Editor’s update: On Friday, Oct. 12, following the publication of this article, the CTFC issued a letter pledging it would take no enforcement actions regarding foreign exchange forwards and swaps through year-end pending the Treasury Secretary’s review of appeals for permanent relief.
Dodd-Frank rules that took effect on Friday and meant to make the $648 trillion swaps market more transparent would also have the perverse effects of denying higher income to yield-starved investors and keeping taxpayers on the hook for mortgage losses.
That is why industry representatives of asset-backed securities are looking to the Commodity Futures Trading Commission (CFTC) to provide an exemption from rules that would render their bonds “commodity pools” subject to CFTC supervision effective Friday.
“I’d be shocked if [the exemption] didn’t happen,” said Robert Bostrom (left), a securities lawyer with SNR Denton in New York, who offered no prediction as to the precise timing of such a decision.
“The policy imperative is so strong,” Bostrom told AdvisorOne in an interview. “The administration, Congress, the private sector – everyone wants the risk of loss shifted to the private sector. The agencies are trying to do exactly what they’re being told to do by the administration and Congress, but they bump into the [Dodd-Frank] law.”
Bostrom, who has been credited with guiding Freddie Mac through the financial crisis as its former general counsel, says the Federal Housing Finance Agency has found a way to limit the role of government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac in the housing market through the issuance of risk-sharing bonds.
But embedded in these bonds are derivative instruments including interest-rate swaps that protect investors from funding-cost spikes.
Dodd-Frank rules intended to lower risk in the financial system would subject even these transactions to strict capital, margin, recordkeeping and trading requirements that make it uneconomic for Fannie Mae and Freddie Mac to issue bonds to the public.