Pilot Committee Guides Remaining Leg of the New MBS Central Counterparty Project
Sometimes test pilots don’t wear aviator jackets. Sometimes they sit on a committee. And for Fixed Income Clearing Corporation’s (FICC) Mortgage-Backed Securities Division, a “pilot” committee is playing a key role in building the new central counterparty (CCP) for mortgage-backed securities trades.
FICC plans to have the new CCP up and running in the first quarter of 2009.
Industry advocates
Pilot committee members have agreed that their firms will work closely with FICC to test the computer code, delivery procedures and messaging requirements designed to make the CCP function. Created in March of this year, the committee includes eight industry executives as well as members from the two planned clearing banks, The Bank of New York Mellon and JPMorgan Chase.
In addition to the pilot committee, FICC works with an advisory committee established in 2006 when the plan to build a CCP for mortgage-backed securities trading was first under consideration. The advisory committee functions as an industry “sounding board” on the various concepts and mechanisms FICC has developed to create and operate the CCP. Several members of the advisory committee also sit on the “pilot” committee.
“We have worked with our customers and with industry organizations like SIFMA [Securities Industry and Financial Markets Association] to assemble a group of executives that clearly sees the advantages of a central counterparty for mortgage-backed securities trades,” said Dennis Paganucci, DTCC director, Product Management, Clearance and Settlement.
Useful feedback
“Pilot committee members are giving us feedback on the design of the actual mechanisms needed to make a central counterparty function,” Paganucci said. “As we move from the blueprint stage into construction of the CCP mechanisms, they will tell us their priorities and concerns, which is critical for ensuring the system meets the needs of the industry and is rolled out on a timely basis.”
Equally important, Paganucci said, the committee members have said they will push their firms to be early adopters of the new procedures so that FICC can see, on a practical basis, what is adding value for customers and what might need to be reworked as the central counterparty nears launch.
“They’re offering to be the test pilots, and that’s extremely useful,” said Kate Connelly, DTCC director, Product Management, Clearance and Settlement. “It also ensures we will get the mechanics of the new procedures thoroughly vetted by these users, and then out to the entire industry on schedule.”
Successful testing
One step toward a CCP that was successfully piloted earlier this year involved automating the substitution of mortgage pools through FICC’s Electronic Pool Notification service, which customers use to allocate pools of mortgages for to-be-announced mortgage-backed securities trades pending settlement.
“When pool substitution was first discussed, we thought it would add a lot of noise and static to the process, but the opposite happened. It literally cut down the noise on our operations floor because it’s so efficient,” said Frank Atwood, vice president and senior operations manager at Banc of America Securities.
“The phones aren’t ringing off the hook anymore and we don’t have to write down pool changes manually. Getting out of that manual environment is a tremendous help. My staff is very enthusiastic,” said Atwood, who also chairs SIFMA’s Operations Committee. In the past, the job of substituting one pool for another typically involved a series of phone calls and faxes and then tedious clerical time double-checking lists of mortgages.
As a member of the pilot committee, Atwood said the success of automating pool substitution was well received among committee members about the project as a whole.
Other members of the pilot committee are John Haley, Barclays Capital; Frank Malarkey, Credit Suisse Securities, LLC.; Chris Crocitto, Goldman Sachs & Co.; Paul Farina, J.P. Morgan Securities, LLC; Jack Fondacaro, Lehman Brothers, Inc.; Chris Moran, Merrill Lynch GSI; and Yves Dominique, Morgan Stanley Market Products, Inc.
The next major project for the pilot committee will be to conduct test runs of mortgage pool netting, the final step toward a functioning central counterparty. The test period is tentatively scheduled to begin later this year. @