FICC Eases Customer Transition to New Risk Methodology for Mortgage-Backed Securities
In the course of implementing a new value-at-risk (VaR) model for the Mortgage-Backed Securities Division in April, Fixed Income Clearing Corporation (FICC) decided to postpone temporarily two components of the new methodology. FICC also announced the elimination of a long-standing cash deposit requirement for MBSD members, effective April 30.
“The successful implementation of VaR for our mortgage-backed securities customers brings heightened risk management to this market,” said Douglas George, DTCC chief risk officer. “However, to help address the concerns of customers coping with volatile market conditions, we decided we could safely postpone two of the methodology’s components until the central counterparty for MBSD goes live early next year.”
The new VaR model allows FICC to measure the portfolio risk of MBSD customers more effectively, which is a key factor in calculating Clearing Fund requirements.
Waiting for the central counterparty (CCP)
The two postponed elements of the VaR methodology for MBSD are the Margin Requirement Differential and the Coverage Component.
The Margin Requirement Differential is designed to capture intra-day risks in a portfolio versus the end-of-day status. The Coverage Component is used when portfolio back-testing shows that the risk confidence level in any portfolio is less than 95%.
“By introducing the Margin Requirement Differential and the Coverage Component after the CCP and common margining are in effect, the overall collateral requirement for most customers will be lower, due to the benefits of having their MBS and government securities transactions margined as a single portfolio,” said Murray Pozmanter, DTCC managing director, Clearance and Settlement Product Management. “The extension also gives customers more time to analyze the impact of these two elements on their daily collateral requirements.”
No more ‘Basic Deposit’
As part of the VaR rollout, FICC also eliminated a long-standing requirement for MBSD customers to post a cash deposit. This deposit covered the potential non-payment of fees for obligations other than trading, such as the net settlement balance order market differential on the days of the month when mortgage-backed securities trades settle, as well as “housekeeping” matters such as funds to cover cash adjustments and interest income rebates. These items are now taken into consideration as part of the margining process.
In the past, MBSD customers had to put up a minimum of $1,000 up to a maximum of $10,000 for each clearing account they maintained with FICC. The deposit, calculated on a semi-annual basis, was equal to the customer’s previous six-month billing average. On May 16, MBSD began returning each customer’s current deposits. Interest that accrued to the deposits for the first four months of the year is also being refunded. @
[For more information on the deposit refunds, contact Jon Gadaleta, DTCC manager, Asset Services, at jgadaleta@dtcc.com or 813.470.2620.]