by James Conmy
DTCC’s Mortgage-Backed Securities Division (MBSD) of its Fixed Income Clearing Corporation (FICC) subsidiary has filed an application with the U.S. Securities and Exchange Commission (SEC) to provide central counterparty (CCP) and pool netting services for trades in U.S. mortgage-backed securities. This initiative is designed to reduce the risks and costs associated with trading in the $100 trillion-a-year market.
“We anticipate that our central counterparty services will reduce risk by greatly streamlining the settlement of mortgage-backed securities trades,” said Murray Pozmanter, DTCC managing director and general manager, Clearing Services.
Once it has regulatory approval and implements the service, MBSD will guarantee settlement on all matched trades, a critical step for the mortgagebacked securities industry where the settlement of a trade often doesn’t take place until months after the trade was made. The guarantee will ensure the completion of these long-settling trades if either of the trading parties defaults on its initial trade commitment or pool delivery obligations.
Although MBSD is currently able to net down more than 90% of the MBS trades it handles, in its role as a central counterparty it will introduce an additional netting process – pool netting – that will further streamline settlement on any remaining obligations.
Mortgage-backed securities are made up of the pools of mortgages that underlie each security. Because pools are frequently allocated and reallocated against numerous settlement obligations, these multiple redeliveries are operationally inefficient and potentially error-prone. By netting down redeliveries of allocated pools, MBSD’s new pool netting process will substantially reduce the number of settlement deliveries and thus help to lower operational risk, while easing settlement costs.
To cover the risk of default by a member firm, MBSD collects and holds collateral from its members in a clearing fund. With the introduction of a CCP, MBSD’s current clearing fund risk management process will be modified to account for two additional components: potential intraday exposure and the results of daily back testing. To show its member firms the impact these new components will have on their daily clearing fund requirement, FICC is running a twomonth “parallel” reporting program.
FICC offers the MBSD’s services to market participants trading mortgages held by various government agencies, including the Government National Mortgage Association (GNMA), the Federal Home Loan Mortgage Corporation (FHLMC) and the Federal National Mortgage Association (FNMA). These mortgages make up the bulk of the U.S. mortgage market.
FICC already provides a CCP service for the U.S. Government securities market. @