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, ~~2016~~2017

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, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated ~~filer” and~~filer,” “smaller reporting ~~company”~~company,” and "emerging growth 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
					Emerging growth company o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 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 September 30, ~~2016,~~2017, including mandatorily redeemable capital stock, registrant had ~~19,376,924~~18,648,304 total outstanding shares of Class B Capital Stock.

TABLE OF CONTENTS



PART I - FINANCIAL INFORMATION
Item 1.	Financial Statements (unaudited).	34
	Statements of Condition	3
	~~Statements of Income~~	4
	Statements of ~~Comprehensive~~ Income	5
	Statements of ~~Capital~~Comprehensive Income	6
	~~Condensed~~ Statements of ~~Cash Flows~~Capital	7
	~~Note 1 - Background and Basis~~Condensed Statements of ~~Presentation~~Cash Flows	8
	Note 21 - ~~Summary~~Background and Basis of ~~Significant Accounting Policies~~Presentation	9
	Note 2 - Summary of Significant Accounting Policies	10
	Note 3 - Recently Issued but Not Yet Adopted Accounting Standards	911
	Note 4 - Interest Income and Interest Expense	1214
	Note 5 - Investment Securities	1315
	Note 6 - Advances	19
	~~Note 7 - MPF Loans Held in Portfolio~~	20
	Note 87 - ~~Allowance for Credit Losses~~MPF Loans Held in Portfolio	21
	Note 8 - Allowance for Credit Losses	22
	Note 9 - Derivatives and Hedging Activities	2324
	Note 10 - Consolidated Obligations	2829
	Note 11 - Capital and Mandatorily Redeemable Capital Stock (MRCS)	29
	~~Note 12 - Accumulated Other Comprehensive Income (Loss)~~	30
	Note 1312 - ~~Fair Value~~Accumulated Other Comprehensive Income (Loss)	31
	Note 13 - Fair Value	32
	Note 14 - Commitments and Contingencies	34
	Note 15 – Transactions with Related Parties and Other FHLBs	3435
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations.	3536
Item 3.	Quantitative and Qualitative Disclosures about Market Risk.	5759
Item 4.	Controls and Procedures.	5961

PART II - OTHER INFORMATION
Item 1.	~~Legal Proceedings~~.	60Legal Proceedings.	62
Item 1A.	~~Risk Factors~~.	60Risk Factors.	62
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	6062
Item 3.	Defaults upon Senior Securities.	6062
Item 4.	Mine Safety Disclosures.	6062
Item 5.	~~Other Information~~.	61Other Information.	62
Item 6.	~~Exhibits~~.	62Exhibits.	63

	Glossary of Terms	6364
	Signatures	S-1

Table of Contents

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.

Statements of Condition (unaudited)

(Dollars in millions, except capital stock par value)



																										September 30, 2017		December 31, 2016
Assets
Cash and due from banks																										$	32	$	351
Interest bearing deposits																										750		650
Federal Funds sold																										9,849		4,075
Securities purchased under agreements to resell																										3,750		2,300
Investment securities -
Trading,		71		and				97			pledged															236		1,045
Available-for-sale																										13,532		14,918
Held-to-maturity,							4,184					and				5,516					fair value					3,768		5,072
Investment securities																										17,536		21,035
Advances,			785				and				672				carried at fair value											50,153		45,067
MPF Loans held in portfolio, net of,																			(2)			and		(3)	allowance for credit losses	5,024		4,967
Derivative assets																										3		6
Other assets,					171				and				44			carried at fair value										391		241
Assets																										$	87,488	$	78,692

Liabilities
Deposits -
Noninterest bearing																										$	52	$	53
Interest bearing,							15			and				16			from other FHLBs									548		443
Deposits																										600		496
Consolidated obligations, net -
Discount notes,						872					and				6,368					carried at fair value						45,460		35,949
Bonds,	5,206				and				5,443					carried at fair value												35,890		36,903
Consolidated obligations, net																										81,350		72,852
Derivative liabilities																										28		43
Affordable Housing Program assessment payable																										87		86
Mandatorily redeemable capital stock																										308		301
Other liabilities																										243		219
Liabilities																										82,616		73,997
Commitments and contingencies - see notes to the financial statements
Capital
Class B1 activity stock,											14			and				12			million shares issued and outstanding					1,351		1,160
Class B2 membership stock,															2		and				6		million shares issued and outstanding			206		551
Capital stock - putable,												$100					and				$100			par value		1,557		1,711
Retained earnings - unrestricted																										2,784		2,631
Retained earnings - restricted																										435		389
Retained earnings																										3,219		3,020
Accumulated other comprehensive income (loss) (AOCI)																										96		(36		)
Capital																										4,872		4,695
Liabilities and capital																										$	87,488	$	78,692

September 30, 2016 December 31, 2015
Assets
Cash and due from banks $ 31
$ 499
Interest bearing deposits 650
650
Federal Funds sold 3,807
1,702
Securities purchased under agreements to resell 1,000
1,375
Investment securities -
Trading, $90 and $62 pledged 1,047
1,160
Available-for-sale 15,561
17,470
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 21
2
Other assets, $58 and $54 carried at fair value 241
240
Assets $ 74,983
$ 70,671

Liabilities
Deposits -
Noninterest bearing $ 59
$ 41
Interest bearing, $15 and $12 from other FHLBs 453
497
Deposits 512
538
Consolidated obligations, net -
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 48
55
Affordable Housing Program assessment payable 90
89
Mandatorily redeemable capital stock 302
8
Other liabilities 233
239
Subordinated notes —
944
Liabilities 70,468
66,019
Commitments and contingencies - see notes to the financial statements

Capital
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 2,577
2,407
Retained earnings - restricted 374
323
Retained earnings 2,951
2,730
Accumulated other comprehensive income (loss) (AOCI) (72 ) (28 )
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

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,
		2016		2015			2016			2015			2017			2016		2017			2016
Interest income		$	309	$	304		$	944		$	934		$	411		$	309	$	1,121		$	944
Interest expense		196		182			600			561			288			196		768			600
Net interest income		113		122			344			373			123			113		353			344
Provision for (reversal of) credit losses		—		1			—			5			(1		)	—		—			—
Net interest income after provision for (reversal of) credit losses		113		121			344			368			124			113		353			344

Noninterest gain (loss) on -
Trading securities		—		(1		)	—			(2		)
Noninterest income -
Derivatives and hedging activities		7		(15		)	(7		)	(17		)	—			7		6			(7		)
Instruments held under fair value option		—		1			6			4			(5		)	—		(3		)	6
Litigation settlement awards		—		2			38			13			—			—		1			38
Other gain (loss), net	��	7		7			24			15
Noninterest gain (loss)		14		(6		)	61			13
MPF fees from other FHLBs													5			4		15			12
Other, net													5			3		12			12
Noninterest income													5			14		31			61

Noninterest expense -
Compensation and benefits		26		20			71			57			26			26		77			71
Operating expenses		15		13			44			38			15			15		45			44
Other		1		2			13			6			2			1		7			13
Noninterest expense		42		35			128			101			43			42		129			128

Income before assessments		85		80			277			280			86			85		255			277

Affordable Housing Program assessment		9		8			28			28
Affordable Housing Program													9			9		26			28

Net income		$	76	$	72		$	249		$	252		$	77		$	76	$	229		$	249

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

Table of Contents

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,
	2016			2015			2016			2015			2017			2016			2017			2016
Net income	$	76		$	72		$	249		$	252		$	77		$	76		$	229		$	249

Other comprehensive income (loss) -
Net unrealized gain (loss) available-for-sale securities	(13		)	(79		)	(113		)	(214		)	(24		)	(13		)	(5		)	(113		)
Non-credit OTTI held-to-maturity securities	9			11			30			37
Noncredit OTTI held-to-maturity securities													8			9			25			30
Net unrealized gain (loss) cash flow hedges	83			(31		)	38			8			42			83			111			38
Post-retirement plans	—			1			1			(7		)
Postretirement plans													3			—			1			1
Other comprehensive income (loss)	79			(98		)	(44		)	(176		)	29			79			132			(44		)

Comprehensive income	$	155		$	(26	)	$	205		$	76		$	106		$	155		$	361		$	205

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

Table of Contents

Statements of Capital (unaudited)

(Dollars and shares in millions)



	Capital Stock - Putable - B1 Activity					Capital Stock - Putable - B2 Membership					Capital Stock					Retained Earnings											Total
	Shares		Value			Shares		Value			Shares		Value			Unrestricted			Restricted		Total			AOCI			Total
December 31, 2016	12		$	1,160		6		$	551		18		$	1,711		$	2,631		$	389	$	3,020		$	(36	)	$	4,695
Comprehensive income																183			46		229			132			361
Proceeds from issuance of capital stock	21		2,162			—		10			21		2,172														2,172
Repurchases of capital stock	—		(35		)	(23	)	(2,285		)	(23	)	(2,320		)												(2,320		)
Capital stock reclassified to mandatorily redeemable capital stock (liabilities)	—		(3		)	—		(3		)	—		(6		)												(6		)
Transfers between classes of capital stock	(19	)	(1,933		)	19		1,933
Cash dividends - class B1																(28		)			(28		)				(28		)
Class B1 annualized rate																											3.15		%
Cash dividends - class B2																(2		)			(2		)				(2		)
Class B2 annualized rate																											1.05		%
Total change in period	2		191			(4	)	(345		)	(2	)	(154		)	153			46		199			132			177
September 30, 2017	14		$	1,351		2		$	206		16		$	1,557		$	2,784		$	435	$	3,219		$	96		$	4,872

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 (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

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
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

December 31, 2014 8
$ 827
11
$ 1,075
19
$ 1,902
$ 2,152
$ 254
$ 2,406
$ 217
$ 4,525
Comprehensive income 202
50
252
(176 ) 76
Proceeds from issuance of capital stock 3
228
—
15
3
243
243
Repurchases of capital stock —
(29 ) (3 ) (223 ) (3 ) (252 ) (252 )
Capital stock reclassified to mandatorily redeemable capital stock (other liabilities) —
—
—
(1 ) —
(1 ) (1 )
Transfers between classes of capital stock (1 ) (60 ) 1
60

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

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

Table of Contents

Condensed Statements of Cash Flows (unaudited)

(Dollars in millions)


	Nine months ended September 30,	2016				2015				Nine months ended September 30,	2017				2016
Operating	Net cash provided by (used in) operating activities	$	184			$	375			Net cash provided by (used in) operating activities	$	337			$	184
Investing	Net change Federal Funds sold	(2,105		)		805				Net change interest bearing deposits	(100		)		—
										Net change Federal Funds sold	(5,774		)		(2,105		)
	Net change securities purchased under agreements to resell	375				—				Net change securities purchased under agreements to resell	(1,450		)		375
	Trading securities -									Trading securities -
	Sales	2,158				—				Sales	801				2,158
	Proceeds from maturities and paydowns	108				109				Proceeds from maturities and paydowns	205				108
	Purchases	(2,156		)		(101		)		Purchases	(200		)		(2,156		)
	Available-for-sale securities -									Available-for-sale securities -
	Proceeds from maturities and paydowns	1,777				1,452				Proceeds from maturities and paydowns	1,307				1,777
	Purchases	(2		)		(12		)		Purchases	(5		)		(2		)
	Held-to-maturity securities -									Held-to-maturity securities -
	Short-term held-to-maturity securities, net	543			^a	675			^a	Short-term held-to-maturity securities, net	570			^a	543			^a
	Proceeds from maturities and paydowns	740				793				Proceeds from maturities and paydowns	816				740
	Purchases	(30		)		(16		)		Purchases	(27		)		(30		)
	Advances -									Advances -
	Principal collected	548,381				251,066				Principal collected	543,511				548,381
	Issued	(554,570		)		(253,574		)		Issued	(548,590		)		(554,570		)
	MPF Loans held in portfolio -									MPF Loans held in portfolio -
	Principal collected	867				1,085				Principal collected	761				867
	Purchases	(759		)		(117		)		Purchases	(821		)		(759		)
	Other investing activities	27				39				Other investing activities	20				27
	Net cash provided by (used in) investing activities	(4,646		)		2,204				Net cash provided by (used in) investing activities	(8,976		)		(4,646		)
Financing	Net change deposits	(26		)		(156		)		Net change deposits	104				(26		)
	Discount notes -									Discount notes -
	Net proceeds from issuance	438,057				210,023				Net proceeds from issuance	1,080,879				438,057
	Payments for maturing and retiring	(440,500		)		(203,798		)		Payments for maturing and retiring	(1,071,386		)		(440,500		)
	Consolidated obligation bonds -									Consolidated obligation bonds -
	Net proceeds from issuance	24,439				8,503				Net proceeds from issuance	13,947				24,439
	Payments for maturing and retiring	(16,943		)		(16,777		)		Payments for maturing and retiring	(15,024		)		(16,943		)
	Net proceeds (payments) on derivative contracts with financing element	(38		)		(47		)		Payments for retirement of subordinated notes	—				(944		)
	Net proceeds (payments) on bond transfers with other FHLBs	—				(35		)		Capital stock -
	Payments for retiring of subordinated debt	(944		)		—				Proceeds from issuance	2,172				964
	Capital stock -									Repurchases	(2,320		)		(978		)
	Proceeds from issuance of capital stock	964				243				Cash dividends paid	(30		)		(28		)
	Repurchase of capital stock	(978		)		(252		)		Other financing activities	(22		)		(47		)
	Cash dividends paid	(28		)		(18		)		Net cash provided by (used in) financing activities	8,320				3,994
	Other financing activities	(9		)		(1		)		Net increase (decrease) in cash and due from banks	(319		)		(468		)
	Net cash provided by (used in) financing activities	3,994				(2,315		)		Cash and due from banks at beginning of period	351				499
	Net increase (decrease) in cash and due from banks	(468		)		264				Cash and due from banks at end of period	$	32			$	31
	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,~~assets and liabilities may be presented on a net ~~consists of investment securities with a~~basis provided that the original maturity of the asset or liability is three months or less ~~than 90 days when purchased.~~from the date of origination or the date of purchase.

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

Table of Contents

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 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. We are supervised and regulated by the Federal Housing Finance Agency (FHFA), an independent federal 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 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.

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, ~~2015,~~2016, included in our Annual Report on Form 10-K ~~(2015~~(2016 Form 10-K) starting on page F-1, as filed with the 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~~See the Glossary of Terms starting on page 63 for the definitions of certain terms used herein.

Use of Estimates and Assumptions

~~The preparation of~~We are required to make estimates and assumptions when preparing our 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.GAAP. The most significant of these ~~assumptions~~estimates and ~~estimates~~assumptions applies to fair value measurements and allowance for credit losses. ~~Actual~~Our actual results ~~could~~may differ from ~~these assumptions~~the results reported in our financial statements due to such estimates and ~~estimates.~~assumptions. This includes the reported amounts of assets and liabilities, the reported amounts of income and expense, and the disclosure of contingent assets and liabilities.

~~Consolidation~~Basis of ~~Variable Interest Entities~~Presentation

~~We would 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~~The basis 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~~presentation pertaining 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~~consolidation of our ~~investments in~~ variable interest entities has not significantly changed since we ~~are~~filed our 2016 Form 10-K. The basis of presentation pertaining to our gross versus net presentation of financial instruments also has not significantly changed since we filed our 2016 Form 10-K with one exception. Specifically, there was a change in our basis of presentation for our cleared derivative transactions with clearinghouses classified as a Derivatives Clearing Organization (DCO) through a Futures Commission Merchant (FCM), a clearing member of the ~~primary beneficiary. We classify~~DCO. Prior to 2017, our accounting presented derivative assets and liabilities of our cleared derivative transactions on a net basis, inclusive of initial and variation margin, and accrued interest receivable/payable and cash collateral. Due to rule changes adopted by our DCOs that characterize the treatment of variation margin payments as settlement of a derivative’s mark-to-market exposure and not as collateral against the derivative’s mark-to-market exposure, we now account for our variation margin payments as settlements to our derivative assets and derivative liabilities. The amendments to the DCOs’ rules have no effect on how we present initial margin, which we include in the carrying amount of our derivative assets or derivative liabilities.

Refer to Note 1- Background and Basis of Presentation to the financial statements in our 2016 Form 10-K with respect to our basis of presentation for consolidation of variable interest entities ~~as investment securities in~~and our ~~statements~~gross versus net presentation of condition. Such investment securities include, but are not limited to, senior interests in private-label mortgage backed securities (MBS) and Federal Family Education Loan Program asset backed securities (FFELP ABS). Our maximum loss exposurefinancial instruments 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.further details.

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 derivative assets and liabilities on a net basis in our statements of 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 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 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 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, if any, and securities borrowing transactions, if any, on a gross basis.~~

Note 2 – Summary of Significant Accounting Policies

Our Summary of Significant Accounting Policies through December 31, ~~2015,~~2016, can be found in Note 2 – Summary of Significant Accounting Policies to the financial statements in our ~~2015~~2016 Form 10-K. We adopted the following policies year to date in ~~2016:~~2017:

~~Simplifying~~Accounting for Variation Margin Payments

Effective in January of 2017 we began accounting for variation margin payments made to or received by the ~~Presentation of Debt Issuance Cost (i.e., Concession Fees)~~

~~In April of 2015, the FASB issued new guidance requiring any concession fee~~DCOs through our FCMs as settlements to ~~be presented as a direct deduction from the debt it relates to rather than separately presented as a deferred cost~~our cleared derivative assets and derivative liabilities. See Note 1 - Background and Basis for Presentation for further details. This change in Other 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 Subordinated notes. This reclassificationaccounting did not have ~~a material~~any effect on the accounting of our ~~financial condition, results~~existing hedge relationships. Specifically, the change in accounting would not require us to discontinue existing hedge relationships or preclude us from using the short-cut method of ~~operations, cash flows, or percentage net interest yield on our consolidated obligations at~~hedge accounting provided no additional changes are made by the ~~time~~DCOs that would preclude the use of ~~adoption.~~the short-cut method of hedge accounting. The International Swaps and Derivatives Association (ISDA) issued a confirmation letter confirming the SEC staff’s non-objection to the conclusions reached by ISDA related to the accounting implications of the DCO rule changes regarding the characterization of the variation margin payments as daily settlements and the continued application of existing hedge accounting relationships, including the use of the short-cut method of hedge accounting.

