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 March 31, ~~2017~~2018

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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.



	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 March 31, ~~2017,~~2018, including mandatorily redeemable capital stock, registrant had ~~15,829,748~~18,903,682 total outstanding shares of Class B Capital Stock.

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^{Federal Home Loan Bank of Chicago}

TABLE OF CONTENTS



PART I - FINANCIAL INFORMATION
Item 1.	Financial Statements (unaudited).	3
	Statements of Condition	3
	Statements of Income	4
	Statements of Comprehensive Income	5
	Statements of Capital	6
	Condensed Statements of Cash Flows	7
	Note 1 - Background and Basis of Presentation	8
	Note 2 - Summary of Significant Accounting Policies	9
	Note 3 - Recently Issued but Not Yet Adopted Accounting Standards	10
	Note 4 - Interest Income and Interest Expense	12
	Note 5 - Investment Securities	13
	Note 6 - Advances	1918
	Note 7 - MPF Loans Held in Portfolio	2019
	Note 8 - Allowance for Credit Losses	2120
	Note 9 - Derivatives and Hedging Activities	2322
	Note 10 - Consolidated Obligations	2927
	Note 11 - Capital and Mandatorily Redeemable Capital Stock (MRCS)	3028
	Note 12 - Accumulated Other Comprehensive Income (Loss)	3129
	Note 13 - Fair Value	3230
	Note 14 - Commitments and Contingencies	3533
	Note 15 – Transactions with Related Parties and Other FHLBs	3534
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations.	3635
Item 3.	Quantitative and Qualitative Disclosures about Market Risk.	5453
Item 4.	Controls and Procedures.	5655

PART II - OTHER INFORMATION
Item 1.	Legal Proceedings.	5756
Item 1A.	Risk Factors.	5756
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	5756
Item 3.	Defaults upon Senior Securities.	5756
Item 4.	Mine Safety Disclosures.	5756
Item 5.	Other Information.	5756
Item 6.	Exhibits.	5857

	Glossary of Terms	5958
	Signatures	S-1

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^{Federal Home Loan Bank of Chicago}

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.

Statements of Condition (unaudited)

(Dollars in millions, except capital stock par value)


	March 31, 2017		December 31, 2016																												March 31, 2018		December 31, 2017
Assets						Assets
Cash and due from banks	$	34	$	351		Cash and due from banks																									$	40	$	42
Interest bearing deposits	700		650			Interest bearing deposits																									775		775
Federal Funds sold	8,317		4,075			Federal Funds sold																									9,361		7,561
Securities purchased under agreements to resell	500		2,300			Securities purchased under agreements to resell																									6,250		5,000
Investment securities -						Investment securities -
Trading, $78 and $97 pledged	240		1,045
Trading,						Trading,	64		and				67			pledged															2,596		233
Available-for-sale	14,571		14,918			Available-for-sale																									12,388		12,957
Held-to-maturity, $4,642 and $5,516 fair value	4,219		5,072
Held-to-maturity,						Held-to-maturity,						3,791					and				4,538					fair value					3,448		4,157
Investment securities	19,030		21,035			Investment securities																									18,432		17,347
Advances, $782 and $672 carried at fair value	42,328		45,067
MPF Loans held in portfolio, net of allowance for credit losses of $(3) and $(3)	4,940		4,967
Advances,						Advances,		917				and				776				carried at fair value											50,840		48,085
MPF Loans held in portfolio, net of						MPF Loans held in portfolio, net of																		(2)			and		(2)	allowance for credit losses	5,357		5,193
Derivative assets	3		6			Derivative assets																									2		3
Other assets, $56 and $44 carried at fair value	257		241
Other assets,						Other assets,				76				and				118				carried at fair value									334		349
Assets	$	76,109	$	78,692		Assets																									$	91,391	$	84,355

Liabilities						Liabilities
Deposits -						Deposits -
Noninterest bearing	$	43	$	53		Noninterest bearing																									$	53	$	51
Interest bearing, $14 and $16 from other FHLBs	521		443
Interest bearing,						Interest bearing,						11			and				32			from other FHLBs									632		473
Deposits	564		496			Deposits																									685		524
Consolidated obligations, net -						Consolidated obligations, net -
Discount notes, $1,871 and $6,368 carried at fair value	32,806		35,949
Bonds, $5,384 and $5,443 carried at fair value	37,662		36,903
Discount notes,						Discount notes,					0					and				749					carried at fair value						41,483		41,191
Bonds,						4,985				and				5,260					carried at fair value												43,516		37,121
Consolidated obligations, net	70,468		72,852			Consolidated obligations, net																									84,999		78,312
Derivative liabilities	39		43			Derivative liabilities																									19		20
Affordable Housing Program assessment payable	86		86			Affordable Housing Program assessment payable																									86		88
Mandatorily redeemable capital stock	301		301			Mandatorily redeemable capital stock																									311		311
Other liabilities	233		219			Other liabilities																									228		248
Liabilities	71,691		73,997			Liabilities																									86,328		79,503
Commitments and contingencies - see notes to the financial statements						Commitments and contingencies - see notes to the financial statements
Capital						Capital
Class B1 activity stock - putable $100 par value - 10 million and 12 million shares issued and outstanding	1,037		1,160
Class B2 membership stock - putable $100 par value - 2 million and 6 million shares issued and outstanding	245		551
Capital stock	1,282		1,711
Class B1 activity stock,						Class B1 activity stock,										14			and				12			million shares issued and outstanding					1,368		1,241
Class B2 membership stock,						Class B2 membership stock,														2		and				2		million shares issued and outstanding			211		202
Capital stock - putable,						Capital stock - putable,											$100					and				$100			par value per share		1,579		1,443
Retained earnings - unrestricted	2,680		2,631			Retained earnings - unrestricted																									2,891		2,845
Retained earnings - restricted	403		389			Retained earnings - restricted																									467		452
Retained earnings	3,083		3,020			Retained earnings																									3,358		3,297
Accumulated other comprehensive income (loss) (AOCI)	53		(36		)	Accumulated other comprehensive income (loss) (AOCI)																									126		112
Capital	4,418		4,695			Capital																									5,063		4,852
Liabilities and capital	$	76,109	$	78,692		Liabilities and capital																									$	91,391	$	84,355

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

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^{Federal Home Loan Bank of Chicago}

Statements of Income (unaudited)

(Dollars in millions)


	Three months ended March 31,										Three months ended March 31,
	2017			2016							2018			2017
Interest income	$	337		$	318		Interest income				$	480		$	337
Interest expense	224			198			Interest expense				356			224
Net interest income	113			120			Net interest income				124			113

Noninterest income -							Noninterest income -
Trading securities	—			1
Derivatives and hedging activities	3			(16		)	Derivatives and hedging activities				(3		)	3
Instruments held under fair value option	(2		)	5			Instruments held under fair value option				(7		)	(2		)
MPF fees from other FHLBs	5			3
MPF fees,							6	and	5	from other FHLBs	8			7
Other, net	4			4			Other, net				2			2
Noninterest income	10			(3		)	Noninterest income				—			10

Noninterest expense -							Noninterest expense -
Compensation and benefits	25			23			Compensation and benefits				24			25
Operating expenses	15			15			Operating expenses				15			15
Other	2			2			Other				3			2
Noninterest expense	42			40			Noninterest expense				42			42

Income before assessments	81			77			Income before assessments				82			81

Affordable Housing Program assessment	8			8
Affordable Housing Program							Affordable Housing Program				8			8

Net income	$	73		$	69		Net income				$	74		$	73

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

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^{Federal Home Loan Bank of Chicago}

Statements of Comprehensive Income (unaudited)

(Dollars in millions)


	Three months ended March 31,						Three months ended March 31,
	2017			2016			2018			2017
Net income	$	73		$	69		$	74		$	73

Other comprehensive income (loss) -
Net unrealized gain (loss) available-for-sale securities	38			(40		)	(49		)	38
Noncredit OTTI held-to-maturity securities	9			11			7			9
Net unrealized gain (loss) cash flow hedges	44			(53		)	58			44
Postretirement plans	(2		)	—			(2		)	(2		)
Other comprehensive income (loss)	89			(82		)	14			89

Comprehensive income	$	162		$	(13	)	$	88		$	162

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

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^{Federal Home Loan Bank of Chicago}

Statements of Capital (unaudited)

(Dollars and shares in millions)


	Capital Stock - Putable - B1 Activity					Capital Stock - Putable - B2 Membership					Capital Stock					Retained Earnings											Capital			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
December 31, 2017																														12		$	1,241		2		$	202		14		$	1,443		$	2,845		$	452	$	3,297		$	112		$	4,852
Comprehensive income																																													59			15		74			14			88
Proceeds from issuance of capital stock																														9		822			—		1			9		823														823
Repurchases of capital stock																														—		(1		)	(7	)	(686		)	(7	)	(687		)												(687		)
Transfers between classes of capital stock																														(7	)	(694		)	7		694
Cash dividends - class B1																																													(12		)			(12		)				(12		)
Class B1 annualized rate																																																								3.50		%
Cash dividends - class B2																																													(1		)			(1		)				(1		)
Class B2 annualized rate																																																								1.50		%
Total change in period																														2		127			—		9			2		136			46			15		61			14			211
March 31, 2018																														14		$	1,368		2		$	211		16		$	1,579		$	2,891		$	467	$	3,358		$	126		$	5,063
	Shares		Value			Shares		Value			Shares		Value			Unrestricted			Restricted		Total			AOCI			Capital
December 31, 2016	12		$	1,160		6		$	551		18		$	1,711		$	2,631		$	389	$	3,020		$	(36	)				12		$	1,160		6		$	551		18		$	1,711		$	2,631		$	389	$	3,020		$	(36	)	$	4,695
Comprehensive income																59			14		73			89			162																		59			14		73			89			162
Proceeds from issuance of capital stock	4		533			—		1			4		534														534			4		533			—		1			4		534														534
Repurchases of capital stock	—		(34		)	(10	)	(926		)	(10	)	(960		)												(960		)	—		(34		)	(10	)	(926		)	(10	)	(960		)												(960		)
Capital stock reclassified to mandatorily redeemable capital stock (liabilities)	—		(3		)	—		—			—		(3		)												(3		)
Capital stock reclassified to mandatorily redeemable capital stock liability																														—		(3		)	—		—			—		(3		)												(3		)
Transfers between classes of capital stock	(6	)	(619		)	6		619																						(6	)	(619		)	6		619
Cash dividends - class B1																(9		)			(9		)				(9		)																(9		)			(9		)				(9		)
Class B1 annualized rate																											3.00		%																											3.00		%
Cash dividends - class B2																(1		)			(1		)				(1		)																(1		)			(1		)				(1		)
Class B2 annualized rate																											0.85		%																											0.85		%
Total change in period	(2	)	(123		)	(4	)	(306		)	(6	)	(429		)	49			14		63			89			(277		)	(2	)	(123		)	(4	)	(306		)	(6	)	(429		)	49			14		63			89			(277		)
March 31, 2017	10		$	1,037		2		$	245		12		$	1,282		$	2,680		$	403	$	3,083		$	53		$	4,418		10		$	1,037		2		$	245		12		$	1,282		$	2,680		$	403	$	3,083		$	53		$	4,418

December 31, 2015	13		$	1,313		6		$	637		19		$	1,950		$	2,407		$	323	$	2,730		$	(28	)	$	4,652
Comprehensive income																55			14		69			(82		)	(13		)
Proceeds from issuance of capital stock	2		183			—		1			2		184														184
Repurchases of capital stock	(1	)	(104		)	—		(3		)	(1	)	(107		)												(107		)
Capital stock reclassified to mandatorily redeemable capital stock (liabilities)	(3	)	(294		)	—		—			(3	)	(294		)												(294		)
Transfers between classes of capital stock	(1	)	(48		)	1		48
Cash dividends - class B1																(8		)			(8		)				(8		)
Class B1 annualized rate																											2.60		%
Cash dividends - class B2																(1		)			(1		)				(1		)
Class B2 annualized rate																											0.60		%
Total change in period	(3	)	(263		)	1		46			(2	)	(217		)	46			14		60			(82		)	(239		)
March 31, 2016	10		$	1,050		7		$	683		17		$	1,733		$	2,453		$	337	$	2,790		$	(110	)	$	4,413

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

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^{Federal Home Loan Bank of Chicago}

Condensed Statements of Cash Flows (unaudited)

(Dollars in millions)


	Three months ended March 31,	2017				2016				Three months ended March 31,	2018				2017
Operating	Net cash provided by (used in) operating activities	$	159			$	(9	)		Net cash provided by (used in) operating activities	$	135			$	159
Investing	Net change interest bearing deposits	(50		)		—				Net change interest bearing deposits	—				(50		)
	Net change Federal Funds sold	(4,242		)		(1,908		)
	Net change securities purchased under agreements to resell	1,800				1,125				Net change Federal Funds sold	(1,800		)		(4,242		)
	Trading securities -									Net change securities purchased under agreements to resell	(1,250		)		1,800
	Sales	801				—				Trading securities -
	Proceeds from maturities and paydowns	1				103				Sales	200				801
	Purchases	—				(100		)		Proceeds from maturities and paydowns	2				1
	Available-for-sale securities -									Purchases	(2,559		)		—
	Proceeds from maturities and paydowns	354				727				Available-for-sale securities -
	Purchases	—				(2		)		Proceeds from maturities and paydowns	478				354
	Held-to-maturity securities -									Held-to-maturity securities -
	Short-term held-to-maturity securities, net	619			^a	581			^a	Short-term held-to-maturity securities, net	535			^a	619			^a
	Proceeds from maturities and paydowns	256				232				Proceeds from maturities and paydowns	188				256
	Purchases	(3		)		(11		)		Purchases	(14		)		(3		)
	Advances -									Advances -
	Principal collected	141,871				149,976				Principal collected	320,511				141,871
	Issued	(139,145		)		(151,432		)		Issued	(323,358		)		(139,145		)
	MPF Loans held in portfolio -									MPF Loans held in portfolio -
	Principal collected	264				282				Principal collected	187				264
	Purchases	(241		)		(132		)		Purchases	(355		)		(241		)
	Other investing activities	9				6				Other investing activities	3				9
	Net cash provided by (used in) investing activities	2,294				(553		)		Net cash provided by (used in) investing activities	(7,232		)		2,294
Financing	Net change deposits	68				(40		)		Net change deposits	161				68
	Discount notes -									Discount notes -
	Net proceeds from issuance	320,127				42,844				Net proceeds from issuance	436,144				320,127
	Payments for maturing and retiring	(323,269		)		(44,124		)		Payments for maturing and retiring	(435,852		)		(323,269		)
	Consolidated obligation bonds -									Consolidated obligation bonds -
	Net proceeds from issuance	4,130				4,410				Net proceeds from issuance	11,586				4,130
	Payments for maturing and retiring	(3,380		)		(3,050		)		Payments for maturing and retiring	(5,062		)		(3,380		)
	Capital stock -									Capital stock -
	Proceeds from issuance	534				184				Proceeds from issuance	823				534
	Repurchases	(960		)		(107		)		Repurchases	(687		)		(960		)
	Cash dividends paid	(10		)		(9		)		Cash dividends paid	(13		)		(10		)
	Other financing activities	(10		)		(12		)		Other financing activities	(5		)		(10		)
	Net cash provided by (used in) financing activities	(2,770		)		96				Net cash provided by (used in) financing activities	7,095				(2,770		)
	Net increase (decrease) in cash and due from banks	(317		)		(466		)		Net increase (decrease) in cash and due from banks	(2		)		(317		)
	Cash and due from banks at beginning of period	351				499				Cash and due from banks at beginning of period	42				351
	Cash and due from banks at end of period	$	34			$	33			Cash and due from banks at end of period	$	40			$	34


^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).

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^{Federal Home Loan Bank of Chicago}

Notes to Financial Statements - (Unaudited)

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

Note 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, ~~2016,~~2017, included in our Annual Report on Form 10-K ~~(2016~~(2017 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.

See the Glossary of Terms starting on page 5958 for the definitions of certain terms used herein.

Use of Estimates and Assumptions

We are required to make estimates and assumptions when preparing our financial statements in accordance with GAAP. The most significant of these estimates and assumptions applies to fair value measurements and allowance for credit losses. Our actual results may differ from the results reported in our financial statements due to such estimates and 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 are not~~The basis of presentation pertaining to the ~~primary beneficiary~~consolidation of any variable interest entity. Specifically, we do not have the power to direct the activities of any variable interest entity that would most significantly impact its economic performance and we do not have the obligation to absorb losses or the right to receive benefits from any variable interest entity that could potentially be significant to a variable interest entity. As a result, we do not consolidate any of our ~~investments in variable interest entities. Instead, we classify~~ variable interest entities ~~as investment securities~~has not changed since we filed our 2017 Form 10-K. The basis of presentation pertaining to our gross versus net presentation of financial instruments also has not changed since we filed our 2017 Form 10-K.

