NEW YORK (AP) â€” The regulator that oversees mortgage giants Fannie Mae and Freddie Mac expects the pair to start using a clearinghouse to hedge against interest-rate changes, according to a Wall Street Journal report.
The Federal Housing Finance Agency will force the mortgage financiers to trade interest-rate swaps through central clearinghouses instead of through private deals, according to anonymous sources cited by the Journal.
Interest-rate swaps are derivatives contracts that companies complete to minimize potential losses when interest rates fluctuate. The deals are especially important to companies with large loan portfolios that are susceptible to changing rates.
There were $341.886 trillion in outstanding interest-rate swaps worldwide as of June 2009, according to the Bank for International Settlements.
Using a clearinghouse to complete trades would essentially provide a safety net for the deals by guaranteeing them should either of the companies involved in the trades default. It would also add a layer of oversight and transparency that regulators argue was sorely lacking during the credit crisis.
Risky derivatives trading in recent years was considered one of the biggest reasons for the collapse of the credit markets because there were no guarantees as many derivative contracts lost value or defaulted. The private deals also meant regulators could not gather data to determine if companies were taking excessive risks.
The Journal said Fannie and Freddie moving to clearinghouses could cut margins on the deals for banks, such as Goldman Sachs Group Inc. and JPMorgan Chase & Co., that typically structure the deals and then sell them to clients. Companies that operate central clearinghouses, such as Nasdaq OMX Group Inc. and CME Group Inc., would benefit from the new business.