~~Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships~~Contingent Put and Call Options in Debt Instruments

In March of 2016, the FASB issued new guidance clarifying the requirements for assessing whether a contingent call (put) option embedded in a debt instrument is clearly and closely related to that ~~a change in counterparty (novation)~~debt instrument, which is referred to ~~a derivative instrument that has been designated as~~ the ~~hedging instrument in~~"host contract" for purposes of this assessment. Specifically, we are no longer required to consider the event triggering the acceleration of an ~~existing hedging relationship would not, in~~embedded contingent call (put) option when assessing whether it is clearly and ~~of itself, be considered a termination of~~closely related to the ~~derivative~~debt instrument or ~~be considered a change in~~host contract. We adopted the ~~critical term of the hedging relationship. We early adopted this~~ new guidance ~~on a prospective basis~~ effective January 1, ~~2016.~~2017. The new guidance ~~had no~~did not have any effect on our financial 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)

Note 3 – Recently Issued but Not Yet Adopted Accounting Standards

Targeted Improvements to Accounting for Hedging Activities

In August of 2017, the FASB amended existing derivatives and hedging guidance. The amended guidance may be adopted immediately in any interim period or January 1, 2019 as required. We are in the process of assessing the anticipated effect of the new guidance on the Bank. Outlined below are the significant changes to existing guidance that are relevant to the Bank.

Enables the Bank to enter into cash flow hedges of a variable-rate instrument indexed to a non-benchmark rate.

Enables the Bank to measure the change in fair value of the hedged item in a fair value hedge on the basis of the benchmark rate component of the contractual coupon cash flows determined at hedge inception, rather than on the full contractual coupon cash flows as required under existing GAAP.

Requires both the effective and ineffective portion of a hedging relationship to be presented in either interest income or interest expense, whichever is appropriate. This means that the ineffective portion of a hedging relationships will no longer be presented in derivatives and hedging activities.

Requires the entire rather than the effective portion of the change in fair value of the hedging instrument in a cash flow hedge to be recorded in Accumulated Other Comprehensive Income (AOCI). Upon recognition, the amounts in AOCI are reclassified to earnings in the same income statement line item that is used to present the earnings effect of the hedged item.

Enables hedge effectiveness to be qualitatively assessed subsequent to hedge inception in cases where initial quantitative testing is required.

Permits the application of the long-haul method of assessing hedge effectiveness in cases where the shortcut method was initially applied but was not or no longer is appropriate, provided that the Bank documented at hedge inception which long-haul methodology it will use.

Requires recognizing a cumulative-effect adjustment at the date of adoption for cash flow hedges related to eliminating the separate measurement of ineffectiveness. Specifically, a cumulative-effect adjustment would be made with a corresponding adjustment to the opening balance of retained earnings as of the beginning of the fiscal year that an entity adopts these amendments. The amended presentation and disclosure guidance is required only prospectively.

Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost

In March of 2017, the FASB amended existing GAAP to require the service cost component of our net periodic pension and postretirement benefit costs to be classified as compensation costs. The other components of our net periodic pension and postretirement benefit costs are required to be classified as Noninterest expense - Other operating expenses on a retrospective basis effective January 1, 2018. Currently, our total net periodic pension and postretirement costs are classified as compensation costs. We do not expect the classification guidance of this GAAP amendment will have a significant effect on our financial condition, results of operations, and cash flows.

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

InIn August of 2016, the FASB issued statement of 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~~and will be applied retrospectively tofor each period our statements of cash flows are presented at the time of adoption. ~~Key provisions relevant~~The new guidance is not expected 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 expectedhave any effect ~~of the remaining provisions of the guidance~~ on our financial condition, results of operations, and cash ~~flows.~~flows since our existing practice is consistent with the provisions that are applicable to us. The provisions applicable to us are outlined below.

~~Cash~~We classify cash payments ~~for debt prepayment~~related to prepaying or ~~extinguishment costs are classified~~extinguishing our consolidated obligations as financing activities in our statements of cash ~~outflows for financing activities.~~flows.

We classify the cash payments attributable to interest expense paid at the maturity of our discount notes, which have a zero coupon rate, as operating activities in our statements of cash flows and in our supplemental disclosure of interest expense paid.

911

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 June of 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.~~cost basis.

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~~in which an ~~other-than-temporary~~other-than-temporary-impairment (OTTI) impairment had been recognized before our effective date. ~~This means write-downs~~The accounting implications of such an approach are outlined below:

Write-downs recognized prior to our effective date on securities may not be reversed at the time of our adoption. ~~Instead, improvements~~

Improvements in expected cash flows ~~that exist at the time we adopt~~subsequent to adoption for such securities will continue to be ~~accreted into income~~accounted for as yield adjustments over ~~the~~their remaining ~~life of the security. Additionally, recoveries~~life.

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 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 required to assess whether the event triggering the acceleration of an embedded contingent call (put) option within a debt instrument is clearly and closely related to its host contract. We plan to adopt the new guidance using the modified retrospective approach on January 1, 2017. The new guidance is not expected to have a material effect on our financial 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)~~

Leases

In February of 2016, the FASB issued new guidance pertaining to lease accounting. ~~Key lessee accounting provisions relevant~~The new guidance requires us to ~~us are outlined below. Our existing practice is to record~~recognize operating leases and right-to-use assets, if any, in our statements of condition if their term exceeds 12 months. Currently, we recognize 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 required to be applied to leases existing at, or entered into after, ~~the beginning of the earliest comparative period presented in the financial statements.~~January 1, 2018. We do not expect the new guidance to 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.

Table of Contents

Notes to Financial Statements - (Unaudited)

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

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 new guidance becomes effective January 1, 2018. We do not expect the new guidance to have a significant effect on our financial condition, results of operations, and cash flows. The key provisions applicable to us ~~include, but~~ are ~~not limited to, the following:~~as follows:

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

~~Requires recognizing the~~The portion of instrument-specific credit risk attributable to 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~~our consolidated obligations that ~~liability~~are carried at fair value under the fair value ~~option.~~option should be recognized in other comprehensive income. We will measure such instrument-specific credit risk based on our nonperformance risk. Specifically, our nonperformance risk includes our own credit risk and the credit risk associated with the joint and several liability of other FHLBs. We do not expect this requirement will have a material effect on our financial condition, results of operations, and cash flows.

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

~~The new guidance becomes effective January 1, 2018. We are in the process of reviewing its expected effect on our financial condition, results of operations, 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 other related pronouncements that provide additional revenue recognition guidance and clarifications to the ~~revenue recognition~~original guidance issued in ~~May of~~ 2014. The new guidance becomes effective January 1, 2018. We do not expect the new revenue recognition guidance ~~is not expected to~~will have ~~a material~~any effect on our financial condition, results of operations, or cash flows at the time of ~~adoption~~adoption. This is because the majority of our financial instruments and other contractual rights that generate revenue are ~~within the scope of~~covered by other GAAP, ~~guidance;~~ and ~~accordingly,~~therefore, are ~~excluded from the scope~~scoped out of this new guidance. Further, we believe that our current method of recognition of our service fee revenue, ~~recognition~~which is insignificant, is already consistent with this new guidance. In the event of an adjustment, if any, we would apply the modified retrospective method.

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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,
	2017			2016		2017		2016
Interest income -

Trading	$	1		$	2	$	3	$	7
Available-for-sale interest income	106			109		321		334
Available-for-sale prepayment fees	9			7		20		33
Available-for-sale	115			116		341		367
Held-to-maturity	47			56		148		171
Investment securities	163			174		492		545

Advances	157			74		386		211
MPF Loans held in portfolio	53			53		160		165
Federal funds sold and securities purchased under agreements to resell	34			7		74		16
Other	4			1		9		7

Interest income	411			309		1,121		944

Interest expense -

Consolidated obligations -
Discount notes	148			95		363		272
Bonds	136			99		394		299

Subordinated notes	—			—		—		24
Other	4			2		11		5

Interest expense	288			196		768		600

Net interest income	123			113		353		344
Provision for (reversal of) credit losses	(1		)	—		—		—
Net interest income after provision for (reversal of) credit losses	$	124		$	113	$	353	$	344

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

Trading $ 2
$ —
$ 7
$ 2
Available-for-sale 116
132
367
396
Held-to-maturity 56
63
171
201
Investment securities 174
195
545
599

Advance interest income 73
44
203
125
Advance prepayment fees 1
1
8
7
Advances 74
45
211
132

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

Interest income 309
304
944
934

Interest expense -

Discount notes 95
72
272
216
Bonds 99
96
299
304
Consolidated obligations 194
168
571
520

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

Interest expense 196
182
600
561

Net interest income 113
122
344
373

Provision for (reversal of) credit losses —
1
—
5

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

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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 are based on the 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 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).

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

~~Government-guaranteed~~Government guaranteed MBS.

~~Private-label~~Private label residential MBS.

State or local housing agency obligations.

Pledged Collateral

We disclose the amount of investment securities pledged as collateral pertaining to our derivatives activity 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~~Our unrealized gains or losses on trading ~~securities.~~securities still held on our statement of condition as of the end of the reporting period were not material.



As of	September 30, 2017		December 31, 2016
U.S. Government & other government related	$	201	$	1,005
Residential MBS:
GSE	34		39
Government guaranteed	1		1
Trading securities	$	236	$	1,045

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

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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
As of September 30, 2017
U.S. Government & other government related	$	266	$	13	$	—		$	279
State or local housing agency	20		—		—			20
FFELP ABS	4,087		235		(7		)	4,315
Residential MBS:
GSE	7,615		178		(3		)	7,790
Government guaranteed	1,048		28		—			1,076
Private label	42		10		—			52
Available-for-sale securities	$	13,078	$	464	$	(10	)	$	13,532

As of December 31, 2016
U.S. Government & other government related	$	322	$	15	$	(1	)	$	336
State or local housing agency	19		—		—			19
FFELP ABS	4,431		165		(24		)	4,572
Residential MBS:
GSE	8,291		266		(2		)	8,555
Government guaranteed	1,346		34		—			1,380
Private label	50		6		—			56
Available-for-sale securities	$	14,459	$	486	$	(27	)	$	14,918

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

Residential MBS:
GSE 8,578
353
(9 ) 8,922
Government-guaranteed 1,457
43
—
1,500
Private-label 51
7
—
58
Residential MBS 10,086
403
(9 ) 10,480
Available-for-sale securities $ 15,016
$ 582
$ (37 ) $ 15,561

As of December 31, 2015
U.S. Government & other government related $ 405
$ 21
$ (4 ) $ 422
State or local housing agency 18
—
—
18
FFELP ABS 5,090
233
(24 ) 5,299

Residential MBS:
GSE 9,427
383
(12 ) 9,798
Government-guaranteed 1,811
57
—
1,868
Private-label 61
4
—
65
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.

1416

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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
As of September 30, 2017
U.S. Government & other government related	$	976	$	—		$	976	$	33	$	(1	)	$	1,008
State or local housing agency	10		—			10		—		—			10
Residential MBS:
GSE	1,590		—			1,590		79		—			1,669
Government guaranteed	633		—			633		8		—			641
Private label	711		(152		)	559		297		—			856
Held-to-maturity securities	$	3,920	$	(152	)	$	3,768	$	417	$	(1	)	$	4,184

As of December 31, 2016
U.S. Government & other government related	$	1,733	$	—		$	1,733	$	42	$	(1	)	$	1,774
State or local housing agency	13		—			13		—		—			13
Residential MBS:
GSE	1,856		—			1,856		100		—			1,956
Government guaranteed	791		—			791		10		—			801
Private label	856		(177		)	679		294		(1		)	972
Held-to-maturity securities	$	5,249	$	(177	)	$	5,072	$	446	$	(2	)	$	5,516

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, 2016
U.S. Government & other government related $ 1,271
$ —
$ 1,271
$ 74
$ —
$ 1,345
State or local housing agency 13
—
13
—
—
13

Residential MBS:
GSE 1,928
—
1,928
133
—
2,061
Government-guaranteed 834
—
834
13
—
847
Private-label 929
(187 ) 742
301
(1 ) 1,042
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, 2015
U.S. Government & other government related $ 1,932
$ —
$ 1,932
$ 64
$ (1 ) $ 1,995
State or local housing agency 16
—
16
—
—
16

Residential MBS:

GSE 2,163
—
2,163
134
—
2,297
Government-guaranteed 969
—
969
16
—
985
Private-label 1,104
(217 ) 887
334
(1 ) 1,220
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.

Contractual Maturity Terms

The maturity of our non-MBS AFS and HTM investments is detailed in the following table.



	Available-for-Sale				Held-to-Maturity
As of September 30, 2017	Amortized Cost Basis		Carrying Amount and Fair Value		Carrying Amount		Fair Value
Year of Maturity -
Due in one year or less	$	2	$	2	$	87	$	87
Due after one year through five years	30		31		178		183
Due after five years through ten years	39		41		117		117
Due after ten years	215		225		604		631
ABS and MBS without a single maturity date	12,792		13,233		2,782		3,166
Total securities	$	13,078	$	13,532	$	3,768	$	4,184

Table of Contents

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~~table presents 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~~positions. Refer 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.Other-Than-Temporary Impairment Analysis section below for further discussion. 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
	Fair Value		Gross Unrealized (Losses)		Fair Value		Gross Unrealized (Losses)			Fair Value		Gross Unrealized (Losses)
Available-for-Sale Securities
As of September 30, 2017
State or local housing agency	$	5	$	—	$	—	$	—		$	5	$	—
FFELP ABS	—		—		661		(7		)	661		(7		)
Residential MBS:
GSE	89		—		809		(3		)	898		(3		)
Government guaranteed	1		—		—		—			1		—
Private label	—		—		7		—			7		—
Available-for-sale securities	$	95	$	—	$	1,477	$	(10	)	$	1,572	$	(10	)
As of December 31, 2016
U.S. Government & other government related	$	—	$	—	$	47	$	(1	)	$	47	$	(1	)
State or local housing agency	7		—		—		—			7		—
FFELP ABS	—		—		753		(24		)	753		(24		)
Residential MBS:
GSE	—		—		991		(2		)	991		(2		)
Government guaranteed	—		—		23		—			23		—
Private label	—		—		8		—			8		—
Available-for-sale securities	$	7	$	—	$	1,822	$	(27	)	$	1,829	$	(27	)

Held-to-Maturity Securities
As of September 30, 2017
U.S. Government & other government related	$	7	$	—	$	16	$	(1	)	$	23	$	(1	)
Residential MBS:
GSE	—		—		2		—			2		—
Private label	—		—		824		(152		)	824		(152		)
Held-to-maturity securities	$	7	$	—	$	842	$	(153	)	$	849	$	(153	)
As of December 31, 2016
U.S. Government & other government related	$	26	$	—	$	17	$	(1	)	$	43	$	(1	)
State or local housing agency	—		—		1		—			1		—
Residential MBS:
GSE	—		—		4		—			4		—
Government guaranteed	117		—		—		—			117		—
Private label	—		—		934		(178		)	934		(178		)
Held-to-maturity securities	$	143	$	—	$	956	$	(179	)	$	1,099	$	(179	)

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

Residential MBS:

GSE 658
—
1,217
(9 ) 1,875
(9 )
Government-guaranteed 24
—
—
—
24
—
Private-label —
—
1
—
1
—
Residential MBS 682
—
1,218
(9 ) 1,900
(9 )
Available-for-sale securities $ 683

$ —

$ 2,078

$ (37 )
$ 2,761

$ (37 )

As of December 31, 2015
U.S. Government & other government related $ 30
$ (1 ) $ 45
$ (3 ) $ 75

$ (4 )
State or local housing agency 4
—
—
—
4

—
FFELP ABS 64
(1 ) 787
(23 ) 851

(24 )

Residential MBS:

GSE 1,081
(3 ) 1,006
(9 ) 2,087

(12 )
Government-guaranteed 90
—
—
—
90

—
Private-label —
—
8
—
8

—
Residential MBS 1,171

(3 )
1,014

(9 )
2,185

(12 )
Available-for-sale securities $ 1,269

$ (5 )
$ 1,846

$ (35 )
$ 3,115

$ (40 )

1618

Table of Contents

Notes to Financial Statements - (Unaudited)

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

~~Held-to-Maturity Securities~~Other-Than-Temporary Impairment Analysis

We recognized no OTTI charges on HTM or AFS securities for the periods presented. This is because we do not intend to sell these securities, we believe it is more likely than not that we will not be required to sell them prior to recovering their amortized cost basis, and we expect to recover the entire amortized cost basis. For further detail on our accounting policy regarding OTTI please see Note 2 - Summary of Significant Accounting Policies to the financial statements in our 2016 Form 10-K.

Less than 12 Months 12 Months or More Total
Fair Value Gross Unrealized (Losses) Fair Value Gross Unrealized (Losses) Fair Value Gross Unrealized (Losses)
As of September 30, 2016
U.S. Government & other government related $ —
$ —
$ 16
$ —
$ 16
$ —
State or local housing agency 9
—
1
—
10
—

Residential MBS:
GSE 4
—
—
—
4
—
Private-label —
—
1,000
(188 ) 1,000
(188 )
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 )

As of September 30, 2017, we had a base case short-term housing price forecast for all markets with projected changes ranging from -6.0% to +13.0% over the twelve month period beginning July 1, 2017. For the vast majority of markets, the short-term forecast has changes ranging from +1.0% to +6.0%.

~~Contractual Maturity Terms~~

The following table ~~primarily~~ presents the ~~amortized cost basis and fair value~~changes in the cumulative amount of ~~U.S. Government & other government related AFS and HTM~~previously recorded OTTI credit losses on investment securities ~~by contractual maturity. ABS and MBS securities are excluded since their expected maturities may differ from their contractual maturities if borrowers of~~recognized into earnings for the ~~underlying loans elect to prepay their loans.~~reporting periods indicated.

Available-for-Sale Held-to-Maturity
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 $ 17
$ 17
$ 176
$ 177
Due after one year through five years 44
46
285
298
Due after five years through ten years 30
32
86
88
Due after ten years 278
292
737
795
ABS and MBS without a single maturity date 14,647
15,174
3,504
3,950
Total securities $ 15,016
$ 15,561
$ 4,788
$ 5,308



	Three months ended September 30,						Nine months ended September 30,
	2017			2016			2017			2016
Beginning Balance	$	499		$	542		$	520		$	568
Reductions:
Increases in expected future cash flows recorded as accretion into interest income	(10		)	(11		)	(31		)	(37		)
Ending Balance	$	489		$	531		$	489		$	531

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. As of September 30, 2017, the remaining litigation covers three private label MBS bonds in the aggregate original principal amount of $65 million.