Refer to Note 1- Background and Basis of Presentation to the financial statements in our ~~statements~~2017 Form 10-K with respect to our basis 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 exposurepresentation for ~~these investment securities is limited to their carrying amounts. We have no liabilities related to these investments in~~consolidation of variable interest ~~entities. We have not provided~~entities and our gross versus net presentation of 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.~~

instruments for further details.

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^{Federal Home Loan Bank of Chicago}

Notes to Financial Statements - (Unaudited)

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

~~Gross versus Net Presentation of Financial Instruments~~

Our over-the-counter derivative transactions may be entered into through a bilateral agreement with an individual counterparty. We present these derivative transactions on a net basis in our statements of condition on the basis that our right to net amounts due to our counterparties is enforceable at law upon early termination. 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. 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.

We also enter into cleared derivative transactions with clearinghouses classified as a Derivatives Clearing Organization (DCO) through a Futures Commission Merchant (FCM), a clearing member of the 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.

~~See~~ ~~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, ~~2016,~~2017, can be found in Note 2 – Summary of Significant Accounting Policies to the financial statements in our ~~2016~~2017 Form 10-K. We adopted the following policies ~~year to date in 2017:~~effective January 1, 2018:

~~Accounting for Variation Margin Payments~~Recognition and Measurement of Financial Assets and Financial Liabilities (ASU 2016-01)

~~Effective in January~~We are required to recognize the portion of ~~2017 we began accounting for variation margin payments made~~instrument-specific credit risk attributable to ~~or received by~~ the ~~DCOs through our FCMs as settlements to our cleared derivative assets and derivative liabilities. See~~ ~~Note 1 - Background and Basis for Presentation~~ ~~for further details. This~~total change in ~~accounting~~fair value of our consolidated obligations that are carried at fair value in our statements of comprehensive income. We measure such instrument-specific credit risk based on our nonperformance risk, which includes our nonperformance risk and the credit risk associated with the joint and several liability of other FHLBs. The new guidance did not have ~~any~~an effect on our financial condition, results of operations, and cash flows at the ~~accounting~~time of our existing hedging 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 hedge accounting provided no additional changes are made by the DCOs that would preclude the use of 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.

~~Contingent Put and Call Options in Debt Instruments~~adoption.

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 adopted the new guidance using the modified retrospective approach on January 1, 2017. Revenue from Contracts with Customers (ASU 2014-09)

The ~~new~~revenue recognition guidance did not have any effect on our financial condition, results of operations, or cash flows at the time of adoption. This is because the majority of our financial instruments and other contractual rights that generate revenue are covered by other GAAP, and therefore, were scoped out of this new guidance. Further, our prior method of recognizing service fee revenue was consistent with this new guidance. As a result, no cumulative effect adjustment to our opening balance of retained earnings in 2018 was required under the modified retrospective method.

Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost (ASU 2017-07)

We are required to classify the service cost component of our net periodic pension and postretirement benefit costs as compensation costs. All other components of our net periodic pension and postretirement benefit costs are required to be classified as Noninterest expense - Other. Previously, our total net periodic pension and postretirement costs were classified as compensation costs. We made this classification change on a prospective rather than retrospective basis due to materiality. This classification guidance did not 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 (ASU 2016-15)

We classify and disclose interest expense on zero coupon discount notes within operating activities, which is consistent with our prior and current classification practice. As a result, this guidance did have any effect on our financial condition, results of operations, and cash flows at the time of adoption.

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^{Federal Home Loan Bank of Chicago}

Notes to Financial Statements - (Unaudited)

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

Note 3 – Recently Issued but Not Yet Adopted Accounting Standards

~~Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost~~Targeted Improvements to Accounting for Hedging Activities (ASU 2017-12)

In ~~March~~August of 2017, the FASB issued ~~amendments~~targeted improvements to ~~current GAAP requiring the service cost component~~existing derivatives and hedging guidance to facilitate financial reporting that more closely reflects an entity’s risk management activities. We plan to adopt this guidance as of ~~our defined benefit pension and postretirement plans to be classified~~January 1, 2019. We are in the ~~same statement~~process of ~~income line item as our compensation costs. The other components~~determining the expected effect of net benefit cost related to our defined benefit pension and postretirement plans are required to be presented in a statement of income line item that is separate from compensation costs. Currently, we include the total net periodic pension costs and net periodic postretirement costs in the same statement of income line item as our compensation costs. As a result, the amendments will require us to reclassify the other components of net benefit costs into Noninterest Expense - Other operating expenses. Such reclassification would be made on a retrospective basis at the time of adoption, which is January 1, 2018. We do not expect the newthis guidance ~~to have a significant effect~~ on our financial condition, results of operations, and cash flows. Outlined below are the significant changes to existing GAAP guidance that are relevant to us.

~~Classification of Certain~~ Cash ~~Receipts and Cash Payments in the Statement of Cash Flows~~Flow Hedges:

I~~n August~~For a cash flow hedge of ~~2016,~~interest rate risk of a variable-rate financial instrument, we would be able to designate the ~~FASB issued statement of~~variability in cash flows ~~classification guidance governing certain~~attributable to the contractually specified interest rate as the hedged risk. By eliminating the concept of benchmark interest rates for hedges of variable-rate instruments under current GAAP, the amendments remove the requirement to designate only the overall variability in cash ~~receipts and~~flows as the hedged risk in a cash ~~payments.~~ flow hedge of a variable-rate instrument indexed to a non-benchmark interest rate.

The ~~new guidance becomes effective January 1, 2018, with earlier adoption permitted. The new guidance must be applied retrospectively to each period~~entire change in fair value of the hedging instrument is recorded in AOCI. Reclassification from AOCI into our statements of income, including hedge ineffectiveness, will depend on whether a recognition event has occurred, such as the discontinuation of the hedge relationship.

Fair Value Hedges:

Permits hedged risk to be the changes in fair value based on the contractual coupon’s benchmark rate component determined at hedge inception on the hedged item. Only the hedged risk of changes in fair value based on the full contractual coupon cash flows ~~are~~is permitted under existing GAAP.

Permits hedged risk to be partial-term of the hedged item, which only includes the designated cash flows being hedged.

Permits hedged risk to be a closed portfolio of prepayable financial assets or one or more beneficial interests secured by a portfolio of prepayable financial instruments in conjunction with a partial-term hedge election. The designated hedged item must have at least one asset or beneficial interest that will be outstanding at the end of the partial-term hedge election -that is, at least one asset or beneficial interest is not expected to be affected by prepayments, defaults, and other factors affecting the timing and amount of cash flows. This designation is referred to as the last-of-layer-method.

Cash Flow Hedges and Fair Value Hedges:

Requires both the effective and ineffective portion of a hedging relationship to be presented in either interest income or interest expense, whichever is appropriate. As a result, ineffectiveness related to hedging relationships would no longer be presented in derivatives and hedging activities.

Enables applying the long-haul method of assessing hedge effectiveness in cases where the shortcut method was initially applied but subsequently becomes no longer appropriate. This is provided only if we documented at hedge inception which long-haul methodology we would use in the event the shortcut method is discontinued.

Enables hedge effectiveness to be qualitatively assessed at the time of ~~adoption. Our~~adoption for existing ~~practice~~hedge relationships and for new hedge relationships entered into after adoption subsequent to their hedge inception in cases where initial quantitative testing is ~~consistent~~required. Such qualitative assessments would require us to quarterly verify and document that the facts and circumstances underlying the hedging relationship have not changed since hedge inception.

Transition:

Upon adoption, the modified retrospective method will be applied. This means all cumulative-effect adjustments, which includes eliminating the separate measurement of ineffectiveness to AOCI, will be recognized to the opening balance of retained earnings as of the beginning of January 1, 2019.

Permits us to modify the risk being hedged without de-designation of the fair value hedging relationship. Such a modification will require us to recognize a cumulative-effect adjustment. We also may elect to de-designate a portion of the modified hedged item. In such cases, we reverse the portion of the cumulative basis adjustment related to the hedged item de-designated cumulative basis adjustment with the ~~requirements outlined below:~~offsetting entry recognized as a cumulative effect adjustment.

~~We classify cash payments related~~

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^{Federal Home Loan Bank of Chicago}

Notes to ~~prepaying or extinguishing our consolidated obligations as financing activities~~Financial Statements - (Unaudited)

(Dollars in ~~our statements of cash flows.~~tables in millions except per share amounts unless otherwise indicated)

~~We classify~~Permits us to reclassify a debt security from held-to-maturity to available-for-sale if the ~~cash payments attributable~~debt security is eligible to ~~interest expense paid~~be included in the hedged item involving the last-of-the layer method. Any unrealized gain or loss at the ~~maturity~~date of ~~our discount notes, which have a zero coupon rate, as operating activities~~the transfer would be recorded in ~~our statements of cash flows and in our supplemental disclosure of interest expense paid.~~AOCI.

~~We are reviewing the expected effect of the guidance’s remaining provisions~~The presentation and disclosure guidance will be adopted on ~~our statements of cash flows. This guidance does not have any effect on our financial condition and results of operations.~~a prospective basis.

Measurement of Credit Losses on Financial Instruments (ASU 2016-13)

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~~Specifically, the ~~financial statements on a timelier basis by utilizing forward looking information. Key provisions of the amendments relevant to us are outlined below.~~

~~Replaces~~amendment 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~~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. Accordingly, the amendment is expected to result in recognizing credit losses in the financial statements on a timelier basis by utilizing forward looking information.

In addition, the accounting for securities is amended as follows:

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 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.

~~Table of Contents~~

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

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

The ~~amendments become effective~~new guidance takes effect January 1, ~~2020, with early~~2020. Upon adoption, ~~permitted effective January 1, 2019. We plan~~any difference in the credit loss amount attributable to ~~implement~~both our on balance sheet and off balance sheet financial instruments resulting from applying the expected credit loss methodology ~~through~~compared to our existing incurred loss methodology will be recognized as a cumulative-effect adjustment to our ~~beginning~~January 1, 2020 opening 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.balance. A prospective transition approach is required for debt ~~securities in which an~~securities. Accordingly, any OTTI ~~impairment had been recognized before our effective date. The accounting implications of such an approach is outlined below:~~

~~Write-downs~~write-downs on securities recognized prior to ~~our effective date on securities~~January 1, 2020 may not be reversed at the time of our adoption.

Improvements in expected cash flows ~~subsequent to adoption~~ for ~~such~~these securities will continue to be accounted for as yield adjustments over their remaining life.

~~Recoveries of amounts previously written off prior to the date of adoption~~ Additionally, recoveries for these securities will be recorded in earnings only 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.

Leases (ASU 2016-02)

In February of 2016, the FASB issued new ~~guidance pertaining to~~ lease ~~accounting.~~accounting guidance. A modified retrospective transition approach will be utilized at the time of adoption, which is January 1, 2019. The ~~primary change to our existing accounting practice resulting from the~~ new guidance ~~is the requirement~~requires us to recognize operating leases and right-to-use assets with ~~a term~~terms exceeding 12 months, if any, in our statements of ~~condition rather than~~condition. Our existing practice is to recognize ~~them~~operating leases off-balance sheet. The ~~new guidance becomes effective January 1, 2019. A modified retrospective transition approach is required~~expense related to our lease payments and the interest expense on our lease obligations will continue to be ~~applied to leases existing at, or entered into after, the beginning~~included in a single line item in our statements of ~~the earliest comparative period presented in the financial statements.~~income. 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.

~~Recognition and Measurement of Financial Assets and Financial~~

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. The key provisions applicable to us include, but are not limited to, the following:

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

Requires recognizing the portion of the total change in fair value of a liability resulting from a change in the instrument-specific credit risk in other comprehensive income when we elect to carry that liability at fair value under the fair value option. We do not expect the change in fair value attributable to the instrument-specific credit risk on our consolidated obligations carried at fair value to have a material effect on our financial condition, results of operations, and cash flows; however, we will continue to monitor its potential effect. This is primarily because of the historically stable high debt ratings for our consolidated obligations and the fact that all FHLBs are joint and severally liable for consolidated obligation debt.

Requires separate presentation of 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

~~Revenue from Contracts with Customers~~

In May of 2014, the FASB issued new guidance governing revenue recognition from contracts with customers. Subsequently, the FASB deferred the effective date of the new guidance until January 1, 2018 and issued several pronouncements that provide additional revenue recognition guidance and clarifications to new guidance. The new revenue recognition guidance is not expected to have a material effect, if any, on our financial condition, results of operations, or cash flows at the time of adoption. This is because the majority of our financial instruments and other contractual rights that generate revenue are covered by other GAAP, and therefore, the revenue recognition guidance is not applicable to these financial instruments and other contractual rights.

Table of Contents

^{Federal Home Loan Bank of Chicago}

Notes to Financial Statements - (Unaudited)

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

Note 4 – Interest Income and Interest Expense

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


	Three months ended March 31,				Three months ended March 31,
	2017		2016		2018		2017
Interest income -

Federal funds sold and securities purchased under agreements to resell	$	15	$	4

Trading	1		2		$	6	$	1

Available-for-sale interest income	108		111		104		108
Available-for-sale prepayment fees	4		21		7		4
Available-for-sale	112		132		111		112

Held-to-maturity interest income	53		59
Held-to-maturity					46		53

Investment securities	166		193		163		166

Advance interest income	98		62
Advance prepayment fees	1		1
Advances	99		63		214		99

MPF Loans held in portfolio	54		57		55		54
Other interest bearing assets	3		1
Federal funds sold and securities purchased under agreements to resell					44		15
Other					4		3

Interest income	337		318		480		337

Interest expense -

Consolidated obligations -
Discount notes	96		82		183		96
Bonds	125		102		169		125
Consolidated obligations	221		184

Subordinated notes	—		14
Other interest bearing liabilities	3		—
Other					4		3

Interest expense	224		198		356		224

Net interest income	$	113	$	120	$	124	$	113

Table of Contents

^{Federal Home Loan Bank of Chicago}

Notes to Financial Statements - (Unaudited)

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

Note 5 – Investment Securities

We classify securities as either trading, held-to-maturity (HTM), or available-for-sale (AFS). Our security disclosures within these classifications are disaggregated by major security types as shown below. Our major security types 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~~See Note 9 - Derivatives and Hedging Activities for further details.

Trading Securities

The following table presents the fair value of our trading securities. ~~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	March 31, 2017		December 31, 2016		March 31, 2018		December 31, 2017
U.S. Government & other government related	$	200	$	1,005	$	2,565	$	202
Residential MBS:
Residential MBS
GSE	39		39		30		30
Government-guaranteed	1		1
Government guaranteed					1		1
Trading securities	$	240	$	1,045	$	2,596	$	233

Table of Contents

^{Federal Home Loan Bank of Chicago}

Notes to Financial Statements - (Unaudited)

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

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


	Amortized Cost Basis		Gross Unrealized Gains in AOCI		Gross Unrealized (Losses) in AOCI			Carrying Amount and Fair Value		Amortized Cost Basis		Gross Unrealized Gains in AOCI		Gross Unrealized (Losses) in AOCI			Carrying Amount and Fair Value
As of March 31, 2017
As of March 31, 2018
U.S. Government & other government related	$	295	$	13	$	—		$	308	$	236	$	13	$	—		$	249
State or local housing agency	18		—		—			18		17		—		—			17
FFELP ABS	4,317		216		(9		)	4,524		3,891		239		—			4,130
Residential MBS:
Residential MBS
GSE	8,154		242		(2		)	8,394		6,944		81		(2		)	7,023
Government-guaranteed	1,243		29		—			1,272
Private-label	47		8		—			55
Government guaranteed										903		18		—			921
Private label										39		9		—			48
Available-for-sale securities	$	14,074	$	508	$	(11	)	$	14,571	$	12,030	$	360	$	(2	)	$	12,388

As of December 31, 2016
As of December 31, 2017
U.S. Government & other government related	$	322	$	15	$	(1	)	$	336	$	256	$	15	$	—		$	271
State or local housing agency	19		—		—			19		21		—		—			21
FFELP ABS	4,431		165		(24		)	4,572		3,987		234		(7		)	4,214
Residential MBS:
Residential MBS
GSE	8,291		266		(2		)	8,555		7,275		132		(1		)	7,406
Government-guaranteed	1,346		34		—			1,380
Private-label	50		6		—			56
Government guaranteed										971		24		—			995
Private label										40		10		—			50
Available-for-sale securities	$	14,459	$	486	$	(27	)	$	14,918	$	12,550	$	415	$	(8	)	$	12,957

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

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^{Federal Home Loan Bank of Chicago}

Notes to Financial Statements - (Unaudited)

