The US Fixed Income Clearing Corporation (FICC) has announced plans to develop central counterparty (CCP) capabilities for the clearance and settlement of mortgage-backed securities (MBS).
In a new white paper, the DTCC subsdiary has outlined its plans for a CCP structure that will involve FICC stepping between trading parties and guaranteeing each side of the trade.
"This approach would break new ground for mortgage-backed securities customers," says Tom Costa, FICC president and chief operating officer. "The goal is to provide a straight-through environment by standardizing, streamlining and/or eliminating the many manually intensive processes involved in the MBS trade lifecycle currently. In fact, a basic objective of this initiative is to provide a seamless processing environment from TBA trade capture straight through to pool delivery and settlement."
On an average day, the FICC's mortgage backed securities division (MBSD) compares approximately 6700 trade sides with a par value in excess of $293 billion.
Essentially, FICC would create a unified CCP structure for both MBSD and its Government Securities Division (GSD) by leveraging its existing CCP system for US Government securities. Under the new model, the Real- Time Trade Matching (RTTM) service, introduced for MBS trades last autumn, would remain the recording and matching engine.
In creating a CCP for MBS trades, FICC also proposes to implement a new risk management structure that could potentially reduce members’ collateral requirements by permitting their MBS and US Government securities activities to be margined as a single, integrated portfolio, allowing for offsets across those products.
The FICC model would further enhance risk management by revaluing MBS trades (mark-to-market) to reflect current market conditions while the trades are awaiting settlement, and passing on the resulting cash debits and credits on a daily basis.
"By integrating risk management and loss mitigation procedures for Government securities and Mortgage-Backed securities, we can accommodate a wider membership, while not compromising the overall safety and soundness of our risk management practices," says Costa.
In addition to risk management changes, the CCP model would introduce several new services for MBS customers, including, netting, blind brokering, repo processing and the elimination of settlement notifications.
FICC has formed two committees to analyse the white paper proposals: a CCP Operations Advisory Group, with many members from The Bond Market Association’s Operations Committee, that will examine the potential impact the CCP has on operational issues; and a CCP Risk Advisory Group, to review and refine the proposed risk structure.
Following the receipt of comments on the white paper, FICC says it will develop a detailed CCP Business Requirements document