1719

Table of Contents

Notes to Financial Statements - (Unaudited)

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

~~Other-Than-Temporary Impairment Analysis~~

~~We had no OTTI for the periods presented based on 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 the FHLB System OTTI Committee, which was established to achieve consistent OTTI analyses for private-label MBS among FHLBs. We are still responsible, however, for making our own OTTI determination, which involves determining the reasonableness of these significant inputs, assumptions, and methodologies, 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, 2016, we had a short-term housing price forecast over all markets with projected changes ranging from -1.0% to +10.0% over the twelve month period beginning July 1, 2016. For the vast majority of markets, the short-term forecast has changes ranging from +3.0% to +6.0%.

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

Three months ended September 30, Nine months ended September 30,
2016 2015 2016 2015
Beginning Balance $ 542
$ 591
$ 568
$ 620
Reductions:

Increases in expected future cash flows recorded as accretion into interest income (11 ) (12 ) (37 ) (41 )
Ending Balance $ 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~~

~~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 terms of contractual 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, 2017	Amount		Weighted Average Contractual Interest Rate
Due in one year or less	$	24,820	1.18	%
One to two years	3,969		1.29	%
Two to three years	1,646		1.71	%
Three to four years	1,905		1.60	%
Four to five years	1,716		1.80	%
More than five years	15,988		1.42	%	^a
Par value	$	50,044	1.32	%

As of September 30, 2016 Weighted Average Contractual Interest Rate Amount
Due in one year or less 0.60 % $ 12,719
One to two years 0.77 % 8,966
Two to three years 0.56 %
^a
7,283
Three to four years 0.58 %
^a
8,120
Four to five years 1.34 % 1,536
More than five years 1.67 % 4,168
Par value 0.76 % $ 42,792


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

We have no allowance for credit losses on our advances. See Note 8 - Allowance for Credit Losses to the financial statements for further information related to our credit risk on ~~advances and allowance methodology for credit losses.~~advances.

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, 2017		December 31, 2016
Par value	$	50,044	$	44,965
Fair value hedging adjustments	105		98
Other adjustments	4		4
Advances	$	50,153	$	45,067

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



As of September 30, 2017	Par Value			% of Total Outstanding
One Mortgage Partners Corp.	$	11,000	^a	22.0	%
BMO Harris Bank, National Association	7,375			14.7	%
The Northern Trust Company	6,000			12.0	%


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

1920

Table of Contents

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~~historically 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~~Government 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 portfolio by contractual maturity at the time of purchase.


As of	September 30, 2016			December 31, 2015			September 30, 2017			December 31, 2016
Medium term (15 years or less)	$	448		$	662		$	292		$	417
Long term (greater than 15 years)	4,209			4,112			4,662			4,489
Unpaid principal balance	4,657			4,774			4,954			4,906
Net premiums, credit enhancement and deferred loan fees	36			20			49			38
Fair value hedging adjustments	30			37			23			26
MPF Loans held in portfolio, before allowance for credit losses	4,723			4,831			5,026			4,970
Allowance for credit losses on MPF Loans	(3		)	(3		)	(2		)	(3		)
MPF Loans held in portfolio, net	$	4,720		$	4,828		$	5,024		$	4,967

Conventional mortgage loans	$	3,543		$	3,568		$	3,946		$	3,818
Government Loans	1,114			1,206			1,008			1,088
Unpaid principal balance	$	4,657		$	4,774		$	4,954		$	4,906

The above table excludes MPF Loans acquired under the MPF Xtra, MPF Direct, and MPF Government MBS products. We concurrently sell MPF Xtra and MPF Direct loans to third party investors. MPF Government MBS loans are held for a short time period, during which they are reflected as Other Assets held at fair value in our Statements of Condition, until such loans are securitized.

See Note 8 - Allowance for Credit Lossesto the financial statements for information related to our credit losses on MPF Loans held in portfolio.

In addition to our portfolio MPF Products, PFIs sell eligible MPF Loans to us through the MPF Program infrastructure and we concurrently sell them to third party investors or hold MPF Loans in our held for sale portfolio in other assets for a short period of time until such loans are pooled into MBS.

2021

Table of Contents

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~~2016 Form 10-K for further details ~~pertaining to the methodologies and factors we consider when determining the amount to recognize as an~~regarding our allowance for credit losses ~~if any,~~methodology for each of the portfolio ~~segment identified~~segments discussed below.

We have identified our portfolio segments as shown below:

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

•Conventional MPF Loans held in portfolio;

•Government Loans held in portfolio; and

•Federal Funds Sold and Securities Purchased Under Agreements to Resell.

Member Credit Products

We have not recorded any allowance for credit losses for our member credit products portfolio segment based upon our credit analysis and the repayment history on member credit products. We had no member credit products that were past due, on nonaccrual status, involved in a troubled debt 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 Held in Portfolio

For further detail of our MPF Risk Sharing Structure see page ~~F-14~~F-15 in our ~~2015~~2016 Form 10-K. There has been no material activity in our allowance for credit losses since December 31, ~~2015.~~2016. The following table presents the recorded investment and the allowance for credit losses in conventional MPF 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.



As of	September 30, 2017		December 31, 2016
Recorded investment in conventional MPF Loans -
Individually evaluated for impairment	$	53	$	74
Collectively evaluated for impairment	3,971		3,812
Recorded investment	$	4,024	$	3,886

Allowance for credit losses on conventional MPF Loans -
Homogeneous pools of loans collectively evaluated for impairment	$	2	$	3

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~~Servicers 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~~servicers 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.

2122

Table of Contents

Notes to Financial Statements - (Unaudited)

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

Credit Quality Indicators - MPF Loans Held in Portfolio

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

"Serious delinquency 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" consists of MPF Loans that are either insured or guaranteed by the government 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 ~~Primary Mortgage Insurance,~~primary mortgage insurance, of a financially responsible party) and in the process of collection.



	September 30, 2017									December 31, 2016
As of	Conventional			Government			Total			Conventional			Government			Total
Past due 30-59 days	$	71		$	49		$	120		$	83		$	57		$	140
Past due 60-89 days	19			14			33			26			17			43
Past due 90 days or more	50			21			71			69			23			92
Past due	140			84			224			178			97			275
Current	3,884			944			4,828			3,708			1,013			4,721
Recorded investment	$	4,024		$	1,028		$	5,052		$	3,886		$	1,110		$	4,996
In process of foreclosure	$	25		$	7		$	32		$	35		$	7		$	42
Serious delinquency rate	1.27		%	2.00		%	1.41		%	1.82		%	2.07		%	1.88		%
Past due 90 days or more and still accruing interest	$	6		$	20		$	26		$	8		$	23		$	31
On nonaccrual status	$	53		$	—		$	53		$	74		$	—		$	74

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. Conventional MPF Loans are 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, since the related allowance for credit losses have been charged off.



As of	September 30, 2017		December 31, 2016
Recorded investment without an allowance for credit losses	$	53	$	74
Unpaid principal balance without an allowance for credit losses	57		80

As of September 30, 2016 December 31, 2015
Recorded investment without an allowance for credit losses $ 78
$ 107
Unpaid principal balance without an allowance for credit losses 84
117

~~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,
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~~held overnight Federal Funds sold and Securities Purchased Under Agreements to Resell as of September 30, ~~2016,~~2017, and December 31, ~~2015.~~2016. We did not have any longer term Federal Funds sold and Securities Purchased Under Agreements to Resell arrangements. We did not establish an allowance for credit losses 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~~securities purchased under agreements to ~~Resell~~resell since all payments due under the contractual terms have been received and we hold sufficient underlying collateral.

2223

Table of Contents

Notes to Financial Statements - (Unaudited)

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

Note 9 – Derivatives and Hedging Activities

~~Refer to~~See Note 2 - Summary of Significant Accounting Policies in our ~~2015~~2016 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 a Futures Commission Merchant (FCM), a clearing member of the DCO. We are not a derivatives dealer and do not trade derivatives for speculative purposes. We enter into derivative transactions through either of the following:

A bilateral agreement with an individual counterparty for over-the-counter derivative transactions.

Clearinghouses classified as DCOs through FCMs, which are clearing members of the DCOs, for cleared derivative transactions.

Managing Interest Rate Risk

We use fair value hedges to offset changes in the fair value or a benchmark interest rate (e.g., LIBOR) related to (1) a recognized asset or liability or (2) an unrecognized firm commitment. We use cash flow hedges to offset an exposure to variability in expected future cash flows associated with an existing recognized asset or liability or a forecasted transaction. We use economic hedges in cases where hedge accounting treatment is not permitted or achievable; for example, hedges of portfolio interest rate risk or financial instruments carried at fair value under the fair value option.

Managing Credit Risk on Derivative Agreements

Over-the-counter Derivative Transactions: 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.~~over-the-counter derivatives. Additionally, collateral related to over-the-counter derivatives with member institutions includes collateral assigned to us, as evidenced by a written security agreement, and which may be held by the member institution for our benefit. Based on credit analyses and collateral requirements, we do not anticipate any credit losses on our over-the-counter derivative agreements. SeeNote 1613 - Fair Value to the financial statements in this Form 10-Q and Note 16 - Fair Value in our ~~2015~~2016 Form 10-K for discussion regarding our fair value methodology for over-the-counter 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~~For most of our bilateral derivative transactions executed prior to March 1, 2017, and for all transactions entered into after March 1, 2017, our bilateral derivative agreements are fully collateralized with a zero unsecured threshold in accordance with variation margin requirements issued by the U.S. federal bank regulatory agencies and the CFTC, as discussed in the Legislative and Regulatory Developments in the Bank’s Annual Report on Form 10-K for the year ended December 31, 2015. Certain of our bilateral derivative agreements may contain provisions that require us to post net additional collateral with our counterparties for transactions executed prior to March 1, 2017, 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 by a major credit rating agency, such as Standard and Poor's or Moody’s, the amount of collateral we would have been required to deliver ~~up to an additional $43 million of collateral at fair value to our derivatives counterparties~~would not have been material at September 30, ~~2016.~~2017.

Cleared ~~swaps~~Derivative Transactions: Cleared derivative transactions are subject to variation and initial margin requirements established by the DCO and its clearing members. As a result of rule changes adopted by our DCOs, variation margin payments are characterized as settlement of a derivative’s mark-to-market exposure and not as collateral against the derivative’s mark-to-market exposure. See Note 1 - Background and Basis of Presentation and Note 2 - Summary of Significant Accounting Policies for further discussion. We post ~~variation and~~our initial margin collateral payments and make variation margin settlement payments through ~~the FCM,~~our FCMs, on behalf of the DCO, which could expose us to institutional credit risk in the event that ~~an FCM~~the FCMs or the DCO fail to meet their obligations. Clearing derivatives through a DCO mitigates counterparty credit risk exposure because the DCO is substituted for individual counterparties and ~~collateral is posted~~variation margin settlement payments are made daily through the FCMs for changes in the value of cleared ~~derivatives through an FCM.~~derivatives. The DCO determines initial margin requirements for cleared derivatives. In this regard, an FCM may require additional initial margin to be posted based on credit considerations, including but not limited to, credit rating downgrades. We had no requirement to post additional initial margin by our FCMs at September 30, 2016.

~~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~~ ~~for further discussion. In addition to the cash collateral as noted in the following table,~~ we ~~also~~ pledged ~~$90~~$71 million of investment securities that can be sold or repledged, as part of our initial margin related to cleared derivative transactions at September 30, ~~2016.~~2017. Additionally, an FCM may require additional initial margin to be posted based on credit considerations, including but not limited to, if our credit rating downgrades. We had no requirement to post additional initial margin by our FCMs at September 30, 2017.

2324

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Notes to Financial Statements - (Unaudited)

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

The following table presents ~~our gross~~details on the notional amounts, and ~~net~~ derivative assets and liabilities ~~by contract type and amount for~~on our ~~derivative agreements.~~statements of condition. Effective in January of 2017, we began treating daily variation margin on our cleared derivatives as cash settlements instead of as cash collateral.



	September 30, 2017										December 31, 2016
As of	Notional Amount		Derivative Assets				Derivative Liabilities				Notional Amount		Derivative Assets				Derivative Liabilities
Derivatives in hedge accounting relationships-
Interest rate contracts	$	26,057	$	39			$	664			$	25,999	$	40			$	898
Derivatives not in hedge accounting relationships-
Interest rate contracts	22,276		327				194				29,313		432				260
Other	1,113		1				2				892		2				3
Derivatives not in hedge accounting relationships	23,389		328				196				30,205		434				263
Variation margin daily settlements on cleared derivatives			(10		)		(200		)
Gross derivative amount before netting adjustments and cash collateral	$	49,446	357				660				$	56,204	474				1,161
Netting adjustments and cash collateral			(354		)	^a	(632		)	^a			(468		)	^a	(1,118		)	^a
Derivatives on statements of condition			$	3			$	28					$	6			$	43

September 30, 2016 December 31, 2015
As of Notional Amount Derivative Assets Derivative Liabilities Notional Amount Derivative Assets Derivative Liabilities
Derivatives in hedge accounting relationships-
Interest rate swaps $ 24,256
$ 40
$ 1,156
$ 25,140
$ 30
$ 1,082

Derivatives not in hedge accounting relationships-
Interest rate swaps 36,692
514
414
28,866
456
341

Interest rate swaptions 550
56
—
1,270
40
—

Interest rate caps or floors 1,129
51
—
1,131
76
—

Mortgage delivery commitments 1,178
1
1
479
1
1

Other 127

1

—
121
—
—

Derivatives not in hedge accounting relationships 39,676
623
415
31,867

573

342

Gross derivative amount before adjustments $ 63,932
663
1,571
$ 57,007

603

1,424

Netting adjustments and cash collateral (642 )
^a
(1,523 )
^a
(601 )
^a
(1,369 )
^a
Derivatives on statements of condition $ 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 FCM and/or counterparty. Cash collateral posted was ~~$910~~$313 million and ~~$793~~$689 million at September 30, ~~2016,~~2017, and December 31, ~~2015,~~2016, and cash collateral received was ~~$29~~$35 million and ~~$25~~$40 million.

The following table presents ~~our gross recognized amount~~the noninterest income on derivatives and hedging activities as presented in the statements of ~~offsetting derivative assets~~income. The amounts attributable to fair value and ~~liabilities for derivatives with legal right of offset as well as derivatives without the legal right of offset.~~cash flow hedges represent hedge ineffectiveness.

Derivative Assets Derivative Liabilities
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 $ 509
$ 93
$ 602
$ 1,182
$ 241
$ 1,423

Netting adjustments and cash collateral (508 ) (93 ) (601 ) (1,140 ) (229 ) (1,369 )
Derivatives with legal right of offset - net 1

—

1

42

12

54

Derivatives without legal right of offset 1
—
1
1
—
1

Derivatives on statements of condition 2

—

2

43

12

55

Noncash collateral received (pledged) and cannot be sold or repledged —
—
—
—
12
12

Net amount $ 2

$ —

$ 2

$ 43

$ —

$ 43


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



	Three months ended September 30,						Nine months ended September 30,
For the periods ending	2017			2016			2017			2016
Fair value hedges - interest rate contracts	$	(3	)	$	5		$	(3	)	$	(7	)
Cash flow hedges - interest rate contracts	1			—			2			4
Economic hedges -
Interest rate contracts	2			(1		)	3			(5		)
Other	—			3			3			1
Economic hedges	2			2			6			(4		)
Variation margin on daily settled cleared derivatives	—			—			1			—
Noninterest income on derivatives and hedging activities	$	—		$	7		$	6		$	(7	)

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

2425

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Notes to Financial Statements - (Unaudited)

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

The following table presents details regarding the ~~gains (losses)~~offsetting of ~~derivatives~~our derivative assets and ~~hedging activities as presented in the~~liabilities on our statements of ~~income.~~condition. Effective in January of 2017, we began treating daily variation margin on our cleared derivatives as cash settlements instead of as cash collateral.



	Derivative Assets									Derivative Liabilities
	Bilateral			Cleared			Total			Bilateral			Cleared			Total
As of September 30, 2017
Derivatives with legal right of offset -
Gross recognized amount	$	272		$	84		$	356		$	568		$	90		$	658
Netting adjustments and cash collateral	(270		)	(84		)	(354		)	(548		)	(84		)	(632		)
Derivatives with legal right of offset - net	2			—			2			20			6			26
Derivatives without legal right of offset	1			—			1			2			—			2
Derivatives on statements of condition	3			—			3			22			6			28
Less:
Noncash collateral received and cannot be sold or repledged	—						—			—			6			6
Noncash collateral pledged and cannot be sold or repledged				(1		)	(1		)
Net amount	$	3		$	1		$	4		$	22		$	—		$	22

As of December 31, 2016
Derivatives with legal right of offset -
Gross recognized amount	$	339		$	133		$	472		$	820		$	339		$	1,159
Netting adjustments and cash collateral	(335		)	(133		)	(468		)	(788		)	(330		)	(1,118		)
Derivatives with legal right of offset - net	4			—			4			32			9			41
Derivatives without legal right of offset	2			—			2			2			—			2
Derivatives on statements of condition	6			—			6			34			9			43
Less:
Noncash collateral received and cannot be sold or repledged	—						—			—			9			9
Cash collateral for initial margin				(1		)	(1		)
Noncash collateral pledged and cannot be sold or repledged				(2		)	(2		)
Net amount	$	6		$	3		$	9		$	34		$	—		$	34

Three months ended September 30, Nine months ended September 30,
For the periods ending 2016 2015 2016 2015
Fair value hedges -
Interest rate swaps $ 5
$ (17 ) $ (7 ) $ (30 )
Fair value hedges 5
(17 ) (7 ) (30 )
Cash flow hedges —
1
4
2
Economic hedges -

Interest rate swaps (1 ) (14 ) (40 ) (43 )
Interest rate swaptions (2 ) 4
16
7
Interest rate caps or floors (14 ) (4 ) (25 ) (12 )
Net interest settlements 16
16
44
60
Other 3
(1 ) 1
(1 )
Economic hedges 2
1
(4 ) 11
Gains (losses) on derivatives and hedging activities $ 7
$ (15 ) $ (7 ) $ (17 )

At September 30, 2017, we had $64 million of additional credit exposure on cleared derivatives due to pledging of noncash collateral to our DCOs for initial margin, which exceeded our derivative liability position. We had $86 million of comparable exposure at December 31, 2016.

