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New Fixed Income Clearing Corporation Gets SEC Approval to Merge Government and Mortgage-Backed Securities Processing

New York, December 19, 2002 - The SEC has approved the establishment of a new company, to be named the Fixed Income Clearing Corporation, which will officially begin operations on January 1, 2003. The new company will be a subsidiary of The Depository Trust & Clearing Corporation (DTCC) and will reflect the merger of Government Securities Clearing Corporation (GSCC) and MBS Clearing Corporation (MBSCC).

"Combining GSCC and MBSCC is a major step forward in how DTCC is bringing greater synergies, cost reductions and efficiencies to the post-trade processing of fixed income instruments," said Dennis Dirks, chief operating officer of DTCC and the CEO of Fixed Income Clearing Corporation. "It continues the streamlining efforts that began with consolidation of GSCC and MBSCC technology and staff in 2001, including the adaptation this year of GSCC's real-time trade matching (RTTM) technology for processing mortgage-backed securities."

Currently, GSCC clears about $1.7 trillion a day in trades involving U.S. government securities, while MBSCC clears an average of about $200 billion a day in mortgage-backed securities trades.

"The formation of Fixed Income Clearing Corporation puts together, under one roof, a common approach to fixed income processing," said Tom Costa, FICC president and formerly president of GSCC/MBSCC. "This means developing uniform standards for messaging, reporting, netting and settlement, as well as standardized settlement practices and coordinated cash and mark-to-market flows. It also will help achieve important membership and risk management goals, such as building a consolidated risk management platform, optimizing cross-margining among various fixed income products and establishing uniform membership standards."

In addition, Costa noted that FICC expects to see reduced costs over time for processing transactions in fixed income products because the merger will eliminate redundant facilities, services and certain operational expenses such as separate regulatory reports, audits, financial statements and regulatory examinations.

FICC will operate as separate divisions, the Government Securities Division and the Mortgage-Backed Securities Division. While looking to leverage synergies and combine technology and risk management, the two divisions will continue to provide product-specific services to their own participants, and each division will maintain a separate collateral margin pool.

"The creation of the FICC reaffirms DTCC's commitment to the fixed income market," said Thomas Wipf, managing director of Morgan Stanley, which is a member and customer of FICC. "In this challenging business environment, efficiencies of operation and maximization of resources is a priority for market participants. FICC will allow DTCC to better address the needs of its members, while enhancing the utilization of existing infrastructure. The combination of product-specific expertise and cross-product synergies will enhance both service and efficiency. FICC is the right idea at the right time for participants in the fixed income markets."

Costa agrees. "As a combined organization," he added, "FICC can bring even greater leverage to streamlining and consolidating operations and controlling expenses. We have a number of major initiatives underway for 2003 to help us do this - and enhance our value to customers."

Benefits of Combining Organizations

There are a number of examples of breakthroughs where synergies will bring additional benefits and savings to the industry:

RTTM for National Securities Clearing Corporation (NSCC)-eligible securities
FICC is working on implementation of real-time trade matching and interactive messaging for transactions in corporate and municipal debt securities, unit investment trusts (UITs) and other NSCC-eligible fixed income securities. Specifications for this initiative will be distributed in the first quarter of 2003, and the test system will be available for customers in the third quarter. FICC anticipates that a broad effort to convert customers to RTTM for these securities will begin in the fourth quarter of 2003. In addition, FICC is looking at folding corporate and municipal bonds now cleared by NSCC into its operations in the future.

This will be the third RTTM system introduced for fixed income securities. MBSCC went live with a modified version of GSCC's RTTM system for mortgage-backed securities in September, which has been functioning well since then. GSCC introduced RTTM for U.S. Government securities in November 2000, and more than 89% of all GSCC volume is now submitted in real-time either interactively or by multi-batch, with an average daily value of approximately $1.5 trillion. Submitting trades in real-time is voluntary for both MBSCC and GSCC member firms, although price incentives for GSCC member firms to move to a real-time submission have been imposed.

Central Counterparty Capabilities for Mortgage-Backed Securities

In contrast to the services DTCC provides through its other clearing corporation subsidiaries, MBSCC historically has not been a central counterparty (CCP). However, as a CCP, the Mortgage-Backed Securities Division of FICC could guarantee and net all transactions, thereby providing better risk management and reduced financial obligations for customers. DTCC has been evaluating whether it is appropriate to implement a CCP capability for MBS transactions and plans to issue in early 2003 a document highlighting and describing the issues relevant to this decision. This document is intended to promote industry dialogue on this issue, with a particular focus on how a unified CCP processing structure for fixed income securities generally can streamline customers' interactions with MBSCC and reduce collateralization requirements.

STP for Institutional Settlement

In response to requests from the industry, FICC and DTCC plan to issue a white paper early next year that will describe alternatives for maximizing netting of dealer trades and STP for institutional settlement for fixed income transactions. Should the industry support this initiative, FICC expects to begin development of the appropriate solution later in 2003. It is unlikely that this would require development efforts for customers next year, though, if the initiative does proceed, FICC would expect that firms would need to include this on their development agenda for 2004.

Common Web Front End

In order to support real time matching, FICC will provide a Web-based user interface for both trade capture and trade reconciliation and management. This interface will be designed to support all the fixed income RTTM systems, and it will be adaptable to all fixed income products. RTTM Web will initially be rolled out for mortgage-backed securities in the second quarter of 2003. Standards defined in that project will be used in development of the Web interface for the government securities and corporate/muni RTTM systems.

About DTCC

The Depository Trust & Clearing Corporation (DTCC), with operating facilities in multiple locations in the U.S. and overseas, is a holding company for six subsidiary businesses - a depository and five clearing corporations - as well as the co-owner with Thomson Financial of a global joint venture called Omgeo. Through its subsidiaries, DTCC provides clearance, settlement and information services for equity, corporate debt, municipal debt, government securities and mortgage-backed securities in the U.S., and emerging markets debt trades globally. It is also a leading clearinghouse for mutual funds and insurance products, linking funds and carriers with distribution networks. In addition, DTCC provides custody and asset servicing for more than two million securities from the U.S. and 84 other countries. For more information on DTCC or FICC, see www.dtcc.com.