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DTCC's Fixed Income Clearing Corporation (FICC) has received approval from the Securities and Exchange Commission (SEC) to let it do away with the requirement that trading parties pay each other any "small change" that may be left over after mortgage-backed securities trades are completed.

"Sometimes," noted Sean Delap, DTCC vice president, Fixed Income Product Management, "there can be a slight difference in value between the mortgage-backed securities that are traded and the pools of mortgages that are delivered to cover the securities. When that happens," he said, "FICC calculates a cash adjustment to bridge any difference between the value of the trade and the value of the underlying securities."

Now, however, FICC has obtained SEC approval to do away with the need to have the parties pay any small differences to each other. "In effect," Delap said, "the variances are now so small in comparison to the size of the trades that it often costs more to process the exchange of cash than the amount of cash involved."

Round numbers

FICC reviews the securities delivered at clearance time to see whether they're in precise $1,000,000 par amounts. Under FICC's longstanding guidelines, the value of securities can vary - they can be over or under - by up to $100 per each million-dollar increment. Any amount over the $100 permitted variance had to be returned, and any amount below the $100 variance had to be paid.

"Years ago, when mortgage-backed securities trades were physically settled, it was hard to organize physical pools into exact $1,000,000 par amounts for delivery. In those days, there were sometimes sizeable variances," Delap said "Now, however, delivery and settlement are computerized, and the variances are small or non-existent."

Consequently, FICC asked the SEC to allow it to eliminate the cash adjustments. The result is the equivalent, according to Delap, of the little bowl with extra pennies in it that merchants keep on the counter next to the cash register so that customers can pay an odd amount without having to hand over another dollar bill. @