2526

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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. We had no gain (loss) for hedges that no longer qualified as a fair value hedge. Additionally, the table indicates where fair value 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 fair value hedging adjustments, which are included in 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.



	On Derivative			On Hedged Item			Total Ineffectiveness-Noninterest Income-Derivatives and Hedging Activities			Amount Recorded in Net Interest Income
Three months ended September 30, 2017
Available-for-sale securities	$	23		$	(26	)	$	(3	)	$	(21	)
Advances	9			(9		)	—			(8		)
MPF Loans held for portfolio	—			—			—			(2		)
Consolidated obligation bonds	(4		)	4			—			7
Total	$	28		$	(31	)	$	(3	)	$	(24	)
Three months ended September 30, 2016
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	)
Nine months ended September 30, 2017
Available-for-sale securities	$	58		$	(64	)	$	(6	)	$	(70	)
Advances	(6		)	9			3			(27		)
MPF Loans held for portfolio	—			—			—			(5		)
Consolidated obligation bonds	55			(55		)	—			29
Total	$	107		$	(110	)	$	(3	)	$	(73	)
Nine months ended September 30, 2016
Available-for-sale securities	$	(4	)	$	—		$	(4	)	$	(93	)
Advances	(143		)	143			—			(57		)
MPF Loans held for portfolio	—			—			—			(7		)
Consolidated obligation bonds	42			(45		)	(3		)	51
Total	$	(105	)	$	98		$	(7	)	$	(106	)

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
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 )

Three months ended September 30, 2015
Available-for-sale securities $ (40 ) $ 29
$ (11 ) $ (33 )
Advances (77 ) 78
1
(22 )
MPF Loans held for portfolio —
—
—
(4 )
Consolidated obligation bonds 87
(94 ) (7 ) 54
Total $ (30 )
$ 13

$ (17 )
$ (5 )

Nine months ended September 30, 2016
Available-for-sale securities $ (4 ) $ —
$ (4 ) $ (93 )
Advances (143 ) 143
—
(57 )
MPF Loans held for portfolio —
—
—
(7 )
Consolidated obligation bonds 42
(45 ) (3 ) 51
Total $ (105 ) $ 98
$ (7 ) $ (106 )

Nine months ended September 30, 2015
Available-for-sale securities $ (28 ) $ 15
$ (13 ) $ (111 )
Advances (49 ) 49
—
(63 )
MPF Loans held for portfolio —
—
—
(11 )
Consolidated obligation bonds 117
(134 ) (17 ) 169
Total $ 40
$ (70 ) $ (30 ) $ (16 )

2627

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Notes to Financial Statements - (Unaudited)

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

Cash Flow Hedges

We reclassify amounts in AOCI into our statements of income in the same periods during which the hedged forecasted transaction affects our earnings. We had no 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 ~~$(8)~~$(2) million as of September 30, ~~2016.~~2017. The maximum length of time over which we are hedging our exposure to the variability in future cash flows for forecasted transactions is 43 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-Noninterest Income-Derivatives and Hedging Activities		Effective Portion Recorded in AOCI		Amount Recorded in Net Interest Income
Three months ended September 30, 2017
Advances	$	—	$	—	$	1
Discount notes	1		44		(40		)
Total	$	1	$	44	$	(39	)

Three months ended September 30, 2016
Advances	$	—	$	—	$	1
Discount notes	—		84		(49		)
Total	$	—	$	84	$	(48	)

Nine months ended September 30, 2017
Advances	$	—	$	—	$	7
Discount notes	2		117		(128		)
Bonds	—		—		(2		)
Total	$	2	$	117	$	(123	)

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

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 )

2728

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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 to raise short-term funds, are issued at less than their face amount and redeemed at par value when they mature. The maturity of consolidated obligation 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 discount notes for which we are the primary obligor. All are due in one year or less.



As of	September 30, 2017			December 31, 2016
Carrying Amount	$	45,460		$	35,949
Weighted Average Interest Rate	0.94		%	0.46		%

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, 2017	Contractual Maturity		Weighted Average Interest Rate		By Maturity or Next Call Date
Due in one year or less	$	15,886	1.19	%	$	26,692
One to two years	7,581		1.23	%	6,420
Two to three years	2,543		1.27	%	1,642
Three to four years	2,995		1.97	%	450
Four to five years	3,178		2.04	%	286
Thereafter	3,876		2.96	%	569
Total par value	$	36,059	1.53	%	$	36,059

As of September 30, 2016 Contractual Maturity Weighted Average Interest Rate By Maturity or Next Call Date
Due in one year or less $ 9,756
1.16 % $ 20,922
One to two years 7,686
1.31 % 4,460
Two to three years 4,591
1.26 % 3,105
Three to four years 979
1.28 % 474
Four to five years 2,808
1.99 % 363
Thereafter 4,354
2.85 % 850
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, 2016 December 31, 2015
Carrying Amount $ 39,144
$ 41,564
Par Value 39,164
41,584
Weighted Average Interest Rate 0.39 % 0.22 %

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


As of	September 30, 2016			December 31, 2015			September 30, 2017			December 31, 2016
Noncallable	$	18,288		$	10,148		$	22,327		$	22,356
Callable	11,886			12,536			13,732			14,778
Par value	30,174			22,684			36,059			37,134
Fair value hedging adjustments	(49		)	(101		)	(165		)	(229		)
Other adjustments	14			(1		)	(4		)	(2		)
Consolidated obligation bonds	$	30,139		$	22,582		$	35,890		$	36,903

The following table summarizes the consolidated obligations of the FHLBs and those for which we are the primary obligor. 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, ~~2016,~~2017, and December 31, ~~2015. Refer to~~ 2016. See Note 17 - Commitments and Contingencies to the financial statements in our ~~2015~~2016 Form 10-K for further details.



	September 30, 2017									December 31, 2016
Par values as of	Bonds			Discount Notes			Total			Bonds			Discount Notes			Total
FHLB System total consolidated obligations	$	620,807		$	407,903		$	1,028,710		$	579,189		$	410,122		$	989,311
FHLB Chicago as primary obligor	36,059			45,499			81,558			37,134			35,969			73,103
As a percent of the FHLB System	6		%	11		%	8		%	6		%	9		%	7		%

September 30, 2016 December 31, 2015
Par values as of Bonds
Discount
Notes
Total Bonds
Discount
Notes
Total
FHLB System total consolidated obligations $ 532,920
$ 434,808
$ 967,728
$ 410,859
$ 494,343
$ 905,202
FHLB Chicago as primary obligor 30,174
39,164
69,338
22,684
41,584
64,268
As a percent of the FHLB System 6 % 9 % 7 % 6 % 8 % 7 %

2829

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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~~$100 and redeemable on five ~~years~~'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~~'smember's activity stock requirement. Class B2 membership stock is available to ~~be purchased to~~ support a ~~member~~'smember'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 Requirements on page ~~F-42~~F-43 of our ~~2015~~2016 Form 10-K. We complied with our minimum regulatory capital requirements as shown below.


	September 30, 2016						December 31, 2015						September 30, 2017						December 31, 2016
	Requirement			Actual			Requirement			Actual			Requirement			Actual			Requirement			Actual
Risk-based capital	$	971		$	4,889		$	1,027		$	4,688		$	1,055		$	5,084		$	1,088		$	5,032
Total regulatory capital	$	2,999		$	4,889		$	2,827		$	4,688		$	3,500		$	5,084		$	3,148		$	5,032
Total regulatory capital ratio	4.00		%	6.52		%	4.00		%	6.63		%	4.00		%	5.81		%	4.00		%	6.40		%
Leverage capital	$	3,749		$	7,332		$	3,534		$	7,032		$	4,374		$	7,626		$	3,935		$	7,549
Leverage capital ratio	5.00		%	9.78		%	5.00		%	9.95		%	5.00		%	8.72		%	5.00		%	9.59		%

Total regulatory capital and leverage capital includes mandatorily redeemable capital stock (MRCS) but does not include 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~~members exceeded 10% of our ~~total~~ regulatory capital stock ~~outstanding:~~outstanding (which includes MRCS):

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 %



As of September 30, 2017	Regulatory Capital Stock Outstanding			% of Total Outstanding		Amount of Which is Classified as a Liability (MRCS)
BMO Harris Bank, National Association	$	307		16.5	%	$	—
One Mortgage Partners Corp.	245		^a	13.1	%	245
The Northern Trust Company	195			10.5	%	—


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

~~Transfer~~Repurchase 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,~~On January 26, 2017, we began repurchasing all excess Class B2 stock on a weekly basis at par value, i.e., $100 per share. Members may continue to request repurchase of excess stock on any business day in addition to the weekly repurchase. All repurchases of excess stock, including automatic weekly repurchases, will continue until otherwise announced, ~~significant reductions in~~but remain subject to our ~~membership stock~~regulatory requirements, certain financial and ~~activity stock requirements, which went into effect on April 1, 2016. As a result of these changes, we held $593 million~~capital thresholds, and prudent business practices. Repurchase of excess capital stock held by members is subject to compliance with financial and capital thresholds, as detailed on ~~April 1, 2016.~~ page 57 of our 2016 Form 10-K.

As of September 30, ~~2016, we held excess~~2017, our regulatory capital stock outstanding was $1.9 billion, a net decrease of ~~$419 million. The reduction was~~$147 million from December 31, 2016, due in part to the automatic weekly repurchases.

Dividends

On October 24, 2017, our Board of Directors declared a ~~result of members requesting repurchase of their excess~~3.30% dividend (annualized) for Class B1 activity stock and ~~members utilizing excess~~a 1.25% dividend (annualized) for Class B2 membership stock ~~to support new advance borrowing activities.~~based on our preliminary financial results for the third quarter of 2017. This dividend, including dividends on mandatorily redeemable capital stock, totaled $11 million and is scheduled for payment on November 15, 2017.

2930

Table of Contents

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 gains (losses) in AOCI for the reporting periods indicated.



	Net Unrealized -			Non-credit OTTI -			Net Unrealized - Cash Flow Hedges
	Available-for-sale Securities			Held-to-maturity Securities			Net Unrealized - Cash Flow Hedges			Post-Retirement Plans			AOCI
Three months ended September 30, 2017
Beginning balance	$	478		$	(160	)	$	(243	)	$	(8	)	$	67
Change in the period recorded to the statements of condition, before reclassifications to statements of income	(24		)	8			44			3			31
Amounts reclassified in period to statements of income:
Net interest income	—			—			(1		)				(1		)
Non-interest gain (loss)	—			—			(1		)				(1		)
Ending balance	$	454		$	(152	)	$	(201	)	$	(5	)	$	96

Three months ended September 30, 2016
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		)
Ending balance	$	545		$	(187	)	$	(425	)	$	(5	)	$	(72	)

Nine months ended September 30, 2017
Beginning balance	$	459		$	(177	)	$	(312	)	$	(6	)	$	(36	)
Change in the period recorded to the statements of condition, before reclassifications to statements of income	(5		)	25			117			1			138
Amounts reclassified in period to statements of income:
Net interest income	—			—			(4		)				(4		)
Non-interest gain (loss)	—			—			(2		)				(2		)
Ending balance	$	454		$	(152	)	$	(201	)	$	(5	)	$	96

Nine months ended September 30, 2016
Beginning balance	$	658		$	(217	)	$	(463	)	$	(6	)	$	(28	)
Change in the period recorded to the statements of condition, before reclassifications to statements of income	(113		)	30			46			1			(36		)
Amounts reclassified in period to statements of income:
Net interest income	—			—			(4		)				(4		)
Non-interest gain (loss)	—			—			(4		)				(4		)
Ending balance	$	545		$	(187	)	$	(425	)	$	(5	)	$	(72	)

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
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 )

Three months ended September 30, 2015
Beginning balance $ 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 )
Amounts reclassified in period to statements of income:

Net interest income —
—
(1 ) (1 )
Non-interest gain (loss) —
—
(1 ) (1 )
Other comprehensive income in the period (79 )
11

(31 )
1

(98 )
Ending balance $ 846

$ (227 )
$ (572 )
$ (6 )
$ 41

Nine months ended September 30, 2016
Beginning balance $ 658
$ (217 ) $ (463 ) $ (6 ) $ (28 )
Change in the period recorded to the statements of condition, before reclassifications to statements of income (113 ) 30
46
1
(36 )
Amounts reclassified in period to statements of income:

Net interest income —
—
(4 ) (4 )
Non-interest gain (loss) —
—
(4 ) (4 )
Other comprehensive income in the period (113 ) 30
38
1
(44 )
Ending balance $ 545
$ (187 ) $ (425 ) $ (5 ) $ (72 )

Nine months ended September 30, 2015
Beginning balance $ 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 )
Amounts reclassified in period to statements of income:
Net interest income —
—
(4 ) (4 )
Non-interest gain (loss) —
—
(2 ) (2 )
Other comprehensive income in the period (214 ) 37
8
(7 ) (176 )
Ending balance $ 846
$ (227 ) $ (572 ) $ (6 ) $ 41

3031

Table of Contents

Notes to Financial Statements - (Unaudited)

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

Note 13 - Fair Value

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~~ See Note 2 - Summary of Significant Accounting Policies to the financial statements in our ~~2015~~2016 Form 10-K for our fair value measurement policies. For a description of the valuation techniques and significant inputs see Note 16 - Fair Value to the financial statements in our ~~2015~~2016 Form 10-K.

The following tables 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;~~concern as they do not take into account future business opportunities and future net profitability of assets and liabilities. We had no transfers between levels in the fair value hierarchy for the periods shown.

The following table shows the fair values of financial 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.



							Fair Value Hierarchy
	Carrying Amount			Fair Value			Level 1			Level 2			Level 3
September 30, 2017
Financial Assets -
Cash and due from banks	$	32		$	32		$	32		$	—		$	—
Interest bearing deposits	750			750			750			—			—
Federal Funds sold	9,849			9,849			—			9,849			—
Securities purchased under agreements to resell	3,750			3,750			—			3,750			—
Held-to-maturity securities	3,768			4,184			—			3,328			856
Advances	50,153			50,181			—			50,181			—
MPF Loans held in portfolio, net	5,024			5,191			—			5,171			20
Financial Liabilities -
Deposits	(600		)	(600		)	—			(600		)	—
Consolidated obligation discount notes	(45,460		)	(45,459		)	—			(45,459		)	—
Consolidated obligation bonds	(35,890		)	(36,110		)	—			(36,110		)	—
Mandatorily redeemable capital stock	(308		)	(308		)	(308		)	—			—

December 31, 2016
Financial Assets -
Cash and due from banks	$	351		$	351		$	351		$	—		$	—
Interest bearing deposits	650			650			650			—			—
Federal Funds sold	4,075			4,075			—			4,075			—
Securities purchased under agreements to resell	2,300			2,300			—			2,300			—
Held-to-maturity securities	5,072			5,516			—			4,544			972
Advances	45,067			45,065			—			45,065			—
MPF Loans held in portfolio, net	4,967			5,162			—			5,136			26
Financial Liabilities -
Deposits	(496		)	(496		)	—			(496		)	—
Consolidated obligation discount notes	(35,949		)	(35,949		)	—			(35,949		)	—
Consolidated obligation bonds	(36,903		)	(37,149		)	—			(37,149		)	—
Mandatorily redeemable capital stock	(301		)	(301		)	(301		)	—			—

Carrying Amount Fair Value Hierarchy
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.~~

3132

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. ~~The~~ ~~Netting~~ ~~adjustment shown in the table reflects our policy of presenting derivative assets and liabilities on a net basis in our statements of condition. See~~ ~~Note 1 - Background and Basis of Presentation~~ ~~and~~ ~~Note 9 - Derivatives and Hedging Activities~~ ~~for further details. Advances,~~This includes advances, consolidated obligation discount notes and bonds, and mortgage loans held for sale ~~resulted from our electing~~for which we elected the fair value option. The Netting and Cash Collateral adjustment is attributable to our derivative transactions that are presented on a net basis in our statements of condition. See Note 1 - Background and Basis of Presentation,Note 2 - Summary of Significant Accounting Policies and Note 9 - Derivatives and Hedging Activities for further details.



	Level 2			Level 3		Netting and Cash Collateral			Fair Value
September 30, 2017
U.S. Government & other government related non-MBS	$	201		$	—				$	201
GSE residential MBS	34			—					34
U.S. Governmental-guaranteed residential MBS	1			—					1
Trading securities	236			—					236
U.S. Government & other government related non-MBS	279			—					279
State or local housing agency non-MBS	20			—					20
FFELP ABS	4,315			—					4,315
GSE residential MBS	7,790			—					7,790
U.S. Government guaranteed residential MBS	1,076			—					1,076
Private label residential MBS	—			52					52
Available-for-sale securities	13,480			52					13,532
Advances held at fair value	785			—					785
Derivative assets	357			—		$	(354	)	3
Other assets held at fair value	171			—					171
Financial assets at fair value	$	15,029		$	52	$	(354	)	$	14,727
Consolidated obligation discount notes held at fair value	$	(872	)	$	—				$	(872	)
Consolidated obligation bonds held at fair value	(5,206		)	—					(5,206		)
Derivative liabilities	(660		)	—		$	632		(28		)
Financial liabilities at fair value	$	(6,738	)	$	—	$	632		$	(6,106	)

December 31, 2016
U.S. Government & other government related non-MBS	$	1,005		$	—				$	1,005
GSE residential MBS	39			—					39
U.S. Governmental-guaranteed residential MBS	1			—					1
Trading securities	1,045			—					1,045
U.S. Government & other government related non-MBS	336			—					336
State or local housing agency non-MBS	19			—					19
FFELP ABS	4,572			—					4,572
GSE residential MBS	8,555			—					8,555
U.S. Government guaranteed residential MBS	1,380			—					1,380
Private label residential MBS	—			56					56
Available-for-sale securities	14,862			56					14,918
Advances held at fair value	672			—					672
Derivative assets	474			—		$	(468	)	6
Other assets held at fair value	44			—					44
Financial assets at fair value	$	17,097		$	56	$	(468	)	$	16,685
Consolidated obligation discount notes held at fair value	$	(6,368	)	$	—				$	(6,368	)
Consolidated obligation bonds held at fair value	(5,443		)	—					(5,443		)
Derivative liabilities	(1,161		)	—		$	1,118		(43		)
Financial liabilities at fair value	$	(12,972	)	$	—	$	1,118		$	(11,854	)

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.~~

3233

Table of Contents

Notes to Financial Statements - (Unaudited)

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

Fair Value Option

We elect the fair value option for financial instruments, such as advances, MPF Loans held for sale, and consolidated obligation discount notes and ~~consolidated obligation~~ bonds in cases where hedge accounting treatment may not be ~~achieved. Specifically,~~achieved due to the inability to meet the 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 derivatives used to hedge these financial~~criterion. Financial instruments ~~have matching terms. Accordingly, electing~~for which we elected the fair value option ~~allows us to better match the change in~~along with their related fair value are shown on our Statements of ~~these~~Condition. Refer to our Note 2 – Summary of Significant Accounting Policies to the financial ~~instruments with the derivative economically hedging them.~~statements in our 2016 Form 10-K for further details.

