MBSD Operational Novation One Year Later A Success for Clients and the Industry

DTCC’s FICC/MBSD Operational Novation initiative celebrated its first full year of operation in October 2018. The completion of this initiative was a major improvement for clients and the industry because it greatly streamlined and simplified mortgage-backed securities (MBS) netting and processing.

In the first 12 months of production, moving from bilateral settlement in all MBSD To-Be-Announced (TBA) eligible CUSIPs to the new central counterparty (CCP) model, 63% of transactions settled for cash, which reduced the overall number of electronic pool notification (EPN) messages and eliminated securities settlements, fails and other costs for clients.

“MBSD Operational Novation not only delivered operational benefits that included efficiencies relating to the TBA allocation process, it further helped to mitigate transactional and fail risk,” said Kristian Hakanson, Vice President of Securitized Products, Barclays. “FICC brought its members together in a professional and collaborative way to deliver a best in class solution that created additional operational efficiencies and simultaneously reducing transactional and fail risk.”

Since November 2017, clients have successfully used FICC as the single CCP for TBA netting and novation transactions. As a result, clients have been able to net away 63% of processing transitions with the introduction of the new DNA (do not allocate) process. Before operational novation, MBSD processed 2.46 trillion in TBA volume, but after operational novation, that number jumped to 5.1 trillion. With the introduction of the DNA process, the volume doubled for the first 12 months of operational novation being live in production.

“Though a long time in the making, FICC’s MBSD Operational Novation initiative has added efficiency to the Agency MBS market by reducing both processing cost and fail risk,” said Christopher Crocitto, Senior Vice President of Fixed Income Securities, Goldman Sachs. “The DNA functionality has extended the netting process to real-time, reducing the overall notional flowing through the allocation process.”

“The success of the Operational Novation initiative has surpassed all expectations, wringing costs and inefficiencies out of MBSD netting and settlement for clients,” said Murray Pozmanter, Managing Director and Head of Clearing Agency Services and Global Operations. “We credit innovative thinking, agility and flexibility to transforming a process that had otherwise been unchanged for decades.”