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Fannie Mae Funding Programs
Fannie Mae issues a variety of debt securities
to meet investors' wide-ranging needs. Fannie
Mae is able to issue different debt structures
at various points on the yield curve because
of its consistent funding and rebalancing needs.
Fannie Mae provides disclosure documents
for its debt securities such as offering
circulars and pricing supplements. The Universal
Debt Facility offering circular includes
detailed disclosures about Fannie Mae’s
funding programs. Pricing supplements are
available for each long-term debt security
issued. Pricing supplements provide additional
details about a specific security issuance,
including the CUSIP number, the offering
price, settlement and maturity dates, principal
amount, coupon or formula, frequency of
interest payments, interest payment dates,
and underwriters. There are no pricing supplements
issued for our short-term securities.
Short-term Debt Securities
Fannie Mae is one of the largest issuers of short-term debt securities as well as one of the largest and most consistent issuers of longer-dated (beyond two weeks) short-term securities. The majority of Fannie Mae's short-term funding needs are met through the Discount Notes and Benchmark Bills programs. These funding programs offer investors highly liquid, high credit quality instruments with maturities ranging from overnight to 360 days.
The particular advantages of Fannie Mae's short-term notes include:
- incremental spread over U.S. Treasury bills of comparable maturity,
- large volume and broad distribution of a wide range of maturities,
- flexibility with respect to reverse inquiry,
- high credit quality and strong secondary market liquidity, and
- greater price transparency in Benchmark Bills maturities.
Discount Notes
Fannie Mae's Discount Notes are unsecured general obligations that are issued in book-entry form through the U.S. Federal Reserve Banks. Discount Notes have maturities ranging from overnight to 360 days from the date of issuance. Three-, six-month, and one-year maturities are issued through the Benchmark Bills program, which is discussed in greater detail below. There are no periodic payments of interest on Discount Notes. They are sold at a discount from the principal amount and mature at par. Discount Notes are offered each business day through a Selling Group of securities dealers and dealer banks.
Discount Notes are available on a cash-, regular-, or skip-day settlement basis. Fannie Mae publicly announces rates for its Discount Notes through various wire services. Fannie Mae will also accommodate reverse inquiry transactions for Discount Notes.
FX Discount Notes
Fannie Mae offers foreign currency discount notes in the Euro money market known as FX Discount Notes. The program enables investors to hold short-term investments in the currency of their choosing, while providing Fannie Mae with a broader investor base and added flexibility in how the company issues debt. Fannie Mae has the ability to issue FX Discount Notes in all tradable currencies in maturities from five days to 360 days. Trades are executed at the posted sub-Eurodollar/LIBOR spread, and dealers that execute the trades are responsible for transacting the foreign exchange components of the trades, ensuring that Fannie Mae does not have any foreign exchange exposures.
Benchmark Bills®
Through this program, Fannie Mae is committed to a schedule of weekly issues in three-, six-month, and one-year maturities.
While Benchmark Bills are a component of the
regular Discount Notes program, they are unlike
Discount Notes in that they are issued via
a Dutch auction process using Web-based technology.
The auction process creates greater price
transparency in the primary market while the
larger size of each issue adds secondary market
liquidity for the benefit of investors. This
system has improved market efficiencies as
results are posted on a variety of electronic
information sources (our Web site,
Reuters, Knight Ridder, and Telerate) within
a few minutes of the final outcome.
As with Discount Notes, the Benchmark Bills program is conducted through the same group of dealers. Auction bids are obtained via the Internet, and the results of the auction are also announced through the Internet. By working with a designated group of dealers, Fannie Mae ensures an active secondary market for Benchmark Bills. Investors in Benchmark Bills receive the benefit of increased liquidity that only a dealer group can provide. Dealers submit bids either on behalf of investors or for their own accounts. Bids on behalf of investors may be competitive or noncompetitive, with noncompetitive bids allowed up to a maximum of 20 percent of a transaction. Settlement occurs on Wednesday (cash settlement) or on Thursday (regular settlement) at the option of the investor.
Discount Notes and Benchmark Bills are considered acceptable collateral for margin deposits at various exchanges and clearing corporations. In certain instances, Discount Notes and Benchmark Bills are acceptable investments for escrow accounts associated with municipal bond offerings. In addition, Discount Notes and Benchmark Bills, like most other Fannie Mae debt products, are eligible as collateral in repurchase transactions entered into with the Federal Reserve Banks.
