Freddie Mac Shows Derivatives Watchdog Needed-FIA
Tue June 10, 2003 10:47 AM ET
By George Matlock
reuters.com
LONDON (Reuters) - A management shake-up at U.S. mortgage financier Freddie Mac over the way it accounted for derivatives highlights the need for a watchdog for the entire futures and options industry, a senior trade body official said on Tuesday.
John Damgard, president of the U.S.-based Futures Industry Association, told Reuters he favored better cooperation between regulators to ensure that the reputation of derivatives was protected.
"If derivatives are proved to be part of the problem at Freddie Mac at all, then they are to do with accounting and disclosure, not likely the instruments themselves," Damgard added during the International Derivatives Conference in London.
"We need a regulator that covers the entire industry. Despite better regulation in recent years, there remains a need for more effective regulation."
Freddie Mac, the largest mortgage lender after Fannie Mae, on Monday dismissed its President and Chief Operating Officer David Glenn for not fully cooperating with a review of the company's earnings statements from 2000 to 2002.
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The company said in March it was restating its results because of a change in the way it accounts for derivatives.
As one of the biggest buyers of home mortgages and a huge issuer of mortgage-backed securities, Freddie Mac uses many swaps and related derivatives to manage the interest rate risk in its massive portfolio.
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Freddie Mac and Fannie Mae together had about $1.4 trillion in outstanding interest rate derivatives at the end of 2001.
Freddie Mac is regulated by the Office of Federal Housing Enterprise Oversight (OFHEO), a agency reporting to the U.S. Treasury Department.
James Newsome, Chairman of the U.S. watchdog Commodities & Futures Trading Commission (CFTC), said his authority did not extend to Freddie Mac nor its sister body Fannie Mae, but that regulation would tighten the more Freddie Mac moved into derivatives activity and into view at the CFTC.
"As we understand it, Freddie Mac's derivatives trading activity is not large enough presently, but were it to grow, then Freddie Mac would appear on our radar and we would happily cooperate and pass on relevant regulatory information about such transactions to Freddie Mac's regulator," Newsome told Reuters.
Newsome added that he had no reservation about agencies such as Freddie Mac using "risk management tools in a prudent manner to protect their portfolios."
Some delegates at the conference told Reuters that there was still scope for better cooperation between regulators.
"I might not be in favor of imposing yet another regulator on the derivatives industry, said John Mathias, director of financial futures and options at Merrill Lynch International in London.
"But I would suggest perhaps a link between the main regulators of the industry, the CFTC and the Securities and Exchange Commission."
One New York-based inter-dealer broker said he would favor a two-year deadline being imposed on the CFTC and SEC to cooperate fully or face the threat of a new body being formed above them in the regulatory hierarchy.
"It may be time to get tough with the regulators, and not only the market participants," he said. |
