Freddie Mac CDS payout

WASHINGTON - JULY 11:     U.S. Secretary of En...Image by Getty Images via Daylife Wow - Bloomberg is reporting that Investors may be forced to unwind contracts protecting $1.47 trillion of Fannie Mae and Freddie Mac bonds against default after the U.S. government seized control of the companies in a bid to bolster the housing market.

13 major CDS dealers agreed unanimously that the rescue constitutes a credit event triggering payment or delivery of the companies' bonds, the Market makers for the privately traded contracts will discuss how to settle them in a conference call at 11 a.m. in New York.

This will be an enormous settlement undertaking without the aid of a centralised infrastructure to orchestrate it. In simple terms, buyers of CDS will either be required to deliver the bonds to the CDS sellers in exchange for the par value of the bonds in cash or the seller will pay the buyer the difference between the par value and the market price of the bonds.

Fannie Mae 5yr CDS premiums fell from a record high of 364 basis points on Aug. 20 to close on Sept. 5 at 233 i.e. $233,000 annually to protect $10 million in bonds from default.

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