— % 326
25
5 % 240
1 % 388
Total 511
100 % $ 41,286
100 % $ 114,229
521
100 % $ 36,074
100 % $ 77,516

The significant increases in collateral loan values are due to the updated loan margins we made available to members effective June 25, 2015, large collateral pledges from two of our biggest borrowers and also a change in the qualified collateral report process that made pledging easier to conduct. The majority of borrowers assigned a 4 rating in the above table were required to submit specific collateral listings and the majority of borrowers assigned a 5 rating were required to deliver collateral to us or a third-party custodian on our behalf.

As a result of the collateral and other credit risk mitigation efforts, we believe our credit outstanding is sufficiently well collateralized and we have not recorded an allowance for credit losses on our advances or other credit products in the periods presented.

~~MPF Loans~~

~~Our allowance declined in 2015 compared to 2014 primarily as a result of change in regulation by AB 2012-02, for further details see~~ Note 29 - ~~Summary of Significant Accounting Policies~~Derivatives and Hedging Activities to the financial ~~statements. For details on~~statements for a discussion of how we manage our ~~allowance for credit losses, please see~~ ~~Note 8 - Allowance for Credit Losses~~ ~~to the financial statements.~~

~~Mortgage Repurchase Risk~~

We are exposed to mortgage repurchase risk in connection with our sale of MPF Loans to Fannie Mae under the MPF Xtra product, to third party investors under the MPF Direct product, and to Ginnie Mae for MPF Loans securitized in Ginnie Mae MBS. If a loan eligibility requirement or other warranty is breached, these third parties could require us to repurchase the ineligible MPF Loan or provide an indemnity. We may require the PFI from which we purchased the ineligible MPF Loan to repurchase that loan from us or indemnify us for related losses. Under the MPF Direct product, if a PFI is insolvent, our repurchase liability is limited to a PFI's failure to deliver the required loan documentation and excludes repurchases for breaches of loan level

~~Table of Contents~~

~~Federal Home Loan Bank of Chicago~~

~~(Dollars in millions except per share amounts unless otherwise indicated)~~

~~representations and warranties. In addition, if we purchased the ineligible MPF Loan from a PFI of another MPF Bank, the MPF Bank will indemnify us for any losses we may incur.~~

For the three and nine months ended September 30, 2015, we have repurchased $4 million and $17 million of unpaid principal balances related to MPF Xtra loans sold to Fannie Mae. These repurchases represent repurchase requests that have been resolved during the reporting period. Due to recoveries from PFIs, we incurred no material losses on these loans. As of September 30, 2015, we have $43 million of unpaid principal with respect to mortgage loans that represent unresolved claims with Fannie Mae, in which a repurchase demand may occur compared to $62 million at December 31, 2014; see ~~Note 14 -Commitments and Contingencies~~ to the financial statements. We did not estimate any mortgage repurchase liability with respect to MPF Direct loans due to the pre-purchase due diligence performed by the investor of all MPF Loans purchased under the MPF Direct product. We did not estimate any mortgage repurchase liability with respect to MPF Government MBS loans due to the minimal volume of MPF Loans securitized in Ginnie Mae MBS as of September 30, 2015.

~~For further details, see~~ ~~Mortgage Repurchase Risk~~ ~~on page 74 in our 2014 Form 10-K.~~

~~Derivative counterparties~~

We transact most of our derivatives with large banks and major broker-dealers. Derivative transactions may be either over-the-counter with a counterparty (bilateral derivatives) or over-the-counter cleared through an FCM with a derivatives clearing organization (clearinghouse).

~~We are subject to~~ credit risk due to the risk of nonperformance by counterparties to our derivative agreements. The amount of credit risk on derivatives depends on the extent to which netting procedures, collateral requirements and other credit enhancements are used and are effective in mitigating the risk. We manage credit risk through credit analysis, collateral management and other credit enhancements. We are also required to follow the requirements set forth by applicable regulation.

~~Bilateral Derivatives.~~ ~~We are subject to credit risk due to nonperformance by counterparties~~exposure related to derivative agreements. We ~~require collateral on bilateral derivative agreements. The amount of net unsecured~~have credit exposure ~~that is permissible with respect~~on net asset positions where we have not received adequate collateral from our counterparties. We also have credit exposure on net liability positions where we have pledged collateral in excess of our liability to a ~~counterparty depends on the credit rating of that~~ counterparty. The counterparty must deliver collateral to us if the total market value of our exposure to that counterparty rises above a specific trigger point. As a result of these risk mitigation initiatives, we do not anticipate any credit losses on our bilateral derivative agreements with counterparties as of ~~September 30, 2015~~.

~~Cleared Derivatives.~~ We are subject to credit risk due to nonperformance by the clearinghouse. The requirement that we post initial and variation margin through the FCM, on behalf of the clearinghouse, exposes us to institutional credit risk in the event that the FCM or the clearinghouse fails to meet their obligations. Clearing derivatives through a clearinghouse mitigates counterparty credit risk exposure because individual counterparties are replaced by the central clearinghouse counterparty and collateral is posted daily for changes in the value of cleared derivatives. We do not anticipate any credit losses on our cleared derivatives as of ~~September 30, 2015~~.

The contractual or notional amount of derivative agreements reflects our involvement in the various classes of financial instruments. Our maximum credit risk with respect to derivative agreements is the estimated cost of replacing interest-rate swaps, forward agreements and purchased caps and floors if the counterparty defaults, minus the value of any related collateral. In determining maximum credit risk, we consider, with respect to each counterparty, accrued interest receivables and payables as well as the legal right to net assets and liabilities.

