Structured Securities: SEC Approves Measures to Address Processing Bottlenecks
DTCC has begun implementing four major initiatives to help solve the processing problems and cost inequities of the structured securities market, after receiving the green light from the Securities and Exchange Commission (SEC) in March.
The initiatives, first proposed in a white paper titled “Transforming Structured Securities Processing” in September 2007, were developed by The Depository Trust Company (DTC), a DTCC subsidiary, and an industry task force that studied and analyzed the market for more than a year. The initiatives will help reduce the number of late principal and interest (P&I) payments each month as well as the number of adjustments made after incorrect P&I payments have been made.
“We’re confident that these measures will begin to streamline and help address the processing problems of the structured securities market,” said Simon Griffiths, an executive director with JPMorgan Worldwide Securities and a member of the industry task force that worked with DTCC. “We will monitor the initiatives and their impact on the market in the coming months and, after we’ve analyzed and studied the new data, we’ll determine next steps that DTCC and the industry task force should take.”
‘Quicker and more efficient’
The SEC’s approval order noted that “by enabling more Structured Securities to be DTC-eligible and by helping to make the reporting of information about Structured Securities more accurate and timely, the proposed rule change…should make the communication of payment rate information on Structured Securities … quicker and more efficient….”
Structured securities include collateralized mortgage obligations (CMOs) and asset-backed securities (ABS). They are essentially bonds or notes backed by a pool of mortgage loans for CMOs and loan payments such as credit cards and auto loans for ABS.
“Inaccurate and late payment rates for structured securities remain the principal causes for these processing problems,” said Peter Gleeson, DTCC vice president, Asset Services. “This is further complicated by the complex flow of information and time-critical data among the many parties servicing these assets.
“These initiatives should help streamline and bring greater efficiencies to the process, as well as compensate those parties that have suffered financial losses because of late or incorrect payment rates.”
The initiatives are:
- Extending the deadline for submission of payment rate information on structured securities to 3 a.m. Eastern Time on payable date;
- Creating two categories of structured securities – conforming and non-conforming;
- Charging an “exception processing fee” for non-conforming securities;
- Distributing a “paying agent” report card to the industry that tracks the performance of the six largest paying agents.
The previous deadline for paying agents to submit payment rate information to DTC in electronic form was preferably five, but no fewer than two business dates prior to payable date. The new deadline gives agents an additional 27 hours to submit payment rate information.
What’s non-conforming?
DTC will categorize all new structured securities issues after May 1, 2008, as either conforming or non-conforming. Conforming securities are those that will meet the new deadline for reporting rates.
Non-conforming are those that are unlikely to ever allow paying agents to report rate information on time.
“DTC and the working committee examined and categorized more than 150,000 existing CUSIPs into conforming and non-conforming,” said Gleeson. “We expect that about 20% to 25% of new issues will ultimately be non-conforming and be charged the exception processing fee.
“The industry supports the processing fee since it is the underwriter – and not others in the processing chain – that creates non-conforming issues.”
The exception processing fee is a one-time charge of $4,200 per non-conforming CUSIP. Annually, the aggregate structured securities performance “exception” monies will be allocated, pro-rata, to the DTC participants for whom DTC processes structured securities’ P&I allocations. This will help defray the additional “exception” costs and write-off expenses associated with handling these more problematic instruments.
Report cards
DTC has posted the first report card for paying agents on the DTCC website at www.dtcc.com. Although DTCC has been issuing these report cards to the paying agents for several years, this is the first time the report has been made public.
Using Six Sigma quality standards, the report tracks the performance of the paying agents by name, including timeliness for non-conforming issues and accuracy for both conforming and non-conforming issues. DTC plans to issue a new report card each month with the previous month’s results.
While new structured securities issues coming to market have dropped substantially in 2008 because of current market conditions, DTC continues to pay out more than $50 billion a month for an estimated 130,000 P&I payments, according to Gleeson. @