Credit default swaps may be unwound
Investors may be forced to unwind contracts protecting $1.47 trillion of Fannie Mae and Freddie Mac bonds against default after the US government seized control of the companies.
By Bloomberg |
SYDNEY: Investors may be forced to unwind contracts protecting $1.47 trillion of Fannie Mae and Freddie Mac bonds against default after the US government seized control of the companies in a bid to bolster the housing market.
Thirteen ���major��� dealers of credit-default swaps agreed ���unanimously��� that the rescue constitutes a credit event triggering payment or delivery of the companies��� bonds, the International Swaps and Derivatives Association said. Market makers will discuss how to settle contracts on Monday.
���This is a big deal,��� said Sarah Percy-Dove, head of credit research at Colonial First State Global Asset Management in Sydney. ���The market is not experienced at settling a credit event for a name of this size, so it is a bit of an unknown.���
A settlement of credit-default swaps would probably be the biggest attempted in the market���s decade-long history because Fannie and Freddie are members of the benchmark index of US credit risk, Percy-Dove said. The index comprises the most frequently traded contracts in the US.
Credit-default swaps are financial instruments based on bonds and loans that are used to speculate on a company���s ability to repay debt. They pay the buyer face value in exchange for the underlying securi-ties or the cash equivalent should a borrower fail to adhere to its debt agreements. An increase indicates deterioration in the perception of credit quality; a decline, the opposite.
Treasury secretary Henry Paulson and Federal Housing Finance Agency director James Lockhart placed Freddie and Fannie in a gov-ernment-operated conservatorship, ousting their chief executives and eliminating their dividends. The Treasury may purchase up to $200 billion of stock in the firms to keep them solvent.
Monday���s conference call will determine whether enough dealers agree the Treasury���s action constitutes a credit event, Louise Marshall, spokeswoman for ISDA, said in a phone interview from New York to-day.
Thirteen ���major��� dealers of credit-default swaps agreed ���unanimously��� that the rescue constitutes a credit event triggering payment or delivery of the companies��� bonds, the International Swaps and Derivatives Association said. Market makers will discuss how to settle contracts on Monday.
���This is a big deal,��� said Sarah Percy-Dove, head of credit research at Colonial First State Global Asset Management in Sydney. ���The market is not experienced at settling a credit event for a name of this size, so it is a bit of an unknown.���
A settlement of credit-default swaps would probably be the biggest attempted in the market���s decade-long history because Fannie and Freddie are members of the benchmark index of US credit risk, Percy-Dove said. The index comprises the most frequently traded contracts in the US.
Credit-default swaps are financial instruments based on bonds and loans that are used to speculate on a company���s ability to repay debt. They pay the buyer face value in exchange for the underlying securi-ties or the cash equivalent should a borrower fail to adhere to its debt agreements. An increase indicates deterioration in the perception of credit quality; a decline, the opposite.
Treasury secretary Henry Paulson and Federal Housing Finance Agency director James Lockhart placed Freddie and Fannie in a gov-ernment-operated conservatorship, ousting their chief executives and eliminating their dividends. The Treasury may purchase up to $200 billion of stock in the firms to keep them solvent.
ADVERTISEMENT
Monday���s conference call will determine whether enough dealers agree the Treasury���s action constitutes a credit event, Louise Marshall, spokeswoman for ISDA, said in a phone interview from New York to-day.
Download
The Economic Times Business News App for the Latest News in Business, Sensex, Stock Market Updates & More.
The Economic Times Business News App for the Latest News in Business, Sensex, Stock Market Updates & More.
Download
The Economic Times News App for Quarterly Results, Latest News in ITR, Business, Share Market, Live Sensex News & More.
The Economic Times News App for Quarterly Results, Latest News in ITR, Business, Share Market, Live Sensex News & More.
ADVERTISEMENT
