Fannie Mae, Freddie Mac Touch Off Swaps Fight

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The regulator of Fannie Mae and Freddie Mac is on the cusp of making big changes to the market for interest-rate swaps, in a move that could potentially cut into Wall Street firms' revenues and generate new business for some firms that run exchanges.

The Federal Housing Finance Agency, which oversees the government-owned mortgage giants, expects them to start using a clearinghouse to trade the swaps by year's end, according to people familiar with the matter.

The impending change away from private "over-the-counter" contracts has generated behind-the-scenes meetings among officials at Fannie and Freddie, the banks that now command their business and the exchanges that want it, according to the people. Each camp is posturing to protect its interests amid the shift.

Fannie and Freddie are among the biggest buyers of interest-rate swaps. The swaps are two-way derivative contracts in which one party pays a fixed rate in exchange for a rate that floats along with the market.

There were $342 trillion of interest-rate swaps outstanding as of June 2009, according to the Bank for International Settlements. Fannie Mae and Freddie Mac have more than $2 trillion of interest-rate swaps on their books, according to public securities filings. Market experts say that share, while under 1%, is among the biggest if not the biggest held by any participant.

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