Plans for issuance of a new type of mortgage security from Fannie Mae and Freddie Mac, the so-called "risk sharing" bond ,  could become a casualty of the Oct. 12 changes to how the  U.S. Commodity Futures Trading Commission (CFTC) defines "commodity pools".

The "risk sharing" arrangement, first outlined by the FHFA in Oct. 2011, would allow GSEs to take losses only after the riskiest bonds in the capital structure (expected to be 5% to 10% in thickness) are first absorbed by private investors in GSE MBS issuances, according to an Oct.28, 2011, online  research report published by the Aite Group.  In addition, the first-loss bonds would give risk-seeking investors a chance to participate in MBSs that would otherwise be unavailable to them.  

The bonds would appeal to investors because they offer higher yields than conventional mortgage backed securities and would also have the backing of the GSEs to guarantee payment even in the event of underlying defaults.

However, Dodd-Frank amended the Commodities and Exchange Act to include a new definition of commodity pools to explicitly include swaps. The GSE "risk sharing" bonds might be regarded as derivative instruments under Dodd-Frank rules, according to an e-mailed statement from SNR Denton.

The mortgage markets, according to the statement, are hoping that the CFTC will provide some exemption for the risk-sharing bonds before it issues determinations this week of what constitutes a "commodity pool."   

ASR reported on Sept. 27, that the change in definition has created for other asset-backed securities that are structured with swaps. The sponsor or servicer of these ABS transactions would be responsible for registering as a commodity pool operator.

Securitizations today are eligible to enter into interest rate, currency and other types of swaps under the Commodity Exchange Act. Credit card securitizations, for example, are commonly structured to include interest rate or currency swaps.

Often, the securitization vehicle enters into swaps to hedge against fluctuations in interest rates or exchange rates or to tailor returns for specific classes of investors.





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