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Fannie, Freddie Face Swaps Trading Shift

The regulator for Fannie Mae and Freddie Mac is about to enforce a rule that will help to de-risk the mortgage giants' interest-rate exposure, but may hurt banks that sell hedging products.

Updated with statement from FHFA spokeswoman, information about CFTC's stance on the issue.



) -- The regulator for

Fannie Mae



Freddie Mac


is moving toward a requirement that will help to de-risk the mortgage giants' interest-rate exposure, but may also hurt big banks that sell hedging products.

The Federal Housing Finance Agency would like the firms to begin using a clearinghouse to trade interest-rate swaps, a derivative product that hedges against the risk of unexpected interest-rate swings. Fannie and Freddie now buy and sell swaps privately with big banks, in an "over the counter" fashion.

While there was chatter that the FHFA might require the firms to begin clearing at some point in 2010, people close to the situation say there is no definitive timeline and mandated clearing is not imminent. Martha Tirinnanzi, who chairs the FHFA's clearinghouse working group, first mentioned the plan at a conference on March 11. She indicated that big banks like

Bank of America

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have been cooperative with the agency in developing the clearinghouse.

On Tuesday, an FHFA spokeswoman declined to provide any additional details, but provided the following statement: "FHFA has been examining the issue of central clearing for some time and has asked the GSEs to explore it as well. We believe that centralized clearing could improve counterparty credit risk management for many users of derivatives. FHFA continues to look at all of the options available in this area and the issues that arise from various legislative proposals."

Spokesmen from Fannie Mae and Freddie Mac declined to provide additional details, and directed a reporter back to the FHFA.

A clearinghouse would lessen the risk of trades by guaranteeing both sides in case of default. But it would also make pricing more competitive and transparent, something that could cut into revenues and margins at banks that provide the swaps.

The FHFA's move is separate from the broader

derivatives reform being hammered out in Congress. Commodity Futures Trading Commission Chairman Gary Gensler has also indicated that his agency plans to move toward mandated clearing of OTC derivatives ahead of congressional reform.

There were $341.9 trillion in outstanding interest-rate swaps worldwide as of June 2009, according to the Bank for International Settlements, though the notional value is far greater than actual risk exposure. The biggest players in the overall derivatives market are

JPMorgan Chase

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, Bank of America, Citigroup,

Goldman Sachs

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Morgan Stanley

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, which control 97% of it, according to the Office of Comptroller of the Currency.

In an open clearinghouse, market share could potentially become more spread out as smaller players step in with more competitive offers. It's unlikely that the dominant banks will lose much of their business, however, since they have existing relationships with counterparties, and act as brokers as well. More likely is that their margins will shrink as competition grows and the cost of operations rises.


Written by Lauren Tara LaCapra in New York