FHFA Sees Swaps Clearing In Months, Sees Exchange Potential
June 04 2010 - 1:07PM
Dow Jones News
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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