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

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


	Amortized Cost Basis		Non-credit OTTI Recognized in AOCI (Loss)			Carrying Amount		Gross Unrecognized Holding Gains		Gross Unrecognized Holding (Losses)			Fair Value		Amortized Cost Basis		Non-credit OTTI Recognized in AOCI (Loss)			Carrying Amount		Gross Unrecognized Holding Gains		Gross Unrecognized Holding (Losses)			Fair Value
As of March 31, 2017
As of March 31, 2018
U.S. Government & other government related	$	1,034	$	—		$	1,034	$	38	$	(1	)	$	1,071	$	967	$	—		$	967	$	16	$	(2	)	$	981
State or local housing agency	12		—			12		—		—			12		8		—			8		—		—			8
Residential MBS:
Residential MBS
GSE	1,791		—			1,791		92		—			1,883		1,453		—			1,453		46		—			1,499
Government-guaranteed	737		—			737		9		—			746
Private-label	813		(168		)	645		286		(1		)	930
Government guaranteed															531		—			531		4		—			535
Private label															625		(136		)	489		279		—			768
Held-to-maturity securities	$	4,387	$	(168	)	$	4,219	$	425	$	(2	)	$	4,642	$	3,584	$	(136	)	$	3,448	$	345	$	(2	)	$	3,791

As of December 31, 2016
As of December 31, 2017
U.S. Government & other government related	$	1,733	$	—		$	1,733	$	42	$	(1	)	$	1,774	$	1,531	$	—		$	1,531	$	29	$	(1	)	$	1,559
State or local housing agency	13		—			13		—		—			13		9		—			9		—		—			9
Residential MBS:
Residential MBS
GSE	1,856		—			1,856		100		—			1,956		1,513		—			1,513		62		—			1,575
Government-guaranteed	791		—			791		10		—			801
Private-label	856		(177		)	679		294		(1		)	972
Government guaranteed															585		—			585		6		—			591
Private label															662		(143		)	519		285		—			804
Held-to-maturity securities	$	5,249	$	(177	)	$	5,072	$	446	$	(2	)	$	5,516	$	4,300	$	(143	)	$	4,157	$	382	$	(1	)	$	4,538

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

Contractual Maturity Terms

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



	Available-for-Sale				Held-to-Maturity
As of March 31, 2018	Amortized Cost Basis		Carrying Amount and Fair Value		Carrying Amount		Fair Value
Year of Maturity -
Due in one year or less	$	22	$	22	$	140	$	139
Due after one year through five years	2		2		157		160
Due after five years through ten years	54		56		123		123
Due after ten years	175		186		555		567
ABS and MBS without a single maturity date	11,777		12,122		2,473		2,802
Total securities	$	12,030	$	12,388	$	3,448	$	3,791

Table of Contents

^{Federal Home Loan Bank of Chicago}

Notes to Financial Statements - (Unaudited)

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

Aging of Unrealized Temporary Losses

The following ~~tables present~~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					Less than 12 Months				12 Months or More					Total
	Fair Value		Gross Unrealized (Losses)		Fair Value		Gross Unrealized (Losses)			Fair Value		Gross Unrealized (Losses)			Fair Value		Gross Unrealized (Losses)		Fair Value		Gross Unrealized (Losses)			Fair Value		Gross Unrealized (Losses)
As of March 31, 2017
Available-for-Sale Securities
As of March 31, 2018
U.S. Government & other government related	$	—	$	—	$	47	$	—		$	47	$	—		$	3	$	—	$	—	$	—		$	3	$	—
State or local housing agency	5		—		—		—			5		—			9		—		—		—			9		—
FFELP ABS	—		—		699		(9		)	699		(9		)	—		—		635		—			635		—
Residential MBS:
Residential MBS
GSE	—		—		832		(2		)	832		(2		)	455		—		753		(2		)	1,208		(2		)
Government-guaranteed	—		—		22		—			22		—
Private-label	—		—		7		—			7		—
Private label															—		—		6		—			6		—
Available-for-sale securities	$	5	$	—	$	1,607	$	(11	)	$	1,612	$	(11	)	$	467	$	—	$	1,394	$	(2	)	$	1,861	$	(2	)

As of December 31, 2016
As of December 31, 2017
U.S. Government & other government related	$	—	$	—	$	47	$	(1	)	$	47	$	(1	)	$	3	$	—	$	—	$	—		$	3	$	—
State or local housing agency	7		—		—		—			7		—			4		—		—		—			4		—
FFELP ABS	—		—		753		(24		)	753		(24		)	—		—		644		(7		)	644		(7		)
Residential MBS:
Residential MBS
GSE															51		—		801		(1		)	852		(1		)
Private label															—		—		7		—			7		—
Available-for-sale securities															$	58	$	—	$	1,452	$	(8	)	$	1,510	$	(8	)

Held-to-Maturity Securities
As of March 31, 2018
U.S. Government & other government related															$	74	$	—	$	24	$	(2	)	$	98	$	(2	)
State or local housing agency															8		—		—		—			8		—
Residential MBS
GSE	—		—		991		(2		)	991		(2		)	—		—		2		—			2		—
Government-guaranteed	—		—		23		—			23		—			135		—		—		—			135		—
Private-label	—		—		8		—			8		—
Available-for-sale securities	$	7	$	—	$	1,822	$	(27	)	$	1,829	$	(27	)
Private label															—		—		734		(136		)	734		(136		)
Held-to-maturity securities															$	217	$	—	$	760	$	(138	)	$	977	$	(138	)
As of December 31, 2017
U.S. Government & other government related															$	594	$	—	$	24	$	(1	)	$	618	$	(1	)
State or local housing agency															2		—		—		—			2		—
Residential MBS
GSE															—		—		2		—			2		—
Private label															—		—		769		(143		)	769		(143		)
Held-to-maturity securities															$	596	$	—	$	795	$	(144	)	$	1,391	$	(144	)

Table of Contents

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

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

~~Held-to-Maturity Securities~~

Less than 12 Months 12 Months or More Total
Fair Value Gross Unrealized (Losses) Fair Value Gross Unrealized (Losses) Fair Value Gross Unrealized (Losses)
As of March 31, 2017
U.S. Government & other government related $ 22
$ —
$ 16
$ (1 ) $ 38
$ (1 )
State or local housing agency —
—
1
—
1
—
Residential MBS:
GSE —
—
4
—
4
—
Private-label —
—
895
(169 ) 895
(169 )
Held-to-maturity securities $ 22

$ —

$ 916

$ (170 )
$ 938

$ (170 )

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 )

~~Contractual Maturity Terms~~

~~The maturity~~^{Federal Home Loan Bank of our investments has not materially changed since December 31, 2016. For details on the aging of our investments seeChicago} ~~Note 5 - Investment Securities~~ ~~to the financial statements in our 2016 Form 10-K.~~

~~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 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.

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. Our assessment entails generating cash flow projections to determine OTTI, if any, For further detail on our ~~private-label MBS. Our initial cash flow projections are based on key modeling assumptions, significant inputs, and methodologies provided by an FHLB System~~accounting policy regarding OTTI ~~Committee, which was formed by~~please see Note 2 - Summary of Significant Accounting Policies to the ~~FHLBs to achieve consistency among the FHLBs~~financial statements in their OTTI analyses for private-label MBS. We then determine the final cash flow projections after assessing the reasonableness of, and if necessary, modifying those assumptions, significant inputs, and methodologies used. We also perform present value calculations using appropriate historical cost bases and yields to crosscheck the reasonableness of the final cash flow projections. OTTI exists when a security's cash flow projection is not expected to result in the recovery of its entire amortized cost basis.our 2017 Form 10-K.

As of March 31, ~~2017,~~2018, we had a base case short-term housing price forecast ~~over~~for all markets with projected changes ranging from ~~-5.0%~~-7.0% to ~~+10.0%~~+12.0% over the twelve month period beginning January 1, ~~2017.~~2018. For the vast majority of markets, the short-term forecast has changes ranging from ~~0.0%~~+1.0% 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 recognized into earnings for the reporting periods indicated.


	Three months ended March 31,						Three months ended March 31,
	2017			2016			2018			2017
Beginning Balance	$	520		$	568		$	477		$	520
Reductions:
Increases in expected future cash flows recorded as accretion into interest income	(12		)	(13		)
Increases in cash flows expected to be collected and recognized into interest income							(9		)	(12		)
Ending Balance	$	508		$	555		$	468		$	508

Ongoing Litigation

On October 15, 2010, we instituted litigation relating to 64 ~~private-label~~private label MBS bonds we ~~purchased in an aggregate original principal amount of $4.29 billion.~~purchased. As of March 31, ~~2017,~~2018, the remaining litigation covers three ~~private-label~~private label MBS bonds in the aggregate ~~original~~outstanding principal amount of ~~$65~~$38 million.

1817

Table of Contents

^{Federal Home Loan Bank of Chicago}

Notes to Financial Statements - (Unaudited)

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

Note 6 – Advances

We offer a wide range of fixed- and variable-rate advance products with different maturities, interest rates, payment characteristics and optionality.

The following table presents our advances by 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 March 31, 2017	Amount		Weighted Average Contractual Interest Rate
As of March 31, 2018						Amount		Weighted Average Contractual Interest Rate
Due in one year or less	$	18,554	0.93	%		$	22,954	1.74	%
One to two years	4,015		1.09	%		2,435		1.84	%
Two to three years	1,553		1.48	%		2,204		2.01	%
Three to four years	1,188		1.72	%		1,898		1.79	%
Four to five years	1,798		1.53	%		4,326		2.08	%
More than five years	15,130		1.02	%	^a	17,049		1.83	%	^a
Par value	$	42,238	1.04	%		$	50,866	1.82	%


^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.

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	March 31, 2017		December 31, 2016		March 31, 2018			December 31, 2017
Par value	$	42,238	$	44,965	$	50,866		$	48,020
Fair value hedging adjustments	87		98		(13		)	69
Other adjustments	3		4		(13		)	(4		)
Advances	$	42,328	$	45,067	$	50,840		$	48,085

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

As of March 31, 2017 Par Value % of Total Outstanding
One Mortgage Partners Corp. $ 11,000
^a
26.0 %
BMO Harris Bank, National Association 4,375
10.4 %



As of March 31, 2018	Par Value			% of Total Outstanding
One Mortgage Partners Corp.	$	11,000	^a	21.6	%
The Northern Trust Company	7,000			13.8	%
BMO Harris Bank, NA	5,975			11.7	%


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

1918

Table of Contents

^{Federal Home Loan Bank of Chicago}

Notes to Financial Statements - (Unaudited)

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

Note 7 – MPF Loans Held in Portfolio

We acquire MPF Loans from PFIs to hold in our portfolio and ~~in some cases we~~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	March 31, 2017			December 31, 2016			March 31, 2018			December 31, 2017
Medium term (15 years or less)	$	364		$	417		$	290		$	285
Long term (greater than 15 years)	4,515			4,489			4,995			4,835
Unpaid principal balance	4,879			4,906			5,285			5,120
Net premiums, credit enhancement and deferred loan fees	40			38			57			55
Fair value hedging adjustments	24			26			17			20
MPF Loans held in portfolio, before allowance for credit losses	4,943			4,970			5,359			5,195
Allowance for credit losses on MPF Loans	(3		)	(3		)	(2		)	(2		)
MPF Loans held in portfolio, net	$	4,940		$	4,967		$	5,357		$	5,193

Conventional mortgage loans	$	3,823		$	3,818		$	4,321		$	4,133
Government Loans	1,056			1,088			964			987
Unpaid principal balance	$	4,879		$	4,906		$	5,285		$	5,120

The above table excludes MPF Loans acquired under the MPF Xtra, MPF Direct, and MPF Government MBS ~~products, which are classified as MPF Loans held for sale, and depending on timing, may be reflected as Other Assets~~products. See Note 2 - Summary of Significant Accounting Policies in our ~~Statements~~2017 Form 10-K for information related to the accounting treatment of ~~Condition. We either concurrently sell~~ these ~~loans to third party investors or hold them for a short time period until such loans are securitized.~~

off balance sheet MPF Loan products.

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

2019

Table of Contents

^{Federal Home Loan Bank of Chicago}

Notes to Financial Statements - (Unaudited)

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

Note 8 – Allowance for Credit Losses

See Note 2 - Summary of Significant Accounting Policies to the financial statements in our ~~2016~~2017 Form 10-K for further details regarding our allowance for credit losses methodology for each of the portfolio 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-15~~F-16 in our ~~2016~~2017 Form 10-K. There has been no material activity in our allowance for credit losses since December 31, ~~2016.~~2017. The following table presents the recorded investment and the allowance for credit losses in conventional MPF Loans by impairment methodology.


As of	March 31, 2017		December 31, 2016		March 31, 2018		December 31, 2017
Recorded investment in conventional MPF Loans -
Recorded investment -
Individually evaluated for impairment	$	68	$	74	$	47	$	49
Collectively evaluated for impairment	3,824		3,812		4,357		4,167
Recorded investment	$	3,892	$	3,886	$	4,404	$	4,216

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

Government Loans Held in Portfolio

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 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.

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^{Federal Home Loan Bank of Chicago}

Notes to Financial Statements - (Unaudited)

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

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, of a financially responsible party) and in the process of collection.

March 31, 2017 December 31, 2016
As of Conventional Government Total Conventional Government Total
Past due 30-59 days $ 78
$ 48
$ 126
$ 83
$ 57
$ 140

Past due 60-89 days 24
18
42
26
17
43

Past due 90 days or more 63
23
86
69
23
92

Past due 165
89
254
178

97
275

Current 3,727
988
4,715
3,708
1,013
4,721

Recorded investment $ 3,892
$ 1,077
$ 4,969
$ 3,886

$ 1,110
$ 4,996

In process of foreclosure $ 30
$ 8
$ 38
$ 35
$ 7
$ 42

Serious delinquency rate 1.67 % 2.14 % 1.77 % 1.82 % 2.07 % 1.88 %
Past due 90 days or more and still accruing interest $ 8
$ 23
$ 31
$ 8
$ 23
$ 31

On nonaccrual status $ 68
$ —
$ 68
$ 74
$ —
$ 74

~~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 March 31, 2017 December 31, 2016
Recorded investment without an allowance for credit losses $ 68
$ 74
Unpaid principal balance without an allowance for credit losses 73
80

We do not recognize interest income on impaired ~~loans.~~conventional MPF Loans.



	March 31, 2018									December 31, 2017
As of	Conventional			Government			Total			Conventional			Government			Total
Past due 30-59 days	$	78		$	47		$	125		$	74		$	48		$	122
Past due 60-89 days	20			15			35			21			16			37
Past due 90 days or more	46			21			67			48			21			69
Past due	144			83			227			143			85			228
Current	4,260			900			5,160			4,073			921			4,994
Recorded investment	$	4,404		$	983		$	5,387		$	4,216		$	1,006		$	5,222
In process of foreclosure	$	19		$	7		$	26		$	21		$	7		$	28
Serious delinquency rate	1.06		%	2.08		%	1.25		%	1.16		%	2.11		%	1.34		%
Past due 90 days or more and still accruing interest	$	8		$	20		$	28		$	8		$	21		$	29
Impaired loans without an allowance for credit losses and on nonaccrual status	47			—			47			49			—			49
Unpaid principal balance of impaired loans without an allowance for credit losses	50			—			50			53			—			53

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

We only held overnight Federal Funds sold and Securities Purchased Under Agreements to Resell as of March 31, ~~2017,~~2018, and December 31, ~~2016.~~2017. 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 to resell since all payments due under the contractual terms have been received and we hold sufficient underlying collateral.

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Table of Contents

^{Federal Home Loan Bank of Chicago}

Notes to Financial Statements - (Unaudited)

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

Note 9 – Derivatives and Hedging Activities

~~See~~Refer to Note 2 - Summary of Significant Accounting Policies in our ~~2016~~2017 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. 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~~Derivatives Clearing Organizations (DCOs) through ~~FCMs,~~Futures Commission Merchants (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 (bilateral) 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 over-the-counter ~~derivatives that establish collateral delivery thresholds.~~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. See Note ~~13 - Fair Value~~ ~~to the financial statements in this Form 10-Q and~~ ~~Note~~ 16 - Fair Value in our ~~2016~~2017 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~~For nearly all 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 Commodity Futures Trading Commission (CFTC). For certain transactions executed prior to March 1, 2017, we may ~~contain provisions that require us~~be required to post net additional collateral with our counterparties if there is deterioration in our credit ~~rating, except for those derivative agreements with a zero unsecured collateral threshold for both parties, in which case positions are required to be fully collateralized regardless of credit~~ rating. If our credit rating is lowered by a major credit rating agency, such as Standard and Poor's or Moody’s, we would be required to deliver additional collateral on derivatives in net liability positions. If our credit rating had been lowered from its current rating to the next lower rating 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 $25 million of collateral at fair value to our derivatives counterparties~~would not have been material at March 31, ~~2017.~~2018.

Cleared 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 our initial margin collateral payments and make variation margin settlement payments through our FCMs, on behalf of the DCO, which could expose us to institutional credit risk in the event that 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 variation margin settlement payments are made daily through the FCMs for changes in the value of cleared derivatives. The DCO determines initial margin requirements for cleared derivatives. In this regard, we pledged ~~$78~~$64 million of investment securities that can be sold or repledged, as part of our initial margin related to cleared derivative transactions at March 31, ~~2017.~~2018. 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 March 31, ~~2017.~~2018.

