(excerpted from an address on Oct. 29, 2008, by Donald Donahue, DTCC chairman and CEO, who explained how a “temporary” CCP was key to helping wind down outstanding Lehman Brothers mortgage-backed securities trades when the company went bankrupt.)

“The last time we had an occasion where we had to use the process for liquidating a mortgage-backed securities firm was in 1984. One reason the industry asked us to construct a CCP for mortgage-backed securities in the first place is that our risk studies suggested handling a crisis in the MBS market…without a CCP…would be extremely daunting. Well, those studies were right.

“Since our new CCP won’t be up and running until the middle of next year, we had to improvise. No sooner did we begin following our rulebook approach to a bi-lateral wind-down for mortgage-backed securities trades than we began to hear from SIFMA and our customers. “You’re already building a central counterparty for MBS,” they said. “So why don’t you play CCP for a day and simply net down Lehman’s open positions among all of us?”

“With more than 300 people on a conference call suggesting we try this approach – and knowing that adopting this approach would reduce the amount of open obligations that would actually have to be liquidated by about 90% – it took us all of about 30 seconds to decide this was an excellent suggestion. We shifted gears immediately, and moved quickly into the job of multilateral netting. The upshot was that we were quickly able to reduce Lehman Brothers’ forward positions in the mortgage–backed market, about $308 billion worth, down to around $30 billion. This immediately erased a lot of pain—and concern—from many balance sheets.”