The following table reflects the difference between the aggregate unpaid principal balance (UPB) outstanding and the aggregate fair value for 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, 2017						December 31, 2016
As of	Advances			Consolidated Obligation Bonds			Advances			Consolidated Obligation Bonds
Unpaid principal balance	$	788		$	5,210		$	677		$	5,447
Fair value over (under) UPB	(3		)	(4		)	(5		)	(4		)
Fair value	$	785		$	5,206		$	672		$	5,443

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

~~Table of Contents~~

~~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 shows our commitments outstanding, which represent off-balance sheet obligations.



	September 30, 2017							December 31, 2016
As of	Expire within one year		Expire after one year			Total		Expire within one year		Expire after one year			Total
Unsettled consolidated obligation bonds	$	300	$	—		$	300	$	10	$	—		$	10
Member standby letters of credit	12,497		2,914		^a	15,411		8,459		2,369		^a	10,828
Housing authority standby bond purchase agreements	—		323			323		25		281			306
Advance commitments	1		—			1		15		1			16
MPF delivery commitments	514		—			514		417		—			417
Other	10		—			10		24		—			24
Commitments	$	13,322	$	3,237		$	16,559	$	8,950	$	2,651		$	11,601

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
Unsettled consolidated obligation bonds $ 748
$ —
$ 748
$ 105
$ —
$ 105
Unsettled consolidated obligation discount notes 500
—
500
—
—
—
Member standby letters of credit 8,283
2,140
^a
10,423
5,063
1,615
^a
6,678
Housing authority standby bond purchase agreements 46
262
308
49
362
411
Advance commitments 45
1
46
163
5
168
MPF delivery commitments 632
—
632
279
—
279
Other commitments 28
—
28
48
3
51
Commitments $ 10,282
$ 2,403
$ 12,685
$ 5,707
$ 1,985
$ 7,692


^a	Contains ~~$372~~$720 million and ~~$637~~$486 million of member standby letters of credit at September 30, ~~2016,~~2017, and December 31, ~~2015,~~2016, which were renewable annually.

For a description of ~~previously~~ defined terms see Note 17 - Commitments and Contingencies to the financial statements in our ~~2015~~2016 Form 10-K.

Table of Contents

Notes to Financial Statements - (Unaudited)

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

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~~either 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~~Directors, or members ~~own all~~that control more than 10% of our ~~capital stock.~~total voting interests. We did not have any members that controlled more than 10% of our total voting interests for the periods presented in these financial statements.

In the normal course of business, we may extend credit to or enter into other transactions with ~~these~~a related ~~parties.~~party. 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 summarizes balances we had with our members who are related parties as defined above (including their affiliates)~~. Members represented in these tables may change between~~ as of the periods ~~presented, to the extent that our related parties change, based on changes in the composition of our Board membership or percentage of capital stock ownership over 10% as noted in~~ ~~Note 11 - Capital and Mandatorily Redeemable Capital Stock (MRCS).~~presented.



As of	September 30, 2017		December 31, 2016
Assets - Advances	$	141	$	107
Liabilities - Deposits	13		8
Equity - Capital Stock	8		18

As of September 30, 2016 December 31, 2015
Assets - Interest bearing deposits $ 650
$ 650
Assets - Advances 16,016
15,168
Liabilities - Deposits 33
20
Equity - Capital Stock 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 transactions with other FHLBs, if any, are identified on the face of our Financial Statements.

3435

Table of Contents

(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, 2016			June 30, 2016			March 31, 2016			December 31, 2015			September 30, 2015			September 30, 2017			June 30, 2017			March 31, 2017			December 31, 2016			September 30, 2016
Selected statements of condition data
Total investments ^a	$	26,853		$	28,964		$	27,597		$	28,324		$	28,883
Investments ^a																$	31,885		$	29,461		$	28,547		$	28,060		$	26,853
Advances	43,117			46,424			38,353			36,778			35,044			50,153			46,844			42,328			45,067			43,117
MPF Loans held in portfolio, gross	4,723			4,670			4,681			4,831			5,082			5,026			4,968			4,943			4,970			4,723
Less: allowance for credit losses	(3		)	(3		)	(2		)	(3		)	(3		)	(2		)	(3		)	(3		)	(3		)	(3		)
Total assets	74,983			80,662			70,913			70,671			69,824			87,488			81,779			76,109			78,692			74,983
Consolidated obligation discount notes, net	39,144			45,876			40,293			41,564			37,290			45,460			37,944			32,806			35,949			39,144
Consolidated obligation bonds, net	30,139			29,091			24,021			22,582			26,062			35,890			37,878			37,662			36,903			30,139
Total capital stock	1,636			1,774			1,733			1,950			1,892
Total retained earnings	2,951			2,884			2,790			2,730			2,640
Capital stock																1,557			1,526			1,282			1,711			1,636
Retained earnings																3,219			3,153			3,083			3,020			2,951
Mandatorily redeemable capital stock (MRCS)	302			302			302			8			9			308			303			301			301			302
Total capital	4,515			4,507			4,413			4,652			4,573			4,872			4,746			4,418			4,695			4,515
Other selected data at period end
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
MPF off-balance sheet loans outstanding - FHLB System ^b																$	18,091		$	17,537		$	17,180		$	16,972		$	16,594
MPF off-balance sheet loans outstanding - FHLBC PFIs ^b																8,395			8,305			8,214			8,196			8,100
FHLB systemwide consolidated obligations (par)	967,728			963,810			896,828			905,202			856,511			1,028,710			1,011,526			959,280			989,311			967,728
Number of members	730			732			737			740			742			717			721			726			728			730
Total employees (full and part time)	443			432			425			422			410			457			457			452			440			443
Selected statements of income data
Net interest income after provision for credit losses	$	113		$	111		$	120		$	135		$	121		$	124		$	116		$	113		$	111		$	113
Non-interest gain (loss)	14			50			(3		)	10			(6		)	5			16			10			15			14
Non-interest expense	42			46			40			37			35			43			44			42			39			42
Net income	76			104			69			97			72			77			79			73			78			76
Other selected data during the periods
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
MPF off-balance sheet loan volume funded - FHLB System ^b																$	1,022		$	935		$	726		$	1,215		$	1,354
MPF off-balance sheet loan volume funded - FHLBC PFIs ^b																354			355			278			527			636
Selected ratios (rates annualized)
Total regulatory capital to assets ratio	6.52		%	6.15		%	6.81		%	6.63		%	6.50		%
Regulatory capital to assets ratio																5.81		%	6.09		%	6.13		%	6.40		%	6.52		%
Market value of equity to book value of equity	108		%	107		%	107		%	108		%	108		%	107		%	108		%	108		%	108		%	108		%
Total investments - % of total assets	36		%	36		%	39		%	40		%	41		%
Investments - % of total assets																36		%	36		%	38		%	36		%	36		%
Advances - % of total assets	58		%	58		%	54		%	52		%	50		%	57		%	57		%	56		%	57		%	58		%
MPF Loans held in portfolio, net - % of total assets	6		%	6		%	7		%	7		%	7		%	6		%	6		%	6		%	6		%	6		%
Dividend rate class B1 activity stock-period paid	2.80		%	2.80		%	2.60		%	2.50		%	2.25		%	3.30		%	3.15		%	3.00		%	2.80		%	2.80		%
Dividend rate class B2 membership stock-period paid	0.60		%	0.60		%	0.60		%	0.50		%	0.50		%	1.25		%	1.05		%	0.85		%	0.60		%	0.60		%
Return on average assets	0.38		%	0.53		%	0.38		%	0.53		%	0.42		%	0.36		%	0.39		%	0.36		%	0.40		%	0.38		%
Return on average equity	6.70		%	9.38		%	5.87		%	8.44		%	6.31		%	6.54		%	6.99		%	6.46		%	6.84		%	6.70		%
Average equity to average assets	5.67		%	5.65		%	6.47		%	6.28		%	6.66		%	5.50		%	5.58		%	5.57		%	5.85		%	5.67		%
Net yield on average interest-earning assets	0.57		%	0.57		%	0.66		%	0.75		%	0.72		%	0.59		%	0.58		%	0.57		%	0.57		%	0.57		%
Return on average Regulatory Capital spread to three month LIBOR index	5.34		%	7.97		%	5.17		%	7.94		%	6.15		%	4.89		%	5.47		%	5.09		%	5.37		%	5.34		%
Cash dividends	$	9		$	10		$	9		$	7		$	7		$	11		$	9		$	10		$	9		$	9
Dividend payout ratio	12		%	10		%	13		%	7		%	10		%	14		%	11		%	14		%	12		%	12		%


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


^b	MPF off-balance sheet loans ~~are~~include MPF Loans purchased from PFIs ~~and 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.~~products. See Mortgage Partnership Finance Program beginning on page 7 in our ~~2015~~2016 Form 10-K.

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(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;~~investments;

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 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 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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(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 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 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;

recent regulatory changes to FHLB membership requirements by the FHFA;

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 ~~2015~~2016 Form 10-K on page ~~19.~~18.

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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Executive Summary

Third Quarter ~~2016~~2017 Financial Highlights

We recorded net income of ~~$76 million for the third quarter of 2016, up from $72~~$77 million in the third quarter of ~~2015.~~2017, up from $76 million in the third quarter of 2016.

Net interest income for the third quarter of ~~2016~~2017 was $113 million, which included $9 million of income from investment security prepayments during the period. For the third quarter of 2015, net interest income was $122 million, which included $11 million of income from investment security prepayments during the period. While our legacy investment portfolio continues to pay 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 2016 was $14~~$123 million, up 9% from ~~a loss of $6 million for the third quarter of 2015 as we experienced increased gains on our balance sheet hedging activities.~~

~~Noninterest expense increased to $42~~$113 million for the third quarter of 2016 ~~compared to $35 million for~~as we benefited both from the ~~third quarter~~rising rate environment and higher levels of ~~2015, with the increase driven mainly by an increase in compensation and benefits.~~interest earning assets.

Total investment securities decreased ~~$3.2 billion~~17% to ~~$21.4~~$17.5 billion at September 30, ~~2016,~~2017, down ~~13%~~ from ~~$24.6~~$21.0 billion at December 31, ~~2015,~~2016, as our investment portfolio continued to pay ~~down during the period.~~down.

Advances outstanding increased ~~$6.3 billion~~11% to ~~$43.1~~$50.2 billion at September 30, ~~2016,~~2017, up ~~17%~~ from ~~$36.8~~$45.1 billion at December 31, ~~2015, as members continue to support investment activities and high loan growth in their communities.~~2016.

MPF Loans held in portfolio, ~~remained relatively flat from December 31, 2015,~~net of allowance for credit losses, increased $57 million or 1% to $5.0 billion at September 30, ~~2016, as new MPF Loan volume helped offset paydown and maturity activity during the period.~~2017.

Total assets increased ~~$4.3 billion~~11% to ~~$75.0~~$87.5 billion as of September 30, ~~2016, up 6%~~2017, compared to ~~$70.7~~$78.7 billion as of December 31, ~~2015.~~2016.

~~We reached $2.95 billion in retained earnings at September 30, 2016.~~

We remained in compliance with all of our regulatory capital requirements as of September 30, ~~2016.~~2017.

Summary and Outlook

Third Quarter ~~2016~~2017 Dividend

On October ~~27, 2016,~~24, 2017, the Bank's Board of Directors ~~maintained the dividend levels for the third quarter of 2016. The Board again recognized our members that borrow from the Bank by declaring~~declared a dividend of ~~2.80%~~3.30% (annualized) for Class B1 activity capital stock ~~based on~~for members that borrow from the ~~Bank’s preliminary financial results for the third quarter~~Bank and a dividend of ~~2016. The Board also declared a 0.60% dividend~~1.25% (annualized) for Class B2 membership capital ~~stock.~~stock . The Bank offers a higher dividend on the Class B1 activity stock as a means to provide additional value to those members that support the cooperative by using our advances products. The higher dividend on Class B1 activity stock, in effect, lowers members’ all-in cost of borrowing from the Bank.

Member ~~Owned~~Owned. Member Focused.

As a member-focused cooperative, we strive to offer products and ~~Member Focused~~

services that meet our members’ business needs. At September 30, ~~2016,~~2017, advances were ~~$43.1~~$50.2 billion, up ~~17%~~11% from December 31, ~~2015,~~2016, and letters of credit were ~~$10.4~~$15.4 billion, up ~~56%~~43% from December 31, ~~2015. As~~2016. In addition, the ~~Bank’s members seek ways~~volume of our MPF Traditional products also increased.

Investments in Our Members’ Communities

We continue to invest in members’ communities across the United States. Through our new Community First^®Capacity-Building Grant Program, we granted $250,000 to six nonprofit lending institutions in Illinois and Wisconsin this August to help them expand their capacity, and, in turn, increase their ~~non-interest income,~~impact on community development and affordable housing in their neighborhoods.

Also this fall, we joined the ~~volume~~ten other Federal Home Loan Banks to donate to hurricane relief efforts in Texas and the ~~traditional MPF products has continued~~Gulf Coast, Florida and the Southeast, Puerto Rico, and the U.S. Virgin Islands. Together we are committed to ~~grow~~supporting members as ~~well.~~they help to rebuild their communities.

The Bank continues to focus on its members by striving to understand what members need from the Bank beyond serving as a reliable source of liquidity. The Bank continues to 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 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 occurred on July 11-12, 2016.

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Results of Operations

Net Interest Income

Net interest income is the difference between the 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 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 and OTTI reversals;

Amortization of hedge adjustments;

Advance and investment prepayment fees; and

MPF credit enhancement fees.

The ~~tables~~table on the following page ~~present~~presents the increase or decrease in interest income and expense due to volume or rate variances. The calculation of these components includes the following considerations:

•

Average Balance: Average balances are calculated using daily balances. Historical cost balances are used to compute the average balances for most of our financial instruments, including available for sale securities and MPF Loans held in portfolio that are on nonaccrual status. Fair value is used to compute average balances for our trading securities and financial instruments carried at fair value under the fair value option.


•	Total Interest: Total interest includes all components of net interest income, if applicable, as discussed above.

Amortized cost basis is used to compute average daily balances for most of our financial instruments, including available for sale securities. Fair value is used to compute average daily balances for our trading securities and financial instruments carried at fair value under the fair value option.


•	Yield/Rate: Effective yields/rates are based on average daily balances and include all components of net interest income as discussed above. Yields/rates are calculated on an annualized basis.

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 changes due to the combined volume/rate variance have been allocated ratably to volume and rate.

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Increase or decrease in interest income and expense due to volume or rate variances


																						September 30, 2017						September 30, 2016						Increase (decrease) due to
	September 30, 2016						September 30, 2015						Increase (decrease) due to									Average Balance		Total Interest		Yield/ Rate		Average Balance		Total Interest		Yield/ Rate		Volume			Rate			Net Change
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	)	$	17,949	$	163	3.63	%	$	21,547	$	174	3.23	%	$	(33	)	$	22		$	(11	)
Advances	44,300		74		0.67	%	33,318		45		0.54	%	18			11			29			47,135		157		1.33	%	44,300		74		0.67	%	10			73			83
MPF Loans held in portfolio	4,657		53		4.55	%	5,140		62		4.82	%	(6		)	(3		)	(9		)	4,927		53		4.30	%	4,657		53		4.55	%	3			(3		)	—
Other interest bearing assets	8,443		8		0.38	%	5,506		2		0.15	%	3			3			6
Federal funds sold and securities purchased under agreements to resell																						11,467		34		1.19	%	6,857		7		0.41	%	14			13			27
Other																						1,247		4		1.28	%	1,586		1		0.25	%	(1		)	4			3
Interest income on assets	78,947		309		1.57	%	68,152		304		1.78	%	41			(36		)	5			82,725		411		1.99	%	78,947		309		1.57	%	19			83			102
Consolidated obligation discount notes	44,417		95		0.86	%	34,080		72		0.85	%	22			1			23			41,241		148		1.44	%	44,417		95		0.86	%	(11		)	64			53
Consolidated obligation bonds	29,461		99		1.34	%	28,565		96		1.34	%	3			—			3			36,437		136		1.49	%	29,461		99		1.34	%	26			11			37
Subordinated notes	—		—		—	%	944		14		5.93	%	(14		)	—			(14		)	—		—		—	%	—		—		—	%	—			—			—
Other interest bearing liabilities	845		2		0.95	%							2			—			2
Other																						918		4		1.74	%	845		2		0.95	%	—			2			2
Interest expense on liabilities	74,723		196		1.05	%	63,589		182		1.14	%	28			(14		)	14			78,596		288		1.47	%	74,723		196		1.05	%	14			78			92
Net yield on interest-earning assets	$	78,947	$	113	0.57	%	$	68,152	$	122	0.72	%	$	17		$	(26	)	$	(9	)
Net yield on interest earning assets																						$	82,725	$	123	0.59	%	$	78,947	$	113	0.57	%	$	6		$	4		$	10

For the nine months ended
Investment securities	$	22,342	$	545	3.25	%	$	24,754	$	599	3.23	%	$	(58	)	$	4		$	(54	)	$	18,639	$	492	3.52	%	$	22,342	$	545	3.25	%	$	(98	)	$	45		$	(53	)
Advances	42,141		211		0.67	%	32,633		132		0.54	%	47			32			79			46,191		386		1.11	%	42,141		211		0.67	%	36			139			175
MPF Loans held in portfolio	4,684		165		4.70	%	5,455		197		4.82	%	(27		)	(5		)	(32		)	4,906		160		4.35	%	4,684		165		4.70	%	7			(12		)	(5		)
Other interest bearing assets	7,346		23		0.42	%	7,297		6		0.11	%	—			17			17
Federal funds sold and securities purchased under agreements to resell																						10,211		74		0.97	%	5,779		16		0.37	%	32			26			58
Other																						1,273		9		0.94	%	1,567		7		0.60	%	(2		)	4			2
Interest income on assets	76,513		944		1.65	%	70,139		934		1.78	%	78			(68		)	10			81,220		1,121		1.84	%	76,513		944		1.65	%	68			109			177
Consolidated obligation discount notes	44,647		272		0.81	%	33,890		216		0.85	%	66			(10		)	56			38,940		363		1.24	%	44,647		272		0.81	%	(53		)	144			91
Consolidated obligation bonds	26,184		299		1.52	%	30,769		304		1.32	%	(51		)	46			(5		)	37,278		394		1.41	%	26,184		299		1.52	%	117			(22		)	95
Subordinated notes	565		24		5.66	%	944		41		5.79	%	(16		)	(1		)	(17		)	—		—		—	%	565		24		5.66	%	(24		)	—			(24		)
Other interest bearing liabilities	825		5		0.81	%							5			—			5
Other																						888		11		1.65	%	825		5		0.81	%	1			5			6
Interest expense on liabilities	72,221		600		1.11	%	65,603		561		1.14	%	54			(15		)	39			77,106		768		1.33	%	72,221		600		1.11	%	49			119			168
Net yield on interest-earning assets	$	76,513	$	344	0.60	%	$	70,139	$	373	0.71	%	$	29		$	(58	)	$	(29	)
Net yield on interest earning assets																						$	81,220	$	353	0.58	%	$	76,513	$	344	0.60	%	$	20		$	(11	)	$	9

~~Net interest income changed mainly due~~The following is an analysis of the preceding table and unless otherwise indicated, comparisons apply to both the ~~following:~~three and nine month periods ending September 30, 2017 compared to September 30, 2016.