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^{Federal Home Loan Bank of Chicago}

Notes to Financial Statements - (Unaudited)

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

The following table presents details on the notional amounts, and cleared and bilateral derivative assets and liabilities on our statements of condition. ~~Effective in January of 2017,~~To conform with our current presentation method, we ~~began treating daily~~reclassified variation margin ~~on our~~for cleared derivatives as ~~cash settlements instead~~ of ~~as cash collateral.~~December 31, 2017, in the amounts of $16 million on our derivative assets and $168 million on our derivative liabilities, to the appropriate interest rate contracts line items.


	March 31, 2017										December 31, 2016										March 31, 2018								December 31, 2017
As of	Notional Amount		Derivative Assets				Derivative Liabilities				Notional Amount		Derivative Assets				Derivative Liabilities				Notional Amount		Derivative Assets			Derivative Liabilities			Notional Amount		Derivative Assets			Derivative Liabilities
Derivatives in hedge accounting relationships-
Interest rate swaps	$	26,303	$	46			$	813			$	25,999	$	40			$	898
Interest rate contracts																					$	28,258	$	37		$	397		$	26,655	$	25		$	367
Derivatives not in hedge accounting relationships-
Interest rate swaps	22,593		318				228				27,769		353				260
Interest rate swaptions	415		41				—				415		41				—
Interest rate caps or floors	1,129		27				—				1,129		38				—
Mortgage delivery commitments	792		1				1				760		2				2
Interest rate contracts																					24,829		155			84			20,506		199			122
Other	132		—				1				132		—				1				888		1			1			810		1			1
Derivatives not in hedge accounting relationships	25,061		387				230				30,205		434				263				25,717		156			85			21,316		200			123
Variation margin daily settlements on cleared derivatives			(12		)		(199		)
Gross derivative amount before netting adjustments and cash collateral	$	51,364	421				844				$	56,204	474				1,161				$	53,975	193			482			$	47,971	225			490
Netting adjustments and cash collateral			(418		)	^a	(805		)	^a			(468		)	^a	(1,118		)	^a			(191		)	(463		)			(222		)	(470		)
Derivatives on statements of condition			$	3			$	39					$	6			$	43					$	2		$	19				$	3		$	20
Cash collateral received on derivative assets																							$	39							$	35
Cash collateral posted on derivative liabilities																										$	310							$	284

The following table presents the noninterest income on derivatives and hedging activities as presented in the statements of income. The amounts attributable to fair value and cash flow hedges represent hedge ineffectiveness.



	Three months ended March 31,
For the periods ending	2018			2017
Fair value hedges - interest rate contracts	$	2		$	2
Cash flow hedges - interest rate contracts	1			1
Economic hedges -
Interest rate contracts	(7		)	—
Other	1			—
Economic hedges	(6		)	—
Noninterest income on derivatives and hedging activities	$	(3	)	$	3

~~Cash collateral posted was $415 million and $689 million at March 31, 2017, and December 31, 2016, and cash collateral received was $27 million and $40 million.~~

2423

Table of Contents

^{Federal Home Loan Bank of Chicago}

Notes to Financial Statements - (Unaudited)

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

The following table presents details regarding the offsetting of our derivative assets and liabilities on our 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.~~


	Derivative Assets									Derivative Liabilities									Derivative Assets									Derivative Liabilities
	Bilateral			Cleared			Total			Bilateral			Cleared			Total			Bilateral			Cleared			Total			Bilateral			Cleared			Total
As of March 31, 2017
As of March 31, 2018
Derivatives with legal right of offset -
Gross recognized amount	$	318		$	102		$	420		$	731		$	112		$	843		$	183		$	9		$	192		$	461		$	20		$	481
Netting adjustments and cash collateral	(316		)	(102		)	(418		)	(703		)	(102		)	(805		)	(182		)	(9		)	(191		)	(453		)	(10		)	(463		)
Derivatives with legal right of offset - net	2			—			2			28			10			38			1			—			1			8			10			18
Derivatives without legal right of offset	1			—			1			1			—			1			1			—			1			1			—			1
Derivatives on statements of condition	3			—			3			29			10			39			2			—			2			9			10			19
Noncash collateral received and cannot be sold or repledged	—						—			—			10			10
Noncash collateral pledged and cannot be sold or repledged				(1		)	(1		)
Less:
Noncash collateral received or pledged and cannot be sold or repledged																			—			—			—			—			10			10
Net amount	$	3		$	1		$	4		$	29		$	—		$	29		$	2		$	—		$	2		$	9		$	—		$	9

As of December 31, 2016
As of December 31, 2017
Derivatives with legal right of offset -
Gross recognized amount	$	339		$	133		$	472		$	820		$	339		$	1,159		$	216		$	8		$	224		$	476		$	13		$	489
Netting adjustments and cash collateral	(335		)	(133		)	(468		)	(788		)	(330		)	(1,118		)	(214		)	(8		)	(222		)	(463		)	(7		)	(470		)
Derivatives with legal right of offset - net	4			—			4			32			9			41			2			—			2			13			6			19
Derivatives without legal right of offset	2			—			2			2			—			2			1			—			1			1			—			1
Derivatives on statements of condition	6			—			6			34			9			43			3			—			3			14			6			20
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		)
Less:
Noncash collateral received or pledged and cannot be sold or repledged																			—			(1		)	(1		)	—			6			6
Net amount	$	6		$	3		$	9		$	34		$	—		$	34		$	3		$	1		$	4		$	14		$	—		$	14

At March 31, ~~2017,~~2018, we had ~~$66~~$55 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~~$60 million of comparable exposure at December 31, ~~2016.~~2017.

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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 the noninterest income on derivatives and hedging activities as presented in the statements~~

^{Federal Home Loan Bank of income.}

Three months ended March 31,
For the periods ending 2017 2016
Fair value hedges
Interest rate swaps $ 2
$ (9 )
Cash flow hedges 1
—
Economic hedges
Interest rate swaps (5 ) (27 )
Interest rate swaptions —
11
Interest rate caps or floors (11 ) (3 )
Net interest settlements 16
12
Economic hedges —
(7 )
Noninterest income on derivatives and hedging activities $ 3
$ (16 )

~~Table of Contents~~Chicago

Notes to Financial Statements - (Unaudited)

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

Fair Value Hedges

The following table presents our fair value hedging results by the type of hedged item. 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 Recognized in Noninterest Income on Derivatives and Hedging Activities			Amount Recorded in Net Interest Income			Gain (Loss) on Hedging Instrument			Gain (Loss) on Hedged Item			Total Ineffectiveness Recognized in Derivatives and Hedging Activities			Amount Recorded in Net Interest Income

Three months ended March 31, 2018
Available-for-sale securities													$	37		$	(37	)	$	—		$	(18	)
Advances													84			(82		)	2			(2		)
MPF Loans held for portfolio													—			—			—			(1		)
Consolidated obligation bonds													(124		)	124			—			(2		)
Total													$	(3	)	$	5		$	2		$	(23	)
Three months ended March 31, 2017
Available-for-sale securities	$	25		$	(26	)	$	(1	)	$	(24	)	$	25		$	(26	)	$	(1	)	$	(24	)
Advances	12			(10		)	2			(11		)	12			(10		)	2			(11		)
MPF Loans held for portfolio	—			—			—			(2		)	—			—			—			(2		)
Consolidated obligation bonds	9			(8		)	1			13			9			(8		)	1			13
Total	$	46		$	(44	)	$	2		$	(24	)	$	46		$	(44	)	$	2		$	(24	)

Three months ended March 31, 2016
Available-for-sale securities	$	(51	)	$	48		$	(3	)	$	(34	)
Advances	(110		)	109			(1		)	(20		)
MPF Loans held for portfolio	—			—			—			(2		)
Consolidated obligation bonds	68			(73		)	(5		)	22
Total	$	(93	)	$	84		$	(9	)	$	(34	)

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^{Federal Home Loan Bank of Chicago}

Notes to Financial Statements - (Unaudited)

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

Cash Flow Hedges

We are exposed to the variability in the total net proceeds received from forecasted zero-coupon discount note issuances, which is attributable to changes in the benchmark interest rate, London Interbank Offering Rate ("LIBOR"). As a result, we enter into cash flow hedge relationships utilizing derivative agreements to hedge the total net proceeds received from our "rolling" forecasted zero-coupon discount note issuances attributable to changes in LIBOR. The maximum length of time over which we are hedging this exposure is 3 years. 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.~~hedges for the periods presented. The deferred net gains (losses) on derivative instruments in AOCI that are expected to be reclassified to earnings during the next twelve months were ~~$(6) million~~not material as of March 31, ~~2017. The maximum length of time over which we are hedging our exposure to the variability in future cash flows for forecasted transactions is 4 years.~~2018.

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.


										Ineffectiveness Recorded in Derivatives and Hedging Activities		Effective Portion Recorded in AOCI		Amount Recorded in Net Interest Income
Three months ended March 31, 2018
Discount notes										$	1	$	59	$	(35	)
		Ineffective Portion Recorded in Noninterest Income on Derivatives and Hedging Activities		Effective Portion Recorded in AOCI			Amount Recorded in Net Interest Income
Three months ended March 31, 2017	Three months ended March 31, 2017
Advances	Interest rate caps or floors	$	—	$	—		$	2		$	—	$	—	$	2
Discount notes	Interest rate swaps	1		46			(45		)	1		46		(45		)
Bonds	Interest rate swaps	—		—			(1		)	—		—		(1		)
Total		$	1	$	46		$	(44	)	$	1	$	46	$	(44	)

Three months ended March 31, 2016
Advances	Interest rate caps or floors	$	—	$	—		$	2
Discount notes	Interest rate swaps	—		(52		)	(47		)
Bonds	Interest rate swaps	—		—			(1		)
Total		$	—	$	(52	)	$	(46	)

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^{Federal Home Loan Bank of Chicago}

Notes to Financial Statements - (Unaudited)

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

Note 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	March 31, 2017			December 31, 2016			March 31, 2018			December 31, 2017
Carrying Amount	$	32,806		$	35,949		$	41,483		$	41,191
Weighted Average Interest Rate	0.62		%	0.46		%	1.50		%	1.23		%

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 March 31, 2017	Contractual Maturity		Weighted Average Interest Rate		By Maturity or Next Call Date
As of March 31, 2018							Contractual Maturity		Weighted Average Interest Rate		By Maturity or Next Call Date
Due in one year or less	$	15,881	1.21	%	$	29,389	$	21,458	1.47	%	$	32,707
One to two years	6,953		1.02	%	3,877		8,539		1.57	%	7,697
Two to three years	3,833		1.32	%	2,683		3,168		1.57	%	1,788
Three to four years	2,025		1.33	%	784		3,954		2.03	%	570
Four to five years	3,851		1.97	%	302		3,064		2.55	%	678
Thereafter	5,341		2.75	%	849		3,690		2.72	%	433
Total par value	$	37,884	1.49	%	$	37,884	$	43,873	1.73	%	$	43,873

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


As of	March 31, 2017			December 31, 2016			March 31, 2018			December 31, 2017
Noncallable	$	23,626		$	22,356		$	30,042		$	23,644
Callable	14,258			14,778			13,831			13,703
Par value	37,884			37,134			43,873			37,347
Fair value hedging adjustments	(218		)	(229		)	(335		)	(214		)
Other adjustments	(4		)	(2		)	(22		)	(12		)
Consolidated obligation bonds	$	37,662		$	36,903		$	43,516		$	37,121

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 March 31, ~~2017,~~2018, and December 31, ~~2016.~~2017. See Note 17 - Commitments and Contingencies ~~to the financial statements~~ in our ~~2016~~2017 Form 10-K for further details.


	March 31, 2017									December 31, 2016									March 31, 2018									December 31, 2017
Par values as of	Bonds			Discount Notes			Total			Bonds			Discount Notes			Total			Bonds			Discount Notes			Total			Bonds			Discount Notes			Total
FHLB System total consolidated obligations	$	581,938		$	377,342		$	959,280		$	579,189		$	410,122		$	989,311		$	629,431		$	389,799		$	1,019,230		$	642,211		$	392,049		$	1,034,260
FHLB Chicago as primary obligor	37,884			32,829			70,713			37,134			35,969			73,103			43,873			41,530			85,403			37,347			41,235			78,582
As a percent of the FHLB System	7		%	9		%	7		%	6		%	9		%	7		%	7		%	11		%	8		%	6		%	11		%	8		%

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^{Federal Home Loan Bank of Chicago}

Notes to Financial Statements - (Unaudited)

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

Note 11 – Capital and Mandatorily Redeemable Capital Stock (MRCS)

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

Minimum Capital Requirements

For details on our minimum capital requirements, including how the ratios below were calculated, see Minimum Capital Requirements on page ~~F-43~~F-44 of our ~~2016~~2017 Form 10-K. We complied with our minimum regulatory capital requirements as shown below.


	March 31, 2017						December 31, 2016						March 31, 2018						December 31, 2017
	Requirement			Actual			Requirement			Actual			Requirement			Actual			Requirement			Actual
Risk-based capital	$	1,096		$	4,666		$	1,088		$	5,032		$	1,131		$	5,248		$	1,075		$	5,051
Total regulatory capital	$	3,044		$	4,666		$	3,148		$	5,032		$	3,656		$	5,248		$	3,374		$	5,051
Total regulatory capital ratio	4.00		%	6.13		%	4.00		%	6.40		%	4.00		%	5.74		%	4.00		%	5.99		%
Leverage capital	$	3,805		$	6,999		$	3,935		$	7,549		$	4,570		$	7,873		$	4,218		$	7,577
Leverage capital ratio	5.00		%	9.20		%	5.00		%	9.59		%	5.00		%	8.61		%	5.00		%	8.98		%

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 ~~exceeded~~had regulatory capital stock exceeding 10% of our total regulatory capital stock outstanding (which includes MRCS):

As of March 31, 2017 Regulatory Capital Stock Outstanding % of Total Outstanding Amount of Which is Classified as a Liability (MRCS)
One Mortgage Partners Corp. $ 245
^a
15.5 % $ 245
BMO Harris Bank, National Association 197
12.4 % —



As of March 31, 2018	Regulatory Capital Stock Outstanding			% of Total Outstanding		Amount of Which is Classified as a Liability (MRCS)
BMO Harris Bank, NA	$	269		14.2	%	$	—
One Mortgage Partners Corp.	245		^a	13.0	%	245
The Northern Trust Company	215			11.4	%	—


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

Repurchase of Excess Capital Stock

~~On January 26,~~Beginning in 2017, we began repurchasing all excess Class B2 membership stock on a weekly basis at par value, i.e., at $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, but remain subject to our regulatory requirements, certain financial and 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 page 57 of our 2016 Form 10-K.~~

~~As of March 31, 2017, our regulatory capital stock outstanding was $1.6 billion, a net decrease of $(429) million from year-end, due in part to these automatic weekly repurchases.~~

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^{Federal Home Loan Bank of Chicago}

Notes to Financial Statements - (Unaudited)

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

Note 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												Net Unrealized -				Non-credit OTTI -			Net Unrealized - Cash Flow Hedges
	Available-for-sale Securities			Held-to-maturity Securities						Post-Retirement Plans				AOCI				Available-for-sale Securities				Held-to-maturity Securities				Net Unrealized - Cash Flow Hedges			Post-Retirement Plans				AOCI
Three months ended March 31, 2018
Beginning balance																			$	407			$	(143	)	$	(147	)		$	(5	)		$	112
Change in the period recorded to the statements of condition, before reclassifications to statements of income																			(49		)		7			59				(2		)		15
Amounts reclassified in period to statements of income:
Non-interest gain (loss)																			—				—			(1		)						(1		)
Ending balance																			$	358			$	(136	)	$	(89	)		$	(7	)		$	126
							Net Unrealized - Cash Flow Hedges
Three months ended March 31, 2017
Beginning balance	$	459		$	(177	)	$	(312	)		$	(6	)		$	(36	)		$	459			$	(177	)	$	(312	)		$	(6	)		$	(36	)
Change in the period recorded to the statements of condition, before reclassifications to statements of income	38			9			46				(2		)		91				38				9			46				(2		)		91
Amounts reclassified in period to statements of income:
Net interest income	—			—			(1		)						(1		)		—				—			(1		)						(1		)
Non-interest gain (loss)	—			—			(1		)						(1		)		—				—			(1		)						(1		)
Non-interest expense											—				—
Other comprehensive income in the period	38			9			44				(2		)		89
Ending balance	$	497		$	(168	)	$	(268	)		$	(8	)		$	53			$	497			$	(168	)	$	(268	)		$	(8	)		$	53

Three months ended March 31, 2016
Beginning balance	$	658		$	(217	)	$	(463	)		$	(6	)		$	(28	)
Change in the period recorded to the statements of condition, before reclassifications to statements of income	(40		)	11			(52		)		—				(81		)
Amounts reclassified in period to statements of income:
Net interest income	—			—			(1		)						(1		)
Other comprehensive income in the period	(40		)	11			(53		)		—				(82		)
Ending balance	$	618		$	(206	)	$	(516	)		$	(6	)		$	(110	)

Table of Contents

^{Federal Home Loan Bank of Chicago}

Notes to Financial Statements - (Unaudited)

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

Note 13 - Fair Value

~~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. See~~ ~~Note 2 - Summary of Significant Accounting Policies~~ ~~to the financial statements in our 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 2016 Form 10-K.~~

The following ~~tables are~~table is a summary of the fair value estimates and related levels in the ~~fair value~~ hierarchy. The carrying amounts are ~~as recorded in~~per the statements of condition. ~~These tables~~Fair value estimates represent the exit prices that we would receive to sell assets or pay to transfer liabilities in an orderly transaction with market participants at the measurement date. They do not represent an estimate of our overall market value as a going concern, as they do not take into account future business opportunities ~~and future net~~or 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~~ See Note 2 - Summary of ~~financial instruments that are measured at amortized cost on~~Significant Accounting Policies in our ~~statements of condition, unless we elect the~~2017 Form 10-K for our fair value ~~option~~policies and Note 16 - Fair Value in our 2017 Form 10-K 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~~valuation techniques 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.~~significant inputs.


