Standard & Poor's expects the U.S. Treasury's announcement that Fannie Mae and Freddie Mac had been placed in conservatorship by the Federal Housing Finance Agency, and S&P's resulting rating actions on these entities  to have a minimal rating impact on U.S. and European synthetic CDO transactions, the rating agency said this afternoon.

According to the International Swaps and Derivatives Association (ISDA), the
U.S. Treasury's announcement on Sept. 7 that both GSEs have been placed in conservatorship by their regulator has triggered a bankruptcy credit event, as defined in section 4.2(f) of both the 1999 and 2003 ISDA Credit Derivative Definitions.

The CDS that underlie synthetic CDO deals generally look to the ISDA Credit Derivative Definitions to determine what constitutes a credit event for a given reference obligation in a CDO.

Even though the ISDA protocol that will determine the recovery rate to be used for Fannie Mae and Freddie Mac CDS contracts is not expected to take place until early October, the rating agency's expectation for a minimal rating impact on U.S. and European synthetic CDOs is based on preliminary indications of high expected ultimate recovery rates for the swaps. 

The rating agency noted that a limited number of synthetic CDO transactions have been structured using a fixed recovery rate assumption for the underlying CDS, and that the credit event could have a negative rating impact on these deals.

A significant number of synthetic CDO deals reference Fannie Mae and Freddie Mac, according to S&P. A total of 1,531 U.S. and European deals making up 2,104 rated tranches have exposure to these entities. 

The rating said it will soon issue a separate press release outlining exposure to Fannie Mae and
Freddie Mac among synthetic CDOs issued in the Asia-Pacific region.

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