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~~Federal Home Loan Bank of Chicago~~

~~(Dollars in millions except per share amounts unless otherwise indicated)~~

The following table presents ~~only~~ our derivative positions ~~with net~~where we have such credit ~~exposure. Rating~~exposures. The rating used was the lowest rating among the three largest ~~NRSROs.~~Nationally Recognized Statistical Rating Organizations. Non-cash collateral pledged consists of initial margin we posted through our FCMs, on behalf of the ~~clearinghouses~~DCOs for cleared ~~derivatives. Non-cash collateral pledged~~derivatives and is included in our derivative positions with credit exposure.


	Net Derivatives Fair Value Before Collateral			Cash Collateral Pledged			Non-cash Collateral Pledged		Net Credit Exposure to Counterparties		Net Fair Value Before Collateral			Cash Collateral Pledged		Non-cash Collateral Pledged		Net Credit Exposure to Counterparties
As of September 30, 2015
Asset positions with credit exposure -
As of September 30, 2016
Non-member counterparties -
Undercollateralized asset positions -
Bilateral derivatives -
Cleared derivatives											$	—		$	1	$	—	$	1
Overcollateralized liability positions -
Bilateral derivatives -
AA rated											(17		)	17		—		—
A rated	$	4		$	(4	)	$	—	$	—	(29		)	29		—		—
Liability positions with credit exposure -
Cleared derivatives	(185		)	184			58		57		(395		)	413		90		108
Net with non-member counterparties	(181		)	180			58		57
Non-member counterparties											(441		)	460		90		109
Member institutions	1			—			—		1		1			—		—		1
Total	$	(180	)	$	180		$	58	$	58	$	(440	)	$	460	$	90	$	110

As of December 31, 2014
Asset positions with credit exposure -
As of December 31, 2015
Non-member counterparties -
Overcollateralized liability positions -
Bilateral derivatives -
A rated	$	7		$	(6	)	$	—	$	1
Liability positions with credit exposure -
Bilateral derivatives -
AA rated											$	(14	)	$	14	$	—	$	—	^a
A rated	(16		)	16			—		—		(4		)	4		—		—		^a
Cleared derivatives	(166		)	168			71		73		(147		)	136		62		51
Net with non-member counterparties	(175		)	178			71		74
Non-member counterparties											(165		)	154		62		51
Member institutions	3			—			—		3		1			—		—		1
Total	$	(172	)	$	178		$	71	$	77	$	(164	)	$	154	$	62	$	52


^a	Less than $1 million.

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~~Federal Home Loan Bank of Chicago~~

(Dollars in tables in millions except per share amounts unless otherwise indicated)

Legislative and Regulatory Developments

Significant regulatory actions and developments ~~for the period covered by this report~~ are summarized below.

~~Joint Final Rule~~Minority and Women Inclusion

On October 27, 2016, the FHFA proposed amendments to its Minority and Women Inclusion regulations that, if adopted, would clarify the scope of the FHLBs’ obligation to promote diversity and ensure inclusion. These proposed amendments update existing FHFA regulations aimed at promoting diversity and the inclusion and utilization of minorities, women, and individuals with disabilities in all Bank business and activities, including management, employment and contracting.

The proposed amendments would:

require the FHLBs to develop standalone diversity and inclusion strategic plans or incorporate diversity and inclusion into their existing strategic planning processes and adopt strategies for promoting diversity and ensuring inclusion;

encourage the FHLBs to expand contracting opportunities for minorities, women, and individuals with disabilities through subcontracting arrangements;

require the FHLBs to amend their policies on ~~Margin~~equal opportunity in employment and ~~Capital Requirements~~contracting by adding sexual orientation, gender identity, and status as a parent to the list of protected classifications; and

require the FHLBs to provide information in their annual reports to the FHFA about their efforts to advance diversity and inclusion through capital market transactions, affordable housing and community investment programs, initiatives to improve access to mortgage credit, and strategies for ~~Covered Swap Entities~~promoting the diversity of supervisors and managers.

~~In October 2015,~~Comments on the proposed amendments are due by December 27, 2016. We are currently assessing the effect the proposed amendments would have on us if adopted.

FHLB Membership for Non-Federally-Insured Credit Unions

On September 28, 2016, the FHFA proposed amendments to regulations governing FHLB membership that would implement statutory amendments to the FHLB Act authorizing FHLBs to accept applications for membership from state-chartered credit unions without Federal share insurance, provided that certain prerequisites have been met. The new rule, if adopted, would generally treat these credit unions the same as other depository institutions with an additional requirement that they obtain an affirmative statement from their state regulator that they meet the requirements for Federal insurance as of the date of their application for FHLB membership; a written statement from the state regulator that it cannot or will not make any determination regarding eligibility for Federal insurance; or if the regulator fails or refuses to respond to the credit union’s request within six months, confirmation of the failure to receive a response.

Comments are due on the proposed rule by November 28, 2016. We are currently assessing the effect of the proposed rule but do not anticipate that, if adopted, it would materially impact us.

Indemnification Payments

On September 20, 2016, the FHFA issued a re-proposed rule that, if adopted, would establish standards for identifying whether an indemnification payment by a FHLB or the Office of Finance to an officer, director, employee, or other entity-affiliated party in connection with an administrative proceeding or civil action instituted by the ~~Comptroller~~FHFA is prohibited or permissible. Under the proposed rule, those payments with respect to an administrative proceeding or civil action initiated by the FHFA are only permitted if they relate to:

premiums for professional liability insurance or fidelity bonds for directors and officers, to the extent that the insurance or fidelity bond covers expenses and restitution, but not a judgment in favor of the ~~Currency, the Board~~FHFA or a civil money penalty;

expenses of ~~Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Farm Credit Administration, and the FHFA (each~~defending an Agency and, collectively, the Agencies) jointly adopted final rules to establish minimum margin and capital requirements for registered swap dealers, major swap participants, security-based swap dealers, and major security-based swap participants (Swap Entities) that areaction, subject to ~~the jurisdiction of one of the Agencies (such entities, Covered Swap Entities,~~an agreement to repay those expenses in certain instances; and ~~the joint final rules, the Final Margin Rules).~~

