Northern Trust has enhanced its collateral management system to include forward settling mortgage-backed securities (MBS) in response to new margin recommendations affecting asset managers that use the securities in a variety of fixed income trading strategies.
“Many asset managers are struggling to comply with the protocol, which affects securities that are critical for mortgage strategies as well as short-term fixed income trading strategies”
Offered as a component of Investment Operations Outsourcing for asset managers, Northern Trust’s collateral management service supports two-way variation margin recommended as of December 31, 2013 by the Treasury Market Practices Group (TMPG), which is sponsored by the Federal Reserve Bank of New York to establish best practices for the Treasury, agency debt and agency MBS securities markets.
The forward-settling nature of most agency MBS transactions exposes trading parties to counterparty credit risk between trade and settlement. In order to prudently manage counterparty exposures, TMPG recommends that asset managers not be allowed to trade forward settling MBS unless they have credit agreements in place with counterparties or can display progress to that end.
"Many asset managers are struggling to comply with the protocol, which affects securities that are critical for mortgage strategies as well as short-term fixed income trading strategies,” said Judson Baker, Product Manager for Derivatives and Collateral Management at Northern Trust. "By offering this capability, Northern Trust helps these managers to comply with new rules while saving them the time and expense of building or buying a system or hiring additional staff to monitor their credit support agreements."
According to TMPG, a sizable portion of the non-centrally cleared agency MBS market currently remains un-margined, posing both counterparty and systemic risks to overall market functioning if one or more market participants were to default. TMPG recommends that market participants exchange two-way variation margin on a regular basis to mitigate counterparty credit risk.
Available on a global basis to investment managers, institutional investors and other asset servicing clients, the new capabilities are integrated with Northern Trust's Investment Operations Outsourcing, global custody and collateral management systems to support all aspects of post-trade processing.
Northern Trust offers an active collateral management service for clients that trade futures and listed options, OTC and cleared swaps. Northern Trust provides this service for an array of derivative participants including asset managers, corporations, pension funds and family offices located around the globe. In addition, Northern Trust will continue to invest in operational capabilities in support of margin management to help clients optimize their pledged assets.