Fannie Mae, Freddie Mac Will Clear Their Swaps -Overseer

An official at the Federal Housing Finance Agency said Thursday that Fannie Mae (FNM) and Freddie Mac (FRE) will clear a large portion of the swaps on their books "in months" even if Congress fails to pass a bill to mandate central clearing.

"If there is no legislation, Fannie Mae and Freddie Mac are still going to go to central clearing," said Martha Tirinnanzi, the head of a clearing workgroup in the FHFA's office of market risk.

"We see that as the outcome of 2008. It is the responsible thing to do and the right thing to do. It is the right thing to do for our country and it is the right thing to do for Fannie Mae and Freddie Mac," she added during a conference held by the Futures Industry Association.

The FHFA is the regulator of Fannie and Freddie, the two large government-controlled suppliers of funding for home mortgages.

Both government-sponsored enterprises are major players in the interest rate swap market, which they use as a hedging tool against interest rate fluctuations.

Tirinnanzi said that both Freddie and Fannie each hold a notional value of between $700 billion to $800 billion in interest rate swap contacts that are "plain vanilla" and likely eligible for clearing.

Tirinnanzi said in the past few months, Fannie and Freddie have been "kicking the tires" in testing out various interest rate swap clearing platforms to see which would be the right fit.

They have tested clearing using a "shadow portfolio" of swaps with the new Nasdaq-owned International Derivatives Clearing Corp., as well as London-based LCH.Clearnet and a clearing platform still in a development phase owned by CME Group Inc. (CME). A final decision on which clearinghouse will be primarily used for Fannie and Freddie hasn't yet been decided.

A move toward clearing by two of the interest rate swap market's biggest players could potentially help shift the debate on the regulatory overhaul for over-the-counter derivatives legislation.

The head of the U.S. Commodity Futures Trading Commission, who spoke earlier Thursday at the conference, is calling for major new regulations, opposed largely by Wall Street, that would force standard over-the-counter products onto trading platforms and through clearinghouses, which guarantee trades.

Tirinnanzi said the goal is ultimately to "remove counterparty credit risk" off the books of the GSEs and the FHFA is in agreement on the kinds of regulations that CFTC Chairman Gary Gensler is advocating.

"I think that when Fannie Mae and Freddie Mac begin executing and moving those derivative trades into central clearing, that it will be a signal to the sell-side that this market has changed," she said. "We've got the largest swap participants in the United States that are saying this is the beginning of the end of the OTC world."

-By Sarah N. Lynch, Dow Jones Newswires; 202-862-6634; sarah.lynch@dowjones.com.

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