Fannie Mae and Freddie Mac’s Credit Default Swaps Auction May Buttress Case Against Regulation of Derivatives

Amid renewed pressures from policy makers to increase regulatory oversight of the $55 trillion over-the-counter credit default swaps market, on Monday, October 6, buyers and sellers of Fannie Mae and Freddie Mac’s debt obligations successfully settled their counterparty exposure in an auction administered by Creditex and Markit in partnership with 13 major credit derivatives dealers.  Auctions have emerged as one of the most efficient methods of settling rights and obligations of parties in the CDS market upon the occurrence of major credit events.  According to market observers, the Fannie and Freddie auction, as well as the low-priced Lehman auction, are a clear sign that CDS markets can operate in an orderly fashion in the midst of the most pervasive financial crisis in decades.  “The process has been very orderly and the CDS market continues to function and provide liquidity,” an ISDA official told the Hedge Fund Law Report.

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