							Fair Value Hierarchy								Carrying Amount			Fair Value			Level 1			Level 2			Level 3		Netting & Cash Collateral
	Carrying Amount			Fair Value			Level 1			Level 2			Level 3
March 31, 2017
Financial Assets -
March 31, 2018
Carried at amortized cost
Cash and due from banks	$	34		$	34		$	34		$	—		$	—	$	40		$	40		$	40		$	—		$	—
Interest bearing deposits	700			700			700			—			—		775			775			775			—			—
Federal Funds sold	8,317			8,317			—			8,317			—
Securities purchased under agreements to resell	500			500			—			500			—
Federal Funds sold and securities purchased under agreements to resell															15,611			15,611			—			15,611			—
Held-to-maturity securities	4,219			4,642			—			3,712			930		3,448			3,791			—			3,023			768
Advances	42,328			42,348			—			42,348			—		49,923			49,961			—			49,961			—
MPF Loans held in portfolio, net	4,940			5,121			—			5,097			24		5,354			5,405			—			5,391			14
Financial Liabilities -
Other assets															138			138			—			138			—
Carried at fair value on a recurring basis
Trading securities															2,596			2,596			—			2,596			—
Government related non-MBS, ABS, and MBS															12,340			12,340			—			12,340			—
Private label residential MBS															48			48			—			—			48
Available-for-sale securities															12,388			12,388			—			12,340			48
Advances - fair value option election															917			917			—			917			—
Derivative assets															2			2			—			193			—		$	(191	)	^a
Other assets - fair value option election															76			76			—			76			—
Carried at fair value on a nonrecurring basis
MPF Loans held in portfolio, net															3			3			—			—			3
Other assets															1			1			—			—			1
Total financial assets															91,272			$	91,704		$	815		$	90,246		$	834	$	(191	)
Other non financial assets															119
Total assets															$	91,391
Carried at amortized cost
Deposits	(564		)	(564		)	—			(564		)	—		$	(685	)	$	(685	)	$	—		$	(685	)	$	—
Consolidated obligation discount notes	(32,806		)	(32,802		)	—			(32,802		)	—		(41,483		)	(41,479		)	—			(41,479		)	—
Consolidated obligation bonds	(37,662		)	(37,919		)	—			(37,919		)	—		(38,531		)	(38,605		)	—			(38,605		)	—
Mandatorily redeemable capital stock	(301		)	(301		)	(301		)	—			—		(311		)	(311		)	(311		)	—			—
Other liabilities															(106		)	(106		)	—			(106		)	—
Carried at fair value on a recurring basis
Consolidated obligation bonds - fair value option															(4,985		)	(4,985		)	—			(4,985		)	—
Derivative liabilities															(19		)	(19		)	—			(482		)	—		$	463		^a
Total financial liabilities															(86,120		)	$	(86,190	)	$	(311	)	$	(86,342	)	$	—	$	463
Other non financial liabilities															(208		)
Total liabilities															$	(86,328	)

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		)	—			—

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^{Federal Home Loan Bank of Chicago}

Notes to Financial Statements - (Unaudited)

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

The following table presents financial instruments measured at fair value on a recurring basis on our statements of condition. This includes advances, consolidated obligation discount notes and bonds, and mortgage loans held for sale 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.~~

March 31, 2017 Level 2 Level 3 Netting and Cash Collateral Fair Value
U.S. Government & other government related non-MBS $ 200
$ —
$ 200
GSE residential MBS 39
—
39
U.S. Governmental-guaranteed residential MBS 1
—
1
Trading securities 240
—
240
U.S. Government & other government related non-MBS 308
—
308
State or local housing agency non-MBS 18
—
18
FFELP ABS 4,524
—
4,524
GSE residential MBS 8,394
—
8,394
U.S. Government-guaranteed residential MBS 1,272
—
1,272
Private-label residential MBS —
55
55
Available-for-sale securities 14,516
55
14,571
Advances 782
—
782
Derivative assets 421
—
$ (418 ) 3
Other assets 56
—
56
Financial assets at fair value $ 16,015
$ 55
$ (418 ) $ 15,652
Consolidated obligation discount notes $ (1,871 ) $ —
$ (1,871 )
Consolidated obligation bonds (5,384 ) —
(5,384 )
Derivative liabilities (844 ) —
$ 805
(39 )
Financial liabilities at fair value $ (8,099 ) $ —
$ 805
$ (7,294 )

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 672
—
672
Derivative assets 474
—
$ (468 ) 6
Other assets 44
—
44
Financial assets at fair value $ 17,097

$ 56

$ (468 ) $ 16,685
Consolidated obligation discount notes $ (6,368 ) $ —
$ (6,368 )
Consolidated obligation bonds (5,443 ) —
(5,443 )
Derivative liabilities (1,161 ) —
$ 1,118
(43 )
Financial liabilities at fair value $ (12,972 )
$ —

$ 1,118
$ (11,854 )



	Carrying Amount				Fair Value			Level 1			Level 2			Level 3		Netting
December 31, 2017
Carried at amortized cost
Cash and due from banks	$	42			$	42		$	42		$	—		$	—
Interest bearing deposits	775				775			775			—			—
Federal Funds sold and securities purchased under agreements to resell	12,561				12,561			—			12,561			—
Held-to-maturity securities	4,157			��	4,538			—			3,734			804
Advances	47,309				47,336			—			47,336			—
MPF Loans held in portfolio, net	5,186				5,306			—			5,295			11
Other assets	119				119			—			119			—
Carried at fair value on a recurring basis
Trading securities	233				233			—			233			—
Government related non-MBS, ABS, and MBS	12,907				12,907			—			12,907			—
Private label residential MBS	50				50			—			—			50
Available-for-sale securities	12,957				12,957			—			12,907			50
Advances - fair value option election	776				776			—			776			—
Derivative assets	3				3			—			225			—		$	(222	)	^a
Other assets - fair value option election	118				118			—			118			—
Carried at fair value on a nonrecurring basis
MPF Loans held in portfolio, net	7				7			—			—			7
Other assets	3				3			—			—			3
Total financial assets	84,246				$	84,774		$	817		$	83,304		$	875	$	(222	)
Other non financial assets	109
Total assets	$	84,355
Carried at amortized cost
Deposits	(524		)		(524		)	—			(524		)	—
Consolidated obligation discount notes	(40,442		)		(40,437		)	—			(40,437		)	—
Consolidated obligation bonds	(31,861		)		(32,011		)	—			(32,011		)	—
Mandatorily redeemable capital stock	(311		)		(311		)	(311		)	—			—
Other liabilities	(94		)		(94		)	—			(94		)	—
Carried at fair value on a recurring basis
Consolidated obligation discount notes - fair value option	(749		)		(749		)	—			(749		)	—
Consolidated obligation bonds - fair value option	(5,260		)		(5,260		)	—			(5,260		)	—
Derivative liabilities	(20		)		(20		)	—			(490		)	—		470			^a
Total financial liabilities	(79,261		)		$	(79,406	)	$	(311	)	$	(79,565	)	$	—	$	470
Other non financial liabilities	(242		)
Total liabilities	$	(79,503	)


^a	The netting adjustment amount includes cash collateral (either received or paid by us) and related accrued interest in cases where we have a legal right, by contract (e.g., master netting agreement) or otherwise, to offset cash flow obligations between us and our counterparty into a single net payable or receivable. See Note 9 - Derivatives and Hedging Activities.

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^{Federal Home Loan Bank of Chicago}

Notes to Financial Statements - (Unaudited)

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

Fair Value Option

We may elect the fair value option for financial instruments, such as advances, MPF Loans held for sale, and consolidated obligation discount notes and bonds, in cases where hedge accounting treatment may not be achieved due to the inability to meet the hedge effectiveness testing criterion. Financial instruments for which we elected the fair value option along with their related fair value are shown on our Statements of Condition. Refer to our Note 2 – Summary of Significant Accounting Policies to the financial statements in our ~~2016~~2017 Form 10-K for further details.

The following table presents the changes in fair values of financial assets and liabilities carried at fair value under the fair value option. These changes were recognized in noninterest income - instruments held under the fair value option in our statements of income.



	Three months ended March 31,
	2018			2017
Advances	$	(9	)	$	—
Consolidated obligation bonds	5			(1		)
Other assets	(3		)	(1		)
Noninterest income - Instruments held under fair value option	$	(7	)	$	(2	)

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.


	March 31, 2017						December 31, 2016						March 31, 2018						December 31, 2017
As of	Advances			Consolidated Obligation Bonds			Advances			Consolidated Obligation Bonds			Advances			Consolidated Obligation Bonds			Advances			Consolidated Obligation Bonds
Unpaid principal balance	$	787		$	5,390		$	677		$	5,447		$	935		$	5,003		$	786		$	5,270
Fair value over (under) UPB	(5		)	(6		)	(5		)	(4		)	(18		)	(18		)	(10		)	(10		)
Fair value	$	782		$	5,384		$	672		$	5,443		$	917		$	4,985		$	776		$	5,260

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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.


	March 31, 2017							December 31, 2016							March 31, 2018							December 31, 2017
As of	Expire within one year		Expire after one year			Total		Expire within one year		Expire after one year			Total		Expire within one year		Expire after one year			Total		Expire within one year		Expire after one year			Total
Unsettled consolidated obligation bonds	$	405	$	—		$	405	$	10	$	—		$	10	$	72	$	—		$	72	$	—	$	—		$	—
Unsettled consolidated obligation discount notes															1,000		—			1,000		—		—			—
Member standby letters of credit	9,978		2,382		^a	12,360		8,459		2,369		^a	10,828		16,534		3,598		^a	20,132		15,703		3,869		^a	19,572
Housing authority standby bond purchase agreements	23		307			330		25		281			306		33		297			330		—		337			337
Advance commitments	1		1			2		15		1			16		1,413		13			1,426		151		—			151
MPF delivery commitments	435		—			435		417		—			417		443		—			443		371		—			371
Other commitments	11		—			11		24		—			24
Other															6		—			6		14		—			14
Commitments	$	10,853	$	2,690		$	13,543	$	8,950	$	2,651		$	11,601	$	19,501	$	3,908		$	23,409	$	16,239	$	4,206		$	20,445


^a	Contains ~~$709~~$744 million and ~~$486~~$750 million of member standby letters of credit at March 31, ~~2017,~~2018, and December 31, ~~2016,~~2017, which were renewable annually.

For a description of defined terms see Note 17 - Commitments and Contingencies to the financial statements in our ~~2016~~2017 Form 10-K.

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^{Federal Home Loan Bank of Chicago}

Notes to Financial Statements - (Unaudited)

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

Note 15 – Transactions with Related Parties and Other FHLBs

We define related parties as either members whose officers or directors serve on our Board of Directors, or members that control more than 10% of our 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 a related 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 material balances we had with our members who are related parties as defined above (including their affiliates) as of the periods presented. The related impacts to our Statements of Income were immaterial.


As of	March 31, 2017		December 31, 2016		March 31, 2018		December 31, 2017
Assets - Advances	$	123	$	107	$	183	$	165
Liabilities - Deposits	14		8		7		13
Equity - Capital Stock	6		18		9		10

Other FHLBs

From time to time, we may loan to, or borrow from, other FHLBs. ~~All~~These 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~~

In addition, we provide programmatic and operational support in our role as the administrator of the MPF Program on behalf of the other MPF Banks for a fee.

Material transactions with other FHLBs, if any, are identified on the face of our Financial Statements.

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^{Federal Home Loan Bank of Chicago}

(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	March 31, 2017			December 31, 2016			September 30, 2016			June 30, 2016			March 31, 2016			March 31, 2018			December 31, 2017			September 30, 2017			June 30, 2017			March 31, 2017
Selected statements of condition data
Investments ^a	$	28,547		$	28,060		$	26,853		$	28,964		$	27,597		$	34,818		$	30,683		$	31,885		$	29,461		$	28,547
Advances	42,328			45,067			43,117			46,424			38,353			50,840			48,085			50,153			46,844			42,328
MPF Loans held in portfolio, gross	4,943			4,970			4,723			4,670			4,681
Less: allowance for credit losses	(3		)	(3		)	(3		)	(3		)	(2		)
MPF Loans held in portfolio, net																5,357			5,193			5,024			4,965			4,940
Total assets	76,109			78,692			74,983			80,662			70,913			91,391			84,355			87,488			81,779			76,109
Consolidated obligation discount notes, net	32,806			35,949			39,144			45,876			40,293			41,483			41,191			45,460			37,944			32,806
Consolidated obligation bonds, net	37,662			36,903			30,139			29,091			24,021			43,516			37,121			35,890			37,878			37,662
Mandatorily redeemable capital stock (MRCS) recorded as a liability																311			311			308			303			301
Capital stock	1,282			1,711			1,636			1,774			1,733			1,579			1,443			1,557			1,526			1,282
Retained earnings	3,083			3,020			2,951			2,884			2,790			3,358			3,297			3,219			3,153			3,083
Mandatorily redeemable capital stock (MRCS)	301			301			302			302			302
Total capital	4,418			4,695			4,515			4,507			4,413			5,063			4,852			4,872			4,746			4,418
Other selected data at period end
MPF off-balance sheet loans outstanding - FHLB System ^b	$	17,180		$	16,972		$	16,594		$	16,061		$	15,664
MPF off-balance sheet loans outstanding - FHLBC PFIs ^b	8,214			8,196			8,100			7,892			7,827
FHLB systemwide consolidated obligations (par)	959,280			989,311			967,728			963,810			896,828
Member standby letters of credit outstanding																$	20,132		$	19,572		$	15,411		$	13,220		$	12,360
MPF Loans par value outstanding - FHLB System ^b																$	52,582		51,563			$	49,970		$	48,260		$	46,728
MPF Loans par value outstanding - FHLB Chicago PFIs ^b																12,692			12,484			12,187			11,987			11,730
Number of members	726			728			730			732			737			719			720			717			721			726
Total employees (full and part time)	452			440			443			432			425			461			460			457			457			452
Selected statements of income data
Net interest income after provision for credit losses	$	113		$	111		$	113		$	111		$	120		$	124		$	130		$	124		$	116		$	113
Non-interest gain (loss)	10			15			14			50			(3		)	—			13			5			16			10
Non-interest expense	42			39			42			46			40			42			45			43			44			42
Net income	73			78			76			104			69			74			88			77			79			73
Other selected data during the periods
MPF off-balance sheet loan volume funded - FHLB System ^b	$	674		$	1,305		$	1,298		$	960		$	703
MPF off-balance sheet loan volume funded - FHLBC PFIs ^b	256			572			609			395			277
MPF Loans par value amounts funded - FHLB System ^b																$	2,494		$	3,280		$	3,474		$	3,088		$	2,073
Number of PFIs funding MPF products - FHLB System ^b																720			750			769			776			730
MPF Loans par value amounts funded - FHLB Chicago PFIs ^b																566			$	729		655			620			517
Number of PFIs funding MPF products - FHLB Chicago ^b																174			175			175			176			160
Selected ratios (rates annualized)
Regulatory capital to assets ratio	6.13		%	6.40		%	6.52		%	6.15		%	6.81		%
Total regulatory capital to assets ratio																5.74		%	5.99		%	5.81		%	6.09		%	6.13		%
Market value of equity to book value of equity	108		%	108		%	108		%	107		%	107		%	107		%	107		%	107		%	108		%	108		%
Investments - % of total assets	38		%	36		%	36		%	36		%	39		%
Advances - % of total assets	56		%	57		%	58		%	58		%	54		%
MPF Loans held in portfolio, net - % of total assets	6		%	6		%	6		%	6		%	7		%
Primary mission asset ratio ^c																69.1		%	67.3		%	67.2		%	67.2		%	67.0		%
Dividend rate class B1 activity stock-period paid	3.00		%	2.80		%	2.80		%	2.80		%	2.60		%	3.50		%	3.30		%	3.30		%	3.15		%	3.00		%
Dividend rate class B2 membership stock-period paid	0.85		%	0.60		%	0.60		%	0.60		%	0.60		%	1.50		%	1.25		%	1.25		%	1.05		%	0.85		%
Return on average assets	0.36		%	0.40		%	0.38		%	0.53		%	0.38		%	0.33		%	0.41		%	0.36		%	0.39		%	0.36		%
Return on average equity	6.46		%	6.84		%	6.70		%	9.38		%	5.87		%	5.82		%	7.34		%	6.54		%	6.99		%	6.46		%
Average equity to average assets	5.57		%	5.85		%	5.67		%	5.65		%	6.47		%	5.67		%	5.59		%	5.50		%	5.58		%	5.57		%
Net yield on average interest-earning assets	0.57		%	0.57		%	0.57		%	0.57		%	0.66		%	0.55		%	0.60		%	0.59		%	0.58		%	0.57		%
Return on average Regulatory Capital spread to three month LIBOR index	5.09		%	5.37		%	5.34		%	7.97		%	5.17		%	3.77		%	5.54		%	4.89		%	5.47		%	5.09		%
Cash dividends	$	10		$	9		$	9		$	10		$	9		$	13		$	10		$	11		$	9		$	10
Dividend payout ratio	14		%	12		%	12		%	10		%	13		%	18		%	11		%	14		%	11		%	14		%


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

Includes all MPF ~~off-balance sheet loans are MPF Loans purchased from PFIs~~products, on 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.~~off our balance sheet. See Mortgage Partnership Finance Program ~~beginning~~ on page 78 in our ~~2016~~2017 Form 10-K.