When they take effect, the Final Margin Rules will subject non-cleared swaps and non-cleared security-based swaps between Covered Swap Entities and financial end users that have material swaps exposure (i.e.,amounts due under an ~~average daily aggregate notional of $8 billion~~indemnification agreement entered into on or ~~more in non-cleared swaps calculated in accordance with the Final Margin Rules),~~prior to a mandatory two-way minimum initial margin requirement. The minimum amount of the initial margin required to be posted or collected would be either the amount calculated by the Covered Swap Entity using a standardized schedule set forth as an appendix to the Final Margin Rules, which provides the gross initial margin (as a percentage of total notional exposure) for certain asset classes, or an internal margin model of the Covered Swap Entity conforming to the requirements of the Final Margin Rules that is approved by the Agency having jurisdiction over the particular Covered Swap Entity.September 20, 2016.

The ~~Final Margin Rules specify~~proposed rule also outlines the ~~types~~process a board of ~~collateral that may be posted or collected as initial margin~~directors must undertake prior to making any permitted indemnification payment for non-cleared swaps and non-cleared security-based swaps with financial end-users (generally cash, certain government and GSE securities, certain liquid debt, certain equity securities, certain eligible publicly traded debt, and gold), and set forth haircuts for certain collateral asset classes. Initial margin must be segregated withexpenses of defending an independent, third-party custodian and, generally, may not be rehypothecated, except that, cash funds may be placed with a custodian bank in return for a general deposit obligation under certain specified circumstances.action instituted by the FHFA.

The Final Margin Rules will require minimum variation margin to be exchanged daily for non-cleared swaps and non-cleared security-based swaps between Covered Swap Entities and all financial end-users (without regard toComments are due on the ~~swaps exposure of~~proposed rule by December 21, 2016. We are currently assessing the ~~particular financial end-user). The minimum variation margin amount is~~effect the daily mark-to-market change in the value of the swap to the Covered Swap Entity, taking into account variation margin previously posted or collected. For non-cleared swaps and security-based swaps between Covered Swap Entities and financial end-users, variation margin may be posted or collected in cash or non-cash collateral that is considered eligible for initial margin purposes. Variation margin is not subject to segregation with an independent, third-party custodian, and may,proposed rule would have on us if ~~permitted by contract, be rehypothecated.~~adopted.

The variation margin requirement under the Final Margin Rules will become effective for the Bank on March 1, 2017, and the initial margin requirement under the Final Margin Rules is expected to become effective for the Bank on September 1, 2020.

The Bank is not a Covered Swap Entity under the Final Margin Rules. But, the Bank is a financial end-user under the Final Margin Rules, and would likely have material swaps exposure when the initial margin requirements under the Final Margin Rules become effective.

Because we are currently posting and collecting variation margin on non-cleared swaps, it is not anticipated that the variation margin requirement under the Final Margin Rules will have a material impact on our costs. However, when the initial margin requirements under the Final Margin Rules become effective, we anticipate that our cost of engaging in non-cleared swaps may increase.

The Commodity Futures Trading Commission (CFTC) and the SEC are expected to adopt their own versions of the Final Margin Rules that will be comparable to the Final Margin Rules. The CFTC’s and SEC’s rules will only apply to a limited number of registered swap dealers, security-based swap dealers, major swap participants, and major security-based swap participants that are not subject to the jurisdiction of one of the Agencies.

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(Dollars in tables in millions except per share amounts unless otherwise indicated)

~~FHFA Core Mission Achievement Advisory Bulletin 2015-05~~FRB Framework for Implementing the U.S. Basel III Countercyclical Capital Buffer

On ~~July 14, 2015,~~September 8, 2016, the FRB adopted a final policy statement (“Policy Statement”) describing the framework that the FRB will follow in setting the countercyclical capital buffer (“CCyB”) for banking organizations that are subject to the advanced approaches capital rules, generally those with more than $250 billion in assets or $10 billion in on-balance-sheet foreign exposures, and to any depository institution subsidiary of such banking organizations. The CCyB supplements the minimum capital requirements and other capital buffers included in existing regulations, which were designed to provide resilience to unexpected losses created by normal fluctuations in economic and financial conditions.

Although the Policy Statement does not directly impact us, the potential impact on borrowings by our few larger members is uncertain.

FHLB New Business Activities

On August 23, 2016, the FHFA ~~issued an advisory bulletin~~proposed a rule that, ~~provides guidance relating to~~if adopted, would reduce the scope of new business activities (“NBAs”) for which a ~~core mission asset ratio by which~~FHLB must seek approval from the FHFA ~~will assess each FHLB’s core mission achievement.~~and would establish more certain timelines for FHFA review and approval of NBA notices. The proposed rule also would clarify the protocol for FHFA ~~plans~~review of NBAs. Under the proposed rule, acceptance of new types of legally permissible collateral by the FHLBs would not constitute a new business activity or require approval from the FHFA prior to assess core mission achievement by using a ratio of primary mission assets, which includes advances and mortgage loans acquired from members (also referred to as acquired member assets), to consolidated obligations. The core mission asset ratio will be calculated at year-end 2015, and annually thereafteracceptance. Instead, the FHFA would review new collateral types as part of the ~~FHFA's examination process, using~~ annual ~~average par values.~~

~~The advisory bulletin provides the FHFA’s expectations for each FHLB’s strategic plan based on its ratio, which are:~~exam process.