•

Interest income from investment securities declined as securities matured or paid down and were not replaced. We are currently unable to make additional investments in MBS/ABS under FHFA regulatory limits as discussed in Investments on page 12 in our 2016 Form 10-K. One of the limits is that our investment in MBS and ABS cannot exceed three times our total regulatory capital. As of September 30, 2017, our MBS and ABS portfolio was 3.23 times our total regulatory capital, compared to 3.46 at December 31, 2016. We expect the decline to continue until we are below that limit.

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 are no longer required to obtain FHFA approval for any new investments that have a term to maturity in excess of 270 days, we are currently unable to make additional investments in MBS/ABS under FHFA regulatory limits as discussed in ~~Investments~~ on page 12 in our 2015 Form 10-K. This decline in interest income was also negatively impacted by declines in accretion into interest income of expected improvements in future cash flows on securities that were previously charged with credit related OTTI. For the quarter ended September 30, 2016, we recorded accretion of $11 million compared to $12 million for the same period in 2015; and $37 million and $41 million for the comparable year to date periods ended September 30. Accretion is dependent upon how estimated market conditions impact future cash flows, and may vary from past experience.

Interest income from advances increased primarily due to a rise in interest rates and, to a lesser extent, higher member demand for ~~advances along with increases in~~advances. Higher interest rates resulted primarily ~~as a result of~~from rate hikes by the 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), which is designed to make the net cost of borrowing through advances more attractive to members by allowing members to borrow new advances using less activity based capital stock.Bank.

Interest income from MPF Loans held in portfolio declined due to the decrease in our outstanding MPF Loans held in portfolio. Though we have recently resumed purchasing MPF Loans, our purchases were not large enough to offset our loan paydown activity year over year.

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Interest income from ~~other~~MPF Loans held in portfolio declined slightly due to lower average interest ~~bearing assets comes primarily~~rates (as our more seasoned and higher interest rate MPF Loans matured and were replaced with lower current interest rate MPF Loans), offset by slightly higher volumes of MPF Loans outstanding.

Interest income from ~~interest bearing deposits,~~ Federal Funds sold and securities ~~sold~~purchased under agreements to ~~repurchase. The increase is primarily~~resell increased both due to higher volumes outstanding and increases in interest rates ~~as a result of~~by the Federal Reserve ~~Bank's actions at year end 2015~~Bank.

Interest expense on our shorter termed consolidated obligation discount notes increased due to ~~raise~~rising short term interest rates ~~by 25 bps.~~despite declines in average balances outstanding as we shifted a portion of our funding to longer termed bonds.

Interest expense on our longer termed consolidated obligation bonds increased ~~primarily~~as we shifted a portion of our funding to longer termed bonds. Rates declined in the first and second quarters of 2017 compared to 2016, 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~~money market reforms which increased demand for FHLB debt in the ~~following table.~~

market, but this effect reversed in the third quarter of 2017 as rates rose.

Our subordinated notes were paid off on June 13, 2016.

~~Non-Interest Gain (Loss)~~


•	For details of the effect our fair value and cash flow hedge activities had on our net interest income see Total Net Effect Gain (Loss) of Hedging Activities on the following page.

Noninterest Income

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



	Three months ended September 30,					Nine months ended September 30,
	2017			2016		2017			2016
Derivatives and hedging activities	$	—		$	7	$	6		$	(7	)
Instruments held under fair value option	(5		)	—		(3		)	6
Litigation settlement awards	—			—		1			38
MPF fees from other FHLBs	5			4		15			12
Other, net	5			3		12			12
Noninterest income	$	5		$	14	$	31		$	61

~~Trading Securities,~~ The following is an analysis of the above table and unless otherwise indicated, comparisons apply to both the three and nine month periods ending September 30, 2017 compared to September 30, 2016.

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

~~Gains or (losses) on these~~Derivatives and hedging activities, ~~have generally stabilized in recent years primarily as a result~~and instruments held under the fair value option were not significantto our statements of ~~less volatile hedging costs, which is consistent with~~income over the ~~hedging strategies for our more simplified balance sheet, along with a more stable economy. However, most~~last year. Instead, the majority of ~~our total net~~the effect from our derivatives and hedging activities ~~was~~is recorded ~~as a component of~~in net interest ~~income, not in the above non-interest gain (loss) line items.~~ income.

The ~~low interest rate environment resulted in significant negative net interest settlements on derivative contracts. Details are in the~~ table on the following ~~page.~~

~~Litigation settlement awards~~

~~On October 15, 2010,~~page details the effect of all of these transactions on our results of operations. Note that 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 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 ~~Legal Proceedings~~ ~~on page 60 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~~economically hedge only a portion of ~~the expenses we incur.~~our trading securities.

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

~~The following table shows the impact~~Total Net Effect Gain (Loss) 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			Other		Total
Three months ended September 30, 2017
Recorded in net interest income																			$	(7	)	$	(21	)	$	(2	)	$	(40	)	$	7		$	—	$	(63	)
Recorded in derivatives & hedging activities																			1			(2		)	2			—			(2		)	1		—
Recorded on instruments held under fair value option																			(1		)	—			(1		)	(1		)	(2		)	—		(5		)
Total net effect gain (loss) of hedging activities																			$	(7	)	$	(23	)	$	(1	)	$	(41	)	$	3		$	1	$	(68	)
	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	)	$	(16	)	$	(31	)	$	(2	)	$	(49	)	$	12		$	—	$	(86	)
Recorded in derivatives & hedging activities	6			1			6			(3		)	(3		)	7			6			1			6			(3		)	(3		)	—		7
Recorded on instruments held under fair value option	(4		)	—			(1		)	(2		)	7			—			(4		)	—			(1		)	(2		)	7			—		—
Total net effect gain (loss) of hedging activities	$	(14	)	$	(30	)	$	3		$	(54	)	$	16		$	(79	)	$	(14	)	$	(30	)	$	3		$	(54	)	$	16		$	—	$	(79	)

Three months ended September 30, 2015
Nine months ended September 30, 2017
Recorded in net interest income	$	(20	)	$	(33	)	$	(4	)	$	(62	)	$	54		$	(65	)	$	(20	)	$	(70	)	$	(5	)	$	(128	)	$	27		$	—	$	(196	)
Recorded in derivatives & hedging activities	(1		)	(11		)	(2		)	3			(4		)	(15		)	(2		)	(5		)	5			2			5			1		6
Recorded in trading securities - hedged only																			—			1			—			—			—			—		1
Recorded on instruments held under fair value option	1			—			—			—			—			1			2			—			(2		)	(1		)	(2		)	—		(3		)
Total net effect gain (loss) of hedging activities	$	(20	)	$	(44	)	$	(6	)	$	(59	)	$	50		$	(79	)	$	(20	)	$	(74	)	$	(2	)	$	(127	)	$	30		$	1	$	(192	)

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

Litigation settlement awards

Litigation settlement awards have not been material during the first nine months of 2017. During the second quarter of 2016 we received $38 million in settlement awards on our ongoing litigation related to our investment in private label mortgage backed securities as further discussed in Note 5 - Investment Securities - Ongoing Litigation to the financial statements on page F-30 in our 2016 Form 10-K.

MPF fees from other FHLBs

Other FHLBs pay us a membership fee to participate in the MPF Program and a fee for us to provide services related to their on balance sheet MPF Loans. These fees offset a portion of the expenses we incur to administer the program.

Other, net

Other, net consists primarily of fee income we earn from our off balance sheet MPF Loan products.

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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,
	2016		2015		2016		2015		2017		2016		2017		2016
Compensation and benefits	$	26	$	20	$	71	$	57	$	26	$	26	$	77	$	71
Operating expenses	15		13		44		38		15		15		45		44
Other	1		2		13		6		2		1		7		13
Noninterest expense	$	42	$	35	$	128	$	101	$	43	$	42	$	129	$	128

The following is an analysis of the preceding table and unless otherwise indicated, comparisons apply to both the three and nine month periods ending September 30, 2017 compared to September 30, 2016.

Compensation and benefits increased ~~primarily~~ due to defined benefit pension costs and 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 employee headcount and ~~incentive compensation expenses.~~increases in salaries and wages. We had ~~443~~457 employees as of September 30, ~~2016,~~2017, compared to ~~410~~443 as of September 30, ~~2015.~~2016.

Other ~~consists of~~decreased in the nine months ended September 30, 2017, due to $5 million in legal fees ~~and expenses related to~~we incurred during the second quarter of 2016 on our $38 million in legal settlement income as noted in Litigation settlement awards on page 42. Our ongoing litigation ~~settlements and costs~~ related to our ~~share~~investment in private label mortgage backed securities is further discussed in Note 5 - Investment Securities - Ongoing Litigation to the financial statements on page F-30 in our 2016 Form 10-K. Litigation settlement fees have not been material during the first nine months of ~~funding the Office of Finance and the Federal Housing Finance Agency.~~2017.

Assessments

We fund the Affordable Housing Program (AHP) program at a calculated rate of 10% of income before ~~assessments.~~assessments, excluding interest expense on MRCS.

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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,						Three months ended September 30,						Nine months ended September 30,						Balance remaining in AOCI as of
	2016			2015			2016			2015			2017			2016			2017			2016			September 30, 2017
Net unrealized gain (loss) available-for-sale securities	$	(13	)	$	(79	)	$	(113	)	$	(214	)	$	(24	)	$	(13	)	$	(5	)	$	(113	)	$	454
Non-credit OTTI held-to-maturity securities	9			11			30			37
Noncredit OTTI held-to-maturity securities													8			9			25			30			(152		)
Net unrealized gain (loss) cash flow hedges	83			(31		)	38			8			42			83			111			38			(201		)
Post-retirement plans	—			1			1			(7		)
Postretirement plans													3			—			1			1			(5		)
Other comprehensive income (loss)	$	79		$	(98	)	$	(44	)	$	(176	)	$	29		$	79		$	132		$	(44	)	$	96

The following is an analysis of the above table and unless otherwise indicated, comparisons apply to both the three and nine month periods ending September 30, 2017 compared to September 30, 2016.

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

Our ~~available-for-sale~~available for sale (AFS) portfolio ~~securities are in~~has experienced a small net unrealized ~~gain position (net of any offsetting related fair value hedge losses) as~~loss during 2017, which was due to a slight increase in longer term market interest rates ~~have declined since we acquired these securities. As~~and reversion of market values to par value as the securities approach maturity. Any unrealized gain (or loss) position in AFS securities reverse to zero by maturity as these securities ~~mature, the~~are expected to pay at par value on maturity. During 2016, our AFS portfolio had a large net unrealized ~~gain position gradually reverses~~loss primarily due to ~~zero as we will only collect the face value at their maturity. Such reversals result~~an increase in periodic net unrealized losses as individual securities mature. Our unrealized net gain position related to our available-for-sale securities portfolio in AOCI was $545 million as of September 30, 2016.longer term market interest rates.

~~Non-credit~~Noncredit OTTI on held-to-maturity securities

~~We accrete~~The gains in noncredit OTTI held-to-maturity (HTM) securities are the ~~non-credit related~~amounts accreted to their carrying amounts as these securities are performing better than expected when we took the original noncredit OTTI ~~amount~~charge in past years. The remaining accumulated losses in AOCI on these securities will be further accreted over their remaining lives provided the gains are expected to be collected. However, 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~~extent that further losses are expected to be incurred, we would immediately recognize those amounts as additional OTTI in our ~~outstanding non-credit OTTI balance, which drove a reduction in the accretion amounts. Our remaining non-credit OTTI amount on held-to-maturity securities in AOCI was $(187) million as~~statements of ~~September 30, 2016. We expect this remaining amount to continue to decline as our OTTI held-to-maturity securities approach maturity.~~income.

Net unrealized gain (loss) on cash flow hedges

~~Our~~The net unrealized gain on cash flow hedges ~~are more sensitive to changes in longer-term market interest rates than to changes in shorter-term market interest rates. The net unrealized gains~~ during both 2017 and 2016 resulted from an increase in shorter term interest rates ~~compared to~~as a result of actions by 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 net unrealized (loss) of $(425) million in AOCI related to our cash flow hedges.Federal Reserve Bank.

~~Post-retirement plans~~

In the first quarter of 2015, we recorded an unrealized loss in OCI of $(8) million due to a revision to the mortality tables used for our post-retirement healthcare and supplemental defined benefit equalization plan. This loss is being amortized into compensation and benefits expense over the average number of years of employment remaining before retirement. The annual amount of amortization is expected to be no more than $1 million.

For further ~~information~~details on the activity in our 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, 2016			December 31, 2015			September 30, 2017		December 31, 2016
Cash and due from banks, interest bearing deposits, Federal Funds sold, and securities purchased under agreement to resell	$	5,488		$	4,226		$	14,381	$	7,376
Investment securities	21,396			24,597			17,536		21,035
Advances	43,117			36,778			50,153		45,067
MPF Loans held in portfolio, net of allowance for credit losses	4,720			4,828			5,024		4,967
Other	262			242			394		247
Assets	$	74,983		$	70,671		87,488		78,692

Consolidated obligation discount notes	$	39,144		$	41,564		45,460		35,949
Consolidated obligation bonds	30,139			22,582			35,890		36,903
Subordinated notes	—			944
Other	1,185			929			1,266		1,145
Liabilities	70,468			66,019			82,616		73,997

Capital stock	1,636			1,950			1,557		1,711
Retained earnings	2,951			2,730			3,219		3,020
Accumulated other comprehensive income (loss)	(72		)	(28		)	96		(36		)
Capital	4,515			4,652			4,872		4,695
Total liabilities and capital	$	74,983		$	70,671		$	87,488	$	78,692

The following is an analysis of the above table and comparisons apply to September 30, 2017 compared to December 31, 2016.

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.

Investment Securities

~~Although we are no longer required to obtain FHFA approval for any new investments that have a term to maturity~~Investment securities declined as securities matured or paid down and were not replaced, as noted in ~~excess~~Results of ~~270 days, we are currently unable to make additional investments in MBS/ABS under FHFA regulatory limits as discussed in~~ ~~Investments~~Operations on page 1240.

Advances

Advances increased to the highest outstanding quarter-end balance in our ~~2015 Form 10-K.~~history at September 30, 2017. See Note 6 - Advances to the financial statements.

~~Table of Contents~~

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

~~Advances~~

~~Advances increased in 2016 primarily due to our members' interest in the benefits we offer our members through our continuing Reduced Capitalization Advance Program (RCAP), which~~While advance demand is ~~designed to make the net cost of borrowing through advances more attractive to members and allows members to borrow new advances using less activity stock.~~

~~While our advances increased,~~strong, it is possible that member demand for our advances could decline in future periods should their funding needs change, or to the extent they elect 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.~~decrease.

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

We had a small net ~~decrease~~increase in our outstanding MPF Loans from year end, as ~~we resumed purchasing a higher volume~~our purchases of new loans during ~~2016 to help~~2017 offset maturities and paydowns experienced in our MPF Loan portfolio. ~~In the third quarter~~

Table of ~~2016, our purchases were slightly greater than our current loan paydowns~~Contents

(Dollars in the 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 decline. For the year to date period ended September 30, 2016, we acquired $759 milliontables in ~~new MPF Loans to our portfolio, compared to $117 million in the same period in 2015.~~millions except per share amounts unless otherwise indicated)

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.

Hurricanes and California Wildfires

During the third quarter of 2017, three significant hurricanes impacted the southeastern coasts of the United States and Puerto Rico.

We have analyzed the potential impact that damage related to these hurricanes might have on our advances, letters of credit, MPF Loans held for portfolio, community investment programs, and non-agency MBS securities. These hurricanes did not have a material impact on our financial condition or results of operation during the third quarter of 2017. Based on the information currently available, we do not expect that the potential losses resulting from these hurricanes will have a material effect on our financial condition or results of operations in future periods.

We continue to evaluate the impact of the hurricanes on our advances, letters of credit, MPF Loans held for portfolio, community investment programs, and non-agency MBS investments. We are also monitoring the significant wildfires in California that occurred in October 2017 for any potential impact. If additional information becomes available indicating that any of our assets have been impaired and the amount of the loss can be reasonably estimated, we will record appropriate reserves at that time.

