Warm-Up Laps Start in August For New MBS Central Counterparty
Four trading firms are lined up to begin a pilot test in early August of pool netting, which is a key element of Fixed Income Clearing Corporation’s (FICC’s) proposed new central counterparty (CCP) for mortgage-backed securities trading.
As part of preparations to test the operation of the new CCP, currently projected to begin later in August, FICC will match, net and settle the mortgage pools allocated for a designated set of mortgage-backed securities.
The idea, according to Sean Delap, DTCC vice president, Clearance and Settlement/Fixed Income, is for both FICC and some of its participants to work with a limited number of securities in order to get a feel for what it takes to make pool netting a fully functioning process.
Starting small and growing
“We’ll run the pilot with the initial four or five firms that have signed up, and then we’ll put more firms into the pilot program as soon as these additional firms clear the other testing components such as connectivity and messaging,” Delap said. “We expect to keep adding firms and testing with a limited number of eligible securities until we can initiate the CCP service itself.”
Although FICC already nets the to-be-announced (TBA) trades that come into the company for clearing, it has never netted the pools of mortgages that underlie the trades and are sent to FICC in the few days prior to settlement. As part of its CCP operation, however, once FICC begins offering the new Pool Netting Service, it will guarantee trades upon TBA matching and then net the most active pools, ultimately settling them against FICC as the counterparty. Any pools not eligible for pool netting will continue to settle between counterparties who will then be required to submit Notifications of Settlement (NOS) as they do today.
FICC submitted its rule filing on the new CCP to the U.S. Securities and Exchange Commission in March 2008 and is awaiting approval to launch the new CCP.
‘Eager’ to get up and running
“We’re eager to get the CCP up and running as soon as possible,” said Murray Pozmanter, managing director, DTCC Clearance and Settlement/Fixed Income. “In the meantime, we hope to keep adding firms to the pilot test so that, when we do get approval to operate the CCP, it will be relatively easy to make the switch-over.”
Twelve trading firms, plus a major vendor that handles trade processing for a number of other trading firms, have initiated testing and will move to the final step of conformance testing once they have completed the preliminary testing requirements.
“These dozen firms plus the vendor account for more than half of FICC’s total volume, so we’re well on our way to getting the bulk of customers tested and prepared for pool netting,” Delap said. “Some firms may not be fully ready for pool netting until after the CCP has already gone into operation, and we will obviously work with those firms to migrate them over as soon as possible.” @
[For more information about the pilot testing of FICC’s Pool Netting Service, contact Sean Delap at sdelap@dtcc.com or 212.855.7627.]