DTCC Rolls Out New Risk Management Model for Mortgage-Backed Securities
DTCC’s Fixed Income Clearing Corporation (FICC) implemented a new and more rigorous risk management model for its Mortgage-Backed Securities Division (MBSD) on April 21. “This new approach is one more step in our ongoing drive to reinforce safety and soundness in the markets we serve,” said Douglas George, DTCC’s chief risk officer. “Recent market volatility underscores the value of world-class risk management practices across our industry.”
Utilizing the value-at-risk or VaR model widely employed in financial markets, the new model changes how MBSD customers’ daily Clearing Fund obligations are calculated. It also extends the liquidation period for mortgage-backed securities to a more manageable three days from the single day allowed before.
The introduction of VaR for MBSD brings a uniform approach to risk management across DTCC’s U.S. clearing corporations, including National Securities Clearing Corporation (NSCC), which handles equity, corporate and municipal bond trades, and FICC’s Government Securities Division.
Making the transition
Implementation of the new risk model for MBSD followed a two-week “parallel period” during which participants continued to be governed by the previous methodology, but had access to the new reports and fund requirements.
Thus far, the new VaR methodology has resulted in a higher aggregate Clearing Fund level than what participants maintained during the second half of 2007. Almost a quarter of MBSD customers, however, have seen reduced Clearing Fund obligations.
Customer benefits
Under MBSD’s new approach, participants have a choice about how they want to margin for the trades they submit.
Firms that function as prime brokers, or maintain more than one account with FICC’s MBSD, can post margin for each of those separate accounts, which is how MBSD historically managed Clearing Fund collateral. Under the new practice, customers that maintain more than one account for clearing mortgage-backed securities trades will be able, if they wish, to aggregate their portfolios into a single account, and can then post margin against that unified portfolio obligation.
“Allowing customers to combine their separate portfolios simplifies collateral management and gives firms the possibility to reduce their overall collateral requirements,” said Murray Pozmanter, DTCC managing director, Clearing and Settlement Product Management. “Among other things, they may have offsetting trades within their aggregate portfolio and, by effectively netting them down, they’ll be able to reduce their overall Clearing Fund obligation.”
Another change is that Clearing Fund deficiency call payments for MBSD customers will be due at 9:30 a.m. U.S. Eastern Time, reflecting their positions at the close of business the previous day. The former 2 p.m. deadline reflected customers’ position as of the same morning. In addition, FICC is now obligated to notify firms whether they need to make up any collateral deficiency by 7 a.m., although on most days the deficiency call will have been issued sometime during the night.
Participants also have more flexibility in what they can use as collateral for their margin accounts. Earlier this year, DTCC introduced more diversified collateral requirements for all its clearing units, and rolled out the Clearing Fund Management system, an Internet-based administrative tool that gives customers hands-on management of their daily collateral needs.
Looking ahead
FICC’s longer-range goal is to create a system for common margining across both government securities and mortgage-backed securities trades, according to Pozmanter. “We want to reach the point where we have a system that allows customers who are long in one market and short in the other market to have the option to offset those positions, which would reduce their overall clearing fund obligations,” he said. @
[For questions about the new methodology, contact Heng Sun at hsun@dtcc.com or Guowen Han at ghan@dtcc.com. For questions about the new Clearing Fund requirements and VaR reports, contact Kevin Lewis at klewis@dtcc.com or Marc Golin at mgolin@dtcc.com.]