Overseas Discount Note Program
In February 1995, Fannie Mae became the first issuer in the U.S. agency market to offer international investors the opportunity to execute discount note trades during their own trading hours. Fannie Mae posts levels at the end of the trading day in Washington, DC. Overseas investors can confirm their trades at the point of sale from 7:00 p.m. eastern time to 7:00 a.m. eastern time with the lead book running dealer. These notes may be purchased only through the Overseas Discount Notes Selling Group dealers. International investors have responded positively to the Overseas Discount Notes program because large-sized orders can often be accommodated and executed during local trading hours, thus reducing or eliminating market risk.
Long-term Debt Securities
Fannie Mae issues long-term debt securities with maturities of greater than one year. Fannie Mae offers a variety of long-term debt securities to meet investors' diverse needs.
Noncallable Benchmark Securities® Program
Overview
Noncallable Benchmark Notes® are large size, regularly scheduled bullet issues which provide increased efficiency, liquidity, and tradability to the market. With the noncallable Benchmark Securities program, Fannie Mae has established a full yield curve of noncallable Benchmark Notes. Fannie Mae may look to maximize the liquidity of each issue by increasing its size through investor-demand-driven reopenings. A diverse and broad-based group of investors participate in noncallable Benchmark Securities because of their liquidity, attractive spreads, and their outstanding credit quality.
In addition, given the enhanced liquidity of noncallable Benchmark Securities, a number of market participants have started to use noncallable Benchmark Securities for a variety of market transactions. For example, some mortgage investors use noncallable Benchmark Securities as duration management tools during periods of rapid mortgage prepayments. Many dealers and investors often use these securities for hedging other high quality spread products. Some indexed investors have found it beneficial to purchase noncallable Benchmark Securities to replace core holdings of off-the-run U.S. Treasuries in order to add spread with little reduction in liquidity as a means of potentially outperforming the U.S. Treasury component of established fixed-income indices.
Issuance Calendar
Fannie Mae's noncallable Benchmark Notes are
issued according to an issuance calendar that
is published annually. The calendar sets forth
the announcement dates during the course of
the year. Fannie Mae believes that in providing
this extensive organization and definition
around our issuance intentions, market participants
now have a greater opportunity to plan on
how best to incorporate noncallable Benchmarks
Notes into their investment strategies.
Financing Noncallable Benchmark Securities
With the liquidity facilitated by the noncallable Benchmark Securities program and the issuance assurance of the calendar, deep and liquid overnight and term repo markets for noncallable Benchmark Securities exist. Both the overnight and term repo markets may offer investors favorable financing rates. The large size of the noncallable Benchmark Securities encourages frequent trading and increased activity as a hedging instrument that, in turn, leads to greater demand for these securities in the repo market. This has often resulted in attractive repo rates that are equal to or below those available for general Treasury collateral. Investors have at times been able to increase their overall return on noncallable Benchmark Securities by taking advantage of these repo-financing activities.
New Issuance
Fannie Mae brings each noncallable Benchmark Notes transaction to market using a traditional underwriting syndicate structure. For each Benchmark Notes transaction, the dealers are chosen to underwrite that specific transaction. In addition to the co-leads, a designated selling group is selected. The company's Benchmark Securities dealer group is responsible for providing timely information on potential demand and pricing levels so that we can determine the size of an impending transaction.
Each noncallable Benchmark Notes transaction is announced in the issuance calendar. Prior to pricing, the transaction is announced and a period of marketing and book building starts. Fannie Mae is generally expected to price each new issue within three business days of the announcement date and will generally settle within two days after pricing of the issue. The pricing level is determined by where existing comparable maturity noncallable Benchmark Notes are trading. Fannie Mae works diligently with all of the underwriters in a Benchmark Securities transaction to facilitate and coordinated communication among all of those participating in the transaction. Our objective is to try to ensure that information is communicated to investors in a consistent and timely manner by all the firms participating in an underwriting.
Reopenings
In some instances, Fannie Mae will reopen an existing debt issue. The decision to reopen an issue is based on investor demand and ability to further enhance the liquidity of a particular security. Fannie Mae's objective is to not disadvantage current holders of its securities. Any of Fannie Mae's long-term debt securities can be reopened, and reopenings are conducted in accordance with the calendar and may be conducted in conjunction with another new issue.
Benchmark Securities Parameters
Noncallable Benchmark Notes are securities
with maturities of 2-, 3-, 5- and 10-years.
Benchmark Securities are issued off of Fannie Mae's Universal Debt Facility and are listed on the Luxembourg Stock Exchange. Settlement for Benchmark Securities is available directly through the Federal Reserve Book Entry System and indirectly through Euroclear and Clearstream (formerly Cedelbank). Interest is calculated on a 30/360-day count.