In 2015, the FHFA issued an advisory bulletin that provides guidance relating to how the FHFA will assess each FHLB's core mission achievement by using a ratio of primary mission assets (which includes advances and mortgage loans acquired from members) to consolidated obligations. The primary mission asset ratios presented in this 10-Q are on an annual average year to date basis. See Mission Asset Ratio on page 5 in our 2017 Form 10-K for more information.

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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 and continue to offer the Reduced Capitalization Advance Program 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;~~mortgages; 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 or changes affecting our regulator and changes in the FHLB Act or applicable regulations as a result of the Housing and Economic Recovery Act of 2008 (Housing Act) or as may otherwise be issued by our ~~regulator, including regulatory changes to FHLB membership requirements proposed by the FHFA;~~regulator; 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~~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 ~~2016~~2017 Form 10-K on page ~~18.~~16.

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

Executive Summary

First Quarter ~~2017~~2018 Financial Highlights

Advances outstanding increased $2.7 billion to $50.8 billion at March 31, 2018, up from $48.1 billion at December 31, 2017.

MPF Loans held in portfolio increased to $5.4 billion at March 31, 2018, up from $5.2 billion at December 31, 2017, as new MPF Loan purchases continued to moderately outpace paydown and maturity activity.

Total investment securities increased 6% to $18.4 billion at March 31, 2018, up from $17.3 billion at December 31, 2017, as we increased our purchase of Treasury securities for liquidity purposes.

Total assets increased to $91.4 billion as of March 31, 2018, compared to $84.4 billion as of December 31, 2017.

We recorded net income of $74 million in the first quarter of 2018, up from $73 million in the first quarter of ~~2017, up from $69 million in the first quarter of 2016.~~

2017.

Net interest income for the first quarter of ~~2017~~2018 was ~~$113~~$124 million, ~~down~~up from ~~$120~~$113 million for the first quarter of ~~2016~~2017, as ~~our higher-earning investment portfolio continued~~we benefited both from the rising rate environment and higher levels of interest earning assets.

Letters of credit commitments increased to ~~pay down, while our cost of funding increased.~~

~~Total investment securities decreased 10% to $19.0~~$20.1 billion at March 31, ~~2017, down~~2018, up from ~~$21.0~~$19.6 billion at December 31, ~~2016 as our investment portfolio continued to pay down.~~

~~Advances outstanding decreased $2.7 billion to $42.3 billion at March 31, 2017, down from $45.1 billion at December 31, 2016.~~

~~Total assets declined to $76.1 billion as of March 31, 2017, compared to $78.7 billion as of December 31, 2016.~~

~~We reached nearly $3.1 billion in retained earnings at March 31,~~ 2017.

We remained in compliance with all of our regulatory capital requirements as of March 31, ~~2017.~~

2018.

Summary and Outlook

First Quarter ~~2017~~2018 Dividend

On April ~~25, 2017,~~24, 2018, the ~~Bank's~~Bank’s Board of Directors increased the dividend declared per share on both sub-classes of capital stock. Based on the Bank’s preliminary financial results for the first quarter of ~~2017,~~2018, the Board of Directors declared a dividend of ~~3.15%~~4.00% (annualized) for Class B1 activity capital stock (an increase of 1550 basis points from the ~~prior~~previous quarter) and a dividend of ~~1.05%~~1.60% (annualized) for Class B2 membership capital stock (an increase of 2010 basis points from the ~~prior~~previous quarter).

The Bank pays a higher dividend per share on Class B1 activity stock than on Class B2 membership stock to reward members who use the Bank’s advances and, thereby, support the financial health of the entire cooperative. The higher ~~dividends enhance~~dividend members receive on Class B1 activity stock has the ~~value~~effect of ~~our members’ membership and reduce the~~lowering their cost of borrowing from the Bank.

~~Increasing Members’ Return on~~Strong Member Activity Continues

~~In 2015~~During 2017, we reported strong growth in member activity and ~~2016 the Bank made changes to its capital plan with the goals of increasing the value of membership and rewarding members~~ that ~~support the cooperative through borrowings by increasing the dividends paid on class B1~~ activity ~~stock which reduces the all-in cost of their advances, all while maintaining members’ access to reliable liquidity and long term funding. In~~continued in the first quarter of ~~2017, the Bank began to automatically repurchase members’ excess Class B2 stock on a weekly basis, which permits us to more effectively invest our capital~~2018. Advances outstanding with ~~a goal to provide a reasonable return on members’ investment in our stock. As a result, capital stock decreased 25%, from $1.7~~members were $50.8 billion and letters of credit were $20.1 billion at ~~December 31, 2016,~~quarter-end. MPF Program activity continued to ~~$1.3~~grow with $5.4 billion in MPF Loans outstanding on balance sheet at ~~March 31, 2017. Total capital, however, only decreased 6% to $4.4 billion at March 31, 2017 compared to $4.7 billion at December 31, 2016.~~quarter-end.

Community Investment Programs in Full Swing

The first quarter of 2018 was a busy time for our Community Investment programs. The application period for Community First® Capacity-Building Grants was announced on March 6, Community First Disaster Relief Program funding for flood-hit communities in Wisconsin became available on March 12, the 2018 Downpayment Plus® (DPP®) Programs opened on March 12, and trainings for the 2018 competitive Affordable Housing Program have begun in anticipation of the round opening on May 7.

FHFA Issues Proposed Rule Amending the Affordable Housing Program Regulations

FHFA recently published proposed amendments to the AHP regulations. The amendments offer some benefits to the AHP program, but also pose some challenges that could impact the development and implementation of AHP funding. See Legislative and Regulatory Developments starting on page 52 for more details on the proposed amendments.

News from Our District

In April, Wisconsin Governor Scott Walker signed into law the 2017 Wisconsin Act 340, an omnibus banking act containing three provisions impacting the Bank. See Legislative and Regulatory Developments starting on page 52 for more details on this act.

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

Critical Accounting Policies

For a detailed description of our Critical Accounting Policies and Estimates see page 38 in our 2017 Form 10-K.

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 subsequent to December 31, 2017.

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~~ discounts;

OTTI ~~reversals;~~security yield adjustments due to either subsequent increases or decreases in estimated cash flows;

Amortization of hedge adjustments;

Advance and investment prepayment fees; and

MPF credit enhancement fees.

The 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~~Amortized cost ~~balances are~~basis is 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.~~status and available for sale securities. The calculation of the yield on our available for sale securities does not give effect to changes in fair value that are reflected as a component of accumulated other comprehensive income (AOCI). 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~~the net interest income ~~if applicable,~~components, as discussed ~~above.~~above, applicable to our interest earning assets and interest bearing liabilities.


•	Yield/Rate: Effective yields/rates are based on total interest and average ~~daily~~ balances ~~and includes all components of net interest income~~ as ~~discussed~~defined 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.~~

volume.

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

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

March 31, 2017 March 31, 2016 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
Investment securities $ 19,771
$ 166
3.36 % $ 23,339
$ 193
3.31 % $ (30 ) $ 3
$ (27 )
Advances 45,193
99
0.88 % 38,340
63
0.66 % 15
21
36
MPF Loans held in portfolio 4,956
54
4.36 % 4,729
57
4.82 % 2
(5 ) (3 )
Federal funds sold and securities purchased under agreements to resell 8,639
15
0.69 % 4,254
4
0.38 % 8
3
11
Other interest bearing assets 1,329
3
0.90 % 1,523
1
0.26 % —
2
2
Interest income on assets 79,888
337
1.69 % 72,185
318
1.76 % 32
(13 ) 19
Consolidated obligation discount notes 37,121
96
1.03 % 43,283
82
0.76 % (15 ) 29
14
Consolidated obligation bonds 37,679
125
1.33 % 22,838
102
1.79 % 49
(26 ) 23
Subordinated notes —
—
— % 944
14
5.93 % (14 ) —
(14 )
Other interest bearing liabilities 900
3
1.33 %
3
—
3
Interest expense on liabilities 75,700
224
1.18 % 67,065
198
1.18 % 26
—
26
Net yield on interest-earning assets $ 79,888
$ 113
0.57 % $ 72,185
$ 120
0.66 % $ 9
$ (16 ) $ (7 )



	March 31, 2018						March 31, 2017						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
Investment securities	$	18,438	$	163	3.54	%	$	19,771	$	166	3.36	%	$	(12	)	$	9		$	(3	)
Advances	52,814		214		1.62	%	45,193		99		0.88	%	31			84			115
MPF Loans held in portfolio	5,226		55		4.21	%	4,956		54		4.36	%	3			(2		)	1
Federal funds sold and securities purchased under agreements to resell	11,968		44		1.47	%	8,639		15		0.69	%	12			17			29
Other	1,216		4		1.32	%	1,329		3		0.90	%	—			1			1
Interest income on interest bearing assets	89,662		480		2.14	%	79,888		337		1.69	%	53			90			143
Noninterest bearing assets	668						639
Total assets	90,330						80,527

Consolidated obligation discount notes	42,995		183		1.70	%	37,121		96		1.03	%	25			62			87
Consolidated obligation bonds	41,141		169		1.64	%	37,679		125		1.33	%	15			29			44
Other	850		4		1.88	%	900		3		1.33	%	—			1			1
Interest expense on interest bearing liabilities	84,986		356		1.68	%	75,700		224		1.18	%	37			95			132
Noninterest bearing liabilities	252						328
Total liabilities	85,238						76,028
Net yield on interest earning assets	$	89,662	$	124	0.55	%	$	79,888	$	113	0.57	%	$	15		$	(4	)	$	11

The following is an analysis of the ~~above table. All~~preceding table and unless otherwise indicated, comparisons ~~are made between~~apply to the ~~period~~three month periods ending March 31, ~~2017 and the period ending~~2018 compared to March 31, ~~2016. Net interest income changed mainly due to the following:~~2017.

•

Interest income from investment securities ~~in 2017~~ declined ~~compared to 2016 primarily due to the reduction in average investment balances~~ as ~~securities~~MBS/ABS matured or paid down ~~during the period. We expect the decline~~and we did not make new investments in ~~average balances and related interest income on our investment securities to continue due to~~MBS/ABS under FHFA regulatory limits ~~on the amount of investment securities that we may hold on our balance sheet~~ as discussed in Investments ~~starting~~ on page 1210 in our ~~2016~~2017 Form ~~10-K.~~10-K. One of the limits is that our investment in MBS/ABS cannot exceed three times our total regulatory capital. We expect to resume making MBS and ABS investments sometime in 2018, subject to regulatory limitations.

•

Interest income from advances in 2017 increased compared to 2016 due to both a rise in interest rates and higher member demand. Higher interest rates resulted primarily from rate hikes by the Federal Reserve Bank. The majority of the increase in the above advance balance was due to increases in advances made under our Reduced Capitalization Advance Program (RCAP). See ~~Reduced Capitalization Advance Program~~ ~~on page 48 for more information on RCAP.~~

Interest income from advances increased primarily due to a rise in interest rates, which resulted primarily from rate hikes by the Federal Reserve Bank during 2017. Interest income also increased to a lesser extent as a result of higher member demand for advances.

Interest income from MPF Loans held in portfolio ~~in 2017 declined compared to 2016 primarily due to the paydown of our higher interest rate MPF Loans. The decline in interest income~~was essentially unchanged from ~~MPF Loans held in portfolio was partially offset by the increase in average balance of MPF Loans held in portfolio.~~2017.

Interest income from Federal Funds sold and securities ~~sold~~purchased under agreements to ~~repurchase in 2017~~resell increased ~~compared to 2016 primarily~~both due to higher ~~volume~~volumes outstanding ~~year over year. The 2017 increase~~and increases in interest ~~income compared to 2016 also was due to rate hikes~~rates by the Federal Reserve Bank. We increased the amounts of these liquid assets as demand for our advances and letters of credit increased.

Interest expense on both our shorter termed consolidated ~~obligations in 2017~~obligation discount notes and our longer termed consolidated obligation bonds increased ~~compared to 2016~~ primarily due to ~~overall higher average balances required to fund the increased advance lending to our members. This increase was partially offset by lower~~rising short and long term interest rates, ~~on our consolidated obligation~~and to a lesser extent, an increase in notes and bonds ~~due to money market reform, as there was more demand for FHLB debt~~outstanding.

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^{Federal Home Loan Bank of Chicago}

(Dollars in ~~the market, which improved our spreads significantly.~~tables in millions except per share amounts unless otherwise indicated)


•	For details of the effect our fair value and cash flow hedge activities had on our net interest income ~~during 2017~~ see ~~Trading Securities, Derivatives and~~Total Net Effect Gain (Loss) of Hedging Activities ~~and Instruments Held at Fair Value Option~~ table on the following page.

~~Table of Contents~~

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

Noninterest Income


	Three months ended March 31,										Three months ended March 31,
	2017			2016							2018			2017
Trading securities	$	—		$	1
Derivatives and hedging activities	3			(16		)	Derivatives and hedging activities				$	(3	)	$	3
Instruments held under fair value option	(2		)	5			Instruments held under fair value option				(7		)	(2		)
Trading securities, derivatives and hedging activities, and instruments held under fair value option	1			(10		)
MPF fees from other FHLBs	5			3
MPF fees,							6	and	5	from other FHLBs	8			7
Other, net	4			4			Other, net				2			2
Noninterest income	$	10		$	(3	)	Noninterest income				$	—		$	10

The following is an analysis of the above table and unless otherwise indicated, comparisons apply to the three month periods ending March 31, 2018 and March 31, 2017.

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

~~Noninterest income on trading securities, derivatives~~Derivatives and hedging activities, and instruments held under the fair value option were not significant to our statements of income over the ~~last year.~~periods presented. Instead, the majority of the effect from our derivatives and hedging activities is recorded in net interest income. The following table details the effect of all of these transactions on our ~~results~~statements of ~~operations. Note that we economically hedge only a portion of our trading securities.~~income.

Total Net Effect Gain (Loss) of Hedging Activities


																			Advances			Investments			MPF Loans			Discount Notes			Bonds			Other			Total
Three months ended March 31, 2018
Recorded in net interest income																			$	(2	)	$	(18	)	$	(1	)	$	(35	)	$	(2	)	$	—		$	(58	)
Recorded in derivatives & hedging activities																			14			1			(1		)	1			(17		)	(1		)	(3		)
Recorded on instruments held under fair value option																			(9		)	—			(4		)	—			6			—			(7		)
Total net effect gain (loss) of hedging activities																			$	3		$	(17	)	$	(6	)	$	(34	)	$	(13	)	$	(1	)	$	(68	)
	Advances			Investments			MPF Loans			Discount Notes			Bonds			Total
Three months ended March 31, 2017
Recorded in net interest income	$	(9	)	$	(24	)	$	(2	)	$	(45	)	$	12		$	(68	)	$	(9	)	$	(24	)	$	(2	)	$	(45	)	$	12		$	—		$	(68	)
Recorded in derivatives & hedging activities	2			—			(1		)	1			1			3			2			—			(1		)	1			1			—			3
Recorded in trading securities - hedged only	—			1			—			—			—			1
Recorded on instruments held under fair value option	—			—			—			—			(2		)	(2		)
Total net effect gain (loss)	$	(7	)	$	(23	)	$	(3	)	$	(44	)	$	11		$	(66	)

Three months ended March 31, 2016
Recorded in net interest income	$	(18	)	$	(34	)	$	(2	)	$	(47	)	$	21		$	(80	)
Recorded in derivatives & hedging activities	(14		)	(3		)	4			(1		)	(2		)	(16		)
Recorded in trading securities - hedged only	—			1			—			—			—			1
Recorded in other, net																			—			1			—			—			—			—			1
Recorded in instruments held under fair value option	11			—			—			(3		)	(3		)	5			—			—			—			—			(2		)	—			(2		)
Total net effect gain (loss)	$	(21	)	$	(36	)	$	2		$	(51	)	$	16		$	(90	)
Total net effect gain (loss) of hedging activities																			$	(7	)	$	(23	)	$	(3	)	$	(44	)	$	11		$	—		$	(66	)

MPF fees (including from other FHLBs)

A majority of MPF fees are from other FHLBs

~~Other FHLBs~~ that pay us a fixed membership fee to participate in the MPF Program and a volume based fee for us to provide services related to their on balance sheet MPF ~~Loans, which offsets~~Loans. MPF fees also include income from off-balance sheet MPF Loan products and other related transaction fees. These fees offset a portion of the expenses we incur to ~~run~~administer the program. MPF fees have grown as off balance sheet MPF Loan volume increased during the periods presented.

