Government Securities Clearing Corporation (GSCC) and MBS Clearing Corporation (MBSCC) have filed with the Securities and Exchange Commission (SEC) for permission to merge the two organizations into a new clearing organization to be called the Fixed Income Clearing Corporation (FICC).
Under the proposal filed with the SEC, MBSCC would be merged into GSCC and the resulting new organization would be renamed. FICC would provide the same services GSCC and MBSCC provide now, but through separate divisions called the GSCC Division and MBSCC Division. These two divisions will continue to operate essentially as GSCC and MBSCC do now, offering their own services to their own members, with each maintaining a separate collateral margin pool.
Currently GSCC clears about $1.6 trillion a day in trades involving U.S. government securities, while MBSCC clears an average of about $200 billion a day in mortgage-backed securities trades daily. GSCC and MBSCC have shared a single senior management group since shortly after they became subsidiaries of The Depository Trust & Clearing Corporation (DTCC) at the beginning of the year.
“The clearing and other services for these two different types of fixed income products have many common elements,” says Tom Costa, president of GSCC/MBSCC. “Having them handled by different clearing corporations hinders the development of uniform standards for the fixed income services industry.”
Costa said combining the two organizations would help lead to the development of uniform standards for messaging, reporting, netting and settlement, as well as standardized settlement practices and coordinated cash and mark-to-market flows. He said it also would achieve important membership and risk management goals, such as building a consolidated risk management platform, optimizing cross-margining among various fixed income products and establishing uniform membership standards.
In addition, Costa noted that redundant facilities, services and such aspects as separate annual reports, regulatory reports, audits, financial statements and regulatory examinations would be eliminated as a result of the merger, thereby reducing costs for processing fixed income transactions over time.
The parent DTCC Board, as well as the Boards of GSCC and MBSCC, have approved the proposed merger. The same board members serve on all three boards.
“This combined entity represents another milestone in DTCC’s response to industry needs for greater synergies and efficiencies in post-trade processing, particularly in the processing of fixed income instruments,” adds Dennis Dirks, chief operating officer of DTCC and CEO of GSCC and MBSCC. “We’re very pleased that the boards have approved this next step in our synergy strategy, and we’ll continue to look for ways to bring additional efficiencies and reduced costs and risks to our customers.”
In keeping with this goal, Dirks indicated there is a possibility that corporate and municipal bonds now cleared by National Securities Clearing Corporation (NSCC), another DTCC subsidiary, might also be folded into FICC operations in the future, but this proposal was not a part of the current rule filing made with the SEC to approve the creation of FICC.
MBSCC recently adopted a modified version of GSCC’s real-time trade matching (RTTM) system for mortgage-backed securities. That system went live on September 27 and has been functioning well since then. GSCC introduced real-time trade matching for U.S. Government securities in December 2000, and more than 80% of all GSCC volume is now submitted in real-time either interactively or by multi-batch, with an average daily value of approximately $1.2 trillion. Submitting trades in real-time is voluntary for both MBSCC and GSCC member firms, although price incentives for GSCC member firms to move to a real-time submission were recently imposed.
GSCC/MBSCC has also collaborated recently with NSCC to develop RTTM services for NSCC fixed income products. These would include corporate and municipal bonds and Unit Investment Trusts (UITs). NSCC is expected to move to real-time trade matching for these fixed income instruments in the first half of 2004, following a testing period scheduled to begin later this year.