~~when~~On October 24, 2016, the ~~ratio is at least 70% or higher,~~FHLBs provided comments to the ~~strategic plan should include an assessment~~proposed rule, which primarily relate to certain procedures under the proposed rule. We do not anticipate that the proposed rule, if adopted, would materially impact us.

Mandatory Contractual Stay Requirements for Qualified Financial Contracts (“QFCs”)

On August 19, 2016, the Office of the ~~FHLB’s prospects for maintaining this level;~~Comptroller of the Currency (“OCC”) issued a proposed rule, which, if adopted, would require certain systemically important financial institutions (“SIFI”) regulated by the OCC to amend their covered qualified financial contracts (“QFCs”) to limit a counterparty’s immediate termination or exercise of default rights in the event of bankruptcy or receivership of the SIFI or an affiliate of the SIFI. Covered QFCs include derivatives, repurchase agreements (known as “repos”) and reverse repos, and securities lending and borrowing agreements. On May 3, 2016, the Federal Reserve Board (“FRB”) issued a substantively identical proposed rule with respect to QFCs entered into with globally systemically important banking organizations (“GSIBs”) and their affiliates that are subject to regulation in the U.S. Further, on October 26, 2016, the Federal Deposit Insurance Corporation ("FDIC") issued a substantively identical proposed rule with respect to QFCs entered into with certain FDIC-supervised institutions.

~~when~~The FHLBs provided comments on the ~~ratio is between 55% but less than 70%,~~FRB proposed rule on August 5, 2016 and to the ~~strategic plan should explain~~OCC proposed rule on October 18, 2016, which primarily seek clarification of an exemption and the ~~FHLB’s plan~~recognition of a safe harbor. The FHLBs are considering whether to ~~increase its mission focus; and~~comment on the FDIC's proposed rule. We do not anticipate that the proposed rules, if adopted, would materially impact us.

~~when~~European Union (“EU”) Market Abuse Regulation

The EU issued updated Market Abuse Regulations (“MAR”) that became effective July 3, 2016 which contain rules on insider dealing, unlawful disclosure of inside information and market manipulation for debt and equity securities on European securities exchanges, which differ in certain respects from U.S. regulations. MAR applies to issuers with securities admitted to trading on the ~~ratio is below 55%,~~EU exchanges, including EU exchanges on which FHLB consolidated obligations are listed. MAR contains an exemption to its requirements for certain public bodies and central banks of third countries. The OF and the ~~strategic plan should include an explanation~~FHLBs are examining whether this exemption applies. If the exemption does not apply, we anticipate that the most significant impact of the ~~circumstances that caused the ratio to~~MAR on us will be ~~at that level~~more stringent and detailed ~~plans~~recordkeeping, creation of detailed lists on parties who have access to increase the ratio. The advisory bulletin provides that if an FHLB maintains a ratio below 55% over the course of several consecutive reviews, then the FHLB’s board of directors should consider possible strategic alternatives.inside information, and notification requirements.

~~Our core mission activities primarily include~~Financial Industry Regulatory Authority (“FINRA”) Rule 4210 establishing margin requirements for the ~~issuance~~TBA Market

On June 15, 2016, the SEC approved a proposed rule by FINRA to require the margining of ~~advances. In addition,~~certain “to-be-announced” (“TBA”) transactions. Specifically, the approved FINRA Rule 4210 will require FINRA members to collect from, but not post to, their customers maintenance margin (i.e. initial margin) and variation margin on transactions that are "Covered Transactions" (as defined in FINRA rules), subject to certain exemptions. Under the rule, we ~~acquire member assets through~~are exempt from posting initial margin but would be required to post variation margin to our FINRA-member counterparty in connection with covered transactions, provided we have more than $10 million in gross open positions with the ~~MPF Program. We expect our core mission achievement ratio at year-end~~counterparty.

FINRA members will be ~~between 55%~~required to comply with the new margin requirements beginning in December 2017. We are currently assessing the financial and ~~70%.~~operational impacts of this rule.

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(Dollars in tables in millions except per share amounts unless otherwise indicated)

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Measurement of Market Risk Exposure

To measure our exposure, we discount the cash flows generated from modeling the terms and conditions of all interest rate-sensitive securities using current interest rates to determine their fair values or spreads to the swap curve for securities where third party prices are used. This includes considering explicit and embedded options using a lattice model or Monte Carlo simulation. We estimate yield curve, option, and basis risk exposures by calculating the fair value change in relation to various parallel changes in interest rates, implied volatility, prepayment speeds, spreads to the swap curve and mortgage rates.

The table below summarizes our sensitivity to various interest rate risk exposures in terms of changes in market value.


				Option Risk						Basis Risk								Option Risk						Basis Risk
	Yield Curve Risk			Implied Volatility			Prepayment Speeds			Spread to Swap Curve			Mortgage Spread		Yield Curve Risk			Implied Volatility			Prepayment Speeds			Spread to Swap Curve			Mortgage Spread
As of September 30, 2015
As of September 30, 2016
Advances	$	(3	)	$	—		$	—		$	(9	)	$	—	$	(4	)	$	—		$	—		$	(10	)	$	—
MPF Loans	(1		)	(2		)	(3		)	(2		)	1		(1		)	(1		)	(3		)	(2		)	1
Mortgage Backed Securities	(5		)	(1		)	(1		)	(6		)	—		(3		)	—			(1		)	(4		)	—
Other interest earning assets	(1		)	—			—			(3		)	—		(1		)	—			—			(3		)	—
Interest-bearing liabilities	6			5			—			6			—		5			3			—			5			—
Derivatives	4			(3		)	—			—			—		3			(2		)	—			—			—
Total	$	—		$	(1	)	$	(4	)	n/m			$	1	$	(1	)	$	—		$	(4	)	n/m			$	1

