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Murray Pozmanter-SIFMA Ops 2015: Fixed Income Clearing Update
Murray Pozmanter, DTCC Managing Director and General Manager in charge of all DTCC’s SIFMU subsidiaries

Developing a full central counterparty (CCP) and novation model for mortgage-backed securities (MBS) and developing a new service for Registered Investment Companies (RICs) were the primary topics of discussion at The Depository Trust & Clearing Corporation’s (DTCC) “Fixed Income Clearing Update” panel at SIFMA Ops 2015.

The MBS Novation project, a conversion to operational novation and a simplification of the netting and settlement process, will enable the Mortgage-Backed Securities Division (“MBSD”) of the Fixed Income Clearing Corporation (FICC) to retire certain inefficient processing. MBS Novation will expand and extend the services rolled out with Pool Netting, which introduced the comparison, trade guarantee, netting and central counterparty settlement of pool allocations submitted in satisfaction of members’ outstanding to-be-announced (TBA) obligations. MBSD will continue to require bilateral matching and to support dealer-to-dealer and broker-to-dealer trade submission.

The Government Securities Division of FICC discussed a proposed new service called Centrally Cleared Institutional Tri-party (CCIT), which will enhance the tri-party repo market’s ability to navigate stressed market conditions by implementing solutions that help mitigate risk and better safeguard the U.S. financial market.

Moderated by Murray Pozmanter, DTCC Managing Director and General Manager in charge of all DTCC’s SIFMU subsidiaries, the panelists included Nicholas Botta, DTCC Vice President, Clearing Services, Chris Crocitto, Senior Vice President, Goldman Sachs, Sean Delap DTCC Vice President, Clearing Services and Greg McDonald, Senior Vice President, Capital Markets Middle Office, Citibank.

Pozmanter shares key insights from the session and an update on DTCC’s efforts related to fixed income clearing designed to increase capital and operational efficiencies.

DC: What benefits will the industry derive from the MBS Novation project, and what are some of the challenges or concerns that come from a large initiative like Novation?

MP: Benefits include a reduction in settlement costs and volumes. It will also reduce by an estimated 50-55% the TBAs that will go to pool. There will also be balance sheet netting, and a major reduction of processing of odd lot transactions once they go into the TBA net.

In terms of challenges, all MBSD input, output, systems and processes will be impacted and changed, to varying degrees, by this initiative; FICC is changing a process that has been virtually the same for decades. As a result, new SWIFT-based Interactive Messaging Specifications, Machine Readable Output (“MRO”) file layouts, and reports will be created, as well as any requisite member reference documentation and training materials.

DC: What was the reaction from client firms to the pre-funding proposal for Novation?

MP: MBS Novation introduces new processing for both FICC and their clients; we are trying to minimize the build for the industry by keeping most of the technology development within FICC.

The proposal for pre-funding allowed for much greater transparency in the process, and the ability to properly budget for the project over the next 3 years.

DC: What do you see as the proposed benefits to the CCIT proposal from a dealer and client perspective?

MP: FICC provides the only central clearing function for tri-party repo trades in the U.S. and is the only platform ready to serve this market. The plan is to leverage functionality and risk management capabilities that FICC has been providing to its members since 1998. There is no need for technology or market structure changes, which would extend the period that it would take to bring a service to market and need to go through a testing period.

Centralizing the clearing and settlement of repo transactions through FICC will provide a broader and more comprehensive view of the repo market for the monitoring and management of systemic risk, as well as mitigate risks associated with a fire sale in the tri-party marketplace.

DC: What are some of the open legal/regulatory issues pending with the regulators related to CCIT?

MP: FICC intends to submit a rule filing with the U.S. Securities and Exchange Commission (SEC) and an advance notice filing to both the SEC and the Federal Reserve Board later this year.

The Fed has expressed concerns over how clearing banks will handle intra-day credit extensions to FICC to settle inter-bank GCF repo trades, however, as an ongoing part of the tri-party reform, the inter-bank credit extension is being addressed in a separate effort. FICC is currently working with both clearing banks to introduce real-time substitutions in 2015.