August 22, 2008 / 5:21 PM / 11 years ago

Fannie, Freddie derivatives trade normally

NEW YORK (Reuters) - Panicked investors are dumping shares of Fannie Mae FNM.N and Freddie Mac FRE.N, but derivatives trading is likely to continue normally with two of the largest players in the market, a trade group official and a bank risk manager said.

The corporate logo for Freddie Mac is seen at its headquarters building in McLean, Virginia, July 23, 2008. REUTERS/Larry Downing

Shares of the two ailing government-sponsored enterprises have plummeted in recent weeks as shareholders braced for a possible nationalization.

However, what’s bad for shareholders will likely have minimal impact on either debt holders or banks that have derivatives trades with Fannie Mae or Freddie Mac, said one risk manager.

“To the extent that they’re nationalized, they’re not going to default on their debt or derivative obligations,” said Robert McWilliam, an official in counterparty exposure management at the Royal Bank of Scotland.

“I’d be pretty relaxed about that,” he added, explaining the bank has collateral arrangements with the entities and its positions are margined.

The two largest mortgage finance companies are among the largest users of interest-rate swaps. These derivatives can be used to lock-in interest rate expectations and help the two manage the risks in their combined portfolio of mortgages, which totals more than $1 trillion.

Bob Pickel, chief executive of trade organization the International Swaps and Derivatives Association, added McWilliam’s view is held widely.

“I think most parties would look at it as the U.S. government stepping in and guaranteeing the obligations of Fannie and Freddie,” Pickel said.

“To that extent a counterparty to a derivatives contract with Fannie and Freddie would take great comfort in that,” Pickel added.

Both Fannie and Freddie have posted large write-downs on their mortgage portfolios as a result of the credit crisis and record home loan defaults.

Fannie Mae has derivatives contracts referencing more than $1.14 trillion of fixed income instruments, while Freddie Mac holds contracts referencing more than $1.3 trillion.

Reporting by Elinor Comlay; Editing by Tom Hals

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