As of December 31, 2014
As of December 31, 2015
Advances	$	(3	)	$	—		$	—		$	(11	)	$	—	$	(3	)	$	—		$	—		$	(10	)	$	—
MPF Loans	(1		)	(3		)	(3		)	(2		)	1		(1		)	(2		)	(2		)	(2		)	1
Mortgage Backed Securities	(6		)	(1		)	(1		)	(7		)	—		(4		)	(1		)	(1		)	(5		)	—
Other interest earning assets	(1		)	—			—			(4		)	—		(1		)	—			—			(3		)	—
Interest-bearing liabilities	10			12			—			9			—		6			5			—			6			—
Derivatives	2			(9		)	—			—			—		3			(3		)	—			—			—
Total	$	1		$	(1	)	$	(4	)	n/m			$	1	$	—		$	(1	)	$	(3	)	n/m			$	1


n/m	Spread movements to the swap curve within each category are independent of the other categories and therefore a total is not meaningful.

Yield curve risk – Change in market value for a one basis point parallel increase in the swap curve.

Option risk (implied volatility) – Change in market value for a one percent parallel increase in the swaption volatility.

Option risk (prepayment speeds) – Change in market value for a one percent increase in prepayment speeds.

Basis risk (spread to swap curve) – Change in market value for a one basis point parallel increase in the spread to the swap curve.

Basis risk (mortgage spread) – Change in market value for a one basis point increase in mortgage rates.

As of September 30, ~~2015,~~2016, our sensitivity to changes in implied volatility was ~~$(1) million.~~zero. At December 31, ~~2014,~~2015, our sensitivity to changes in implied volatility was $(1) million. These sensitivities are limited in that they do not incorporate other risks, including but not limited to, non-parallel changes in yield curves, ~~prepayment speeds,~~ and basis risk related to differences between the swap and the other curves. Option positions embedded in our mortgage assets and callable debt impact our yield curve risk profile, such that swap curve changes significantly greater than one basis point cannot be linearly interpolated from the table above.

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(Dollars in tables in millions except per share amounts unless otherwise indicated)

Duration of equity is another measure to express interest rate sensitivity. We report the results of our duration of equity calculations to the FHFA each quarter. We measure duration of equity in a base case using the actual yield curve as of a specified date and then shock it with an instantaneous shift of the entire curve. The following table presents the duration of equity reported by us to the FHFA in accordance with the FHFA's guidance, which prescribes that down and up interest-rate shocks equal 200 basis points. The results are shown in years of duration equity.

September 30, 2015 December 31, 2014
Down 200 bps Base Up 200 bps Down 200 bps Base Up 200 bps
3.2 1.3 0.8 3.2 -0.3 0.2



September 30, 2016			December 31, 2015
Down 200 bps	Base	Up 200 bps	Down 200 bps	Base	Up 200 bps
2.5	1.0	1.0	2.8	0.6	0.7

Duration gap is another measure of interest rate sensitivity. Duration gap is calculated by dividing the dollar duration of equity by the fair value of assets. A positive duration gap indicates an exposure to rising interest rates. As of September 30, ~~2015,~~2016, our duration gap was ~~1.0~~0.9 months, compared to ~~-0.2~~0.5 months as of December 31, ~~2014.~~2015.

As of September 30, ~~2015,~~2016, on a U.S. GAAP basis, our fair value surplus (relative to book value) was ~~$351~~$399 million, and our market value of equity to book value of equity ratio was 108%~~. At~~, compared to $351 million and 108% at December 31, 2014, our fair value surplus was $618 million and our market value of equity to book value of equity ratio was 114%. The reduction in market value to book value was partly driven by the increase in our capital and the gradual pay down of assets at a fair value premium to book value that are replaced by assets at par. This is a trend that is expected to continue.2015. Our market to book value of total capital for regulatory risk-based capital purposes differs from this GAAP calculation, as discussed in Note 11 - Capital and Mandatorily Redeemable Capital Stock (MRCS) .to the financial statements.

Our Asset/Liability Management Committee provides oversight of market risk management practices and policies. This includes routine reporting to senior management and the Board of Directors, as well as maintaining the Income and Market Value Risk Policy, which defines our interest rate risk limits. The table below reflects the change in market risk limits under the Income and Market Value Risk Policy.


	September 30, 2015						December 31, 2014						September 30, 2016						December 31, 2015
Scenario as of	Change in Market Value of Equity			Loss Limit			Change in Market Value of Equity			Loss Limit			Change in Market Value of Equity			Loss Limit			Change in Market Value of Equity			Loss Limit
-200 bp	$	119.6		$	(185.0	)	$	118.6		$	(185.0	)	$	60.1		$	(370.0	)	$	123.0		$	(370.0	)
-100 bp	95.5			(77.5		)	28.5			(77.5		)	125.7			(155.0		)	65.2			(155.0		)
-50 bp	48.9			(30.0		)	(0.6		)	(30.0		)	42.4			(60.0		)	21.8			(60.0		)
-25 bp	22.6			(15.0		)	(2.4		)	(15.0		)	16.9			(30.0		)	7.5			(30.0		)
+25 bp	(12.7		)	(30.0		)	4.1			(30.0		)	(11.4		)	(30.0		)	(6.4		)	(30.0		)
+50 bp	(23.0		)	(60.0		)	9.2			(60.0		)	(20.2		)	(60.0		)	(13.9		)	(60.0		)
+100 bp	(42.7		)	(155.0		)	12.9			(155.0		)	(35.9		)	(155.0		)	(31.3		)	(155.0		)
+200 bp	(78.3		)	(370.0		)	7.0			(370.0		)	(80.3		)	(370.0		)	(62.8		)	(370.0		)

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(Dollars in tables in millions except per share amounts unless otherwise indicated)

Item 4. Controls and Procedures.

