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The Depository Trust & Clearing Corporation (DTCC) is helping firms comply with recommendations established by the Treasury Market Practices Group (TMPG) related to the margining of agency mortgage-backed securities (MBS) transactions. As a central counterparty (CCP), clients of the Mortgage-Backed Securities Division (MBSD) – a division of DTCC subsidiary Fixed Income Clearing Corporation (FICC) – benefit from the margining of all transactions, including forward-settling agency MBS transactions, which helps firms reduce counterparty risks and follow the best practices outlined by the TMPG.
Scheduled to become effective at the end of 2013, the TMPG recommendations aim to reduce counterparty risk which may occur if the market value fluctuates significantly for agency MBS securities, which typically settle one month, or later, after the trade execution.
"Broader adoption of margining for agency MBS transactions will help reduce counterparty risks and strengthen the stability of the financial system, especially during periods of market stress," said Andrew Gray, DTCC managing director, Core Business Management. "As the primary infrastructure of the U.S. capital markets, DTCC is committed to protecting our clients and the financial markets from systemic risk."
How MBSD Helps Firms Comply
MBSD member firms will be in compliance with the TMPG's recommendations because MBSD's risk management practices require members to post margin in connection with their trading of agency MBS securities. As margining is less common in bilateral trading between dealers and customers that are not MBSD members, these parties are subject to counterparty credit risk.
Additionally, in the event that the TMPG decides to extend their recommendations to include "fails" margining, FICC expects that MBSD members will already be in compliance because the MBSD margin calculation currently includes fails.
MBSD membership also eliminates the need for market participants to enter into bilateral legal agreements because forward settling trades will automatically be margined by MBSD. In order to effectively implement the margining requirements outlined in the TMPG's recommendations, market participants may be required to enter into bilateral legal agreements with trading counterparties. Failure to enter into such agreements may result in the inability to transact business with them. According to the TMPG recommendations, firms can either use the Securities Industry and Financial Markets Association (SIFMA)'s Master Securities Forward Transaction Agreement (MSFTA), or they can select to use existing forward trading and margining agreements or draft their own agreements. MBSD membership, however, removes the need for such agreements.
MBSD Membership Types
For loss allocation purposes, MBSD members are placed in one of two membership categories – tier one members or tier two members. Tier one members are subject to loss mutualization and this membership includes all current entity types, other than registered investment companies (RICs).Tier two members are comprised of RICs. Because RICs are legally prohibited from participating in loss mutualization, such members are only subject to loss allocation based upon their trading activity with the defaulting member that resulted in a loss.
"DTCC fully supports the recommendations made by the TMPG. Non-cleared agency MBS transactions can expose trading parties to counterparty credit risk between trade execution and settlement," said Murray Pozmanter, Managing Director and General Manager of DTCC's Clearing Services. "MBSD membership enables firms to meet TMPG's requests for implementing margining best practices to help protect and preserve the resiliency of the Treasury, agency debt, and agency mortgage-backed securities market and foster overall integrity in the financial system.
