Low trading agency debt may threaten CDS settlement
NEW YORK, Sept 12 (Reuters) - Credit derivative players are holding calls on Friday to determine if some Fannie Mae (FNM.N) and Freddie Mac (FRE.N) debt trading with low market values may be used to settle hundreds of billions of dollars in contracts triggered by their takeover, traders and analysts said.
If the debt is agreed to be backing for the credit default swap contracts it could push down how much the derivatives recover, creating large losses for sellers of protection.
The International Swaps and Derivatives Association (ISDA), a trade group, is hosting calls with industry participants on Friday to determine whether some principal-only agency debt can be used to settle the contracts, said people familiar with the calls who declined to be identified.
ISDA did not immediately return calls for comment.
The principal-only debt is trading significantly below its par value, in some cases in the region of 30 cents on the dollar, said market participants.
If the debt is included in an auction that will be set to the value of Fannie Mae and Freddie Mac's credit default swaps it could push down the amount the contracts recover, which had been expected to be near par.
Total protection written on the agencies debt is estimated to total hundreds of billions of dollars, though the private nature of the market makes it hard to estimate exact volumes.
Credit default swaps are used to hedge against the risk of a borrower defaulting on their debt, or to speculate on a company's credit quality.
The government takeover of the agencies on Sunday triggered terms in the derivative contracts that require them to be paid out, even though the $1.6 trillion of outstanding agency debt will continue to be repaid. (Reporting by Karen Brettell and Dan Wilchins; Editing by Leslie Adler)
