Hedging: Freddie Mac Adds Agency Futures to Its Menu of Hedging Tools.(Brief Article)

Freddie Mac announced that it plans to engage in the trading of agency debt futures for hedging purposes, a move that may help the giant mortgage secondary market player limit its "basis risk."

To date, Freddie Mac said it has refrained from using futures contracts on agency debt issues to allow the nascent market time to mature and develop liquidity. But last month, Freddie Mac officials said they believe that agency debt futures contracts have developed sufficiently to support limited participation for hedging purposes.

Louise Herrle, vice president and treasurer of Freddie Mac, said that by making a public announcement about the agency's participation in the futures market for its own debt issues, Freddie Mac hopes to eliminate any concern that the agency could dominate or manipulate the market. In addition, Freddie Mac is placing a self-imposed limit on the extent of its participation in the market.

Freddie Mac said it will limit its aggregate position to the lesser of 10% of the open interest in any contract in which it trades or any applicable position limits established by the relevant exchange.

Over the past year, the amount of agency debt outstanding has grown as both Fannie Mae and Freddie Mac expand their portfolios of mortgage holdings. Ms. Herrle said the development of agency debt futures "is another sign of the liquid and efficient secondary market in agency debt."

She said Freddie Mac hopes its participation will only strengthen the liquidity and market acceptance for futures contracts on agency debt.

"We definitely have an interest in seeing this contract succeed," she told MSN.