Subordinated Benchmark Notes
In 2001, Fannie Mae began the issuance of
a regular series of large-sized and externally
rated securities called Subordinated Benchmark
Notes. These issues have an interest deferral
feature that if triggered would simultaneously
apply to all outstanding Subordinated Benchmark
Notes for a maximum of five years, but will
not exceed the stated maturity of the issue.
The subordinated debt Fannie Mae issues must
be issued in a quantity such that the sum
of total capital (core capital plus general
allowance for losses) plus the outstanding
balance of qualifying subordinated debt will
equal or exceed the sum of outstanding net
MBS times 0.45 percent and total on-balance
sheet assets times 4 percent. Subordinated
debt will be discounted for the purposes of
this calculation during the last five years
before maturity.
Other Callable and Noncallable Securities
Other Callable and Noncallable Securities include all long-term non-Benchmark Securities, such as globals, zero-coupons, fixed and floating-rate medium-term notes, and other long-term securities, and are generally negotiated underwritings with one or more dealers or dealer banks. On any given day, a number of new notes and bonds of various maturities, call features, or lockouts may be issued through several dealers. The key feature of these securities is flexibility. Fannie Mae responds quickly to reverse inquiry from investors communicated through dealers to create securities that meet particular investment profiles. Since Fannie Mae has continuous funding requirements, we are able to entertain many structures simultaneously. However, Fannie Mae is very mindful of having similar structures in the market at the same time and the adverse impact this could have on performance. Therefore, Fannie Mae takes great caution to avoid bringing similar issues to market within a short timeframe. Fannie Mae will respond to reverse inquiry for almost any type of callable structure.
Investment Notes
Fannie Mae also issues Investment Notes for retail investors through weekly offerings. While Fannie Mae does not sell the Notes directly to investors through this program, the company has designated Merrill Lynch & Co. as the principal dealer. Investment Notes are also sold by an authorized Selling Group which is comprised of retail-oriented dealers. Fannie Mae most often issues Investment Notes that are callable. The Notes have final maturities ranging from four to 30 years and lockout periods equal to or greater than one year. Investment Notes are offered at par with no accrued interest and are sold in minimum denominations of $1,000 with $1,000 multiples thereafter. As with all of our securities, offering documentation and other information can be obtained from qualified dealers. In addition, Fannie Mae makes such information available through the Debt Securities section of this Web site.
Foreign Currency Denominated Notes
Fannie Mae has issued securities in several different currencies and is prepared to issue in numerous non-U.S. dollar currencies. All foreign currency denominated transactions are swapped back into U.S. dollars for funding Fannie Mae's mortgage portfolio. Fannie Mae does not take any foreign currency risk exposure. Fannie Mae was the first agency to issue in yen, deutsche marks, pounds sterling, Hong Kong dollars, Australian dollars, and New Zealand dollars.
Typically the preferred minimum size for reverse inquiry, non-dollar transactions is approximately $25 million U.S. dollar equivalent.
Fannie Mae's foreign currency transactions are most often priced at spreads above the comparable local government issues. This provides investors with an opportunity for spread pickup over local government issues while still allowing them to obtain high credit quality paper in a particular currency. With this spread advantage, inclusion of Fannie Mae foreign currency denominated debt may allow for outperformance versus benchmark global fixed-income indices. Fannie Mae's proven liquidity, outstanding credit quality, and fair pricing are the main reasons why such a diverse range of investors have participated in these non-dollar offerings.
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Last Revised: November 9, 2009
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This document is for information purposes
only. It is neither an offer to sell nor a
solicitation of an offer to buy any Fannie
Mae security. Fannie Mae securities are offered
only in jurisdictions where permissible by
offering documents available through qualified
dealers. Securities issued by Fannie Mae are
not guaranteed by the United States and do
not constitute a debt or obligation of the
Unites States or of any agency or instrumentality
thereof other than Fannie Mae. All statements
made herein are qualified in their entirety
by reference in the applicable offering documents.
Securities discussed herein may not be eligible
for sale in certain jurisdictions or to certain
persons and may not be suitable for all types
of investors. An offering only may be made
through delivery of the Offering Document.
Investors considering purchasing a Fannie
Mae security should consult their own financial
and legal advisors for information about such
security, the risks and investment considerations
arising from an investment in such security,
the appropriate tools to analyze such investment,
and the suitability of such investment in
each investor's particular circumstances.
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