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by Michael Schollr

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Extending the Clock To Tackle Fails

DTCC’s Fixed Income Clearing Corporation (FICC) has successfully replaced its legacy system for clearing mortgage-backed securities (MBS) trades with a new platform that delivers risk mitigation, capital efficiencies and greater overall efficiency and security to customers in the MBS market.

A major benefit of the new system is its impact in reducing fails-todeliver, which have become a growing concern in this segment of the market because they can disrupt hedging, create credit exposure and increase funding costs.

DTCC launched the new platform, the Mortgage-Backed Securities Division (MBSD) Distributed Clearing System, on April 11. Its implementation was transparent to customers and did not require any changes to their systems.

Speeding it up

One driver of the redesign was the desire of regulators and the industry to reduce delivery fails involving mortgage-backed securities and agency debt.

Now, thanks to the new system’s faster processing capability, MBSD gives customers an extra three-and-ahalf hours to submit trades on “netting day,” which occurs once per month for each of the four classes of mortgage-backed securities. The added time allows more trading volume to be netted by MBSD, which in turn potentially reduces fails.

The netting statistics for June reveal that many customers are taking advantage of the later pass time. For Class A securities (traditionally the largest class of mortgage-backed securities) $123.5 billion worth of trades, or 3.2% of the total, matched within the extended timeframe. Class B securities saw $25.1 billion in matched trades during the extended hours, amounting to 4% of all activity for the month. For Class C, $22.3 billion, or 4% of the total, matched during the extended hours.

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What’s more, MBSD has been able to maintain its traditionally high netting percentages even while dealing with the extended timeframe. In June, for example, the netting factor was 97% for Class A securities, which means that all but 3% of the activity for that class was netted away. The June netting factors were 96% for class B securities and 94% for Class C. These high netting factors ensure that large numbers of mortgage-backed pools are netted away by MBSD.

By way of illustration, MBSD typically sees 2.25 pools delivered per million dollars of trading volume. Using that figure, if one month brings $123.5 billion of trading volume and a netting rate of 97%, as was the case for Class A securities in June, it can be expected that the netting process will result in nearly 270,000 pools potentially being eliminated from the allocation and settlement process.

Optimizing capital and other benefits

“Customers have gained multiple benefits from the switch to the new system,” said Michele Hillery, DTCC vice president, MBSD.

“They are able to have more activity included in the net and they are getting their netting data output faster. They are therefore able to reduce their potential fails while still getting their output in plenty of time to prepare for allocation day.” In other words, more time for customers and faster turnaround from DTCC.

Fewer fails also translate into capital efficiencies.

“The new MBSD Distributed Clearing System is generating savings for our customers by allowing them to reduce the financing and capital charges they incur as a result of fails,” said Murray Pozmanter, DTCC managing director and general manager, Clearing Services.

The system has also reduced DTCC’s operational risks associated with the legacy platform. In addition, it gives DTCC more flexibility to provide future service offerings to customers.@