The MBS Novation project, a conversion to operational novation and a simplification of the netting and settlement process, will enable the Mortgage-Backed Securities Division (“MBSD”) of the Fixed Income Clearing Corporation (FICC) to retire certain inefficient processing.
Subject to the Securities and Exchange Commission’s approval, MBS Novation will expand and extend the services rolled out with Pool Netting, which introduced the comparison, trade guarantee, netting and central counterparty settlement of pool allocations submitted in satisfaction of members’ outstanding to-be-announced (TBA) obligations. MBSD will continue to require bilateral matching and to support dealer-to-dealer and broker-to-dealer trade submission.
Benefits include a reduction in settlement costs and volumes. It will also reduce by an estimated 50-55% the TBAs that will go to pool. There will also be balance sheet netting, and a major reduction of processing of odd lot transactions once they go into the TBA net.
In terms of challenges, all MBSD input, output, systems and processes will be impacted and changed, to varying degrees, by this initiative; FICC is changing a process that has been virtually the same for decades. As a result, new SWIFT-based Interactive Messaging Specifications, Machine Readable Output (“MRO”) file layouts, and reports will be created, as well as any requisite member reference documentation and training materials.
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