Additionally, in response to the hurricanes and California wildfires, we communicated to our mortgage loan servicers of our conventional MPF Loans held in portfolio that special relief would be available for certain borrowers, including forbearance or temporary suspension of mortgage payments for up to 90 days for borrowers whose income is affected by the disaster or for borrowers whose property is located in a FEMA disaster designated area. To assist individuals and households displaced by the hurricanes, we have announced that vacant AHP-assisted rental units may be temporarily leased to displaced individuals/households, regardless of income.

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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, ~~2016,~~2017, 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 48 in our ~~2015~~2016 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% or $3.1 billion of total assets. As of September 30, ~~2016,~~2017, our overnight liquidity was ~~$9.0~~$20.7 billion or ~~12%~~24% of total assets, giving us an excess overnight liquidity of ~~$6.3~~$17.6 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, ~~2016,~~2017, we had excess liquidity of ~~$43.7~~$40.0 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 ~~$16.4~~$17.7 billion as of September 30, ~~2016.~~2017.

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. 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~~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~~are maintaining increased balances in short-term investments. In addition, we fund certain overnight or shorter-term investments and advances with debt that has a maturity that extends beyond the maturities of the related investments or advances. For a discussion of how this may impact our earnings, see page 2221 in the Risk Factors section of our ~~2015~~2016 Form 10-K. On July 3, 2017, the FHFA proposed to rescind certain minimum regulatory liquidity requirements for the FHLBs as further discussed in Legislative and Regulatory Developments starting on page 56.

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					MPF Loans Held in Portfolio			Investment Securities
As of September 30, 2016			Available-for Sale			Held-to-Maturity
As of September 30, 2017									MPF Loans Held in Portfolio		MPF Loans Held in Portfolio				Available-for Sale				Held-to-Maturity
Year of Expected Principal Cash Flows	MPF Loans Held in Portfolio
One year or less	$	1,329		$	1,347		$	1,707	$	888	MPF Loans Held in Portfolio			$	1,182			$	1,367
After one year through five years	2,280			10,783			2,812		1,979			9,630				2,166
After five years through ten years	740			1,742			588		1,155			1,465				349
After ten years	308			795			162		932			620				132
Total	$	4,657		$	14,667		$	5,269	$	4,954		$	12,897			$	4,014

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~~2016 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 2016, the~~The Federal Open Market Committee (FOMC) ~~delayed further interest rate hikes due~~maintained the target range from 1.00 to ~~fragile economic growth~~1.25 percent during the third quarter of 2017. In September 2017, the FOMC initiated its balance sheet normalization program to shrink its balance sheet by reducing reinvestment purchases of US Treasuries and ~~tepid inflation. Market indicators suggest a~~agency mortgage backed securities. The markets predict another 25 basis point ~~interest rate hike~~increase in ~~December 2016 by~~ the ~~FOMC, one year after its last rate increase. The 10 year Treasury Note rose 13 basis points over~~target range in the fourth quarter ~~ending at 1.60 percent.~~of 2017.

We maintained ready access to funding during the third quarter. However, the U.S. Treasury has projected that the statutory “debt ceiling” limit could be reached in the first quarter of 2018. In preparation for the possibility of disorderly markets caused by potential debt defaults of the U.S. Government, we will be monitoring our liquidity position.

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 )



Nine months ended September 30,	2017		2016		Change
Net cash provided by (used in) operating activities	$	337	$	184	$	153

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. The $(191) million change in netNet cash provided by ~~(used in)~~ operating activities primarily ~~resulted~~result from the following:

~~The non-cash~~Net income; plus

A noncash adjustment ~~attributable~~related to derivatives and hedging activities; minus

Net cash outflows related to the ~~unrealized net changes in the fair value~~purchase of ~~our derivative instruments.~~

MPF Loans held for sale offset by proceeds from securitized mortgage loans.

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 )



Nine months ended September 30,	2017			2016			Change
Net cash provided by (used in) investing activities -
Liquid assets (Federal Funds sold, securities purchased under agreements to resell, interest bearing deposits, and trading securities)	$	(6,518	)	$	(1,620	)	$	(4,898	)
Securities held for investment (available-for-sale and held-to-maturity)	2,661			3,028			(367		)
Advances	(5,079		)	(6,189		)	1,110
Other	(40		)	135			(175		)
Net cash provided by (used in) investing activities	$	(8,976	)	$	(4,646	)	$	(4,330	)

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

~~short-term interest-earning assets.~~advances. The ~~$(6.9)~~$(4.3) billion change in net cash provided by (used in) investing activities primarily resulted from the following:

~~The~~Liquid assets reflect a desire for increased liquidity to meet the needs of our members.

Securities held for investment reflects the continued paydown in our investments portfolio.

Advances reflect the further increase in ~~net cash (used in) funding~~ advances ~~reflects our objective to make advances to our members our~~outstanding during 2017, but at a slower rate than 2016.

~~primary business;~~

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

The increase in net cash (used in) acquiring Federal Funds sold and securities purchased under agreements to resell reflects our objective to invest in liquid assets to meet the needs of our members; and

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

~~to resume these purchases.~~

Cash flows from financing activities with significant changes


Nine months ended September 30,	2016			2015			Change			2017			2016			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		)
Consolidated obligation discount notes										$	9,493		$	(2,443	)	$	11,936
Consolidated obligation bonds										(1,077		)	7,496			(8,573		)
Payments for retirement of subordinated notes										—			(944		)	944
Other	(115		)	(266		)	151			(96		)	(115		)	19
Net cash provided by (used in) financing activities	$	3,994		$	(2,315	)	$	6,309		$	8,320		$	3,994		$	4,326

Our financing activities primarily reflect cash flows related to issuing and repaying consolidated obligations. 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~~$4.3 billion change in net cash provided by (used in) financing activities primarily resulted from the following:

~~A net~~An increase in the amount of our consolidated ~~obligation debt outstanding, with a shift~~obligations used to fund the growth in ~~funding from~~ our ~~consolidated obligation~~balance sheet. We relied on shorter term discount notes for our funding in 2017 compared to ~~consolidated obligation bonds; and~~longer term bonds in 2016.

The payment for the retirement of our subordinated ~~notes.~~notes in 2016.

Capital Resources

Capital Rules

Under our Second Amended and Restated Capital Plan of the Federal Home Loan Bank of Chicago, effective October 1, 2015 (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.

Under our Capital Plan, our Board of Directors may 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. That threshold 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.

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. ~~In addition, our Board reduced each member's~~Each member’s activity stock requirement ~~from 5% to~~remained at 4.5% for non-RCAP ~~advances, effective April 1, 2016.~~advances.

Our Capital Plan 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.

~~Table of Contents~~

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

The Board may periodically adjust members’ membership stock requirement within a range of 0.20% to 2% of a member’s mortgage assets. ~~In February 2016, our Board reduced the~~Each member’s membership stock requirement tois the greater of either $10,000 or 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. ~~Also in February 2016 , the Board reduced the dollar~~The cap on each member’s membership stock ~~from $25 million to~~requirement is now $5 million, which is less than 9.9% of the Bank’s total capital stock outstanding at December 31, ~~2015,~~2016, and is thus the operative cap during the remainder of ~~2016~~2017 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~~

For details on ~~April 1, 2016. As a result of these changes, we held $593 million of excess~~our capital stock requirement changes in 2016, see Capital Resourceon ~~April 1, 2016. As~~page 54 of ~~September 30,~~our 2016 ~~we held excess capital stock~~Form 10-K.

Table 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.~~Contents

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

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 as discussed ~~below.~~in Note 11 - Capital and Mandatorily Redeemable Capital Stock (MRCS) to the financial statements in this Form 10-Q.

On July 3, 2017, the FHFA proposed to amend certain regulatory capital requirements for the FHLBs as further discussed in Legislative and Regulatory Developments on page 56.

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

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 4.5% requirement under our Capital Plan’s general ~~provisions. Since June 1,~~provisions as further discussed in Capital Resources on page 54 of our 2016 Form 10-K. As of September 30, 2017, and December 31, 2016, RCAP advances outstanding total $24.1 billion to 164 members and $22.7 billion to 147 members, respectively.

Repurchase of Excess Capital Stock

On January 26, 2017, we ~~have offered~~began repurchasing all excess Class B2 membership stock on a ~~more flexible version~~weekly basis at par value, i.e., $100 per share. Members may continue to request repurchase of ~~RCAP, under which~~excess stock on any business day in addition to the weekly repurchase. All repurchases of excess stock, including automatic weekly repurchases, will continue until otherwise announced, but remain subject to our regulatory requirements, certain financial and capital thresholds, and prudent business practices.

Repurchase of excess capital stock held by members ~~can borrow both short-~~is subject to compliance with financial and ~~long-term funding, including overnight advances, with the reduced activity stock~~ capital ~~requirement.~~thresholds, as detailed on page 57 of our 2016 Form 10-K.

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~~other liabilities in our statements of condition.


	September 30, 2016			December 31, 2015			Change			September 30, 2017		December 31, 2016			Change
Capital stock	$	1,636		$	1,950		$	(314	)
Total retained earnings	2,951			2,730			221
Accumulated other comprehensive income (loss)	(72		)	(28		)	(44		)
Total GAAP capital	$	4,515		$	4,652		$	(137	)

Capital Stock	$	1,636		$	1,950		$	(314	)	$	1,557	$	1,711		$	(154	)
MRCS	302			8			294			308		301			7
Total retained earnings	2,951			2,730			221
Regulatory capital stock										1,865		2,012			(147		)
Retained earnings										3,219		3,020			199
Regulatory capital	$	4,889		$	4,688		$	201		$	5,084	$	5,032		$	52

Capital stock										$	1,557	$	1,711		$	(154	)
Retained earnings										3,219		3,020			199
Accumulated other comprehensive income (loss)										96		(36		)	132
GAAP capital										$	4,872	$	4,695		$	177

~~Although we have had no OTTI~~Accumulated other comprehensive income (loss) in ~~2016, credit deterioration may negatively impact our remaining private-label MBS portfolio. We believe that future impairments~~the above table consists of ~~this portfolio~~changes in market value of various balance sheet accounts where the change is not recorded in earnings but are ~~possible if unemployment rates, default, delinquency, or loss rates~~instead recorded in equity capital as the income (loss) is not yet realized. For details on ~~mortgages were~~these changes please see Note 12 - Accumulated Other Comprehensive Income (Loss) 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 2015 Form 10-K.~~financial statements.

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

Although we have had no OTTI year to date in 2017, credit deterioration may negatively impact our remaining private label MBS portfolio. We cannot predict if or when impairments will occur, or the impact these impairments may have on our retained earnings and capital position. See page 28 of the Risk Factors section of our 2016 Form 10-K.

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

On October ~~27, 2016,~~24, 2017, our Board of Directors ~~approved maintaining the dividend levels for the third quarter of 2016 and~~ declared a ~~2.80%~~3.30% dividend (annualized) for Class B1 activity stock and a ~~0.60%~~1.25% dividend (annualized) for Class B2 membership stock based on our preliminary financial results for the third quarter of ~~2016.~~2017. This dividend, including dividends on mandatorily redeemable capital stock, totaled $11 million and ~~will be paid~~is scheduled for payment on November ~~14, 2016. With this action,~~15, 2017. The Class B2 capital stock dividend is intended to enhance the ~~Board continues~~value of membership; the ~~practice~~Class B1 capital stock dividend reduces the effective cost of ~~rewarding~~borrowing from the Bank and rewards our members ~~that use the Bank’s advances and~~who support the ~~financial health of the~~ entire ~~cooperative.~~ cooperative by using our advance products.

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~~On October 24, 2017, our Board of Directors amended our Retained Earnings and Dividend Policy to include consideration of settlement risks relating to unsettled consolidated obligations and investment securities. For further information see Retained Earnings ~~and Dividend Policy~~ & Dividends on page 57 in our ~~2015~~2016 Form 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-43~~F-44 in our ~~2015~~2016 Form 10-K.

The increase in MRCS and decrease in Capital Stock in the above table is mostly due to the transfer in the first quarter of 2016 of $294 million of our captive insurance company members' capital stock from equity to MRCS in 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~~For a detailed description of ~~each can be found~~our Critical Accounting Policies and Estimates see page 61 in our ~~2015~~2016 Form 10-K.



~~Estimating Credit Losses~~	~~Page 60~~
~~Estimating Fair Value~~	~~Pages 60-61~~

~~See~~Also see Note 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.~~results subsequent to December 31, 2016.

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(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 6364 in our ~~2015~~2016 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~~$50.0 billion were advances (par value) and ~~$10.4~~$15.4 billion were letters of credit at September 30, ~~2016,~~2017, compared to ~~$36.6~~$45.0 billion and ~~$6.7~~$10.8 billion at December 31, ~~2015.~~2016.


	September 30, 2016									December 31, 2015									September 30, 2017									December 31, 2016
Rating	Borrowing Members	% of Total		Credit Outstanding		% of Total		Collateral Loan Value		Borrowing Members	% of Total		Credit Outstanding		% of Total		Collateral Loan Value		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	499	97	%	$	65,443	100	%	$	116,386	483	97	%	$	55,750	100	%	$	106,814
4	6	1	%	47		—	%	129		12	2	%	158		—	%	318		7	1	%	59		—	%	102		7	1	%	47		—	%	103
5	12	2	%	100		—	%	242		20	4	%	145		—	%	353		10	2	%	113		—	%	199		11	2	%	140		—	%	390
Total	510	100	%	$	53,365	100	%	$	99,851	514	100	%	$	43,393	100	%	$	91,037	516	100	%	$	65,615	100	%	$	116,687	501	100	%	$	55,937	100	%	$	107,307

The majority of members assigned a 4 rating in the above table were required to submit specific collateral listings and the majority of members assigned a 5 rating were required to deliver collateral to us or a third-party custodian on our behalf.

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.

Credit Risk Exposure - Our credit risk exposure on conventional MPF Loans held in portfolio is the potential for financial loss due to borrower default and depreciation in the value of the real estate collateral securing the MPF Loan, offset by our ability to recover losses from PMI, Recoverable CE Fees, and the CE Amount which may include SMI. The PFI is required to pledge collateral to secure any portion of its CE Amount that is a direct obligation of the PFI.

Setting Credit Enhancement Levels - Credit losses in a Master Commitment are first absorbed by the Bank’s FLA but, if applicable to the MPF product, we will withhold a PFI’s scheduled performance credit enhancement fee in order to reimburse ourselves for any losses allocated to the FLA. If the FLA is exhausted, the credit losses are then absorbed by the PFI’s CE Amount that is calculated by utilizing a third party’s credit model. For further details on the FLA and PFI’s CE Amount, refer to Item 1- PFI Responsibilities on page 9 and Note 2 - MPF Risk Sharing Structure on page F-15 of the 2016 10-K.

Pursuant to the revised AMA regulation, effective January 18, 2017, we adjusted our methodology to set the PFI’s CE Amount. The PFI’s CE Amount is determined by the Bank with respect to an asset or a pool, based on documented analysis, that the Bank has a high degree of confidence that it will not bear material losses beyond the losses absorbed by the FLA, even under reasonably likely adverse changes to expected economic conditions.

The CE Amounts and the FLA for certain conventional MPF products held in our portfolio may be periodically reset lower for each Master Commitment after a required period of seasoning because the amount of credit enhancement necessary to maintain our risk of credit losses within our risk tolerance is usually reduced over time.

Table of Contents

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

Under the MPF Plus product, the PFI is required to provide an SMI policy covering MPF Loans in the Master Commitment and having a deductible initially equal to the FLA. Certain SMI providers fell below the requirements in the MPF Guides and instead of replacing the SMI provider or indemnifying us for any losses, most PFIs elected to forfeit future performance CE Fees. Credit losses associated with Master Commitments where the SMI coverage has been discontinued are incorporated into the allowance for credit losses calculation. Such credit losses are immaterial.

The following table shows the status of our credit enhancement structure on conventional MPF Loans held in portfolio. Unpaid principal balances in this table include REO, as losses in REO impact, and are impacted by, the credit enhancement structure of a Master Commitment. As defined, the CE Amount includes SMI on the MPF Plus product. Government Loans are excluded from the table as they are not directly credit enhanced by the PFI.



	As of September 30, 2017
MPF Product Type	Unpaid Principal Balance		90+ Days Delinquent	FLA ^a	PFI's CE Amount ^b
100	$	236	1.66%	4.91%	4.22%
125	1,216		0.22%	1.33%	1.42%
Plus	1,378		3.88%	5.95%	1.66%
35	32		—%	0.35%	2.89%
Original	1,104		0.71%	0.90%	7.07%


^a	For each product above, except MPF Original, a portion of losses experienced at the FLA level may be recovered through the withholding of performance-based CE Fees from PFIs.


^b	Credit losses on a loan may only be absorbed by the CE Amount in the Master Commitment related to the loan. For further detail refer to Note 2 - MPF Risk Sharing Structure on page F-15 of the 2016 10-K.

Mortgage Repurchase Risk

~~We are exposed to~~For details on our 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,~~breached, see Mortgage Repurchase Risk on page 6667 in our ~~2015~~2016 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 AA or better rated 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~~were no material ~~change~~changes in the credit ratings of these ~~AA or better rated~~ securities since December 31, ~~2015, and except~~2016. For further details see page 70 in our 2016 Form 10-K. Except for ~~private-label~~private label MBS, ~~as noted below,~~ we have never taken an impairment charge on ~~these~~our investment securities. ~~For further details see page 69 in our 2015 Form 10-K.~~

Our ~~private-label~~private label MBS are predominantly variable rate securities rated below investment grade (BBB). There ~~was~~were no material ~~change~~changes in overall credit quality since December 31, ~~2015,~~2016, nor have we acquired any new ~~private-label~~private label MBS. We last had an other-than-temporary impairment (OTTI) loss on ~~private-label~~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~~Investment 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.~~statements.

