IntercontinentalExchange Group Inc. (ICE) is pitching WallStreet on new derivative contracts allowing investors to wager onU.S. homeowner defaults, six years after subprime-mortgage swapshelped fuel the financial crisis, according to five people withknowledge of the matter.

ICE, which owns the biggest clearinghouse of swaps tied to thecreditworthiness of companies, is gauging interest among banks andinvestment firms for a contract linked to a new type of mortgagesecurities that Fannie Mae and Freddie Mac started selling lastyear, said the people, who asked not to be named because thediscussions are private. The government-backed firms have issued$4.5 billion of those bonds, which share the risk of home-loandefaults, as policy makers seek to scale back their roles in the$9.4 trillion mortgage market.

Subprime mortgage derivatives were among the fastest-growingfinancial instruments during an era of innovation that fueled thecredit bubble that triggered the 2008 crisis. As the market for thenew risk-sharing debt matures, creating swaps that allow investorsto start betting against it or hedging against losses would be “thelogical next step,” said David Liu, co-manager of asecuritized-asset fund run by New York-based TIG Advisors LLC.

“Having a healthy two-way market will actually keep things morebalanced,” said Liu, whose fund, with about $450 million, hasinvested in the Fannie Mae and Freddie Mac notes.

Principal in the risk-sharing securities can be erased whenhomeowners stop paying their mortgages.

After the first sale of the bonds in July by Freddie Mac, theriskiest portion has soared from par, or 100 cents on the dollar,to about 129 cents on April 29, according to Trace, the bond-pricereporting system of the Financial Industry RegulatoryAuthority.

The debt carries a coupon that floats 7.15 percentage pointsabove a borrowing benchmark. The rally allowed the company to sellsimilar debt in April at a spread of 3.6 percentage point.

Unlike the mortgage-linked swaps created during the creditbubble, the new contracts would be backed by ICE's clearinghouse,the people said. The Dodd-Frank Act has been pushing most tradingin the market into such entities, which are intended to curb risksto the financial system by collecting margin to ensure deals arehonored and holding billions of dollars in reserves from banks.

Dealer Reluctance

Some banks have expressed reluctance to support swaps that mayjeopardize their ability to win underwriting assignments or hamperdevelopment of the new market, the people said. At the same time,dealers are looking for ways to boost trading revenue after volumesin other markets shrunk.

Freddie Mac hasn't been involved in the discussions, saidPatricia Boerger, a spokeswoman for the company. BrooklyMcLaughlin, a spokeswoman for Atlanta-based ICE, declined tocomment, as did Fannie Mae spokesman Andrew Wilson and DeniseDunckel, a spokeswoman for the Federal Housing Finance Agency,which oversees the mortgage-finance giants.

Policy makers see the risk-sharing notes as a way to reducetaxpayer dangers and assess whether the firms are charging enoughto guarantee their traditional home-loan bonds. The sales alsoresemble the future under a bill by the leaders of the SenateBanking Committee, which would replace the companies with agovernment reinsurer that bears losses after private capital.

Fannie Mae and Freddie Mac were seized by the U.S. in 2008during a crisis that was exacerbated by the wagers on subprimemortgages made with credit-default swaps. The side bets multipliedlosses at banks such as Citigroup Inc. and insurers includingAmerican International Group Inc. and allowed bearish investors toaccelerate the contraction in credit.

“There is a definite potential downside, as history clearlyshows,” said Michael Canter, head of securitized assets at NewYork-based AllianceBernstein Holding LP. On the other hand, there'salready a series of index-based swaps that serve important roles incorporate-credit trading, he said.

Derivatives tied to the loss-sharing deals could allow dealersto hedge their inventories and investors to take positions morequickly, helping the market's functioning, Canter said. They alsowould let underwriters and the issuers prepare for future sales,Liu said.

Mortgages since the crisis haven't been as risky, suggesting anew swaps market wouldn't pose any immediate danger, Liu said.

Shrinking Swaps

ICE's plans, which it's working on with eBond Advisors LLC, mayalso include futures contracts tied to the privately tradedmortgage swaps, as well as instruments tied to the performance of abroader pool of loans that Fannie Mae and Freddie Mac back, two ofthe people said. Richard MacWilliams, managing partner of NewYork-based eBond Advisors, which advises on notes calledexchangeable bonds, declined to comment.

ICE's clearinghouses in the U.S. and Europe are the world'slargest for backing credit swaps. As of April 28, it had guaranteed$52 trillion of contracts through 1.7 million trades, the companysaid yesterday.

The market for mortgage swaps has shriveled since the crisis.Just $460 million of most-active ABX index contracts tied tosubprime loans traded in the week ended April 25, compared with$106.7 billion for the busiest index swaps tied to corporatecredit, according to data from the Depository Trust & ClearingCorp.

ICE stumbled last year in its effort to create a futurescontract based on corporate credit swaps. That idea was ahead ofits time and “largely failed,” ICE Chief Executive Officer JeffSprecher said last year.

The company is close to offering a new futures contract based onthe most-active swap indexes owned by Markit Group Ltd.,replicating the lineups of investment-grade and junk-ratedcompanies, a person with knowledge of the plan said last month.

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