Bloomberg News

Depository Trust to Create Clearinghouse for U.S. Mortgage-Backed Bonds

March 12, 2012

The Depository Trust & Clearing Corp. received approval from the Securities and Exchange Commission to operate a clearinghouse for trading of U.S. mortgage bonds, allowing it to replicate the services it offers for U.S. Treasuries and other government-related securities.

The mortgage-backed securities division of DTCC’s Fixed Income Clearing Corp. will begin acting as a so-called central counterparty in April, the New York-based company said today in a statement distributed by Business Wire. As a CCP, the unit will guarantee settlement of mortgage-bond trades if one of the parties to agreements filed with it defaults on its commitment.

The initiative is designed to curb risk and costs in the market for government-backed U.S. mortgage bonds, where trading totals about $100 trillion a year, the DTCC said. Unlike the company’s division that handles government-securities transactions, the mortgage-bond unit didn’t previously back trades while providing netting and margining services, according to Murray Pozmanter, managing director and general manager for clearing services at the DTCC.

“This is part of a long-standing plan to harmonize the services across the two asset classes,” Pozmanter said today in a telephone interview.

Cash Markets

The change in the mortgage division represents “the first CCP to be created in U.S. cash markets in more than a quarter of a century,” Donald F. Donahue, the DTCC’s president and chief executive officer, said in the statement.

The last one was a predecessor to the company’s government- securities unit, Pozmanter said. “Cash” markets mean those not considered to involve derivatives.

The DTCC is owned by its member firms, including international broker-dealers, clearing banks, mutual fund companies and investment banks, according to its website. Its FICC unit was created by the combination of the Government Securities Clearing Corp. and MBS Clearing Corp. in 2003.

While adding trade guarantees on mortgage deals won’t require an increase in FICC’s capital, the unit plans to begin demanding 15 percent to 30 percent more in margin on mortgage- securities transacations, Pozmanter said.

The change will also “will greatly reduce risk” and costs in the market by allowing the DTCC to offer so-called “pool netting services and streamlining the settlement of mortgage- backed securities trades.” Donahue said.

Netting involves consolidating offsetting trades among market participants, while so-called margining entails collecting deposits to protect counterparties.

To contact the reporter on this story: Jody Shenn in New York at jshenn@bloomberg.net

To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net


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