S&P cuts ratings of top clearing houses

US ENTITIES:THE RATINGS of the top US financial clearing houses and government-related entities were cut by one notch yesterday, in line with Standard & Poor's (S&P) decision last Friday to downgrade the US economy to AA+.

The decision sent the yields on home-loan bonds issued by government agencies Fannie Mae and Freddie Mac soaring.

S&P downgraded the ratings of the Depository Trust Co, National Securities Clearing Corp, Fixed Income Clearing Corp and Options Clearing Corp – considered the main arteries of the US financial system – from AAA to AA+.

The clearing houses, which hold large quantities of US treasuries as collateral against outstanding trades, were also given a negative outlook.

S&P said the downgrades incorporated “potential incremental shifts in the macroeconomic environment and the long-term stability of the US capital markets as a consequence of the decline in the creditworthiness of the federal government”. However, it added that its view of the “fundamental soundness” of the clearing houses had not changed.

S&P downgraded, as expected, the senior issue ratings on mortgage buyers Fannie Mae and Freddie Mac to AA+. It also downgraded 10 of the 12 Federal Home Loan Banks (FHLBs), as well as the senior debt issued by both the FHLB system and the Federal Farm Credit Banks – but not the ratings of the individual farm member banks.

According to S&P, the downgrades of Fannie Mae and Freddie Mac reflected “their direct reliance on the US government”. The short-term issue ratings for these entities were affirmed at A-1+ but the outlook remained negative. The move sent the spread, or the difference, between mortgage bonds and US treasuries to its highest level in more than two years.

S&P also downgraded bonds guaranteed by the Federal Deposit Insurance Corp and the National Credit Union Association from AAA to AA+, reflecting their direct credit support from the US treasury.

S&P remains the only ratings agency to have downgraded the US economy. In a note yesterday, Moody’s reaffirmed its top-tier rating of August 2nd for the US, citing the “unparalleled diversity and size of the US economy” and the “global role of the dollar”.

But it repeated its warning that it could downgrade the US if “further measures to address the long-term fiscal situation are not adopted”.