Disclosure Controls and Procedures

Under the supervision and with the participation of management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, as of the end of the period covered by this report (the Evaluation Date). Based on this evaluation, the principal executive officer and principal financial officer concluded as of the Evaluation Date that the disclosure controls and procedures were effective such that information relating to us that is required to be disclosed in reports filed with the SEC (i) is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and (ii) is accumulated and communicated to management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

For the ~~current year~~most recent quarter presented in this Form 10-Q, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Consolidated Obligations

Our disclosure controls and procedures include controls and procedures for accumulating and communicating information relating to our joint and several liability for the consolidated obligations of other FHLBs. For further information, see Item 9A. Controls and Procedures on page 8582 of our ~~2014~~2015 Form 10-K.

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PART II - OTHER INFORMATION

Item 1. Legal Proceedings.

On October 15, 2010, the Bank instituted litigation relating to 64 ~~private label~~private-label MBS bonds purchased by the Bank in an aggregate original principal amount of $4.29 billion. ~~The litigation was brought in state court~~Of the three cases that were filed by the Bank, only the action filed in the ~~states~~Circuit Court of Washington, California and Illinois. The Washington action has been resolved and was dismissed with prejudice on December 5, 2013. The California action has been resolved and was dismissed with prejudice on January 27, 2014. TheCook County, Illinois ~~action, which currently relates to nine private label~~remains active. As of September 30, 2016, this litigation covers four private-label MBS bonds ~~with an~~in the aggregate original principal amount of ~~$494 million, is proceeding in discovery.~~$77.5 million.

In ~~the Illinois~~this action, the Bank asserts claims for untrue or misleading statements in the sale of securities, signing or circulating securities documents that contained material misrepresentations, and negligent misrepresentation. The Bank seeks the remedies of rescission, recovery of damages, and recovery of reasonable attorneys' fees and costs of suit. As of ~~October 31, 2015,~~September 30, 2016, Morgan Stanley & Co., Incorporated, and certain of its affiliates, remain as the sole defendants in the Illinois ~~litigation include the following entities and affiliates thereof: Goldman Sachs & Co. and Morgan Stanley & Co., Incorporated.~~action.

The Bank may also be subject to various other legal proceedings arising in the normal course of business. After consultation with legal counsel, management is not aware of any other proceedings that might have a material effect on the Bank's financial condition or results of operations.

Item 1A. Risk Factors.

In addition to the information presented in this report, readers should carefully consider the factors set forth in the Risk Factors section on page 19 in our ~~2014~~2015 Form 10-K, which could materially affect our business, financial condition, or future results. These risks are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also severely affect us.

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~~Federal Home Loan Bank of Chicago~~

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

Not applicable.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not applicable.

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Item 5. Other Information.

~~None.~~

PricewaterhouseCoopers LLP (PwC) serves as the independent registered public accounting firm for us and the other FHLBs. Rule 2-01(c)(1)(ii)(A) of Regulation S-X (the Loan Rule) prohibits an accounting firm, such as PwC, from having certain financial relationships with their audit clients and affiliated entities. Specifically, the Loan Rule provides, in the relevant part, that an accounting firm generally would not be independent if it receives a loan from a lender that is a “record or beneficial owner of more than ten percent of the audit client’s equity securities.”

PwC has advised the Bank that as of September 30, 2016 it has borrowing relationships with one Bank member (referred to below as the “Lender”) who owns more than ten percent of the Bank’s capital stock, which could call into question PwC’s independence with respect to the Bank. The Bank is providing this disclosure to explain the facts and circumstances as well as PwC’s and the Audit Committee’s conclusions concerning PwC’s objectivity and impartiality with respect to the audit of the Bank.

PwC advised the Audit Committee of the Bank that it believes that, in light of the facts of the borrowing relationship, its ability to exercise objective and impartial judgment on all matters encompassed within PwC’s audit engagement have not been impaired and that a reasonable investor with knowledge of all relevant facts and circumstances would reach the same conclusion. PwC has advised the Audit Committee that this conclusion is based in part on the following considerations:

the borrowings are in good standing and the Lender does not have the right to take action against PwC, as borrower, in connection with the financings;

the debt balances outstanding are immaterial to PwC and to the Lender;

PwC has borrowing relationships with a diverse group of lenders, therefore PwC is not dependent on any single lender or group of lenders; and

the PwC audit engagement team has no involvement in PwC’s treasury function and PwC’s treasury function has no oversight or ability to influence the PwC audit engagement team.

Additionally, the Audit Committee of the Bank assessed PwC’s ability to perform an objective and impartial audit, including consideration of the ownership and governance structure of the Bank, the limited voting rights of the Bank’s members and the composition of the board of directors. In addition to the above listed considerations, the Audit Committee considered the following:

although the Lender owned more than ten percent of the Bank’s capital stock, the voting power of the Lender's capital stock is less than ten percent;

no individual officer or director of a member or independent director that serves on the board of directors has the ability to significantly influence the Bank based on the composition of the board of directors; and

as of September 30, 2016, no officer or director of the Lender serves on the board of directors of the Bank.

Based on the Audit Committee’s evaluation, the Audit Committee has concluded that PwC’s ability to exercise objective and impartial judgment on all issues encompassed within PwC’s audit engagement has not been impaired.

If in the future, however, PwC is ultimately determined under the Loan Rule not to be independent with respect to the Bank, or permanent relief regarding this matter is not granted by the SEC, the Bank may need to take other actions and incur other costs in order for the Bank’s previously filed Annual Reports on Form 10-K and Quarterly Reports on Form 10-Q to be deemed compliant with applicable securities laws. Such actions may include, among other things, obtaining a new audit of our historical financial statements by another independent registered public accounting firm. Any of the foregoing could have an adverse impact on the Bank.

