Advancing Innovation, Improving Efficiency

MBSD Operational Novation One Year Later: A Success for Clients and the Industry

By DTCC Connection Staff | Feb 06, 2019

MBSD Operational Novation One Year Later: 
A Success for Clients and the Industry

DTCC’s FICC/MBSD Operational Novation initiative celebrated its first full year of operation in October 2018. The completion of this initiative was a major improvement for clients and the industry because it greatly streamlined and simplified mortgage-backed securities (MBS) netting and processing.

In the first 12 months of production, moving from bilateral settlement in all MBSD To-Be-Announced (TBA) eligible CUSIPs to the new central counterparty (CCP) model, 63% of transactions settled for cash, which reduced the overall number of electronic pool notification (EPN) messages and eliminated securities settlements, fails and other costs for clients.

“MBSD Operational Novation not only delivered operational benefits that included efficiencies relating to the TBA allocation process, it further helped to mitigate transactional and fail risk,” said Kristian Hakanson, Vice President of Securitized Products, Barclays. “FICC brought its members together in a professional and collaborative way to deliver a best in class solution that created additional operational efficiencies and simultaneously reducing transactional and fail risk.”

TERMS TO KNOW:

DNA (Do Not Allocate)
The DNA process gives a client the ability to inform FICC if it does not want to receive or send pool information. This process allows clients to pair-off trades facing FICC buys and sells.

Odd Lot Trades
Odd Lot Trades are trades that are less than $1 million. Prior to the Operational Novation initiative, these trades were not included in the TBA netting process

TBA (To-Be-Announced)
A TBA is a contract for the purchase or sale of a mortgage-backed security to be delivered at an agreed-upon future date because as of the transaction date, the seller has not yet identified certain terms of the contract, such as the pool number and number of pools, to the buyer.


Since November 2017, clients have successfully used FICC as the single CCP for TBA netting and novation transactions. As a result, clients have been able to net away 63% of processing transitions with the introduction of the new DNA (do not allocate) process. Before operational novation, MBSD processed 2.46 trillion in TBA volume, but after operational novation, that number jumped to 5.1 trillion. With the introduction of the DNA process, the volume doubled for the first 12 months of operational novation being live in production.

“Though a long time in the making, FICC’s MBSD Operational Novation initiative has added efficiency to the Agency MBS market by reducing both processing cost and fail risk,” said Christopher Crocitto, Senior Vice President of Fixed Income Securities, Goldman Sachs. “The DNA functionality has extended the netting process to real-time, reducing the overall notional flowing through the allocation process.”

“The success of the Operational Novation initiative has surpassed all expectations, wringing costs and inefficiencies out of MBSD netting and settlement for clients,” said Murray Pozmanter, Managing Director and Head of Clearing Agency Services and Global Operations. “We credit innovative thinking, agility and flexibility to transforming a process that had otherwise been unchanged for decades.”




TBA VOLUME:

Pre-Novation TBA Volume (11/16-10/17) 2.5 trillion
Post-Novation TBA Volume (11/17-10/18) 5.1 trillion

Volume increase: 61%
ODD LOT TRADES1:

Pre-Novation Odd Lot Trades

$575 billion
Post-Novation Odd Lot Trades

$7 billion

Netting ratio of odd lot activity: 96%


Do Not Allocate (DNA):

DNA Volume
2.7 billion
DNA Percentage
63%
Stipulated Trades - Activity
544.11 billion
Largest DNA Month – Class A April 2018
Class A April 2018
Value
$215 Billion
Percentage
71% decrease in trades that needed to go to settlement.

 

 

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