Summit News

CME working with Fannie, Freddie on swaps

NEW YORK (Reuters) - Exchange operator CME Group Inc CME.O is working with mortgage lending giants Fannie Mae FNM.N and Freddie Mac FRE.N to design a clearing facility for the $414 trillion global market for interest-rate swaps.

“We have been working with them to help structure our cleared interest-rate swap offering,” CME CEO Craig Donohue said on Tuesday at the Reuters Global Exchanges and Trading Summit in New York. “I imagine that we, among others, will be competing to try to win business from them as we introduce our interest-rate swaps clearing solution.”

Fannie Mae and Freddie Mac, which were seized by the U.S. government in September 2008, will start moving their swaps to centralized clearing within months, their federal regulator said earlier in March.

Regulators want to shift more over-the-counter derivatives -- seen by some as a cause of the recent financial crisis -- into clearinghouses where they are seen as posing less of a systemic risk.

Fannie and Freddie’s combined $3 trillion portfolio makes them the biggest swaps holders in the United States.

“That’s a big opportunity for us,” said Donohue, adding that CME was also working with a broad range of other market participants. “Fannie and Freddie are significant customers of CME interest rate products and typically use our Treasury note and bond and interest-rate products to hedge interest rate risk.”

Using CME to clear interest-rate swaps would also provide additional capital efficiencies, he said.

CME has faced an uphill battle against rival IntercontinentalExchange ICE.N in providing clearing for credit default swaps, the first over-the-counter derivative deemed by regulators to be ripe for clearing.

ICE has cleared more than $6.4 trillion of the swaps since it began providing the service little more than a year ago. CME has done a fraction of that.

“It has been a challenge for us,” Donohue acknowledged, of CDS clearing. “Our biggest focus is on the rates swaps market.”

While ICE has not said whether it will pursue clearing of interest-rate swaps, CME will face at least two competitors for Fannie Mae and Freddie Mac’s business.

LCH.Clearnet, Europe’s largest independent clearinghouse, dominates clearing of interest-rate swaps between dealers and since December has offered clearing for hedge funds and other so-called buy-side firms.

CME will also compete with Nasdaq OMX Group's NDAQ.O majority-owned clearinghouse, the International Derivatives Clearing Group.

Asked if CME would win the race against rivals to clear interest-rate swaps, Donohue said it was too soon to tell. He also declined to say whether CME would be ready to clear interest-rate swaps in the time frame laid out by Fannie Mae and Freddie Mac.

“It’s hard to declare a front runner before the race has begun,” he said.

Reporting by Jonathan Spicer and Ann Saphir; editing by John Wallace