Fannie Mae and Freddie Mac will begin using a clearing house to trade their interest-rate swaps by year's end, according to a Wall Street Journal report. The nice thing about trading through a clearing house is that it shields counterparties from losses that would otherwise result if a firm can't cover its derivative obligations. If such potential losses occur, then the other firms who participate in the clearing house pay for what the troubled firm can't. Is this good news for taxpayers? Probably not.
It sure seems like it would be through WSJ's report:
For years, the mortgage firms have purchased the swaps from Wall Street banks to hedge their huge mortgage portfolios against rate swings. The banks, such as Goldman Sachs Group Inc. and J.P. Morgan Chase & Co., make money by structuring the deals and selling them to clients.
With so-called central clearing, banks play a similar role but operate under the umbrella of a clearinghouse that guarantees the trade for both parties in case one side defaults. The guarantee is something that many felt was badly missing during the financial crisis. Then, markets seized up amid fears that some firms would falter and be unable to make good on their swap trades.
The WSJ appears to be indicating that, somehow, Fannie and Freddie will save money now by using a clearing house. The grounds for this assertion are unclear. They will continue to have to pay structuring and placement fees to banks when they create new swaps. In fact, these swaps will likely be more even costly if traded through a clearing house, because Fannie and Freddie will have to put up additional capital in order to use the clearing house.