FICC Schedules Live Testing of Its New CCP For Mortgage-Backed Securities
Fixed Income Clearing Corporation (FICC) has scheduled the first full live testing of its new central counterparty (CCP) for mortgage-backed securities to begin in mid-September in conjunction with the “Class B” settlement cycle that ends September 17.
Although the CCP, which is expected to reduce post-trade risks and costs for the fixed income market, has yet to receive final regulatory approval, the Securities and Exchange Commission (SEC) has agreed that live “pilot testing” of the concept may begin on a limited, controlled basis.
“We’re reaching the end of nearly three years of work to build the CCP,” noted Murray Pozmanter, DTCC managing director, Clearance and Settlement/Fixed Income, “and now we’re set to do a full run-through with a handful of firms that will submit live trades in a few specific categories so that we can evaluate all the inputs and outputs for pool netting and the CCP’s operation.”
Recent preparations
The push to undertake live pilot testing follows FICC’s introduction of new notification-of-settlement technology at the end of July, plus the successful completion in mid-August of end-to-end practice tests for firms in the pilot group and a parallel test run of FICC’s new portfolio margining process.
In the parallel margin test, FICC customers were able to evaluate their margin requirements each day under the new portfolio approach and compare them to their current costs under FICC’s existing margining methodology. So that firms can become more accustomed to the new methodology, FICC will continue to post “parallel” margining charges until the CCP itself has been fully tested and goes into operation.
According to Kevin Lewis, DTCC director, Enterprise Risk Management, margining costs for many firms, depending on their trading portfolios, tended to run somewhat lower under the new procedures.
Demonstrating portfolio margining
“We want our member firms to see the impact of portfolio margining on their own costs,” Lewis said. “But we also want to demonstrate to regulatory authorities that, while portfolio margining can help reduce the amount of money that trading firms need to set aside for margin, it also reflects the reduced risk that trades carry when they can be offset against other trades across the portfolio.”
Sometimes referred to as “common” margining, portfolio margining will let eligible FICC member firms post margin on their outstanding trades across both FICC’s Mortgage Backed and Government Securities Divisions – or across multiple accounts within each division – as though the trades are all part of a single or common portfolio. Typically, the broader the portfolio, the more the various trades may counterbalance each other, thus reducing the amount of margin needed.
“The aim of the margining test was to give our customers another chance to view and analyze the impact of portfolio margining on their margining costs,” said Sean Delap, DTCC vice president, Clearance and Settlement/Fixed Income. “At the same time, it helps every company that opts to employ portfolio margining prepare to begin using it the moment we receive approval from the SEC to launch the CCP.”
Pool Netting How-To's
For pool netting, DTCC Learning has developed a two-part, web-based course, as well as simulations and a user guide.
To view the user guide, click on MBS Pool Netting User Guide. To view the simulations, click on Pool Netting Task Simulations.
To access both parts of the e-learning course, Introduction to Pool Netting in the MBS RTTM System, click here to go to the Login page. If you are a returning user, type your e-mail address (lowercase) and the password welcome. On the Course Information page, click on Launch, then Submit and Launch. If you are a new user, click on Register (New User).
Test ‘scripts’
While the firms slated to participate in the pilot run of the CCP in September have already completed their end-to-end tests, other firms are only now beginning to undertake end-to-end testing, according to Kate Connelly, DTCC director, Clearance and Settlement/Fixed Income.
As part of the drills, the firms execute test scripts that take them through all the phases of the new CCP service, including trade submission and the post-pool netting process. “The testing helps the firms familiarize themselves with the operational steps needed to participate in the CCP and its pool netting service, and it proves instructive to us as well,” Connelly said. “In fact, as a result of some of the testing so far, we’ve rewritten some of the test scripts we use to correspond more closely to members’ operational challenges.”
‘End of an era’
Retiring the notification-of-settlement screens on its legacy CICS terminal application marked “the end of an era” for FICC, noted Bart Schiavo, DTCC vice president, Clearance and Settlement/Fixed Income. Replacing them is a new notification-of-settlement screen available on the Internet through FICC’s Real-Time Trade Management (RTTM) web system.
To help customers familiarize themselves with the new Internet-based screens and the added functions they offer, as well as the steps necessary for firms to participate in the new pool netting process that lies at the heart of the CCP for mortgage-backed securities, FICC released a series of new training materials and simulations plus a new user guide.
The training courses, developed by DTCC Learning, are designed for use online. The first course introduces the pool netting tools now available in RTTM and how to enter “pool instructs” and other commands. The second course covers more of the steps customers can take to allocate mortgage pools for pool netting as well as notification-of-settlement activities at the end of the clearing and settlement process.
Simulations for pool netting
DTCC Learning also has created a series of simulations dealing with the use of the new screens and data fields as well as “how-to” steps and procedures to make the task of pool allocation and settlement easier to understand and complete.
Finally, as a basis for the training courses and simulation exercises, FICC has developed and posted a full MBS Pool Netting User Guide on the DTCC website.
“We’re continuing to prepare for the implementation of the new central counterparty,” Delap said. “We’ll be ready, and we’re confident our customers will be ready, when we get the green light from regulators.” @
[For questions on any aspect of the MBS CCP, contact Sean Delap at sdelap@dtcc.com or 212.855.7627, or Kate Connelly at kconnelly@dtcc.com or 212.855.7611].