Dutch Limit Derivative Sales to Social Housing in Wake of Losses

The Netherlands placed greater restrictions on banks’ derivative sales to affordable-housing providers after Stichting Vestia Groep unwound billions of euros of soured interest-rate swaps at a loss this year.

Housing associations will only be permitted to purchase so- called payer swaps and interest-rate caps from Oct. 1, Interior Minister Liesbeth Spies said in a statement on the ministry’s website today. They can only buy derivatives from banks that agree to consider them non-professional investors, she said.

Vestia, which owns 89,000 homes and is based in Rotterdam, lost 1.3 billion euros ($1.6 billion) of collateral as part of a deal reached in June to unwind derivatives and repay 700 million euros to nine banks, including Citigroup Inc. (C) and Deutsche Bank AG. (DBK) The agreement stopped the organization from having to post more collateral if interest rates kept falling.

Spies “wants to prevent corporations taking irresponsible risks in future,” according to the statement. “Vestia struggled with big liquidity issues as it had to add collateral to the bank because of dropping interest rates. It also speculated with complex derivative products.”

The Netherlands has about 400 housing organizations, of which 162, excluding Vestia, had 17.9 billion euros in derivative contracts as of Dec. 31, a supervisory body said on June 4. That compared with lending of 62.2 billion euros. Vestia alone had amassed interest-rate swaps with a value of 22 billion euros, compared with 6.1 billion euros of loans, the organization said in February.

Housing organizations using derivatives will be forced to maintain a buffer that allows them to handle an interest-rate drop of two percentage points, Spies said.

Payer swaps, contracts in which a housing firm pays a fixed rate on loan while receiving a variable rate, will be capped at a duration of 10 years, Spies said. Interest-rate caps provide insurance that limits interest payments to a certain maximum.

To contact the reporter on this story: Maud van Gaal in Amsterdam at mvangaal@bloomberg.net

To contact the editor responsible for this story: Frank Connelly at fconnelly@bloomberg.net