For further discussion of Bank members owning more than ten percent of the Bank’s capital stock at September 30, 2016, please see Note 11 - Capital and Mandatorily Redeemable Capital Stock (MRCS) to the financial statements in this Form 10-Q. For a discussion of the voting rights of our members, please see Item 10 - Directors, Executive Officers, and Corporate Governance - 2015 Director Election on page 84 in our 2015 Form 10-K.

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Item 6. Exhibits.



~~4.1~~	~~Second Amended and Restated Capital Plan~~
10.1	MPF Consolidated Interbank Agreement, dated as of ~~the Federal Home Loan Bank of Chicago, effective October 1, 2015~~¹July 22, 2016

31.1	Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by the Principal Executive Officer

31.2	Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by the Principal Financial Officer

32.1	Certification pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by the Principal Executive Officer

32.2	Certification pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by the Principal Financial Officer

101.INS	XBRL Instance Document

101.SCH	XBRL Taxonomy Extension Schema Document

101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF	XBRL Taxonomy Extension Definition Linkbase Document

101.LAB	XBRL Taxonomy Extension Label Linkbase Document

101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

¹~~Filed with our 8-K Current Report on August 31, 2015~~

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Glossary of Terms

Advances: Secured loans to members.

ABS: Asset-backed-securities.

AFS: Available-for-sale securities.

AOCI: Accumulated Other Comprehensive Income.

Capital Plan: The Second Amended and Restated Capital Plan of the Federal Home Loan Bank of Chicago, effective as of October 1, 2015.

~~CDFI:~~CBSA: ~~Community development financial institution.~~Core Based Statistical Areas (CBSAs), which are based upon an assessment of the individual housing markets. CBSA refers collectively to metropolitan and micropolitan statistical areas as defined by the United States Office of Management and Budget; as currently defined, a CBSA must contain at least one urban area with a population of 10,000 or more people.

Consolidated Obligations (CO): FHLB debt instruments (bonds and discount notes) which are the joint and several liability of all FHLBs; issued by the Office of Finance.

Consolidated obligation bonds: Consolidated obligations that make periodic interest payments with a term generally over one year, although we have issued for terms of less than one year.

DCO: Derivatives Clearing Organization. A clearinghouse, clearing association, clearing corporation, or similar entity that enables each party to an agreement, contract, or transaction to substitute, through novation or otherwise, the credit of the DCO for the credit of the parties; arranges or provides, on a multilateral basis, for the settlement or netting of obligations; or otherwise provides clearing services or arrangements that mutualize or transfer credit risk among participants.

Discount notes: Consolidated obligations with a term of one year or less, which sell at less than their face amount and are redeemed at par value when they mature.

Dodd-Frank Act: Dodd-Frank Wall Street Reform and Consumer Protection Act, enacted July 21, 2010.

Excess capital stock: Capital stock held by members in excess of their minimum investment requirement.

Fannie Mae: Federal National Mortgage Association.

FASB: Financial Accounting Standards Board.

FCM: Futures Commission Merchant.

~~FDIC:~~ ~~Federal Deposit Insurance Corporation.~~

FFELP: Federal Family Education Loan Program.

~~FHA:~~ ~~Federal Housing Administration.~~

FHFA: Federal Housing Finance Agency - The Housing and Economic Recovery Act of 2008 enacted on July 30, 2008 created the Federal Housing Finance Agency which became the regulator of the FHLBs.

FHLB Act: The Federal Home Loan Bank Act of 1932, as amended.

FHLBs: The 11 Federal Home Loan Banks or subset thereof.

FHLB System: The 11 FHLBs and the Office of Finance.

~~FHLBC:~~FHLB Chicago: The Federal Home Loan Bank of ~~Chicago~~Chicago.

Freddie Mac: Federal Home Loan Mortgage Corporation.

GAAP: Generally accepted accounting principles in the United States of America.

Ginnie Mae: Government National Mortgage Association.

Ginnie Mae MBS: Mortgage-backed securities guaranteed by Ginnie Mae.

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Government Loans: Mortgage loans insured or guaranteed by the Federal Housing Administration, ~~(FHA),~~ the Department of Housing and Urban Development, ~~(HUD),~~ the Department of ~~Veteran~~Veterans Affairs ~~(VA)~~ or Department of Agriculture Rural Housing ~~Service (RHS).~~Service.

GSE: Government sponsored enterprise.

~~Housing Act:~~ HFS:~~Housing and Economic Recovery Act of 2008, enacted July 30, 2008.~~ Held for sale.

~~HUD:~~ ~~Department of Housing and Urban Development.~~

HTM: Held-to-maturity securities.

LIBOR: London Interbank Offered Rate.

~~Master Commitment (MC):~~ ~~Pool of MPF Loans purchased or funded by an MPF Bank.~~

MBS: Mortgage-backed securities.

Moody's: Moody's Investors Service.

MPF^®: Mortgage Partnership Finance.

MPF Banks: FHLBs that participate in the MPF program.

MPF Direct product: The MPF Program product under which we acquire jumbo MPF Loans from PFIs and concurrently resell them to a third party investor.

MPF Government MBS product: The MPF Program product under which we aggregate Government Loans acquired from PFIs in order to issue securities guaranteed by the Ginnie Mae that are backed by such Government Loans.

MPF Loans: ~~Conforming conventional~~Conventional and government ~~fixed-rate~~ mortgage loans secured by one-to-four family residential properties with maturities from five to 30 years or participations in such mortgage loans that are acquired under the MPF Program.

MPF Program: A secondary mortgage market structure that provides liquidity to FHLB members that are PFIs through the purchase or funding by an FHLB of MPF Loans.

