The Depository Trust & Clearing Corporation (DTCC) has been approved by the Securities and Exchange Commission to operate a new central counterparty (CCP) for the $100 trillion U.S. mortgage-back securities (MBS) market.
The CCP has been undergoing testing with a number of member firms for several months and will be launched to all member firms April 2 as part of the Mortgage-Backed Securities Division of the Fixed Income Clearing Corporation (FICC), a subsidiary of DTCC.
The CCP will guarantee settlement of all matched MBS trades, which DTCC says is a crucial step for the securities industry where currently the settlement of an MBS trade often does not take place until months after the trade was made. The FICC will ensure completion of MBS trades, even if one of the trading parties defaults on its initial trade commitment or pool delivery obligations.
This is the first CCP to be created in U.S. cash markets in more than a quarter of a century, says Donald F. Donahue, president and CEO of DTCC. We expect it will greatly reduce risk by offering pool netting services and streamlining the settlement of mortgage-backed securities trades.
FICCs MBS Division is currently able to net down more than 90% of the MBS trades it processes, but the new CCP will also add pool netting, further streamlining settlement on the related delivery obligations.
The CCPs phase-in period will extend over two months as pool delivery obligations to fulfill trades guaranteed beginning on April 2 are subsequently submitted for netting. The phase-in will also allow member firms adjust to new reporting and clearing fund requirements as well as same-day collection of settlement debits and credits.
Having a central counterparty for MBS trades is a real innovation that will lower systemic and operational risk in the U.S. MBS market, says Murray Pozmanter, DTCCs managing director and general manager for Clearing Services.
The CCP adds to the FICCs service offering for agency pass-through mortgage-backed securities issued by Ginnie Mae, Freddie Mac and Fannie Mae. FICC already provides CCP services to the market for U.S. government securities trades.
(CG)