Other, net

Other, net consists primarily of fee income we earn from ~~our off balance sheet MPF Loan~~member standby letters of credit products, ~~and fees we earn on a variety of functions we perform for our members.~~as noted in Item 2. Selected Financial Data.

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^{Federal Home Loan Bank of Chicago}

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

Noninterest Expense


	Three months ended March 31,				Three months ended March 31,
	2017		2016		2018		2017
Compensation and benefits	$	25	$	23	$	24	$	25
Operating expenses	15		15		15		15
Other	2		2		3		2
Noninterest expense	$	42	$	40	$	42	$	42

~~Compensation~~The following is an analysis of the preceding table and ~~benefits increased due~~unless otherwise indicated, comparisons apply to ~~increased employee count.~~ the three month periods ending March 31, 2018 and March 31, 2017.

We had ~~452~~461 employees as of March 31, ~~2017,~~2018, compared to ~~425~~452 as of March 31, ~~2016.~~2017. Compensation and benefit expenses declined slightly due to a decline in anticipated pension expense recorded during the first quarter. However, we can not predict future return trends at this time and this reduction may not be sustained.

Other consists primarily of our share of the funding for the FHFA, our regulator, and the Office of Finance, which manages the consolidated obligation debt issuances of the FHLBs. In addition, Other includes MPF related non-operating expenses/gains on the sale of real estate owned.

Assessments

We ~~fund~~record the Affordable Housing Program (AHP) ~~program~~assessment expense at a ~~calculated~~ rate of 10% of income before assessments, excluding interest expense on MRCS. See Note 11 - Affordable Housing Program in our 2017 Form 10-K for further details.

Other Comprehensive Income (Loss)


	Three months ended March 31,						Balance remaining in AOCI as of March 31,			Three months ended March 31,						Balance remaining in AOCI as of
	2017			2016			2017			2018			2017			March 31, 2018
Net unrealized gain (loss) available-for-sale securities	$	38		$	(40	)	$	497		$	(49	)	$	38		$	358
Noncredit OTTI held-to-maturity securities	9			11			(168		)	7			9			(136		)
Net unrealized gain (loss) cash flow hedges	44			(53		)	(268		)	58			44			(89		)
Postretirement plans	(2		)	—			(8		)	(2		)	(2		)	(7		)
Other comprehensive income (loss)	$	89		$	(82	)	$	53		$	14		$	89		$	126

The following is an analysis of the above table and unless otherwise indicated, comparisons apply to the three month periods ending March 31, 2018 and March 31, 2017.

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

The ~~increase in net unrealized gain for 2017 compared to the~~ net unrealized loss ~~for 2016~~ on our available for sale (AFS) portfolio ~~was primarily due~~for 2018 is attributable to ~~a decrease in longer term market interest rates during 2017. As~~the reversal of net unrealized gains from prior reporting periods. The net unrealized gains on our AFS securities reverse as these securities approach maturity. This is because we expect to receive par value at the maturity of these AFS ~~securities move closer to their maturity, this~~securities. As of March 31, 2018, we had a net unrealized gain ~~position~~balance remaining in AOCI ~~is expected~~attributable to ~~reverse to zero as we will only collect the face value at their maturity.~~

our AFS portfolio.

Noncredit OTTI on held-to-maturity securities

~~The gain in~~We recorded unrealized noncredit ~~OTTI~~impairments on held-to-maturity ~~(HTM)~~ securities ~~for 2017 compared~~during the last financial crisis. As the market has recovered and because we intend to ~~2016 was lower as a result of~~hold these ~~HTM~~ securities ~~moving closer~~ to ~~their maturity. The gain in each period represents the amount~~maturity, we ~~accrete~~are recording accretion to the carrying amount of ~~these HTM securities. Specifically we reverse~~the

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^{Federal Home Loan Bank of Chicago}

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

securities, reversing the ~~previously recorded noncredit OTTI amount on these HTM~~remaining loss balance in AOCI. The annual accretion gains declined in 2018 and are expected to continue to decline as the securities ~~through the accretion of the amount we expect to collect over their remaining life.~~

near maturity.

Net unrealized gain (loss) on cash flow hedges

~~Net unrealized gains were $44 million for 2017 compared to~~The net unrealized ~~losses of $53 million for 2016. The~~ gain inon cash flow hedges during the ~~first quarter of 2017~~periods presented resulted from ~~the impact of~~ an increase in shorter term interest rates onas a result of actions by the Federal Reserve Bank.

We did not recognize any instrument-specific credit risk in our ~~cash flow hedges.~~

statements of comprehensive income as of March 31, 2018 due to our credit standing.

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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^{Federal Home Loan Bank of Chicago}

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

Statements of Condition


	March 31, 2017		December 31, 2016			March 31, 2018		December 31, 2017
Cash and due from banks, interest bearing deposits, Federal Funds sold, and securities purchased under agreement to resell	$	9,551	$	7,376		$	16,426	$	13,378
Investment securities	19,030		21,035			18,432		17,347
Advances	42,328		45,067			50,840		48,085
MPF Loans held in portfolio, net of allowance for credit losses	4,940		4,967			5,357		5,193
Other	260		247			336		352
Assets	$	76,109	$	78,692		91,391		84,355
Consolidated obligation discount notes	$	32,806	$	35,949		41,483		41,191
Consolidated obligation bonds	37,662		36,903			43,516		37,121
Other	1,223		1,145			1,329		1,191
Liabilities	71,691		73,997			86,328		79,503
Capital stock	1,282		1,711			1,579		1,443
Retained earnings	3,083		3,020			3,358		3,297
Accumulated other comprehensive income (loss)	53		(36		)	126		112
Capital	4,418		4,695			5,063		4,852
Total liabilities and capital	$	76,109	$	78,692		$	91,391	$	84,355

The following is an analysis of the above table and comparisons apply to March 31, 2018 compared to December 31, 2017.

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.

We increased the amounts of these liquid assets as demand for our advances and letters of credit increased.

Investment Securities

~~We are currently unable to make additional investments~~Investment securities increased as we purchased $2.6 billion in short term U.S. Government securities during the first quarter of 2018. This increase was partially offset by declines in MBS/ABS ~~under FHFA regulatory limits~~securities that matured or paid down and were not replaced, as ~~discussed~~noted in ~~Investments~~Results of Operations on page ~~12 in our 2016 Form 10-K.~~40.

Advances

Advances increased to the highest outstanding ~~decreased as of March 31, 2017 compared~~quarter end balance in our history due to ~~amounts outstanding as of December 31, 2016 as many depository members had an increased need~~strong market demand for ~~liquidity at December 31, 2016, which did not recur at March 31, 2017.~~

funding in our district. While advance demand ~~has remained~~is 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~~may 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 prior year end, as our purchases of new loans ~~during 2017 mostly~~ offset maturities and paydowns experienced in our MPF Loan portfolio. A majority 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 March 31, 2017, we acquired $241 million in new MPF Loans to our portfolio, compared to $132 million in the same period in 2016.

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

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^{Federal Home Loan Bank of Chicago}

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

Liquidity, Funding, & Capital Resources

Liquidity

For the period ending March 31, ~~2017,~~2018, 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 ~~2016~~2017 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 ~~$2.7~~$3.2 billion of total assets. As of March 31, ~~2017,~~2018, our overnight liquidity was ~~$11.1~~$24.0 billion or ~~15%~~26% of total assets, giving us an excess overnight liquidity of ~~$8.4~~$20.8 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 March 31, ~~2017,~~2018, we had excess liquidity of ~~$35.4~~$49.6 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 ~~$15.3~~$16.9 billion as of March 31, ~~2017.~~2018.

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 5five days and that during that period we will automatically renew maturing and called advances for all members except for very large, highly rated members. These additional requirements are more stringent than the contingency liquidity requirement discussed above and are designed to enhance our protection against temporary disruptions in access to the FHLB debt markets in response to a rise in capital markets volatility. As a result of this guidance, we 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 2118 in the Risk Factors section of our ~~2016~~2017 Form 10-K. In July the FHFA proposed to rescind certain minimum regulatory liquidity requirements for the FHLBs as further discussed in Legislative and Regulatory Developments on page 14 in our 2017 Form 10-K.

We are sensitive to maintaining an appropriate liquidity and funding balance between our financial assets and liabilities, and we measure and monitor the risk of refunding such assets as liabilities mature (refunding risk). In measuring the level of assets requiring refunding, we take into account their contractual maturities, as further described in the notes to the financial statements. In addition, we make certain assumptions about their expected cash flows. These assumptions include: calls for assets with such features, projected prepayments and scheduled amortizations for our MPF Loans held in portfolio, MBS and ABS investments. The following table presents the unpaid principal balances of (1) MPF Loans held in portfolio, (2) AFS securities, and (3) HTM securities (including ABS and MBS investments), by expected principal cash flows. The table is illustrative of our assumptions about the expected rather than contractual cash ~~flow~~flows 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 March 31, 2017			Available-for Sale			Held-to-Maturity
As of March 31, 2018									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	$	787		$	1,224		$	1,374	$	694	MPF Loans Held in Portfolio			$	2,553			$	1,316
After one year through five years	2,057			10,311			2,525		2,051			7,475				1,943
After five years through ten years	1,201			1,585			461		1,351			1,371				435
After ten years	834			725			174		1,189			531				118
Total	$	4,879		$	13,845		$	4,534	$	5,285		$	11,930			$	3,812

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 2422 of the Risk Factors section in our ~~2016~~2017 Form 10-K.

Table of Contents

^{Federal Home Loan Bank of Chicago}

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

Funding

Conditions in Financial Markets

~~The~~In March 2018, the Federal Open Market Committee (FOMC) ~~ended 2016 by delivering an interest rate increase raising~~raised the target range for the federal fund rate by 25 basis ~~points. In March, 2017, it raised~~points to a range of 1.50 percent to 1.75 percent. This is the sixth rate hike since the FOMC began to raise rates in December 2015. The markets anticipate another 25 basis point increase in the target range ~~again by another 25 basis points to 0.75 to 1.00 percent while signaling to~~for the ~~market that more~~federal fund rate ~~hikes will occur.~~

in the second quarter of 2018.

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

first quarter of 2018.

Cash flows from operating activities ~~with significant changes~~

Three months ended March 31, 2017 2016 Change
Net cash provided by (used in) operating activities -
Net income $ 73
$ 69
$ 4
Non cash (gain) loss on derivatives and hedging activities 96
(120 ) 216
Other (10 ) 42
(52 )
Net cash provided by (used in) operating activities $ 159
$ (9 ) $ 168



Three months ended March 31,	2018		2017
Net cash provided by (used in) operating activities	$	135	$	159

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 ~~change of $168 million~~decline in net cash provided by ~~(used in)~~ operating activities resulted primarily ~~resulted~~ from ~~the following:~~

~~The non-cash~~a noncash adjustment ~~attributable~~related to ~~the unrealized net changes in the fair value of our derivative instruments~~

derivatives and hedging activities.

Cash flows from investing activities with significant changes


Three months ended March 31,	2017			2016			Change			2018			2017
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)	$	(1,690	)	$	(780	)	$	(910	)
Securities held for investment (available-for-sale and held-to-maturity)	1,226			1,527			(301		)
Liquid assets (Federal Funds sold, securities purchased under agreements to resell, and interest bearing deposits)										$	(3,050	)	$	(2,492	)
Investment securities										(1,170		)	2,028
Advances	2,726			(1,456		)	4,182			(2,847		)	2,726
Other	32			156			(124		)	(165		)	32
Net cash provided by (used in) investing activities	$	2,294		$	(553	)	$	2,847		$	(7,232	)	$	2,294

Our investing activities ~~consists~~consist predominantly of liquid assets, securities held for investment, and advances. The ~~$2.8 billion change~~decline in net cash provided by (used in) investing activities primarily resulted from the following:

~~Liquid~~The increase in liquid assets ~~reflects a desire for~~reflect our increased liquidity needs to meet the ~~needs~~demands of our ~~members~~members.

Securities held for investment ~~reflects~~reflect the purchases made in our trading security portfolio in 2018. The rest of our investment security portfolio continued to paydown in ~~our investments portfolio~~2018.

Advances ~~reflects~~reflect the ~~recent decline~~increase in advances outstanding during ~~1Q 2017 while they increased during 1Q 2016~~

~~Table of Contents~~

~~(Dollars~~2018, as compared to the reduction in ~~tables~~advances outstanding in ~~millions except per share amounts unless otherwise indicated)~~

2017.

Cash flows from financing activities with significant changes


Three months ended March 31,	2017			2016			Change			2018		2017
Net cash provided by (used in) financing activities -
Consolidated obligation discount notes	$	(3,142	)	$	(1,280	)	$	(1,862	)	$	292	$	(3,142	)
Consolidated obligation bonds	750			1,360			(610		)	6,524		750
Capital stock	(426		)	77			(503		)	136		(426		)
Other	48			(61		)	109			143		48
Net cash provided by (used in) financing activities	$	(2,770	)	$	96		$	(2,866	)	$	7,095	$	(2,770	)

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 ~~$(2.9) billion change~~increase in net cash provided by (used in) financing activities primarily resulted from the following:

AAn increase in 2018 in the amount of our consolidated obligations used to fund the growth in our balance sheet, compared to 2017, when there was a net decrease in our consolidated ~~obligation debt outstanding, with a shift in funding to longer termed~~obligations outstanding. In first quarter of 2018, we relied primarily on consolidated obligation bonds ~~from shorter termed discount notes~~for our funding.

~~A reduction~~An increase in capital stock outstanding as ~~we implemented automatic weekly repurchases~~members purchased capital stock to support their advance borrowings.

Table of ~~members' excess capital stock~~Contents

^{Federal Home Loan Bank of Chicago}

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

Capital Resources

Capital Rules

Under ~~our~~the 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~~the Reduced Capitalization Advance Program (RCAP) as further discussed below. Each member’s activity stock requirement ~~remained~~remains at 4.5% for non-RCAP 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.

The Board may periodically adjust members’ membership stock requirement within a range of 0.20% to 2% of a member’s mortgage assets. Each member’s membership stock requirement is 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. The cap on each member’s membership stock requirement is now $5 million, which is less than 9.9% of the Bank’s total capital stock outstanding at December 31, ~~2016,~~2017, and is thus the operative cap during the remainder of ~~2017~~2018 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.

~~Table of Contents~~

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

~~For details on our capital stock requirement changes in 2016, see~~ ~~Capital Resource~~ ~~on page 54 of our 2016 Form 10-K.~~

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

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.

For details on our capital stock requirements under our Capital Plan during 2017, see Capital Resource on page 53 of our 2017 Form 10-K. 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.

For details on our minimum regulatory capital requirements see Note 11 - Capital and Mandatorily Redeemable Capital Stock (MRCS) to the financial statements in this Form 10-Q, and Minimum Capital Requirements on page F-44 of our 2017 Form 10-K.

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 as further discussed in~~ ~~Capital Resources~~ ~~on page 54 of our 2016 Form 10-K.~~provisions. As of March 31, ~~2017,~~2018, and December 31, ~~2016,~~2017, RCAP advances outstanding total ~~$22.8~~$24.7 billion to ~~147~~157 members and ~~$22.7~~$24.7 billion to ~~147 members.~~158 members, respectively.

Table of Contents

^{Federal Home Loan Bank of Chicago}

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

Repurchase of Excess Capital Stock

~~On January 26,~~Beginning in 2017, we began repurchasing all excess Class B2 membership stock on a weekly basis at par value, i.e., $100 per ~~share~~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, but remain subject to our regulatory requirements, certain financial and capital thresholds, and prudent business ~~practices~~practices.

~~Repurchase of excess capital stock held by members is subject to compliance with~~For details on the financial and capital thresholds ~~as detailed~~ relating to repurchases, see Repurchase of Excess Capital Stock on page 57 of our ~~2016~~2017 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 liabilities in our statements of condition.


