FICC Unrolls Initial Blueprints For New Central Counterparty

By James Conmy

Dennis Paganucci, DTCC vice president, Clearance and Settlement Group

Fixed Income Clearing Corporation (FICC) has unrolled the detailed blueprints for the initial steps in its three-phase plan to create a central counterparty (CCP) for mortgage-backed securities. In order to make the plans work, customers will have to tweak their systems and message formats, although no major changes will be required.

“Later, in Phase 3 of our plan, when the clearing corporation becomes a full CCP,” said Susan Tysk, DTCC managing director, Clearance and Settlement Group, “firms will be required to make some substantial adjustments to their business-as-usual steps or procedures. But the blueprints for these first two service enhancements don't call for radical changes.”

Details for Phases 1 and 2

In April, FICC reaffirmed its plans to build a central counterparty that would guarantee and novate settlement of mortgage-backed securities trades. In a paper outlining its plans, the company laid out three separate phases for creating the new business model.

Now, in a set of recent service bulletins and participant specifications, the company has released details of how the first two of the three phases will unfold. Phase 1 involves matching trades of specified mortgage pools by using FICC’s real-time trade matching (RTTM) platform. Phase 2 centers on simplifying and automating the process for substituting mortgage pools via FICC’s Electronic Pool Notification (EPN) service.

The goal of the bulletins and specifications, FICC said, is to give its clearing members and EPN users an understanding of exactly what changes will be made to everyday processes and message formats – and what the timetable is for those changes.

Leveraging systems “Where we have to make changes to current ways of doing business, we’re trying as much as possible to do so by leveraging current technology – with an eye toward the ultimate goal of building a CCP,” said Dennis Paganucci, DTCC vice president, Clearance and Settlement Group. For example, in the plan for specified pool trade matching, all the processing to support the revised trade flow will be built on the RTTM platform that FICC participants already use.

“Enhancements will be made to provide for the valid submission and handling of specified pool trades in RTTM,” the service bulletin notes, “but the current processing in place to support TBA (to be announced) trades will not be changed.”

Phase 1: Adding new data fields

The aim of the first phase in building the CCP is to make it easier for firms to submit specified pool trades via RTTM, to match them bilaterally and to report them. Because RTTM doesn’t currently support “pool-specific” data, participants will have to make some changes to their existing processes in order to submit the required data. Eventually, when other elements of the plan have been introduced, the new specifications introduced in Phase 1 will also involve final money calculation and repricing – again via RTTM.

One change is a requirement to fill in or populate the existing “par” or “quantity” data field with “original face” instead of “current face.” A second change in current procedure is that participants will need to submit a “pool number” on all specified pool trades. Pool numbers will also be a required match field. Participants can also choose to fill in another new data field called “final money,” but this entry will eventually be calculated by RTTM itself in later phases of implementing the central counterparty.

If the information that buyers and sellers put into the required fields matches, the specified pool trades will then be matched bilaterally in real time just as TBA trades are – and RTTM will provide clearing members with immediate trade notification and status information, just as it does now for TBA information.

New reports for customers

FICC will modify three existing RTTM participant reports to reflect the specified pool trades in addition to the TBA trades now reported. Plus, RTTM will generate two new end-of-day reports specifically for the specified pools that correspond to clearing output for the TBA trades so that participants will know their specified pool trade activity for that day and have the data available for analysis.

“The real difference,” said Melanie Sterman, product management director in the Clearance and Settlement Group, “is that trading firms will no longer have to ’retrofit’ specified pool trades in to the TBA process. Instead, they will now have a direct way to submit, match and reconcile their specified pool trade activity on RTTM.”

Testing of the new process for handling specified pool trades is scheduled to begin later this year.

Phase 2: pool substitution

The second major phase centers on EPN pool substitution. The proposed new substitution service will enable all EPN members to cancel existing pool allocations and simultaneously replace them with new ones using a single EPN message. This is expected to streamline substitutions and eliminate cumbersome manual processes.

While FICC will continue to support existing EPN message formats and processes without change, in order to help automate pool substitutions, FICC will expand its EPN service to include the new substitution messages during the first half of 2007. As with all EPN messages, FICC noted that pool substitution messages will be passed to counterparties on a real-time basis.

In addition, FICC stresses that validation of the business terms of the messages will continue to be the responsibility of the sending and receiving members.

Everybody into the pool

According to Michele Hillery, DTCC product manager, Clearance and Settlement Group, participants should begin development for pool substitution this year in order to prepare for testing in the first quarter of 2007 and for production implementation in the second quarter of 2007.

“All participants will be affected by the implementation of this service,” she said. “That means that all EPN members need to download, install and test the upgraded version of EaSy Pool messages, which will be posted on FICC’s Website,” said Hillery, adding that FICC will notify firms once the download is available. “Firms using computer-to-computer communication either have to develop the computer-to-computer message layouts for their application or use EaSy Pool.” @