MPF Xtra^® product: The MPF Program product under which we acquire MPF Loans from PFIs and concurrently resell them to Fannie Mae.

MRCS: mandatorily redeemable capital stock.

~~NRSRO:~~Nonaccrual MPF Loans: ~~Nationally Recognized Statistical Rating Organization.~~Nonperforming mortgage loans in which the collection of principal and interest is determined to be doubtful or when interest or principal is past due for 90 days or more, except when the MPF Loan is well secured and in the process of collection.

Office of Finance: A joint office of the FHLBs established to facilitate issuing and servicing of consolidated obligations.

~~OIS:~~ ~~Fed Funds Effective Swap Rate (or Overnight Index Swap Rate).~~

OTTI: Other-than-temporary impairment.

PFI: Participating Financial Institution. A PFI is a member (or eligible housing associate) of an MPF Bank that has applied to and been accepted to do business with its MPF Bank under the MPF Program.

~~PMI:~~PwC: ~~Primary Mortgage Insurance.~~PricewaterhouseCoopers LLP.

RCAP: Reduced Capitalization Advance Program.

Recorded Investment: Recorded investment in a loan is its amortized cost basis plus related accrued interest receivable, if any. Recorded investment is not net of an allowance for credit losses but is net of any direct charge-off on a loan. Amortized cost basis is defined as either the amount funded or the cost to purchase MPF Loans held in portfolio. Specifically, the amortized cost basis includes the initial fair value amount of the delivery commitment as of the purchase or settlement date, agent fees (i.e., market risk premiums or discounts paid to or received from PFIs), if any, subsequently adjusted, if applicable, for accretion, amortization, collection of cash, charge-offs, and cumulative basis adjustments related to fair value hedges.

Regulatory capital: Regulatory capital stock plus retained earnings.

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Regulatory capital stock: The sum of the paid-in value of capital stock and mandatorily redeemable capital stock.

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~~Federal Home Loan Bank of Chicago~~

~~REO:~~SEC: ~~Real estate owned.~~Securities and Exchange Commission.

~~RHS:~~ ~~Department of Agriculture Rural Housing Service.~~

System or FHLB System: The Federal Home Loan Bank System consisting of the 11 Federal Home Loan Banks and the Office of Finance.

~~VA:~~ TBA:~~Department of Veteran's Affairs.~~ A forward contract on a mortgage-backed security (MBS), typically issued by a U.S. government sponsored entity, whereby a seller agrees to deliver an MBS for an agreed upon price on an agreed upon date.

UPB: Unpaid Principal Balance.

U.S.: United States

6965

Table of Contents

~~Federal Home Loan Bank of Chicago~~

Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.




		FEDERAL HOME LOAN BANK OF CHICAGO

		/s/ Matthew R. Feldman
		~~By:~~Name:	Matthew R. Feldman
		Title:	President and Chief Executive Officer
Date:	November ~~6, 2015~~3, 2016	(Principal Executive Officer)

		/s/ Roger D. Lundstrom
		~~By:~~Name:	Roger D. Lundstrom
		Title:	Executive Vice President and Chief Financial Officer
Date:	November ~~6, 2015~~3, 2016	(Principal Financial Officer and Principal Accounting Officer)

S-1



As of September 30, 2015	Par Value Outstanding			% of Total Outstanding
One Mortgage Partners Corp	$	11,000	^a	32	%
The Northern Trust Company	4,000			12	%



	Amortization of Effective Portion Reclassified From AOCI to Interest			Ineffective Portion Reclassified From AOCI to Derivatives and Hedging Activities		Total Reclassified From AOCI to Statements of Income			Net Change in Other Comprehensive Income			Effective Portion Recorded in AOCI			Net Interest Settlements Recorded in Net Interest Income
Three months ended September 30, 2015
Advances - interest rate floors	$	2		$	—	$	2		$	(2	)	$	—		$	—
Discount notes - interest rate swaps	(1		)	1		—			(29		)	(29		)	(61		)
Total	$	1		$	1	$	2		$	(31	)	$	(29	)	$	(61	)
Three months ended September 30, 2014
Advances - interest rate floors	$	4		$	—	$	4		$	(4	)	$	—		$	—
Discount notes - interest rate swaps	(1		)	—		(1		)	88			87			(62		)
Bonds - interest rate swaps	(1		)	—		(1		)	1			—			—
Total	$	2		$	—	$	2		$	85		$	87		$	(62	)
Nine months ended September 30, 2015
Advances - interest rate floors	$	8		$	—	$	8		$	(8	)	$	—		$	—
Discount notes - interest rate swaps	(2		)	2		—			14			14			(185		)
Bonds - interest rate swaps	(2		)	—		(2		)	2			—			—
Total	$	4		$	2	$	6		$	8		$	14		$	(185	)
Nine months ended September 30, 2014
Advances - interest rate floors	$	9		$	—	$	9		$	(9	)	$	—		$	—
Discount notes - interest rate swaps	(2		)	1		(1		)	98			97			(184		)
Bonds - interest rate swaps	(2		)	—		(2		)	2			—			—
Total	$	5		$	1	$	6		$	91		$	97		$	(184	)



As of September 30, 2015	Capital Stock Outstanding			% of Total Outstanding
One Mortgage Partners Corp	$	250	^a	13	%
Northern Trust Company	200			11	%



	Level 3
As of	September��30, 2015		December 31, 2014
Impaired conventional MPF Loans held in portfolio	$	36	$	150
REO (recorded in Other Assets)	12		9



As of September 30, 2015	Unpaid Principal Balance		Life-To-Date OTTI Credit Impairment ^a			Other Adjustments ^b		Amortized Cost
Private label MBS	$	1,642	$	(742	)	$	317	$	1,217