	March 31, 2017		December 31, 2016			Change			March 31, 2018		December 31, 2017		Change
Capital Stock	$	1,282	$	1,711		$	(429	)	$	1,579	$	1,443	$	136
MRCS	301		301			—			311		311		—
Regulatory capital stock	1,583		2,012			(429		)	1,890		1,754		136
Retained earnings	3,083		3,020			63			3,358		3,297		61
Regulatory capital	$	4,666	$	5,032		$	(366	)	$	5,248	$	5,051	$	197

Capital stock	$	1,282	$	1,711		$	(429	)	$	1,579	$	1,443	$	136
Retained earnings	3,083		3,020			63			3,358		3,297		61
Accumulated other comprehensive income (loss)	53		(36		)	89			126		112		14
GAAP capital	$	4,418	$	4,695		$	(277	)	$	5,063	$	4,852	$	211

Accumulated other comprehensive income (loss) in the above table consists of changes in market value of various balance sheet accounts where the change is not recorded in earnings but are instead recorded in equity capital as the income (loss) is not yet realized. For details on these changes please see Note 12 - Accumulated Other Comprehensive Income (Loss) to the financial statements.

~~Table of Contents~~

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

Although we have had no OTTI year to date in ~~2017,~~2018, credit deterioration may negatively impact our remaining ~~private-label~~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 on page 16 of our ~~2016~~2017 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 April ~~25, 2017,~~24, 2018, our Board of Directors ~~increased the dividend declared per share on both sub-classes of capital stock. The Board~~ declared a ~~3.15%~~4.00% dividend (annualized) for Class B1 activity stock and a ~~1.05%~~1.60% dividend (annualized) for Class B2 membership stock based on our preliminary financial results for the first quarter of ~~2017.~~2018. This dividend, including dividends on mandatorily redeemable capital stock, totaled ~~$10~~$16 million and ~~will be paid~~is scheduled for payment on May 15, ~~2017.~~2018. The ~~higher~~Class B2 capital stock dividend onis intended to enhance the value of membership; the Class B1 ~~activity~~capital stock ~~in effect, lowers our members’~~dividend reduces the effective cost of ~~doing business with us.~~borrowing from the Bank and rewards our members who support the entire 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 see Retained Earnings & Dividends on page 57 in our ~~2016~~2017 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-44~~F-45 in our ~~2016~~2017 Form 10-K.

~~Critical Accounting Policies~~

~~For a detailed description of our Critical Accounting Policies and Estimates see page 61 in our 2016 Form 10-K.~~

~~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 subsequent to December 31, 2016.~~

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^{Federal Home Loan Bank of Chicago}

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

Risk Management - Credit Risk

Managing Our Credit Risk Exposure Related to Member Credit Products

Our credit risk rating system focuses primarily on our member's overall financial health and takes into account the member's asset quality, earnings, and capital position. For further information please see Member Credit Risk Ratings on page 6461 in our ~~2016~~2017 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, ~~$42.2~~$50.9 billion were advances (par value) and ~~$12.4~~$20.1 billion were letters of credit at March 31, ~~2017,~~2018, compared to ~~$45.0~~$48.0 billion and ~~$10.8~~$19.6 billion at December 31, ~~2016.~~2017.


	March 31, 2017									December 31, 2016									March 31, 2018					December 31, 2017
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	Credit Outstanding		Collateral Loan Value		Borrowing Members	Credit Outstanding		Collateral Loan Value
1-3	478	97	%	$	54,621	100	%	$	106,577	483	97	%	$	55,750	100	%	$	106,814	485	$	70,532	$	120,774	495	$	67,105	$	116,810
4	7	1	%	48		—	%	97		7	1	%	47		—	%	103		6	487		565		7	498		577
5	10	2	%	72		—	%	156		11	2	%	140		—	%	390		11	107		229		11	120		234
Total	495	100	%	$	54,741	100	%	$	106,830	501	100	%	$	55,937	100	%	$	107,307	502	$	71,126	$	121,568	513	$	67,723	$	117,621

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~~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~~credit losses due to borrower default on contractual principal and interest, which would result from the 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. For further details see

Loss Structure for Credit Risk Sharing Products on page 9 of our 2017 Form 10-K, and Credit Risk Exposure and 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.

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.

~~Table of Contents~~

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

~~The following table shows the status~~63 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 March 31, 2017
MPF Product Type Unpaid Principal Balance 90+ Days Delinquent
FLA ^a

PFI's CE Amount ^b
100 $ 277
1.94% 4.37% 3.82%
125 950
0.39% 1.39% 1.65%
Plus 1,613
4.11% 5.19% 1.74%
35 14
—% 0.35% 3.48%
Original 994
1.28% 1.02% 8.91%


^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~~2017 Form 10-K.

Mortgage Repurchase Risk

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, see Mortgage Repurchase Risk on page 6765 in our ~~2016~~2017 Form 10-K.

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^{Federal Home Loan Bank of Chicago}

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

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 securities since December 31, ~~2016.~~2017. For further details see Investment Securities by Rating on page 7067 in our ~~2016~~2017 Form 10-K. Except for ~~private-label~~private label MBS, ~~as noted below,~~ we have never taken an impairment charge on our investment securities.

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, ~~2016,~~2017, 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.

Unsecured Short-Term Investments ~~Credit Exposure~~

~~For~~See Unsecured Short-Term Investmentspage 70 in our 2017 Form 10-K 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 2016 Form 10-K.~~exposure.

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 March 31, 2017	AA		A		BBB		Unrated		Total
As of March 31, 2018											AA		A		BBB		Below BBB		Total
Domestic U.S.
Interest-Bearing Deposits	$	—	$	700	$	—	$	—	$	700	$	—	$	775	$	—	$	—	$	775
Fed Funds Sold	—		—		115		2		117		975		—		191		20		1,186
U.S. branches and agency offices of foreign commercial banks - Federal Funds sold:
Australia	2,000		—		—		—		2,000		1,500		—		—		—		1,500
Canada	—		1,300		—		—		1,300		—		1,900		—		—		1,900
France	—		300		—		—		300		—		500		—		—		500
Japan	—		700		—		—		700		—		700		—		—		700
Netherlands	—		600		—		—		600		—		650		—		—		650
Norway	—		600		—		—		600		—		600		—		—		600
Sweden	2,000		700		—		—		2,700		1,625		700		—		—		2,325
Total unsecured credit exposure	$	4,000	$	4,900	$	115	$	2	$	9,017	$	4,100	$	5,825	$	191	$	20	$	10,136

All ~~$9.0~~$10.1 billion of the unsecured credit exposure shown in the above table were overnight investments.

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^{Federal Home Loan Bank of Chicago}

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

Managing Our Credit Risk Exposure Related to Derivative Agreements

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.~~NRSROs. 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 Derivative 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			Noncash Collateral Pledged		Net Credit Exposure to Counterparties
As of March 31, 2017
As of March 31, 2018
Non-member counterparties -
Undercollateralized asset positions -
Bilateral derivatives -
BBB												$	20		$	(20	)	$	—	$	—	^a
Overcollateralized liability positions -
Bilateral derivatives -
A rated												(54		)	55			—		1
BBB												(70		)	70			—		—		^a
Cleared derivatives												(9		)	—			64		55
Non-member counterparties												(113		)	105			64		56
Member institutions												1			—			—		1
Total												$	(112	)	$	105		$	64	$	57

As of December 31, 2017
Nonmember counterparties -
Undercollateralized asset positions -
Bilateral derivatives -
BBB												$	8		$	(8	)	$	—	$	—	^a
Overcollateralized liability positions -
Bilateral derivatives -
AA rated	$	(11	)	$	11		$	—	$	—	^a	(52		)	52			—		—		^a
A rated	(46		)	47			—		1			(75		)	76			—		1
Cleared derivatives	(9		)	—		^b	78		69			(6		)	—			67		61
Non-member counterparties	(66		)	58			78		70
Member institutions	1			—			—		1
Nonmember counterparties												(125		)	121			67		63
Member counterparties												1			—			—		1
Total	$	(65	)	$	58		$	78	$	71		$	(124	)	$	121		$	67	$	64

As of December 31, 2016
Non-member counterparties -
Overcollateralized liability positions -
Bilateral derivatives -
AA rated	$	(60	)	$	60		$	—	$	—	^a
A rated	(57		)	60			—		3
Cleared derivatives	(206		)	198		^b	97		89
Non-member counterparties	(323		)	318			97		92
Member institutions	2			—			—		2
Total	$	(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.

2017 Wisconsin Act 340. On April 16, 2018, Wisconsin Governor Scott Walker signed into law the 2017 Wisconsin Act 340 which includes three provisions we believe will benefit the Bank and our Wisconsin members.

The first provision clarifies in the Wisconsin public deposit statute that FHLB letters of credit are acceptable collateral substitutes for public unit deposits. This clarification may help our Wisconsin bank and credit union members more easily obtain low-cost local funding.

The second provision provides protections for the Bank under state insurance insolvency law by limiting the stay authority applicable to the Bank and removing the Bank from the voidable preference provisions. These protections will allow our Wisconsin insurance company members to receive improved securities collateral values when borrowing from us.

The third provision allows the Wisconsin Department of Financial Institutions to share their confidential exam reports of state-chartered banks, thrifts, and credit unions with the Bank. Federal law has long required federal banking regulators to share their exam reports with the FHLBs. This provision will help our Wisconsin-chartered depository members receive similar collateral values as federally-chartered institutions when borrowing from us.

FHFA Proposed Amendments to Affording Housing Program ("AHP") Regulations. On March 14, 2018, the FHFA published a proposed rule to amend the operating requirements of the FHLBs’ AHP. The proposal is open for public comment through June 12, 2018. If adopted as proposed, among other updates, the AHP rule would:

require an FHLB to create its own scoring criteria that are designed to satisfy new regulatory outcome requirements, replacing the existing regulatory scoring guidelines;

permit an FHLB to voluntarily increase its AHP homeownership set-aside funding program to 40% of annual available funds (up from the current rule’s 35% annual limit);

increase the per-household set-aside grant amount to $22,000 with an annual housing price inflation adjustment (up from the current fixed limit of $15,000);

remove the retention agreement requirement for owner-occupied units;

further align AHP monitoring with certain federal government funding programs;

increase threshold requirements for certain project types, such as projects dedicated to homeless or special needs populations; and

authorize an FHLB using market research empirical data to create special targeted grant programs that would be a sub-set of the regular AHP competitive funding program.

The rule, as proposed, would represent a substantial overhaul of the existing regulation on the FHLBs’ AHP and fundamentally change the structure and methodology for awarding grants to affordable housing projects. The proposed rule would also increase AHP’s complexity and administrative burden.

The rule, as proposed, would require changes in the areas of operations, communications, and information systems of the FHLBs. It would also require increased Board and Affordable Housing Advisory Council action and increased communications and education with members and sponsors. We do not believe, the rule, if adopted substantially as proposed, would be material to our financial condition or results of operation, since, among other things, it would not increase the annual AHP funding requirement. However, we expect there will be increased costs related to implementing the rule requirements and making related adjustments to our systems. In addition, if the rule is adopted as proposed, the Bank expects a possible change to the types of projects that may be funded on a go-forward basis in the Bank’s district, with a commensurate impact on AHP sponsors and their respective communities.

Office of the Comptroller of the Currency ("OCC"), Federal Reserve Board ("FRB"), Federal Deposit Insurance Corporation ("FDIC"), Farm Credit Administration and FHFA Proposed Rule on Margin and Capital Requirements for Covered Swap Entities. On February 21, 2018, the OCC, FRB, FDIC, Farm Credit Administration, and the FHFA published a proposed amendment to each agency’s final rule on Margin and Capital Requirements for Covered Swap Entities (“Swap Margin Rules”) to conform the definition of “eligible master netting agreement” in such rules to the FRB’s, OCC’s and FDIC’s final qualified financial contract (“QFC”) rules. It also clarifies that a legacy swap would not be deemed to be a covered swap under the Swap Margin Rules if it is amended to conform to the QFC rules. The QFC rules previously published by the OCC, FRB, and FDIC require their respective regulated entities to amend covered QFCs to limit a counterparty’s immediate termination or exercise of default rights in the event of bankruptcy or receivership of the regulated entity or its affiliate(s).

Comments on the proposed rule were due by April 23, 2018. We continue to evaluate the proposed rule, but do not expect this rule, if adopted substantially as proposed, to materially affect our financial condition or results of operations.

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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.


	March 31, 2017						December 31, 2016						March 31, 2018						December 31, 2017
Scenario as of	Change in Market Value of Equity			Loss Limit			Change in Market Value of Equity			Loss Limit			Change in Market Value of Equity			Loss Limit			Change in Market Value of Equity			Loss Limit
-200 bp	$	241		$	(370	)	$	192		$	(370	)	$	156		$	(370	)	$	202		$	(370	)
-100 bp	95			(155		)	101			(155		)	56			(155		)	66			(155		)
-50 bp	40			(60		)	38			(60		)	31			(60		)	31			(60		)
-25 bp	18			(30		)	17			(30		)	17			(30		)	16			(30		)
+25 bp	(18		)	(30		)	(17		)	(30		)	(18		)	(30		)	(17		)	(30		)
+50 bp	(37		)	(60		)	(36		)	(60		)	(38		)	(60		)	(37		)	(60		)
+100 bp	(76		)	(155		)	(76		)	(155		)	(79		)	(155		)	(83		)	(155		)
+200 bp	(164		)	(370		)	(167		)	(370		)	(178		)	(370		)	(195		)	(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 March 31, 2017 $ (1 ) $ (2 ) $ (2 ) (14 ) $ 1
As of December 31, 2016 $ (1 ) $ (1 ) $ (2 ) (14 ) $ 1



				Option Risk						Basis Risk
	Yield Curve Risk			Implied Volatility			Prepayment Speeds			Spread to Swap Curve		Mortgage Spread
As of March 31, 2018	$	(1	)	$	(2	)	$	(2	)	(12	)	$	1
As of December 31, 2017	(1		)	(2		)	(2		)	(13	)	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 March 31, ~~2017,~~2018, our sensitivity to changes in implied volatility was $(2) million. At December 31, ~~2016,~~2017, our sensitivity to changes in implied volatility was ~~$(1)~~$(2) 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.

March 31, 2017 December 31, 2016
Down 200 bps Base Up 200 bps Down 200 bps Base Up 200 bps
2.5 1.4 1.8 2.3 1.3 1.8



	Duration of equity
Scenario as of	Down 200 bps	Base	Up 200 bps
March 31, 2018	2.1	1.2	1.8
December 31, 2017	2.9	1.2	2.2

As of March 31, ~~2017,~~2018, on a U.S. GAAP basis, our fair value surplus (relative to book value) was ~~$368~~$358 million, and our market value of equity to book value of equity ratio was ~~108%~~107%, compared to ~~$388~~$371 million and ~~108%~~107% at December 31, ~~2016.~~2017. 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.

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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, see Item 9A. Controls and Procedures on page 8481 of our ~~2016~~2017 Form 10-K.

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PART II - OTHER INFORMATION

Item 1. Legal Proceedings.

For a discussion of the litigation relating to ~~private-label~~private label MBS bonds purchased by the Bank, see Item 3. Legal Proceedings on page 3130 of our ~~2016~~2017 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 1816 in our ~~2016~~2017 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.

Item 5. Other Information.

None.

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Item 6. Exhibits.




~~10.1~~ 31.1	~~Federal Home Loan Bank P&I Funding and Contingency Plan Agreement, as amended and restated effective as of January 1, 2017, by and among the Office of Finance and each of the Federal Home Loan Banks~~^a

~~10.2~~	~~Federal Home Loan Bank of Chicago President and Executive Team Incentive Compensation Plan, as amended and restated effective January 1, 2017~~

~~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

^a~~Filed as Exhibit 10.7 with our Form 10-K on March 9, 2017, SEC File No.: 000-51401~~

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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.

CE Amount: A PFI's assumption of credit risk on conventional MPF Loan products held in an MPF Bank's portfolio that are funded by, or sold to, an 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 CE Fee may be performance based.

CFTC: Commodity Futures Trading Commission

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.

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.

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

NRSRO: Nationally Recognized Statistical Rating Organization.

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. 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.

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.

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:	May 8, ~~2017~~2018	(Principal Executive Officer)

		/s/ Roger D. Lundstrom
		Name:	Roger D. Lundstrom
		Title:	Executive Vice President and Chief Financial Officer
Date:	May 8, ~~2017~~2018	(Principal Financial Officer and Principal Accounting Officer)

S-1



	As of March 31, 2017
MPF Product Type	Unpaid Principal Balance		90+ Days Delinquent	FLA ^a	PFI's CE Amount ^b
100	$	277	1.94%	4.37%	3.82%
125	950		0.39%	1.39%	1.65%
Plus	1,613		4.11%	5.19%	1.74%
35	14		—%	0.35%	3.48%
Original	994		1.28%	1.02%	8.91%