FHFA Sees Swaps Clearing In Months, Sees Exchange Potential

A senior executive at the Federal Housing Finance Agency said Friday that mortgage giants Fannie Mae and Freddie Mac expect to begin clearing interest-rate swap transactions in the coming months, with an exchange-like platform for the market possible in a year.

The regulator of the mortgage giants also anticipates using several broker-dealers to handle the tremendous amount of business driven by the mortgage giants, which represent the biggest customer portfolios of interest-rate swaps.

Martha Tirinnanzi, chairwoman of FHFA's clearing house working group, said Friday that the entities are looking at routing interest-rate swap transactions through multiple clearing facilities in a bid to avoid a repeat of late 2008, when swap markets froze around the world.

Clearinghouses are used in stock, futures and options markets to guarantee trades, but only in the past year have dealer banks begun clearing complex, over-the-counter derivatives transactions.

The credit crisis highlighted counterparty credit issues related to products like credit default swaps and other off-exchange markets, prompting a regulatory push for more clearing.

Tirinnanzi said that the FHFA has been working on central clearing for Fannie and Freddie's swap books for almost a year, first with the Nasdaq OMX Group Inc. (NDAQ)-backed International Derivatives Clearing Group.

She said talks soon followed with London-based LCH.Clearnet, which has cleared interest-rate swaps for nearly a decade, and CME Group Inc. (CME), operator of the dominant interest-rate futures market.

Fannie and Freddie have been test-clearing across the planned platforms with about $1 billion worth of notional contract value, she said.

"We're starting to draw conclusions about what their capabilities are, and who we can begin to start the process with of executing trades," Tirinnanzi said.

Because the mortgage insurers were likely to use several brokers to handle the large volume of business, she said that it's equally likely that Fannie and Freddie will wind up using multiple clearinghouses.

A year from now, "we may see an exchange develop for swaps," Tirinnanzi said. Such a platform -- strongly resisted by dealer banks, which control the majority of trade in over-the-counter markets -- would provide greater price transparency, Tirinnanzi said.

The push for Fannie and Freddie to clear their swap transactions was prompted by the failure of Lehman Brothers Holdings in September 2008, which caused over-the-counter markets to "seize up," she said.

With the asset liability of the mortgage entities representing trillions of dollars, "we can't afford to go through that again," said Tirinnanzi.

-By Jacob Bunge, Dow Jones Newswires; 312 750 4117; jacob.bunge@dowjones.com

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