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The operation of a central counterparty (CCP) is expected to revolutionize how trades are cleared and settled in the mortgage-backed securities market, where trading in the U.S. now surpasses $100 trillion annually. The CCP will make trade processing easier, cheaper and less risky.

In preparation for implementing its CCP, DTCC's Fixed Income Clearing Corporation (FICC) will introduce its new Pool Netting service in Q3 2009. Pool Netting further reduces the number of financial obligations requiring settlement by matching and offsetting the buys and sells in each mortgage pool designated for settlement in satisfaction of the traded securities. Once the Pool Netting is complete, FICC’s new CCP will ensure delivery versus payment of any net pool settlement obligations that still remain.

FICC’s longer-range plans are to extend its central counterparty services to include to-be-announced (TBA) trades themselves, and not just their underlying mortgage pools.

With the introduction of the CCP for Pool Netting, FICC will provide its settlement guaranty at the point of comparison for both TBA trades and Specified Pool trades. FICC will also act as CCP to all net pool settlement obligations. It is anticipated that the new CCP will:

• Reduce settlement risks
• Standardize processing
• Lower operational costs
• Free up capital by returning collateral more quickly
• Improve market capacity, and
• Create anonymity for trading parties.

To construct the central counterparty, FICC is moving through two stages to establish necessary procedures and give industry participants time to adjust their own processing and messaging procedures and technology.

CCP Pool Netting

Through Pool Netting, FICC is able to compare and net out various mortgage pools, thus extending the benefits of TBA Netting to further reduce the number of securities and the amount of money that has to change hands in order to complete a trade. Members are currently testing interactive messaging to support Pool Netting, and a limited pilot of the service is slated to occur in mid-2009 in preparation for full implementation by all members in Q3 2009.

CCP TBA Netting and Novation

FICC’s longer-range plans are to extend CCP services to encompass TBA trades. Through the creation of a TBA Netting and Novation service, DTCC will become the CCP to all matched trades in the TBA trade matching system. Once FICC becomes the central counterparty to TBA trades, all member allocations would be made versus the clearing corporation. This will integrate all mortgage-backed securities activities into a unified and coordinated processing flow from trade matching through settlement of the underlying pools as part of Pool Netting. In conjunction with TBA Netting and Novation, FICC’s plans include deploying a number of additional beneficial services. These include fail netting, expanded services for Specified Pool Trades, and the introduction of blind-brokering and Comparison-Only services, among others. The current implementation timeframe for TBA Netting and Novation is in 2011.