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Apr 30, 2012 • Press Releases

New Central Counterparty for Mortgage-Backed Securities Brings Significant Cuts in Trading Costs

New York, April 30 – The Depository Trust & Clearing Corporation (DTCC) reported today that in the first settlement cycle run by its new central counterparty for mortgage-backed securities (MBS), which began operation April 2, it was able to achieve a 70% reduction in the mortgage securities pools and payments involved in settling the trades, and consequently a sharp reduction in the costs and operational risks in this market.

In the first cycle of trades to go through the central counterparty or CCP, DTCC said it netted the nearly 43,000 pool allocations underlying the trades down to less than 13,000. As the month progressed, DTCC said the processing of “Class B and C” MBS trades through the central counterparty also brought significant reductions in the number of securities and payments that had to be delivered to complete the transactions, thus eliminating the movement of billions of dollars’ worth of cash and securities.

The new central counterparty or CCP was able to net down more than 90% of the trades it processed, and then, in a second step, netted down the underlying pools of mortgage securities that have to be delivered to complete the trades. In addition to its pool netting success with “Class A” securities, it netted down pool delivery instructions for “Class C” MBS trades from about 37,500 to 11,500, a 69% reduction.

“We’re very pleased by the results the CCP has been able to achieve, and so is the industry,” noted Murray Pozmanter, DTCC Managing Director and General Manager, Clearing Services. “Our member firms were delighted by how quickly the pool netting process was completed and by how much it reduced their obligations to exchange funds and securities.”

Operated by DTCC’s Fixed Income Clearing Corporation (FICC) subsidiary, the CCP provides the first-ever guaranty that matched MBS trades will be completed even if one side to the trade defaults or fails to deliver the pools of mortgage securities that underlie the trade. Because the settlement of an MBS trade often does not take place until months after the trade itself, the trade guaranty is a long-sought step for the securities industry.

The first CCP created for U.S. cash markets in more than 25 years, it streamlines the complex delivery process involved in completing MBS trades. Delivery entails the allocation of specific pools to be delivered against the netted TBA obligations. Because pools are frequently allocated and reallocated against numerous TBA settlement obligations, there can be multiple redeliveries, creating a process that’s operationally inefficient and potentially error-prone. FICC’s new CCP process allows it to net down offsetting allocations of pools against these delivery obligations, which can sharply reduce the number of settlement deliveries.

“Fewer deliveries mean lower operational risk and lower settlement costs,” Michele Hillery, DTCC vice president, said, “and that’s the goal we set out to achieve.”

The new CCP services are being phased in from April through to June so that FICC’s member firms can adjust to new reporting and clearing fund requirements as well as same-day collection of settlement debits and credits. By July, all the securities classes to be settled will have gone through the CCP and member firms will have experience with them.

ICC offers services to market participants trading agency pass-through mortgage-backed securities issued by the Government National Mortgage Association (GNMA), the Federal Home Loan Mortgage Corporation (FHLMC) and the Federal National Mortgage Association (FNMA), more commonly known as Ginnie Mae, Freddie Mac and Fannie Mae. These MBS make up the bulk of the U.S. mortgage market. FICC already provides CCP services to the market for U.S. Government securities trades.

About DTCC

DTCC, through its subsidiaries, provides clearance, settlement and information services for equities, corporate and municipal bonds, government and mortgage-backed securities, money market instruments and over-the-counter derivatives. In addition, DTCC is a leading processor of mutual funds and insurance transactions, linking funds and carriers with their distribution networks. DTCC’s depository provides custody and asset servicing for almost 3.7 million securities issues from the United States and 121 other countries and territories, valued at US$39.5 trillion. In 2011, DTCC settled nearly US$1.7 quadrillion in securities transactions. DTCC has operating facilities and data centers in multiple locations in the United States and overseas. For more information, please visit

James Conmy


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