Unsecured Short-Term Investments Credit Exposure

For further details on our unsecured short-term investments as well as policies and procedures to limit and monitor our unsecured credit risk exposure, see page 72 in our ~~2015~~2016 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, 2016	AA		A		BBB		Unrated		Total
As of September 30, 2017											AA		A		BBB		Unrated		Total
Domestic U.S.
Interest-Bearing Deposits	$	—	$	650	$	—	$	—	$	650	$	—	$	750	$	—	$	—	$	750
Fed Funds Sold	—		—		188		19		207		—		—		147		27		174
U.S. branches and agency offices of foreign commercial banks - Federal Funds sold:
Australia	500		—		—		—		500		1,750		—		—		—		1,750
Canada	—		1,100		—		—		1,100		500		2,225		—		—		2,725
Finland	500		—		—		—		500
France											—		600		—		—		600
Japan											—		700		—		—		700
Netherlands	—		500		—		—		500		—		600		—		—		600
Norway	—		500		—		—		500		—		600		—		—		600
Sweden	—		500		—		—		500		2,000		700		—		—		2,700
Total unsecured credit exposure	$	1,000	$	3,250	$	188	$	19	$	4,457	$	4,250	$	6,175	$	147	$	27	$	10,599

All ~~$4.5~~$10.6 billion of the unsecured credit exposure shown in the above table were overnight investments.

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

Managing Our Credit Risk Exposure Related to Derivative Agreements

~~Refer to~~ See Note 9 - Derivatives and Hedging Activities to the financial statements for a discussion of how we manage our credit risk exposure related to derivative agreements. We have credit exposure 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.

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


	Net Fair Value Before Collateral			Cash Collateral Pledged		Non-cash Collateral Pledged		Net Credit Exposure to Counterparties			Net Derivative Fair Value Before Collateral			Cash Collateral Pledged				Non-cash Collateral Pledged		Net Credit Exposure to Counterparties
As of September 30, 2016
As of September 30, 2017
Non-member counterparties -
Undercollateralized asset positions -
Bilateral derivatives -
Cleared derivatives	$	—		$	1	$	—	$	1
BBB											$	2		$	(2	)		$	—	$	—
Overcollateralized liability positions -
Bilateral derivatives -
AA rated	(17		)	17		—		—
A rated	(29		)	29		—		—			(71		)	72				—		1		^a
Cleared derivatives	(395		)	413		90		108			(6		)	—			^b	71		65
Non-member counterparties	(441		)	460		90		109			(75		)	70				71		66
Member institutions	1			—		—		1			1			—				—		1
Total	$	(440	)	$	460	$	90	$	110		$	(74	)	$	70			$	71	$	67

As of December 31, 2015
As of December 31, 2016
Non-member counterparties -
Overcollateralized liability positions -
Bilateral derivatives -
AA rated	$	(14	)	$	14	$	—	$	—	^a	$	(60	)	$	60			$	—	$	—	^a
A rated	(4		)	4		—		—		^a	(57		)	60				—		3
Cleared derivatives	(147		)	136		62		51			(206		)	198			^b	97		89
Non-member counterparties	(165		)	154		62		51			(323		)	318				97		92
Member institutions	1			—		—		1			2			—				—		2
Total	$	(164	)	$	154	$	62	$	52		$	(321	)	$	318			$	97	$	94


^a	Less than $1 million.

Effective in January of 2017 we began accounting for variation margin payments made to or received by the DCOs through our FCMs as settlements to our derivative assets and derivative liabilities. Accordingly, we no longer include variation margin in the Cash Collateral Pledged column. See Note 1 - Background and Basis of Presentation,Note 2 - Summary of Significant Accounting Policies and Note 9 - Derivatives and Hedging Activities for further details.

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

Legislative and Regulatory Developments

Significant regulatory actions and developments are summarized below.

Information Security Management Advisory Bulletin

On September 28, 2017, the FHFA issued an Advisory Bulletin that supersedes previous guidance on an FHLB’s information security program. The Advisory Bulletin describes three main components of an information security program and provides the expectation that each FHLB will use a risk-based approach to implement its information security program. The Advisory Bulletin contains expectations related to (i) governance, including guidance related to roles and responsibilities, risk assessments, industry standards, and cyber-insurance; (ii) engineering and architecture, including guidance on network security, software security, and security of endpoints; and (iii) operations, including guidance on continuous monitoring, vulnerability management, baseline configuration, asset life cycle, awareness and training, incident response and recovery, user access management, data classification and protection, oversight of third parties, and threat intelligence sharing.

We do not expect this Advisory Bulletin to materially affect our financial condition or results of operations.

Minority and Women Inclusion

On ~~October 27, 2016,~~July 25, 2017, the FHFA ~~proposed amendments to~~published a final rule, effective August 24, 2017, amending its Minority and Women Inclusion regulations ~~that, if adopted, would~~to clarify the scope of the FHLBs’ obligation to promote diversity and ensure inclusion. ~~These proposed amendments update~~The final rule updates the existing FHFA regulations aimed at promoting diversity and the inclusion and ~~utilization~~use of minorities, women, and individuals with disabilities, and the businesses they own (MWDOB) in all ~~Bank~~FHLB business and activities, including management, employment, and contracting. The final rule will:

~~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 develop policies that address reasonable accommodations for employees to observe their religious beliefs;

require the FHLBs to amend their policies on equal opportunity in employment ~~and 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~~financial transactions, identification of ways in which FHLBs might be able to improve MWDOB business with the FHLB by enhancing customer access by MWDOB businesses, including through its affordable housing and community investment programs ~~initiatives to improve access to mortgage credit,~~ and strategies for promoting the diversity of supervisors and ~~managers.~~managers; and

require the FHLBs to classify and provide additional data in their annual reports about the number of and amounts paid under its contracts with MWDOB.

~~Comments on~~

We do not expect this final rule to materially affect our financial condition or results of operations, but anticipate that it may result in increased compliance costs and substantially increase 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~~amount of tracking, monitoring, and reporting 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 asbe required 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 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 FHFA or a civil money penalty;

~~expenses of defending an action, subject to an agreement to repay those expenses in certain instances; and~~

~~amounts due under an indemnification agreement entered into on or prior to September 20, 2016.~~

~~The proposed rule also outlines the process a board of directors must undertake prior to making any permitted indemnification payment for expenses of defending an action instituted by the FHFA.~~

~~Comments are due on the proposed rule by December 21, 2016. We are currently assessing the effect the proposed rule would have on us if adopted.~~

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

~~FRB Framework for Implementing the U.S. Basel III Countercyclical~~FHLB Capital ~~Buffer~~Requirements

On ~~September 8, 2016,~~July 3, 2017, the ~~FRB adopted~~FHFA published a ~~final policy statement (“Policy Statement”) describing~~proposed rule to adopt, with amendments, the ~~framework~~regulations of the Federal Housing Finance Board (predecessor to the FHFA) pertaining to the capital requirements for the FHLBs. The proposed rule would carry over most of the existing regulations without material change but would substantively revise the credit risk component of the risk-based capital requirement, as well as the limitations on extensions of unsecured credit. The main revisions would remove requirements that the ~~FRB will follow in setting~~FHLBs calculate credit risk capital charges and unsecured credit limits based on ratings issued by a nationally recognized statistical rating organization, and instead, require that the ~~countercyclical~~FHLBs establish and use their own internal rating methodology. With respect to derivatives, the proposed rule would impose a new capital ~~buffer (“CCyB”)~~charge for ~~banking organizations that are subject~~cleared derivatives, which under the existing rule do not carry a capital charge, to align with 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 proposed a rule that, if adopted, would reduce the scope of new business activities (“NBAs”) for which a FHLB must seek approval from the FHFA and would establish more certain timelines for FHFA review and approval of NBA notices.Dodd-Frank Act’s clearing mandate. The proposed rule also would ~~clarify~~revise the ~~protocol~~percentages used in the regulation’s tables to calculate credit risk capital charges for advances and for non-mortgage assets. The FHFA ~~review of NBAs. Under~~proposes to retain, for now, the percentages used in the tables to calculate capital charges for mortgage-related assets, and to address the methodology for residential mortgage assets at a later date. While a March 2009 regulatory directive pertaining to certain liquidity matters will continue to remain in place, the FHFA also proposes to rescind certain minimum regulatory liquidity requirements for the FHLBs and address these liquidity requirements in a separate rulemaking.

We submitted a joint comment letter with the other FHLBs on August 31, 2017. We are continuing to evaluate 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 acceptance. Instead, the FHFA would review new collateral types as part of the annual exam process.

~~On October 24, 2016, the FHLBs provided comments to the proposed rule, which primarily relate to certain procedures under the proposed rule. We~~but do not ~~anticipate that the proposed~~expect this rule, if adopted ~~would~~in final form, to materially ~~impact us.~~affect our financial condition or results of operations.

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

On ~~August 19, 2016,~~September 12, 2017, the ~~Office of the Comptroller of the Currency (“OCC”) issued~~Federal Reserve Board (FRB) published a ~~proposed~~final rule, ~~which, if adopted, would require~~effective November 13, 2017, requiring certain global systemically important ~~financial~~banking institutions ~~(“SIFI”)~~(GSIBs) regulated by the ~~OCC~~FRB to amend their covered qualified financial contracts ~~(“QFCs”)~~(QFCs) to ~~limit~~prevent a counterparty’s immediate termination orof, and limit the exercise of default rights under, the QFCs in the event of bankruptcy or receivership of the ~~SIFI~~GSIB or an affiliate of the ~~SIFI. Covered~~GSIB. QFCs include derivatives, repurchase agreements (known as ~~“repos”)~~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,September 27, 2017, the Federal Deposit Insurance Corporation ~~("FDIC") issued~~(FDIC) adopted a substantively identical ~~proposed~~final rule, effective January 1, 2018, with respect to QFCs entered into with certain FDIC-supervised institutions.

~~The FHLBs provided comments on the FRB proposed rule on August 5, 2016 and~~Although we are not a covered entity under these rules, as a counterparty to ~~the OCC proposed rule on October 18, 2016, which primarily seek clarification of an exemption and the recognition of a safe harbor. The FHLBs are considering whether~~covered entities under QFCs, we may be required to ~~comment on the FDIC's proposed rule.~~amend QFCs entered into with FRB-regulated GSIBs or applicable FDIC-supervised institutions. We do not ~~anticipate that the proposed~~expect these final rules ~~if adopted, would~~to materially ~~impact us.~~affect our financial condition or results of operations.

~~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 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 FHLBs are examining whether this exemption applies. If the exemption does not apply, we anticipate that the most significant impact of the MAR on us will be more stringent and detailed recordkeeping, creation of detailed lists on parties who have access to inside information, and notification requirements.

~~Financial Industry Regulatory Authority (“FINRA”) Rule 4210 establishing margin requirements for the TBA Market~~

On June 15, 2016, the SEC approved a proposed rule by FINRA to require the margining of 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 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 counterparty.

~~FINRA members will be required to comply with the new margin requirements beginning in December 2017. We are currently assessing the financial and 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.

Our Asset/Liability Management Committee provides oversight of risk management practices and policies. This includes routine reporting to senior Bank 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 policy.



	September 30, 2017						December 31, 2016
Scenario as of	Change in Market Value of Equity			Loss Limit			Change in Market Value of Equity			Loss Limit
-200 bp	$	222		$	(370	)	$	192		$	(370	)
-100 bp	74			(155		)	101			(155		)
-50 bp	32			(60		)	38			(60		)
-25 bp	15			(30		)	17			(30		)
+25 bp	(15		)	(30		)	(17		)	(30		)
+50 bp	(32		)	(60		)	(36		)	(60		)
+100 bp	(73		)	(155		)	(76		)	(155		)
+200 bp	(167		)	(370		)	(167		)	(370		)

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

As of December 31, 2015
Advances $ (3 ) $ —
$ —
$ (10 ) $ —
MPF Loans (1 ) (2 ) (2 ) (2 ) 1
Mortgage Backed Securities (4 ) (1 ) (1 ) (5 ) —
Other interest earning assets (1 ) —
—
(3 ) —
Interest-bearing liabilities 6
5
—
6
—
Derivatives 3
(3 ) —
—
—
Total $ —
$ (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.~~



				Option Risk						Basis Risk
	Yield Curve Risk			Implied Volatility			Prepayment Speeds			Spread to Swap Curve		Mortgage Spread
As of September 30, 2017	$	(1	)	$	(1	)	$	(3	)	(13	)	$	1
As of December 31, 2016	(1		)	(1		)	(2		)	(14	)	1

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, ~~2016,~~2017, our sensitivity to changes in implied volatility was ~~zero.~~$(1) million. At December 31, ~~2015,~~2016, 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, 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

September 30, 2017

December 31, 2016

Scenario as of

Down 200 bps

Base

Up 200 bps

Down 200 bps

Base

Up 200 bps

Duration of equity

2.6

1.1

1.7

2.3

1.3

1.8

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, ~~2016, our duration gap was 0.9 months, compared to 0.5 months as of December 31, 2015.~~

~~As of September 30, 2016,~~2017, on a U.S. GAAP basis, our fair value surplus (relative to book value) was ~~$399~~$385 million, and our market value of equity to book value of equity ratio was ~~108%~~107%, compared to ~~$351~~$388 million and 108% at December 31, ~~2015.~~2016. 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, 2016 December 31, 2015
Scenario as of Change in Market Value of Equity Loss Limit Change in Market Value of Equity Loss Limit
-200 bp $ 60.1
$ (370.0 ) $ 123.0
$ (370.0 )
-100 bp 125.7
(155.0 ) 65.2
(155.0 )
-50 bp 42.4
(60.0 ) 21.8
(60.0 )
-25 bp 16.9
(30.0 ) 7.5
(30.0 )
+25 bp (11.4 ) (30.0 ) (6.4 ) (30.0 )
+50 bp (20.2 ) (60.0 ) (13.9 ) (60.0 )
+100 bp (35.9 ) (155.0 ) (31.3 ) (155.0 )
+200 bp (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 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, seeItem 9A. Controls and Procedures on page 8284 of our ~~2015~~2016 Form 10-K.

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PART II - OTHER INFORMATION

Item 1. Legal Proceedings.

~~On October 15, 2010,~~For a discussion of the ~~Bank instituted~~ litigation relating to ~~64 private-label~~private label MBS bonds purchased by the Bank, ~~in an aggregate original principal amount~~see Item 3. Legal Proceedings on page 31 of ~~$4.29 billion. Of the three cases that were filed by the Bank, only the action filed in the Circuit Court of Cook County, Illinois remains active. As of September 30,~~our 2016 ~~this litigation covers four private-label MBS bonds in the aggregate original principal amount of $77.5 million.~~

In 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 September 30, 2016, Morgan Stanley & Co., Incorporated, and certain of its affiliates, remain as the sole defendants in the Illinois action.Form 10-K.

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 1918 in our ~~2015~~2016 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.

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.

~~Table of Contents~~

Item 5. Other Information.

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.”None.

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.




~~10.1~~ 31.1	~~MPF Consolidated Interbank Agreement, dated as of July 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 - The instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL 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

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Glossary of Terms

Advances: Secured loans to members.

ABS: ~~Asset-backed-securities.~~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.

~~CBSA:~~ ~~Core Based Statistical Areas (CBSAs), which~~CE Amount: A PFI's assumption of credit risk on conventional MPF Loan products held in an MPF Bank's portfolio that are ~~based upon~~funded by, or sold to, an ~~assessment~~MPF Bank by providing credit enhancement either through a direct liability to pay credit losses up to a specified amount or through a contractual obligation to provide SMI. Does not apply to the MPF Government, MPF Xtra, MPF Direct or MPF Government MBS product.

CE Fee: Credit enhancement fee. PFIs are paid a credit enhancement fee for managing credit risk and in some instances, all or a portion 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.CE Fee may be performance based.

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.

FFELP: Federal Family Education Loan Program.

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.

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

FHLB Chicago: The Federal Home Loan Bank of Chicago.

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FLA: First loss account is a memo account used to track the MPF Bank's exposure to losses until the CE Amount is available to cover losses.

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 ~~Veterans~~Veteran Affairs (VA) or Department of Agriculture Rural Housing ~~Service.~~Service (RHS).

GSE: Government sponsored enterprise.

HFS: Held for sale.

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~~non-conforming (jumbo) MPF Loans from PFIs without any CE Amount 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 Guides: MPF Program Guide, MPF Selling Guide, and MPF Servicing Guide including the Selling and Servicing Guides and manuals for specific MPF Loan products.

MPF Loans: Conventional and government 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 without any CE Amount and concurrently resell them to Fannie Mae.

MRCS: ~~mandatorily~~ Mandatorily redeemable capital stock.

~~Nonaccrual MPF Loans:~~ 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 by the Finance Board to facilitate issuing and servicing of consolidated obligations.

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.

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PMI: Primary Mortgage Insurance.

PwC: 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.~~Loans. 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.

Recoverable CE Fee: Under the MPF Program, the PFI may receive a contingent performance based credit enhancement fee whereby such fees are reduced up to the amount of the FLA by losses arising under the Master Commitment.

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.

REO: Real estate owned.

SEC: Securities and Exchange Commission.

SMI: Supplemental mortgage insurance.

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

~~TBA:~~ 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

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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
		Name:	Matthew R. Feldman
		Title:	President and Chief Executive Officer
Date:	November ~~3, 2016~~6, 2017	(Principal Executive Officer)

		/s/ Roger D. Lundstrom
		Name:	Roger D. Lundstrom
		Title:	Executive Vice President and Chief Financial Officer
Date:	November ~~3, 2016~~6, 2017	(Principal Financial Officer and Principal Accounting Officer)

S-1



	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
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	)

Three months ended September 30, 2015
Available-for-sale securities	$	(40	)	$	29		$	(11	)	$	(33	)
Advances	(77		)	78			1			(22		)
MPF Loans held for portfolio	—			—			—			(4		)
Consolidated obligation bonds	87			(94		)	(7		)	54
Total	$	(30	)	$	13		$	(17	)	$	(5	)

Nine months ended September 30, 2016
Available-for-sale securities	$	(4	)	$	—		$	(4	)	$	(93	)
Advances	(143		)	143			—			(57		)
MPF Loans held for portfolio	—			—			—			(7		)
Consolidated obligation bonds	42			(45		)	(3		)	51
Total	$	(105	)	$	98		$	(7	)	$	(106	)

Nine months ended September 30, 2015
Available-for-sale securities	$	(28	)	$	15		$	(13	)	$	(111	)
Advances	(49		)	49			—			(63		)
MPF Loans held for portfolio	—			—			—			(11		)
Consolidated obligation bonds	117			(134		)	(17		)	169
Total	$	40		$	(70	)	$	(30	)	$	(16	)